Investment lending surged in Oct 2014, APRA is concerned re Lending Practices article by Corelogic

Investment lending continues to surge in October, no wonder APRA are concerned

Posted: 09 Dec 2014 07:05 PM PST

The Australian Bureau of Statistics (ABS) published housing finance data for October earlier today.  The data release coincided with the Australian Prudential Regulation Authority (APRA) sending Australian Authorised Deposit-taking Authorities (ADIs) a letter on Tuesday afternoon.  The letter highlighted that APRA was going to increase surveillance on risky lending and have a specific focus in growth in investor lending by ADIs.  The October housing finance data showed that the proportion of lending to investors had grown to fresh record highs while owner occupier lending is slowing.

The value of housing finance commitments continues to become much more important than the headline number of commitments.  The reason being that the number of commitments only coves owner occupier commitments, excluding investors completely which are the key driver of the current market.  Furthermore, with APRA now focused on ADIs not growing housing credit to investors too fast, a focus on the value of lending becomes even more important.

The above chart uses raw (not seasonally adjusted) data and uses a 12 month average to smooth the volatility of the data.  The chart shows an ongoing decline in demand from owner occupier first home buyers and more recently a dip in commitments by owner occupiers that already own a home.  Across the four borrower types listed you can see that investors now account for the greatest proportion of borrowings from ADIs.  With values continuing to rise across capital city markets clearly they are a key driver of this growth.

The second chart shows the monthly value of housing finance commitments across owner occupier new loans (excluding refinances) owner occupier refinances and investment loans.  Over the month, owner occupier refinance commitments increased by 3.7%, owner occupier new loan commitments fell by -0.1%, while investment commitments rose by 1.0%.  Year-on-year, the increases have been recorded at 18.1% for owner occupier refinances, 0.8% for owner occupier new loans and 19.8% for investment loans.  With $5.4 billion in commitments for owner occupier refinance commitments in October, activity in this space continues to trend higher.  Investment lending is also trending higher reaching a record high $12.1 billion in October.  Meanwhile, owner occupier new loan commitments have actually pulled back a little of late.  After monthly commitments sat at a record high $12.0 billion in November 2013, they have pulled back to $11.7 billion in October 2014. For only the second month on record, the value of investment loans was greater than the value of owner occupier new loans in October 2014.

As a proportion of the value of all housing finance commitments, investors were steady at a record-high 41.4% in October.  Owner occupier new loans accounted for 40.2% (a new all-time low) and owner occupier refinances accounted for 18.5% of lending, its greatest proportion since August 2012.  If we just look at new lending, excluding refinances, investment lending reached a new all-time high of 50.8% of total lending in October, more than one in every two loans.  The capital city housing market has been rising since hitting a low point in May 2012 and at that time investor housing finance commitments totalled $6.9 billion and 33.9% of all housing finance commitments.  Clearly there has been a substantial surge in demand from this segment, recorded at $12.1 billion in October 2014 and 41.4% of all borrowings.

The headline result that gets reported on each month is the number of owner occupier loans.  Although it is a very valuable statistic, it should be read with caution because it is missing a significant proportion of the market, those represented by investors.  As the above chart shows, much like the data on the value of commitments, the number of owner occupier new loan commitments is now trending lower while refinance commitments trend higher at a  moderate pace.  In October, the number of refinance commitments rose 3.6% while new loan commitments fell by -1.4%.  Year-on-year, refinances are 7.5% higher while new loan commitments are -4.2% lower.  The number of new loan commitments most recently peaked at 35,568 in November 2013 and has since fallen by -5.5% to 33,597 commitments in October 2014.  There were 18,123 refinance commitments in October 2014, the highest monthly volume since February 2008.

As investor activity has risen, there has been a sharp drop-off in the number of loans to first home buyers.  Although there is no data to support it, there are plenty of anecdotal suggestions that many first home buyers are choosing to purchase investment properties rather than homes for owner occupation.  Unfortunately, the ABS data only captures those homes purchased by first home buyers for owner occupation.  Owner occupier first home buyer numbers continue to languish at near record low levels.  The proportion of total owner occupier housing finance commitment to first home buyers hit a record low 11.6% in October 2014.  The number of loans actually rose, up 1.2% over the month however, year-on-year first home buyer commitments are -7.8% lower.

The Reserve Bank (RBA) has already highlighted a number of times that they have some concerns with the heightened level of investment activity, particularly in Sydney and Melbourne.  With the proportion of loans to investors hitting a new record high in September it will further re-iterate those concerns.  Just yesterday APRA wrote to ADIs highlighting some concerns about lending practices and providing a set of guidelines to ensure prudential standards are maintained.  With investor activity continuing to rise in October, it seems the concerns are well found.  We may see a further increase in the November data next month however, it is likely that growth in the value of investment finance commitments should start to ease thereafter.

Of course, owner occupier lending demand is already slowing and if/when investment lending follows suit, demand for mortgages should ease and we would expect that it will also continue to contribute to a further slowing of home value growth.  It will be interesting to see how the slowing of demand plays out from a new housing perspective.  With the RBA hopeful that a heightened level of housing construction can help assist the economy as it transitions away from resource investment, as value growth slows some of these projects may be in jeopardy.  Given most developers are private businesses, they generally need growing demand for housing and some increase in home values to allow enough pre-sales for the project to go ahead.  We are already seeing sales volumes and home values trending lower, so if demand for mortgages softens further we will potentially see a fall in dwelling commencements despite the fact that there is such a strong pipeline of development in place.  It will be interesting to see how this plays out in 2015.L J-Gilland-Real-Estate

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