The deep drop in new mortgage applications is a stark illustration of how much the housing market has fallen – and some experts are warning we are yet to reach the bottom.
Since the May budget, all four major banks have reported hefty declines in loan applications, though economists also point out the mortgage slide is coming on the heels of an enormous boom in lending, fuelled by a surge in house prices. Some experts say a three-decade “super cycle” for housing could be ending, and there is little doubt that credit growth will slow down.
But the credit tap is not being turned off entirely. Far from it; even if new lending falls by 30 per cent, as some expect, it will still only take the annual flow of credit going into the property market back to where it was a few years ago.
Here are five charts that explain the boom in Australian mortgage lending – and the fall in new lending that is expected as the housing market continues to slow.
1. Australia’s post-COVID housing boom stood out
Our housing market had long been known for being one of the most expensive in the world. But since COVID-19, local house prices have risen more quickly than key comparable nations.
Australian house prices rose more than 50 per cent since COVID-19, according to this chart from AMP economist Diana Mousina, a trend driven by low interest rates, a jump in migration, and a shortage of homes compared with demand.
For many first home buyers, this surge in prices put homes even further out of reach and added fuel to the long-running debate about housing affordability, culminating in the federal government’s move to rein tax concessions for property investors in the May budget.
2. Our household debt is unusually high
Australians are also known for carrying large sums of household debt – so much so that it’s among the highest in the world. This AMP graph shows the long-term run-up in household debt as a percentage of annual income, a key measure often used by economists.
A recent note from financial firm Challenger said a slightly different measure, the nation’s household debt as a percentage of gross domestic product, was 114 per cent, second only to Switzerland.
Why is our household debt so high? Challenger’s chief economist, Dr Jonathan Kearns, points to a few reasons: one is because households are much more likely to be landlords with mortgages in Australia, as opposed to overseas where corporations or not-for-profit operators commonly own rental housing. Another is that offset accounts are much more common here than in other markets. Finally, Kearns noted Australia is wealthy, and wealthier countries tend to have more debt.
3. The value of new lending surged, but now it’s falling
The post-COVID housing boom was accompanied by a lending boom, but that is now reversing. Investment bank UBS’ chart shows how the value of new home loan commitments per quarter hit more than $100 billion earlier this year.
That is roughly twice as much as banks were lending out before the COVID-19 pandemic, which resulted in interest rates being cut to near zero, sparking a property bonanza.
Now that the housing market is falling, thanks to higher interest rates and a government clampdown on tax concessions for property investors, the mortgage boom is also unwinding. UBS forecasts the quarterly value of new mortgage lending will fall about 30 per cent from its early 2026 peak, by late 2027.
UBS chief economist George Tharenou expects the decline in new lending would last almost two years, as a result of people taking out smaller loans due to falling house prices and tighter lending conditions.
4. Home buyers have borrowed much more
To keep up with rising prices over the years, the average homebuyer has had to borrow even more money. This UBS chart illustrates how steeply the average home loan has shot up in the last few years: the average owner-occupier loan in NSW was $842,000 in the June quarter and $664,000 in Victoria, according to ABS figures released last week.
5. But higher interest rates are now squeezing borrowing power
Whenever the Reserve Bank raises interest rates – as it has three times this year – it limits the maximum amount of money a bank will lend you. This is known as borrowing capacity, or borrowing power.
During the current downturn in housing, there is another force at play that is putting the brakes on how much credit banks will extend to one particular type of borrower: property investors. This is illustrated in the graph below, which comes from the Commonwealth Bank.
Because owning an investment property under the government’s new tax regime won’t deliver as many tax advantages as previously, banks have limited how much money they’ll lend new property investors.
The government’s move to rein in negative gearing and capital gains tax concessions is intended to make it a bit harder for property investors to buy existing homes, and one way it does this is by restricting their borrowing capacity. It’s been estimated borrowing capacity for investors buying existing homes could be reduced by up to 20 per cent.
While the recent fall in new lending has been the hot topic in banking lately, some are also looking at when conditions could turn around. Interest rates are likely to play a big role here, too. CBA’s boss Matt Comyn last week said rate cuts would stoke demand in the housing market – though the bank doesn’t expect these until next year.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.From our partners
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