Investment Loans

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<div>If it seemed that the big capital city housing markets were strengthening into Christmas then so it was, with a massive 4.9 percent jump in investment loans to a 17-month high of $13.3 billion, up 21.4 percent from a year ago in seasonally adjusted terms. </div>
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<div>It never pays to get too excited about month to month changes, but even with the ABS drilling its trend line through the figures it's clear than investors were resurgent. </div>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/18/HF1.jpg" target="_blank">Click to enlarge</a></p>
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<div>Total housing finance increased by 2.2 percent in the month to a strong $32.7 billion.</div>
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<div>Ex-refinancing, the number of owner-occupier loans picked up in the month, but the real story is the huge flip back to investment loans. </div>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/18/HF2.jpg" target="_blank">Click to enlarge</a></p>
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<p>Average loan sizes are now clearly trending up again, having been knocked back by the first salvo of macroprudential measures to curb investor lending. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/18/HF4.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/01/18/HF4.jpg" alt=""></p>
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<div>In the owner-occupier markets, Melbourne and to some extent Queensland are seeing strong mortgage volumes for owner-occupiers. </div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/01/18/HF3.jpg" target="_blank">Click to enlarge</a></div>
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<div>The number of first homebuyer loans jumped from 7,302 to 8,281 in November in original terms, but overall it's a tough environment for first homebuyers in Sydney (which in part accounts for why so many are turning to investment property as a first purchase).  </div>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/18/HF5.jpg" target="_blank">Click to enlarge</a></p>
<div class="separator"><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/01/18/HF5.jpg" alt=""></div>
<p><br><strong><span style="text-decoration: underline;">The wrap - $1 trillion of home loans</span></strong><br><br></p>
<div>Investment loans increased for the sixth time in seven months, and this one was a big leap, taking the year-on-year increase to above 21 per cent, the highest such percentage increase since the peak of the Sydney boom in Q2 2015. </div>
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<div>In part thanks to net loan reclassifications and some cases of 'switching' of loan purpose, the stock of outstanding investor loans increased by only 3 per cent over the year to November.</div>
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<div>Owner-occupier loans outstanding on the other hand surged by more than 9 per cent to pass $1 trillion.</div>
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<div>Regardless of the blurred classification of outstanding credit, the key takeaway is that investors were pouring back into the market in late 2016, particularly in Sydney and Melbourne,</div>
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<div>I'll look as those investment loans in more detail and by state. </div>
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<div><em><span>PETE WARGENT </span>is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>. </em></div>
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pwargent-M4siyDbqQY

APRA shrugged? Investments loans up 21 percent: Pete Wargent

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<p>Heritage Bank, the nation's second largest mutual, will stop offering property investment loans amid fears it is close to the regulatory speed limit on lending growth set by APRA.</p>
<p>after recent attractive offers attracted a deluge of borrowers.</p>
<p>It follows the decision of CUA, the nation's largest mutual, to stop writing new loans for property investors because demand is so strong.</p>
<p>The combined lenders have about $17.5 billion of assets and account for about 1.5 per cent of the total property lending market.</p>
<p>Their withdrawal from the market highlights continued strength of buyer demand in Melbourne and Sydney at the beginning of peak Spring sales and the inherent disadvantage on smaller lenders of a blanket 10 per cent cap.</p>
<p>Major banks, which because of their size can write much more loans and comfortably remain within limits, are cutting rates, waiving fees and offering lucrative promotional packages.</p>
<p>It also means that other lenders offering investment loans will come under greater pressure to remain within the caps from borrowers chasing the best deals.</p>
<p>Heritage Bank said it will "temporarily stop" accepting new applications for investment loans to ensure it remains "comfortably" within Australian Prudential Regulation Authority limits.</p>
<p>Under the restraints, which are intended to cool demand and direct buyers away from riskier interest-only loans, investor lending growth must remain under 10 per cent and interest-only loans can only total 30 per cent of all loans in a quarter.</p>
<p>"Heritage has experienced a sharp increase in the proportion of investment lending in our new approvals," the bank said.</p>
<p>"That's the result both of our attractive pricing structure and the actions of competitors in the market place," it said.</p>
<p>In July, Heritage chief executive Peter Lock said investment lending was only 2 per cent of mortgage growth, well below the 10 per cent regulatory cap.</p>
<p>Mr Lock warned he did not want the bank to become "an open harbour" to borrowers declined by other lenders as it launched highly competitive one and three-year fixed rate investment mortgages.</p>
<p>In recent weeks it has attempted to correct the lending imbalance and increase principal and interest lending by increasing interest-only investment lending rates and imposing an 80 per cent loan-to-value cap on interest-only loans for investment lending.</p>
<p>"We need to manage our investment lending carefully, to ensure we stay within the caps APRA has placed on growth in investor and interest only lending," the bank said.</p>
<p>In addition, its Family Guarantee packages will from today only be on offer to owner-occupier borrowers.</p>
<p>The bank is also introducing loan-to-value pricing tiers for two of its home loan products.</p>
<p>It means borrowers with smaller deposits will pay higher interest rates to "account for the higher risk".</p>
<p>It will calculate the new rate on the total amount funded, which will include fees and charges.</p>
<p>Heritage is offering a discount variable rate of 3.97 per cent for owner occupiers with a deposit of at least 20 per cent.</p>
<p>A spokesman for CUA said it continues to monitor investment lending but has no immediate plans for their reintroduction.</p>
<p>It is offering investment loans to some established customers that meet borrowing criteria.</p>
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j.ballantyne1990-6AQqhLzZaK

