Investor Demand For Housing Reaches Historic High

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The Australian Bureau of Statistics (ABS) released housing finance data for July 2014 earlier this week.   

The headline result was the 0.3 per cent rise in owner-occupier housing finance commitments over the month.  In my opinion, a more significant result was the 6.8 per cent monthly rise in investment lending.  

Investment lending had shown signs of slowing over recent months but has come surging back in July.

Looking at the value of housing finance commitments over the month, the total value increased by 2.7 per cent in July (2.6 per cent excluding refinances).  

“After seemingly topping out over recent months, investor commitments recorded a sharp rise in July.”

Owner-occupier refinance commitments increased by 3.1 per cent, owner-occupier new mortgage commitments fell by -1.3 per cent and investment finance commitments increased by 6.8 per cent.  

Year-on-year, the total value of finance commitments has increased by 17.4 per cent or 17.2 per cent excluding refinances. 

The year-on-year increase in owner-occupier refinance commitments was 18.6 per cent, new home loan commitments to owner-occupiers were 7.1 per cent higher and lending to investors surged 29.6 per cent. 

In the current climate, subsequent purchasers and investors are occupying the majority of housing finance demand.

Nearly Half Of Mortgages Going To Investors

Looking at the same data but focussing on the proportion of total lending reconfirms the high level of lending to investors and subsequent purchasers.  

In July, 41.4 per cent of total mortgage lending was for new loans to owner-occupiers, 18.3 per cent was to owner-occupiers for refinances and 40.3 per cent was to investors.  

The 41.4 per cent of total commitments to owner-occupiers (excluding refinances) was the lowest proportion of lending to this cohort on record. Conversely, at 40.3 per cent of all mortgage lending, investment lending was at its highest proportion since October 2003 (and second highest ever).  

“Such high rates of capital gain won’t continue forever and our concern remains what will happen once the growth dissipates and interest rates move higher…”

If you remove refinances from the equation, 49.3 per cent of lending was to investors, which was a record high.

Data focusing on the number of loans to owner-occupiers shows there were 52,251 owner-occupier commitments in July.  The number of commitments rose by 0.3 per cent over the month however, it has recorded only a moderate 1.7 per cent rise year-on-year.  

Loans for refinancing purposes increased by 2.4 per cent over the month and 6.6 per cent year-on-year compared to a -0.7 per cent fall in non-refinanced loans over the month and a -0.7 per cent fall over the year. 

This data and the data previously detailed suggest that demand from owner-occupiers for new loans has slowed with investors and refinances currently driving activity.

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Established Dwelling Commitments Down

The owner-occupiers that commit to finance overwhelmingly commit to finance for the purposes of purchasing an established dwelling.  

In July, there were 25,469 new owner-occupier loans (excluding refinances) for the purchase of established dwellings, 6,157 for construction of new dwellings and 2,871 for the purchase of new dwellings.  

Over the month, established dwelling commitments were down -0.7 per cent, construction of dwellings were -1.3 per cent lower and purchase of new dwellings was 0.5 per cent higher.  

Year-on-year, commitments for the purchase of established dwellings are -3.6 per cent lower while commitments for construction are 16.4 per cent lower and commitments for purchase of new are -5.1 per cent lower.

The number of housing finance commitments by first home buyers remains stuck at near record low levels.  In July, there were 6,717 housing finance commitments to first home buyers, which accounted for 12.2 per cent of total owner-occupier commitments over the month.

First Home Buyers Remain On The Sidelines

The number of first home buyer housing finance commitments is -2.2 per cent lower over the month and -15.7 per cent lower year-on-year. 

While the number of commitments by first home buyers is lower over the year, the average loan size has risen by 7.0 per cent. First home buyers largely remain on the sideline in the current market as investors and subsequent purchasers capture much of the mortgage demand.

Based on current mortgage rates, fixed rate loans generally have a lower interest rate than discounted variable loans.  

This is not necessarily unusual; however, housing finance data showed that there were just 7,553 owner-occupier finance commitments (or 13.7 per cent of all owner-occupier finance commitments) on a fixed rate in July.  

“In the current climate, subsequent purchasers and investors are occupying the majority of housing finance demand.”

The number of fixed rate loans has been trending lower after most recently peaking at 17.4 per cent of all mortgage commitments in November 2013.

The RP Data Mortgage Index (RMI) which measures mortgage activity across RP Data’s proprietary platforms recorded a fall in August.  

As this index is closely correlated with owner-occupier housing finance commitments, we anticipate a fall in the number of owner-occupier commitments next month when the ABS releases August data.

In volume terms, owner-occupier loan demand is pretty steady and appears to be at or close to its peak.  

High Level of Investment Lending Is A Concern

The value of lending continues to climb as home values continue to increase. After seemingly topping out over recent months, investor commitments recorded a sharp rise in July.  

As a proportion, investment lending is at its second highest monthly level ever and highest ever level if you exclude refinances.  

The high level of investment lending remains a key area of concern. With returns on safe asset classes extremely low, many investors are purchasing property, mainly in Sydney and Melbourne where capital growth is strong and interest costs on loans are historically low.  

As we have mentioned many times, such high rates of capital gain won’t continue forever and our concern remains what will happen once the growth dissipates and interest rates move higher. There may be a high number of these investors looking to exit property.  

“Owner-occupier loan demand is pretty steady and appears to be at or close to its peak.”

Historically, we know that once value growth slows, demand also eases. If these investors look to sell as demand drops, a risk develops that value falls could become greater as these investors enter a discounting war in order to sell their homes.  

Obviously this may be good news for those first time buyers who are currently sidelined from the market; however, it would be bad news for the two thirds of Australians that own or have a mortgage and have the majority of their wealth stored in their home in the form of equity.