Investor Lending

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Banking on housing: APRA's Wayne Byres

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<p>GUEST OBSERVER</p>
<p><span>As always, a plethora of information on lending for housing-related purposes. The headline number, which is the value of total lending over July, rose by 1.5%. The detail reveals that loans to owner-occupiers (O-Os) rose by 2.2% and loans to investors were 0.5% higher. </span></p>
<p><span>O-Os: There has been pretty reasonable growth in lending to O-Os over the past year. By value lending is up 14.0% through the year and by number it’s up 3.9%. The difference between the two largely reflects the strong lift in dwelling prices which means that the average loan size has risen quite 5 solidly. Today’s data shows that the average new loan size for an O-O was 365k in July – up 9.8% through the year. Clearly, interest rate cuts have helped contribute to a lift in average loan size because the capacity to borrow rises when borrowing costs fall.</span></p>
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<p><span>Investors: For much of the past two years, lending to investors has been the dominant driver of housing-related lending growth. </span></p>
<p><span>But in the last few months lending to investors has cooled a little. It’s still early days, but there are some tentative signs that some of the measures introduced by a number of banks to slow investor-related lending growth are having the desired impact. A gradual decline in rental yields is also playing its part in moderating the rate of lending growth to investors. We expect this trend to continue over coming months. </span></p>
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<p><span>Construction: Total lending for dwelling-related construction fell slightly over July to leave annual growth at 12.9%. The solid growth in construction lending mirrors the lift in building approvals and residential construction surge currently underway. This story still has a way to run and the latest building approvals data shows that the pipeline of residential construction to come is deep. Dwelling construction generates jobs and the multiplier effect benefits other sectors of the economy. It will also help to alleviate some of the supply/demand imbalances in the property market, particularly in Sydney where dwelling prices have been running riot. </span></p>
<p><span style="line-height: 1.3em;">States: The data on O-Os by State in July shows that annual growth in the number of loans is strongest in NSW (+11.0%), followed by QLD (+4.3%) and Vic (+3.6%). Unsurprisingly, the capital cities of these States have had the strongest house price growth over the past year. Other State results were Tas (+2.0%), SA (+0.4%) and WA (-6.8%). An update on lending to investors by State will be in Friday’s Lending Finance publication.</span></p>
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<p><span>First home buyers: The number of loans to first home buyers fell by 1.0% in July to be down 1.1% through the year. First home buyers represent just 15.4% of all dwellings financed – close to record lows. </span></p>
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<p><span><em><span>Gareth Aird is e</span><span>conomist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905" target="_blank">here</a>.</span></em></span></p>
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Housing-related lending up in July: Gareth Aird

