How does long term credit growth affect property prices?


Tomas Turkayoglu

Long Term Credit Growth

Long term credit growth is the year on year rate of change in the total value of money lent by banks and financial institutions to consumers taking out new mortgages or refinancing existing mortgages. Long term referring to the length of the maturity of the loan, E.g. at least 5 years, therefore excluding consumer credit such as car loans, personal loans and credit cards.

The long term credit growth rate and the national property median price growth rate have a highly correlated relationship. If long term credit growth is on an upward trend, then property prices are likely to follow, with a similar relationship in a downward trend.

As can be seen in the graph below, the correlation becomes clearer when taking a historical view from 1977 until present, as long term credit growth and property price growth rates have followed a parallel downward trend.

Overall, long term credit growth has still been positive year on year, however the rate of growth has slowed. A slower rate of growth for property prices means that the average time it takes a property to double in value is likely to increase. In capital cities historically we have found property prices have taken 11 years to double and 15 years in regional cities, the graph below indicates that this doubling cycle is likely to take longer.

Long Term Credit Growth Rate

In addition, the slowing rate of long term credit growth is most likely attributable to the slowing rate of population growth and a smaller dominant consumer base currently running through our economy.

Long term credit growth is a leading indicator for property price growth because the total value of housing finance being borrowed by consumers has a direct impact on the number of properties being purchased. Consumers generally don’t have the financial capacity to purchase a property without financial assistance. Therefore, without consumers borrowing additional money, it is highly likely to cause a decrease in demand for property.

We can conclude from the data that the slowing rate of long term credit growth shows us that property prices are likely to also grow at a slower rate.

 

Tomas Turkayoglu
Acquisitions Manager - Performance Property Advisory

Tomas’ role at Performance Property Advisory is to assist the acquisitions team with their property based administrative functions, from property sourcing to property purchase.