Tightening of mortgage credit generally and construction loans hits builders

Banks tighten credit guidelines on home buyers, hurting home builders

The banks have been tightening their credit guidelines on home buyers for over the last year and this is strangling  building companies cashflow and construction activity slowed for the 11th month straight.

The simple fact is that if home buyers can’t get finance then builders won’t get building contracts financed.

Australian home builders group the Housing Industry Association performance of construction index rose 3.2 points to a seasonally adjusted 34.1, but the number was still below the 50-point level that separates expansion from contraction. 

The index has remained below 50 points since February 2008. 

AIG associate director of economics and research, Tony Pensabene, said builders had scaled back projects in January as business borrowing conditions continued to deteriorate. 

Competition between house builders increased

“January was another poor month for the construction industry, with the relentless pressures of tight credit conditions and deteriorating economic sentiment driving a further decline in activity,” he said. 

“We are continuing to see weakness on a broad industry front, with intense competition for contracts and many firms reporting that clients are either scaling back or deferring planned project developments.” 

HIA chief economist Harley Dale was hopeful that the federal Government’s planned $42 billion stimulus and rate cuts would drive a turnaround in the construction sector. 

“We have seen a further interest rate cut and a substantial fiscal housing package aimed at stimulating residential construction sooner rather than later,” he said. 

“This combination, together with the short-term boost available to first-home buyers, creates a solid base for a recovery to emerge as we move through the year.” 

Apartment building activity remained weak in January – the sub-index fell 2.6 points to 26.8, marking the 12th consecutive month of contraction. 

House-building also was in negative territory for the 12th straight month, although the sub-index rose 8.5 points last month to 31.9, signalling a slower pace of contraction. 

Across the construction sector, employment was contracting, although the measure rose 1.8 points to 37.3. 

Wages still were expanding, rising 1.9 points in January to 56.

About: Rick Adlam: Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers. Website: http://www.mrmortgage.com.au