Heritage, CUA stop landlord loans to avoid APRA breach

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<p>National Australia Bank have cut their three-year fixed investor interest only deals, making it the cheapest lender of the big four.</p>
<p>CBA have their rates at 4.29 percent, ANZ are at 4.49 percent and Westpac are the only one breaking the 4.5 percent barrier at 4.54 percent.</p>
<p>NAB were the last of the big four banks this month to announce it was moving a number of its fixed rate loans, with the other three making cuts earlier in March.</p>
<p>Some loans, such as the five-year fixed owner occupier principal and interest, has been by 50 basis points. It went from 4.59 percent to 4.09 percent.</p>
<p>Three-year, interest-only fixed deals for investors have dropped from 4.49 percent to 4.19 percent.</p>
<p>All the changes only apply to new fixed rates deals and not for existing borrowers.</p>
<p>A <span class="il">NAB</span> spokeswoman said the changes was a result of the bank wanting “to help Australians achieve their property goals.”</p>
<p>The Reserve Bank of Australia board this week kept the cash rate on hold at 1.5 per cent.</p>
<p>AMP Capital's Shane Oliver, among other experts, believes there may not be another cash rate move until later this year or <a href="https://www.urban.com.au/expert-insights/investing/81564-olivers-insights-growth-will-continue-but-rate-hikes-not-expected-till-2019" target="_blank">in 2019.</a></p>
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jonathanchancellor-7SQnKwU6yx

