The average size of a new mortgage in Australia has reached a record high, indicating a return of confidence to the property market, according to new data from the country’s largest mortgage broker.
The news come as the International Monetary Fund has warned Australian house prices are overvalued by as much as 20% and a potential bubble could emerge.
New data from mortgage broker AFG shows the average size of a new mortgage in Australia has climbed to $354,137 during July, beating the October 2008 record of $353,223.
But in an encouraging sign for the long-term strength of the sector, AFG said 30% of all new mortgages were arranged for investors, up from a low of 24.5% in March, indicating confidence is returning in areas other than the first home owners’ market.
First home owners, who accounted for 28% of the market during March, now only account for 19% of new mortgagees. The increased first home owners’ grants starts to be phased out from next month.
AFG general manager of sales and operations Mark Hewitt says the return of investors shows the property market won’t see a crash like in the US or Britain.
“The return of investors has been talked about in meetings for six months, but only in the last two months have we seen it transpire. A lot of people pulled cash out of the stock market when it crashed and have been sitting on the sidelines waiting to get into that market.”
“As the property market starts to pick up, and there’s still demand for rental properties, a lot of the fear around about whether there was going to be a housing crash has subsided, as it’s fairly clear that’s not going to occur.”
The average mortgage size was highest in New South Wales at $407,226, while the lowest was in South Australia at $270,179.
Australian Property Monitors economist Matthew Bell says the data is a good indication that confidence is returning to the market.
“The proportion of first home owners has fallen and the number of investors has gone up, so it’s a good indication of the highest activity levels. Investors are not just thinking of coming back, they are coming back now, which of course many people expected.”
Bell says the increase in the average mortgage size is not alarming when considered in context, and points to banks that have introduced higher lending standards to avoid the flow of credit to mortgage holders who are likely to default on repayments.
“The banks have higher lending standards, and certainly haven’t loosened up, so how do you explain the average loan size? I suspect it’s explained by the fact there have been a large number of people who have been frozen out of buying a house. All of a sudden when affordability suddenly increases, a lot of people say that it’s time to get into the market and they all come in at the same time.
“Additionally, the demographic of the first home owners has changed, they’re a bit older, have a higher income level and the family size is larger and can support a larger sized mortgage. These are good demographic reasons, and no reason to be alarmed.”
Meanwhile, the International Monetary Fund has warned in its annual review of the Australian economy that housing prices are overvalued by up to 20% and that a correction in prices could drag Australia into a recession.
“The linkages between high household debt and bank balance sheets are a key domestic vulnerability,” it said.
“A sharper than expected deterioration in banks’ asset quality, possibly stemming from lower house prices, could constrain credit and deepen the downturn.”
Concerns of a housing bubble were also brought up after recent data from APM showed housing prices increased by 3.3% during the June quarter. The IMF said prices are overvalued by up to 15%, while comparisons with rent show a 20% overvaluation.
The IMF said Australia can avoid a crash if there is higher growth in migration numbers, rents and household incomes. But the analysis suggests a “significant adjustment in house prices could be required”.
But Matthew Bell says he prefers the RBA’s analysis, saying the IMF may be a bit distant from the Australian economy to gain a clear picture.
“My general view is that I don’t think there’s a bubble. If in six months there are a couple of quarters of four or five percent increases, then I would be concerned, but that strong performance in the sector has been getting back to the levels of about one year ago.”
Meanwhile, Melbourne has continued its string of impressive auction results with the city recording an 85% clearance rate with 366 properties sold. Total sales in Melbourne reached $262 million.
While Real Estate Institute of Victoria chief executive Enzo Raimondo noted in a statement that “the number of auctions held is down by 33% compared to 2007”, the volume is set to increase next week with 500 auctions expected.
Sydney recorded a clearance rate of 74%, with 129 properties sold at a total of $95 million. Brisbane recorded 15 properties sold with a clearance rate of 43%, while Adelaide auctions saw a 60% clearance rate from six properties sold.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
