Can you Trust Lending Trends to Predict Price Trends?

You might have heard this: “If lending falls, house prices follow; If lending rises, house prices rise.”

It seems correct if you look at this chart:

Or this chart:

However, is it a universal trend you can rely on for all your purchases?

Of course not. Otherwise, property analysts would all lose their jobs.

The fact is, when you’re buying a property, you’re not buying in Australia or Greater Sydney but in a micro market, eg. a local town or a suburb. The correlation on a macro scale, i.e. Australia / Greater Sydney, doesn’t necessarily apply to a micro-scale market.

I’m going to explain further with this blog.

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Housing lending data: Where do you get it?

First, let’s see where the housing lending data is from and to what extent it’s available.

ABS’s Lending Indicators page provides monthly data on housing, personal and business loans. You can find new home loan and refinancing numbers & values over the past 20 years (excellent time coverage!). However, they are only available on a minimum state level, with no further breakdown.

Now we’re ready to examine the correlation between lending and price trends.

The correlation: Lending and price trends tend to correlate on the GCCSA level, especially for the most unaffordable regions.

We have visualised each state’s housing lending trend and their median house price trends on a GCCSA (Greater Capital City Statistical Areas, i.e. greater capital cities and rest of states) level, as shown in the charts below.

We see that lending and price trends correlate with each other in many cases, with time lags varying from 0 months (eg. regional NSW 2019-21; WA 2020-22) to 9-12 months (eg. TAS 2013-15 & 2020-22).

However, the correlation is NOT always there. For example, SA’s housing lending saw a significant slowdown from 2013 to 2014, but Greater Adelaide’s house price growth didn’t show a large drop; Instead, it was regional SA that felt the impact badly; Later, in 2018-19 SA’s housing lending seemed to be picking up strength, but Greater Adelaide’s house price growth, again, was not influenced– it was still regional SA that’s reacted to the lending trend shift.

We also note that Greater Sydney and Greater Melbourne’s prices react the most dramatically to lending trends among all GCCSA regions, with only one exception: They were exceeded by their regional counterparts during the pandemic property boom.

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On smaller scales? Less significant correlation.

Now we have discussed the correlation between housing lending and price trends on a GCCSA level. How about on smaller scales? Let’s now have a look at some SA3s and suburbs.

SA3 Level

Regional SA’s price trend seems to correlate well with the state’s lending trend. Let’s check if that’s still the case when we break the price trends down to an SA3 level.

The above chart shows the state’s housing lending year-on-year change trend and three SA3s’ median house price YoY growth rates over the past decade. The three SA3s are shown in the map below.

– Limestone Coast: Local economy dominated by the timber industry.

– Fleurieu – Kangaroo Island: Local economy features tourism, agriculture, and food &wine processing.

– Barossa: Famous for its wine production.

The three regions each have their distinctive industrial structure, economic activity, population growth pattern, housing supply level, etc. That’s why their price growth trends differ from regional SA’s average trendline and react much differently to the lending trendline.

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Suburb Level

Now that Greater Sydney’s median price correlates the most significantly with the state’s lending trend, let’s first look at some of its suburbs’ price trends.

The above chart shows the state’s housing lending year-on-year change trend and four suburbs’ median house price YoY growth rates over the past decade. The four suburbs are shown in the map below.

– Paddington: representing the Eastern Suburbs

– Hornsby: representing the Upper North Shore

– Kellyville: representing the Hills District

– Springwood: representing the Blue Mountains

It seems that overall price growth trends of the four Sydney suburbs are influenced by the state’s lending trend, with micro differences in time lags and fluctuating ranges. Then how about suburbs in other regions?

Let’s turn our attention to regional Victoria.

We have three regional Victorian suburbs here: Ballarat, Bendigo and Shepparton, as shown in the above map. The below chart shows the state’s housing lending year-on-year change trend and three suburbs’ median house price YoY growth rates over the past decade.

While the regional VIC price trend correlates by the state’s lending trend from 2017 to 2022, the three suburbs’ prices have been running in different patterns.

The same happens in many other regions too.

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In a Nutshell…

Yes, lending trends correlate with house prices on a macro level, but not necessarily on micro levels. Each city/region has a unique micro property market. They are dominated by local housing demand and supply, which are influenced by many factors like population, household structure, economic strength, construction activities, lending policies, and more. A micro market’s trend can be very different from most markets of the state/country, and to precisely tell its price trend, you need to check all influencers instead of solely relying on lending data.

InvestorKit is a buyer’s agency that understands the difference between macro and micro markets and the risk of relying on a single indicator. We constantly examine micro markets on all data points available to figure out their unique growth trajectories. That’s why our clients get to buy properties that meet their investment goals no matter how the macro market is going. Thinking it’s not a good time for value growth because of the declining lending trend? Talk to us and find your super growers with InvestorKit!