NAB cut investor interest only deals and outdo other big four 

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<p>GUEST OBSERVER</p>
<p>The real estate sector has been a key driver of China’s economic growth in recent years, helping to support the economy during the transition away from growth led by investment in heavy industry towards domestic consumption.</p>
<p>However, this growth has also built a sizeable debt burden which will have to be carefully managed in coming years to avoid a major downturn. </p>
<p>This is the first of two parts looking into the real estate sector. This part provides a high level view of the importance of the sector and recent trends, while part two will look at the risks related to the sector going forward.</p>
<p><strong>PROPERTY SECTOR A CORE COMPONENT OF CHINA’S ECONOMY</strong></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/1/CORELOGIC%201.jpg" alt=""></p>
<p>Private ownership of real estate has a short history in China. Prior to the period of opening up that commenced in 1978, all property was state-owned. Two decades of gradual reforms saw the introduction of ‘commodity houses’ in 1998 – private properties that could be bought and sold at market prices. Chinese residents embraced home ownership – with surveys conducted by Peking University showing that around 90% of households own their home.</p>
<p>The property sector is a critical part of China’s economy, and has been a major driver of growth over the past decade. In 2017, the broad sector (accounting for construction and real estate services) comprised 13.2% of China’s economy – compared with 10.8% a decade earlier, highlighting above average growth over this period. The IMF estimates that when combined with upstream and downstream demand (including cement and steel, along with furniture, electronics and automobiles), real estate drives around a quarter of the Chinese economy.</p>
<p>Similarly, investment in real estate (as a share of GDP) rose sharply from the start of the century – peaking at almost 15% of GDP in 2014, before easing back to 13.3% in 2017. The residential sector accounts for over two-thirds of this total. The trend over this period was supported by the mass migration of Chinese residents from rural areas to cities, as well as a substantial improvement in the quality of housing for existing urban residents.</p>
<p><strong>Property a major part of the economy </strong></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/1/CORELOGIC%202.jpg" alt=""></p>
<p>Real estate’s importance to the financial sector has also increased in recent years. Outstanding loans to real estate have rapidly increased over the past decade – from around RMB 4.8 trillion to over RMB 32 trillion in Q4 2017. This increase has outpaced lending growth to other sectors as well as the broader economy– with real estate lending (as a percentage of GDP) increasing from 18% a decade ago to around 39% at the end of last year. Although this share is not particularly high when compared with advanced economies – particularly Australia (where it is around 90% of GDP) and the United States – its rapid growth poses some concern.</p>
<p>The key contributor to the increase in real estate lending has been residential mortgages – with the mortgage share of total real estate lending rising to 74% in December 2017, up from 63% in December 2007. In addition, the property sector has lured funds from the shadow banking sector (although data on this sector is patchy at best). In Q3 2017, around 10% of funds from the trust sector (one component of shadow banking) were invested in real estate. </p>
<p><strong>Property loans have grown rapidly </strong></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/1/CORELOGIC%203.jpg" alt=""></p>
<p>Finally, the sector has been extremely important to government balance sheets – with land sales a major source of revenue for the often highly indebted local governments. In 2016, land sales accounted for almost 26% of the total – although this share varies widely across the country. Governments also benefit from tax revenue from the real estate sector – although at present there are no residential property taxes. The sector is also been a major employer – around 27 million people were employed in construction in 2016, with a further 4 million in real estate management, which together accounts for almost 18% of urban employment (and with it income tax revenue). </p>
<p><strong>Land sales still a major source of funding </strong></p>
<p>This implies that there are various bodies – both state and private – that benefit from continued growth in construction and property development, despite growing concerns around oversupply once again. This incentive to continue to expand increases risks around China’s economy. </p>
<p><strong>RECENT TRENDS IN PROPERTY </strong></p>
<p>China’s previous residential property cycle peaked in April 2014 – following a period of domestic and international concern around potential price bubbles and overbuilding (particularly in so-called ghost cities). Aggregate prices for 70 major cities fell over the next twelve months before the recovery commenced (led by the largest Tier 1 cities – Beijing, Shanghai, Shenzhen and Guangzhou).</p>
<p>During this period, there was a substantial slowdown in investment in the real estate sector – with the rate of growth down from around 15% yoy (on a three month moving average basis) to -0.6% yoy (3mma) by November 2015. This resulted in a drop in construction activity, with residential starts (measured in square metres of floor space) falling considerably between February 2014 and January 2016. These weaker conditions flowed through into the next link in the chain – local government revenues from land sales fell 24% in 2015 on weaker demand from developers. </p>
<p><strong>PROPERTY PRICES BY TIER - </strong><strong style="font-size: 12.16px;">Vast disparities between China’s cities </strong></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/1/CORELOGIC%204.jpg" alt=""></p>
<p>However, investment in real estate recovered in 2016 – as easing property purchase restrictions allied to a credit boom, fiscal stimulus and poor performance in other asset classes supported a fresh surge in property demand and construction activity. Much of the attention was focussed on the extraordinary price increases in tier 1 cities – by September 2016, prices in these locations were 40% above their April 2014 peak – however these cities accounted for just 8% of real estate investment in 2016 (IMF). The majority of investment (59%) occurred in smaller tier 3 and 4 cities (where prices in December 2017 were only 4.0% above the previous peak), where concerns around oversupply have been higher.</p>
<p>This growth provided a major boost to China’s economy in 2016 – at a time where fears of a hard landing were elevated. In real terms, real estate and construction grew by 8.6% and 7.2% respectively in 2016, well above the rest of the economy. </p>
<p>Growing fears around overheating property markets have seen a tightening in property policies since this time– including higher down payments, restrictions on finance and tighter eligibility for purchases – however these policies have varied across the country. Prices stabilised in tier 1 cities and growth slowed substantially in tier 2 ones. As a result, the strong growth in construction starts and property sales in the first half of 2017 slowed considerably in the second half.</p>
<p><strong>CONCLUSIONS </strong></p>
<p>We anticipate the slowing trends generally exhibited across the property sector in late 2017 will extend into this year. Slowing sales and softer price trends should flow through into weaker construction activity – which would have downstream effects for steel and cement demand (along with Australian iron ore) and local government revenues (with land sales likely to fall as well). </p>
<p><em><strong>Gerard Burg</strong> is senior economist - Asia Group Economics at National Australia Bank.</em></p>
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