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<p>GUEST OBSERVER</p>
<p>Private sector credit rose by 0.3 percent in February after a 0.2 percent gain in January. Annual credit growth of 5.0 percent is near 3-year lows.  </p>
<p>Investor housing: Investor housing finance lifted by 0.6 per cent in February to stand 6.7 per cent higher over the year – the fastest growth in 12 months.  </p>
<p>China data: The National Bureau of Statistics manufacturing purchasing managers’ index rose from 51.6 to 51.8 in March while the services gauge rose from 54.2 to 55.1 – a near 3-year high.  </p>
<p>What does it all mean?</p>
<p>The latest lending (private sector credit) figures suggest a subdued borrowing environment. But it is important to point out that lending recorded the biggest lift in 15 months in December and only partially gave back some of that out-sized growth over January and February. The subdued February reading was largely due to a modest slide in business credit which would be expected given the out-sized gain in December. The key will be how business borrowing performs in coming months.  </p>
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<p><img src="https://www.urban.com.au/images/2017/04/02/Screen%20Shot%202017-04-03%20at%208.47.27%20AM.png" alt=""></p>
<p>Interestingly home lending continues to lift, dominated by investor credit growth. In fact annual growth in investor finance is now at a 12-month high. The measures taken over the last couple of year by regulators to curb investment lending had a temporary impact that has faded. And as such it is no surprise that the regulators have today looked at other avenues to tighten lending standards.  </p>
<p>The measures announced by APRA today are designed to keep modest pressure on the brakes of investor home lending rather than represent a slamming on the brakes. Annual growth of investor lending still remains comfortably below the 10 per cent annual growth limit although new lending has been lifting in recent months. Anecdotally the lift in interest rates on investor housing loans is already acting to slow interest in home buying.  </p>
<p>The stronger Chinese manufacturing and services data bodes well for the broader global economy. And given the strong trade links between Australia and China, policymakers would be encouraged by a strengthening Chinese economy.  </p>
<p>No doubt policymakers will continue to discuss key issues like housing affordability, but overall the central bank seems upbeat on the medium-term outlook for the Australian economy. CommSec expects no change to interest rates over the rest of 2017.  </p>
<p>What do the figures show?  </p>
<p>Private sector credit  </p>
<p>Private sector credit (lending) rose by 0.3 per cent in February after a 0.2 per cent gain in January. Annual credit growth eased from 5.4 per cent to a near 3-year   low of 5.0 per cent.</p>
<p>Housing credit grew by 0.6 per cent in February to be up 6.4 per cent on a year ago – annual growth is lifting of the lowest levels in 30 months.  </p>
<p>Owner occupier housing credit rose by 0.5 per cent in February to stand 6.2 per cent higher than a year ago – the slowest growth in 17 months. Investor housing finance lifted 0.6 per cent in February to stand 6.7 per cent higher over the year – the fastest growth in 12 months.  </p>
<p>Personal credit fell by 0.1 per cent in February to be down 1.3 per cent over the year – just up from the 1.4 per cent annual decline in January, which was the biggest annual decline in 41⁄2 years.  </p>
<p>Business credit fell by 0.1 per cent in February after a 0.4 per cent fall in January and 1.1 per cent rise in December. Business credit is 3.7 per cent higher than a year ago – slowest growth in 21⁄2 years.  What is the importance of the economic data?  </p>
<p>Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.</p>
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<p><img src="https://www.urban.com.au/images/2017/04/02/Screen%20Shot%202017-04-03%20at%208.46.29%20AM.png" alt=""></p>
<p>What are the implications for interest rates and investors?</p>
<p>The Chinese economic data remains encouraging, showing that the transition from the industrial sector to household sector remains on track. The manufacturing sector is expanding, while the services sector is clearly the driver taking up any slack.  </p>
<p>Interest rates are super-low but credit growth is slowing rather than rising. Excluding investor housing, demand for loans is modest. Consumers and businesses are still keen to pay down debt rather than take up new credit.  </p>
<p> Interest rates will remain on hold over the rest of 2017.  </p>
<p><em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></p>
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Investor lending dominates borrowings: CommSec's Savanth Sebastian

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<p><span style="line-height: 1.3em;">GUEST OBSERVER</span></p>
<p><span style="line-height: 1.3em;">The minutes of the RBA August board meeting revealed a marginally more positive tone to the commentary. Given that the Board meeting pre-dates the release of the comprehensive Statement on Monetary Policy (SoMP), </span><span style="line-height: 1.3em;">they don’t provide </span><span style="line-height: 1.3em;">significantly new detail, but </span><span style="line-height: 1.3em;">the tone suggests that interest rates are firmly on hold.</span></p>
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<span style="line-height: 1.3em;">Does this mean the Bank has moved to ‘neutral’? We don’t really think so. </span><span style="line-height: 1.3em;">Whil</span><span style="line-height: 1.3em;">e the RBA is certainly wishing and hoping that it won’t have to cut rates again, </span><span style="line-height: 1.3em;">over the next 18 months there is still a greater risk of a further cut in the cash rate than a hike.</span><br><p style="line-height: 1.3em;">The points of interest in the minutes were:</p>
<span style="line-height: 1.3em;">The Board noted that downside risks to the outlook for China growth have receded. The improvement in housing markets and stimulatory policy steps taken were noted. Keep in mind though that the meeting pre-dates the release of the patch of very weak data last week (especially for exports) as well as the devaluation of the RMB.</span><br><p style="line-height: 1.3em;">On the domestic economy, the minutes had a decidedly ‘glass half full’ feel about them, despite the fact that the forecasts presented to the board included a downgrade for GDP forecasts. They noted the improvement in labour market outcomes, and were relatively positive about consumption noting that “the most recent data on retail sales and liaison information were consistent with the momentum in consumption growth being sustained”.</p>
<p style="line-height: 1.3em;"><span style="line-height: 1.3em;">The minutes also noted the improvement in business conditions, but highlighted the fact that the pick-up was concentrated in household and business services, which are generally less capital intensive than goods-related sectors.</span></p>
<p style="line-height: 1.3em;"><span style="line-height: 1.3em;">On the currency, the minutes reiterated the points made by Governor Glenn Stevens in a recent speech and the SoMP, that the lower exchange rate was supporting net services exports</span></p>
<span style="line-height: 1.3em;">Board members discussed APRA’s measures targeting investor hou</span><span style="line-height: 1.3em;">sing lending, but noted that it was too early to gauge the impact</span>
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<div class="column"><em><span style="line-height: 1.3em;">Felicity Emmett co-head of Australian economics, ANZ Research and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/felicity-emmett/5a/3ba/256" target="_blank">here</a>.</span></em></div>
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The RBA's 'glass half full' outlook: ANZ's Felicity Emmett

