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Australia Home Loans Fall, Tempering Housing Recovery -- Update

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10/14/2013 | 02:22am EST

By Rachel Pannett

SYDNEY--The number of home loans approved in Australia fell for the first time this year, tempering what has been emerging as a bright spot in a weakening economy.

Approvals for the purchase of owner-occupied homes fell a seasonally adjusted 3.9% in August from a month earlier, the first decline since December, official data showed Monday.

Record-low interest rates have fueled a recovery in rate-sensitive sectors like housing, with auction clearances, house prices, and homebuilding permits all increasing in recent months. Home loans have also risen steadily up to now.

Cementing recent signs that much of the housing market activity is being driven by investors, first-time homebuyers accounted for less than 14% of the market in August--the lowest percentage in nearly a decade. New lending to investors was flat on-month, but surged by almost 26% from a year earlier, the steepest gain since 2007.

The data showed "a strong skew toward investors," Deutsche Bank economists said in a client note. "In such an environment it is the marginal buyer that gets priced out of the market--with the marginal buyer in housing typically the first homebuyer."

Australian house prices jumped more than 5% in the second quarter from a year earlier, the fastest pace in three years. Capital-city house prices recently hit a record high, led by properties in Sydney and Melbourne, as investors bet rising home values would outpace other asset classes in Australia and overseas.

That has led some economists to question whether low interest rates are spurring gains in mortgage lending that threaten to put the housing market out of step with the rest of the economy as it nears the end of a long resources boom.

Australia's central bank has cut rates eight times since November 2011 in a bid to revive activity in weaker parts of the economy, including retail and housing construction, as investment in resources slows and threatens to boost unemployment. The latest cut in August took the benchmark cash rate to a fresh record low 2.5%.

While the low rates are needed to cushion the economy from the resource slowdown, the bank doesn't want to let prices rise unchecked. A housing crash would rapidly undo what little progress has been made reigniting the rest of the economy. Along with retail, housing is among the most rate-sensitive sectors, and a recovery in both have led previous expansions.

In a sign low interest rates may be stimulating residential contruction--which could also help contain house price growth--Monday's data showed approvals to build new houses rose 2.2% in August from July.

"The partial catch-up from new construction in terms of numbers and values is a sign that residential investment should provide a modest boost to GDP growth before the end of the year," Citigroup economists Joshua Williamson and Paul Brennan said in a client note.

-Write to Rachel Pannett at rachel.pannett@wsj.com

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