Property exposed!
By Street News on 5 Dec 2013
No Comments yet, your thoughts are very welcome
The Australian Prudential Regulation Authority (APRA) has recently begun to release data on the exposure to the property market by ADIs on a quarterly basis.
The data is a welcome inclusion to the regular data flow and provides great insight into the type of lending that banks, credit unions and mutuals are undertaking.
Over the September 2013 quarter, 77.6 per cent of all new loan originations were written by one of the four major banks, down from 79.6 per cent over the June quarter.
Australians overwhelmingly tend to choose to get a new loan from a major bank
As the above chart shows, Australians overwhelmingly tend to choose to get a new loan from a major bank despite smaller lending institutions generally having higher customer satisfaction ratings than the major banks.
Over the September 2013 quarter, ADIs with more than $1 billion in outstanding residential loans lent a total of $76.6 billion in new residential housing loans.
Across these loans, 34.3 per cent were for investment purposes with the remaining 65.7 per cent for owner occupiers. More than one third of new loans were for investment purposes
Based on the data, more than one third of new loans were for investment purposes however, the figure has fallen from 35.2 per cent the previous quarter.
Note that the rate of growth for investment lending continues to outstrip the growth in lending for owner occupiers. The major banks lent a slightly lower 34.4 per cent for investment purposes compared to all ADIs.
“Australians overwhelmingly tend to choose to get a new loan from a major bank…”
The Reserve Bank has previously cautioned about the current high level of investment activity in the housing market. We feel that there are a number of reasons for regulators such as APRA and the RBA to be cautious.
One of the major reasons is that investors are often only paying off the interest on a loan rather than paying down the principal and the interest. The September quarter data showed that 37.3 per cent of the value of all new loans was lent for interest only purposes.
37.3 per cent of the value of all new loans was lent for interest only purposes
Although the figure was down from 38.7 per cent over the June quarter, there is still more than a third of all loans in which the principal is not being reduced.
Interest only lending is even more prevalent across the major banks where 39.0 per cent of loans written over the quarter were interest only.
Another reason why regulators would potentially be concerned about the level of investment activity is that investor owners are chasing the types of returns which simply aren’t currently available in other asset classes.
“The rate of growth for investment lending continues to outstrip the growth in lending for owner occupiers.”
When capital growth does start to slow or potentially fall, other asset classes may become more attractive and a concern may be that many of these investors all look to exit the housing market at the same time which may in-turn create downwards pressure on the value of all homes.
The other area of much debate currently is the level of high LVR lending taking place.
In New Zealand the Reserve Bank has recently introduced so-called macro-prudential tools whereby ADIs can lend more than 10 per cent of their total home loan lending to those borrowing at an LVR of more than 80 per cent.
In Australia over the September 2013 quarter, 34.7 per cent of the value of new loans had an LVR of greater than 80 per cent up from 32.7 per cent in June and at its highest level since December 2011 (34.9 per cent).
Across the major banks, 35.0 per cent of all lending was for loans at an LVR in excess of 35.0 per cent which was the highest proportion since June 2009 (35.6 per cent).
LVR limits such as those introduced in New Zealand would be one way to curtail higher risk lending in the market. Of course, loans with an LVR of greater than 80 per cent in Australia in most instances have lenders mortgage insurance (LMI), which is paid by the borrower with the aim of insuring the ADI against future potential loss.
“Housing finance data shows that first home buyers are currently at record low levels.”
It is our belief that APRA would be extremely reluctant to introduce measures such as those being used in New Zealand, particular given the fact the strong growth is currently focussed in just two markets, lending standards remain robust and such tools are untested in this market and likely to have a number of unintended adverse consequences.
We believe their preference is to keep the lines of communication open and influence lending practices behind closed doors and via their public statements rather than a tool as overt as that which has been introduced in New Zealand.
Housing finance data shows that first home buyers are currently at record low levels. Given that they would be the cohort that typically borrows above 80 per cent LVR it may suggest that some buyers could be stretching themselves quite significantly in order to upgrade from their current home or potentially to purchase an investment property.
It also shows how strong investor activity is, given they generally borrow at high LVR levels for tax purposes.
This article has been published with the permission of RP Data.
