Soaring Sydney and Melbourne house prices aren't reflecting the value of new loans

The latest mortgage statistics suggest something rather strange about the hot housing market – despite markedly higher prices and more housing loans, the total value of new loans in the September quarter, $95 billion, was pretty much the same as the 2015 September period.

While the value of loans were only up a fraction, prices in the key Sydney and Melbourne markets soared during the quarter. By CoreLogic’s methodology, Sydney prices jumped 3.5 per cent in the quarter while Melbourne prices blew out by a rather scary 5 per cent.

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The housing markets in those two cities, counting for about half the nation, have become increasingly divorced from what was previously considered normality. A conversation with a valuer last week highlighted that – his profession is having trouble valuing properties as many of the usual old rules about square metres and comparable sales simply don’t matter in a market running hot, when the shortage of alternative offerings is driving buyers into unchartered territory.

At the end of November, September quarter statistics are already looking old in such a market, but there are still some lessons to be drawn from the latest Australian Prudential Regulation Authority publication which pulls together the lending figures from all the deposit-taking institutions.

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The higher prices reflect the well-reported lack of desired stock in the key markets. There has been a steady slowing in the number of loans over the past year. The number of residential loans to households jumped from 5.469 million in September 2015 to 5.533 million in December, firmed to 5.560 million in quiet March quarter, picked up again to 5.624 million in June but only added another 41,000 by the end of September.

The average balance of housing loans picked up 4.5 per cent to $255,000 over the year. That’s a reminder that, given record low interest rates, there is no strain involved in servicing most mortgages – it’s just the late-comers to the game who are stressed out.

Amidst all the talk about negative gearing, the amount borrowed for investment loans from the major institutions actually fell over the year from $509.7 billion to $507.3 billion. Loans to owner-occupiers jumped from $826.2 billion to $934.8 billion.

Following the money then, it backs up other suggestions that it’s owner-occupiers upgrading that have been providing most of the latest lift in price pressure.

And then there’s the reality of Australians saying one thing, but doing another. There is a steady litany of complaints about the Big Four banks, but at the end of the day, we just keep borrowing from them. The Big Four at the end of September had 80.7 per cent of the housing market, little changed from the year before.

My guess is that most of the customers making up the Big Four’s $1.179 trillion housing honeypot are paying the “lazy tax” – failing to chase the best interest rate available. You can lead horses to water but you can’t…

Michael Pascoe

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.