In Australia, the term for fixed home loans is usually for a period of 1-5 years (quite different to the US where you can fix for 30 years and refinance inbetween if interest rates fall which is a good deal for mortgage holders). CBA analysis of their lending book suggests that the largest share of these loans expire in the second half of 2023 which means that households will roll onto a variable mortgage rate that could be 2-3 times their current fixed rate. The households impacted make up around ~30% of the total housing loan stock according to bank data which is a significant downside risk for consumer spending. We see consumer spending growth declining to just over 1% per annum in late 2023, well down from 4% over the year to March 2022. Some potential offsets to these higher costs of debt include the accumulated savings of households (worth around $250bn) which can be utilised, high mortgage prepayments (RBA research suggests ¾ of variable mortgages are more than 3 months ahead on repayments) which reduces the risk of missed payments/bad loans in the short-term and rising wages growth.
The residential construction outlook
The fall in net migration in 2020/21 from Australia’s closed borders (net migration only turned positive again in the December quarter of last year for the first time since March 2020) was negative for fundamental housing demand. However, this was offset by a fall in mortgage rates, cashed up households, a fall in the size of households due to the pandemic and the HomeBuilder subsidy which lifted demand for new housing. Residential construction added up to 0.7 percentage points to annual GDP growth in mid-2021, its highest annual contribution since 2004.
Net migration is starting to rise again which is positive for residential construction. But, rising interest rates, higher construction costs and the end of the HomeBuilder subsidy (which brought demand forward) are headwinds for new housing demand. Building approvals have plunged for houses, down by 29% over the year to May while apartment approvals are holding up better (down by 4.2% over the year to May).
Despite the recent weakness in building approvals, residential vacancy rates fell to around 1% in June, which is around their lowest point since the SQM data started in 2009 (see the chart below), after reaching a cycle high of 2.5% during the pandemic. The fall in the vacancy rate is a sign that more new housing construction may be required.