Is lending to investors finally starting to slow?

Image Source: www.theguardian.com

The Australian Bureau of Statistics (ABS) released the housing finance data for February 2015. The results suggested to me that perhaps; after many warnings, the exuberance from the investor segment of the market is starting to slow. Keep in mind that investor borrowing remains at near record highs however, there have been signs that the growth has slowed recently.

In February, there was $30.4 billion worth of housing finance commitments which was -1.0% lower over the month. $18.3 billion was committed to by owner occupiers compared to $12.1 billion to investors. Over the month, the value of owner occupier housing finance commitments increased by 0.5% while the value of investment commitments was -3.4% lower, the largest monthly fall since January 2012. Year-on-year, the value of owner occupier housing finance commitments has increased by 8.7% compared to a 9.9% increase in investment lending.

Taking a closer look at the owner occupier commitments shows that virtually all of the growth is coming from the refinance segment. As previously mentioned, owner occupier housing finance commitments increased by 0.5% in February with construction of new -0.2%, purchase of new +5.7%, refinances +4.5% and purchases of established stock -2.3%. Year-on-year, construction of new is +1.1%, purchase of new is +7.5%, refinances are +28.4% and purchase of established stock is +0.1%. This data indicates that refinances are the driving force behind the increase in housing finance commitments by owner occupiers. It suggests that many home owners are shopping around for a better mortgage deal, which should come as no surprise considering the low mortgage rates that are available and the heightened level of competition across Australia’s lenders. It may also be indicative of many home owners refinancing their mortgage with the intention of purchasing an investment property or using their equity to invest in some other asset class.

Turning to the investment segment of the market, which recorded its largest monthly fall in commitments since January 2012 in February 2015 with a fall of -3.4%. Although I try not to read too much into one month’s data, the value of investment housing finance commitments has now fallen in three out of the past four months. Breaking the results down further shows that investor commitments for construction of new stock was -15.8% lower over the month while established home commitments fell -2.5%. Year-on-year investor commitments for construction were -37.9% lower while commitments for established stock rose by +15.2%. The chart below shows that the investors overwhelmingly favour borrowing for established stock as opposed to new stock. Keep in mind that there is significantly more established stock to choose from than new stock.

The owner occupier and investor data paired shows some interesting trends. Over the month, owner occupiers committed to $2.8 billion in new housing stock while investors committed to $0.7 billion in new housing stock. This indicates that new stock made up just $3.5 billion in new commitments or 11.4% of total commitments or 14.3% of total new commitments (excluding refinances). Whether it is the investment or the owner occupier segment, a relatively small proportion of borrowing is directed towards new construction. Year-on-year the value of owner occupier commitments for new housing is +3.3% higher while the lumpy investment series is -8.7% lower. On the other hand the owner occupier segment of lending for established stock was +0.1% higher year-on-year while investor commitments for established stock were +15.2% higher. This data seems to indicate that much of the new unit stock being built across the major capital cities is not being purchased by local investors. Local investors generally have a preference for existing stock rather than newly constructed stock. A proportion of this new construction is being purchased by owner occupiers but the data suggests implies a lot of the newly developed unit stock is being purchased by offshore investors.

This month’s data makes for interesting reading and while it is still early days it seems like growth in the local investor segment of the market may be cooling (we have though this to be the case previously and the market surged once again!). Additionally, the heightened level of refinances may lead to more investor activity over the coming months. We know that APRA are monitoring lending standards closely and they, along with the RBA, are carefully watching the investment segment of the market. No doubt the regulators will be happy to see that growth in the investor lending segment is slowing and will be hopeful that overall credit growth to investors falls back within the APRA guidelines of ten percent per annum (based on February data, investor credit growth was at 10.1% growth over the past year). Housing credit data also indicates that the rate of growth in investor demand has slowed over recent months which may indicate that the warnings from the RBA and new benchmarks from APRA are starting to be heeded.