Is a crunch in investor mortgage demand now starting to bite?
EXPERT OBSERVATION
Dwelling values, particularly those in Sydney and Melbourne, have been falling now for a number of months. The latest ABS housing finance data indicates that the impact of these falls is now seemingly being felt in demand for new mortgages.
While the value of lending fell over the month for owner occupiers and investors, the slowdown was much more substantial for investors, and the sharp month-on-month fall follows a downwards trend that has been evident across several rounds of macro prudential measures over the past few years. This isn’t really a surprise given so much of the lending to investors has been focused on Sydney and Melbourne and these cities are seeing values fall and yields at close to historic lows while investors are also incurring higher mortgage rates than owner occupiers, with additional rate premiums they use interest-only mortgages,.
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In March 2018 there was $31.9 billion worth of housing finance commitments which was the lowest monthly value of commitments since August 2016. Housing finance commitments were split between $21.0 billion to owner occupiers and $10.9 billion to investors. Owner occupier commitments fell by -1.9% over the month to their lowest value since December 2017. Investor finance commitments were down by -9.0% over the month, falling to their lowest value since January 2016. The declining trend in investor housing finance commitments had slowed recently, however, the -9.0% monthly fall was the largest decline since September 2015 when they fell -10.4% over the month as lenders tightened in order to remain under the 10% APRA speed limit in annualised terms.
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The $21.0 billion worth of finance commitments to owner occupiers was split between: $1.9 billion for construction of dwellings, $1.2 billion for purchase of new dwellings, $6.3 billion for the refinance of established dwellings and $11.6 billion for the purchase of established dwellings. Each type of owner occupier commitment fell over the month however, year-on-year the value of lending for construction of dwellings was the only owner occupier finance segment that was lower.
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The $10.9 billion worth of investor housing finance commitments in March 2018 was split between $1.0 billion for construction of new dwellings and $9.9 billion for established dwellings. The value of lending for new construction was -18.9% lower over the month while the value of commitments for established dwellings was -7.9% lower.
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Looking more broadly at finance commitments for new housing vs established housing shows a decline over the month for both. The chart also shows how the established market, of which there are substantially more properties, dwarfs the new housing market. Over the month there was $4.1 billion worth of commitments for new housing and $21.5 billion for existing housing (excluding refinances). Commitments for new housing fell by -1.9% over the month while commitments for existing stock were -6.8% lower.
A month’s worth of data doesn’t necessarily indicate a trend but it was quite a substantial fall in the value of housing finance commitments in March, particularly for investors. CoreLogic has believed for some time that investment in housing, particularly in the most expensive markets of Sydney and Melbourne, made little sense given stretched affordability, yield compression and little near-term value growth prospects with values currently declining. Despite this, lending finance data (which will be updated next Tuesday) has continued to show investor activity which is well above average levels in NSW and Vic. We would expect that the coming release will show a further weakening of demand in these two states.
Over the coming months it is anticipated that mortgage activity, particularly from the investment sector will remain weak relative to recent years. With APRA recently announcing they will lift the 10% speed limit on investment credit growth from July 1, it will be important to watch the trend in investment credit flows.
There have been recent reports that lenders are starting to reduce the interest rate premiums on some interest only loans and investment loans, however any reduction in rates could be offset by stricter serviceability testing on borrower expenses and incomes as well as the prospect for renewed focus from lenders to reduce their exposure to high loan to income ratio loans as well as maintaining their reluctance to take on high loan to valuation ratio loans.
CAMERON KUSHER is head of research for CoreLogic. You can contact him here.
