- Home loans have experienced their biggest monthly gain in almost four years, as buyers take on more debt to jump into the property market.
- It comes after prices in Australian capital cities bounced last month with auction clearance rates running hot in the country's largest two markets, Melbourne and Sydney.
- Stimulated by two interest rate cuts, the Reserve Bank of Australia (RBA) may have to be more cautious with future rates as asset prices expand without yet producing an uptick in consumer spending.
Home lending is surging once again as fresh life is breathed back into the property market.
In July, the value of Australian home loans increased by 5.1% on the previous month, ten times greater growth than what was expected and its biggest monthly gain in four years.
"There’s an old adage that one month’s numbers do not make a trend. But we think that the July figures mark a turning point," Commonwealth Bank economist Gareth Aird said in a note on the data.
"We expect lower mortgage rates to increase the demand for credit from here which will in turn support dwelling prices and turn a negative wealth effect into a positive one."
That's been spearheaded by owner-occupiers. Their lending was up 5.3% in July on June which was in turn 4.1% up on May. In fact, as others retreated during price declines, it was first home buyers that took their opportunity to get into the market.
Collectively they hold just shy of 30% of the number of loans, and around a quarter of the value of all home loans in the country -- well up from before Sydney and Melbourne prices peaked in 2017.
Property investors meanwhile are a little behind the curve, borrowing 4.7% more in July, after a more modest 0.9% the month prior.
It comes as soaring auction clearance rates boom into their third straight month in both Melbourne and Sydney, and volumes start to tick up coming into spring.
The rocketing figures do however demonstrate the catch-22 facing the Reserve Bank of Australia (RBA) when it comes to steadying the Australian economy.
Two interest rate cuts in June and July no doubt have helped jumpstart the property market again by making it even cheaper to borrow. However, while a stable property market is economically desirable, soaring prices driven by a glut of credit is not.
It's what RBA governor Philip Lowe warned of earlier this month when he flagged that further rate cuts could "risk just pushing up asset prices".
"[Lowe is] exactly right. But right now it appears in Australia that the intention is indeed to give a short‑term positive boost to the economy from a pickup in house prices and credit growth from lowering borrowing costs," Aird said.
"But we are yet to see a lift in the consumer spending part of the equation. We expect to see that in coming months, aided also by tax rebates."
Given that Australian households already hold an eye-watering amount of debt, it remains unclear whether or not an uptick in spending will ever arise.
Take the following chart for example that shows how much the average homebuyer loan size has grown as prices have shot up.
"Is this really what the government and the RBA are seeking to achieve?" IFM chief economist Alex Joiner tweeted.
With greater levels of debt, and higher mortgage repayments constraining the disposable income of Australians, the question is a rhetorical one.
That surprising expansion of household debt might make the RBA think twice before cutting again, as pressure builds on households and asset prices swell.
"If housing‑related lending accelerates over coming months and dwelling prices rise too briskly the RBA may once again talk about financial stability risks. If we find ourselves in that situation the RBA may be more cautious about taking the cash rate lower without some form of additional macro‑prudential measurers," Aird said.
With the vast majority of economists expecting another cut by November, and as the economy continues to weaken, the RBA has found itself between a rock and a hard place.