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<p>Policies seeking to increase home buyers’ purchasing power when supply is insufficient will serve only to drive up prices and reduce housing affordability, according to the Australian Bankers Association Inc (ABA).</p>
<p>"The buying power of most home purchasers is determined ultimately by the amount of money they can borrow. </p>
<p>"The average loan size is now $357,500 or 8.7%higher over the past year, and not surprisingly the highest on record."</p>
<p>Finance providers are maintaining high lending standards, claimed ABA in the submission to the House of Representatives Standing Committee on Economics.</p>
<p><span style="line-height: 1.3em;">"The proportion of new loan approvals to high LVR borrowers, i.e. LVRs more than 90% has fallen since 2009 for all borrowers and remains below 10% for investor loans.</span></p>
<p>"Low doc loans have fallen to very low levels for both owner-occupiers and investors. The proportion of interest only loans has been gradually rising since 2009, with investors showing a greater propensity to use this form of financing compared with owner-occupiers. The share of housing loans which are impaired has been falling since 2011." </p>
<p>Australia needs to progressively increase its housing stock to shelter its growing population. </p>
<p><span style="line-height: 1.3em;">"Over the year ending September 2014 Australia’s population is estimated to have increased by 354,600.Of this, 150,700 was natural increase and 203,900 was net overseas migration. </span></p>
<p>"There is a danger that policy prescriptions that seek to address issues in particular markets – such as excess demand in Sydney and Melbourne – but which are applied across the nation may have unintended consequences in other areas of Australia where such issues are less pressing or absent." </p>
<p><span style="line-height: 1.3em;">ABA believes that there is significant opportunity for reform in policies to increase land release for housing construction. </span></p>
<p>"The supply side of the housing industry is now beginning to lift. Approvals to build new dwellings have been trending up since mid-2012 and over the year to April 2015, 214,000 approvals were issued for the construction of dwellings. </p>
<p><span style="line-height: 1.3em;">Building approvals </span></p>
<p>"The close relationship between interest rates and housing construction approvals does not mean that interest rates can be used as a policy tool to address issues of housing shortages. </p>
<p>"Interest rates influence the short term cycles in construction, but do nothing to address the longer term structural imbalance between demand and supply."</p>
<p>In terms of structural issues a persistent complaint is that development is hindered by a shortage of green field sites, reflecting insufficient land release by state governments, and by excessively restrictive council regulations and developer levies. </p>
<p>"Demographia supports the assertion that higher land prices are a major factor and that a key reason for expensive land is inadequate release of new land for development." </p>
<p>Around two thirds of households own or are purchasing their home and about one third are renting. Australia’s home ownership rate is around the middle of many of its peers in the Organisation for Economic Co-operation and Development (OECD). </p>
<p>"More recent data on housing finance commitments suggests that investors are increasing their share of the housing stock. This is not a uniform trend across Australia but is particularly marked in Sydney and to a lesser extent in Melbourne."</p>
<p>Banks are the predominant suppliers of finance for housing in Australia and housing loans comprise the major part of most banks’ assets. </p>
<p><span style="line-height: 1.3em;">"Loans outstanding for the purchase and construction of houses total $1.46 trillion. Of this, banks lend $1.35 trillion, with the remainder spread among building societies, credit unions and finance companies. </span></p>
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<p>"Housing loans comprise 62 per cent of the total lending assets of banks and about two- thirds are loans to owner-occupiers and the remaining third to investors. </p>
<p>"Over the past two years or so the growth rate [of borrowing for housing] has gradually accelerated and has now reached 7.2 per cent over the year ending April 2015. </p>
<p>"The growth rate over recent months has been the highest since late 2010, but it is well below the average rate of growth in the pre GFC era. The last historical high point was in March 2004 at almost 22 per cent."</p>
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<p>Interest rates on home loans are at multi-generational lows. The average advertised standard variable mortgage rate was 5.45 per cent in May 2015, the lowest since 1968. </p>
<p>"Today’s discounted rate is even lower at less than 5 per cent. These low rates compare to the 17 per cent peak recorded between June 1989 and March 1990.</p>
<p><span style="line-height: 1.3em;">"These low rates charged to home borrowers are in part a reflection of the intense competitive environment faced by bank and non-bank lenders. Mostly however, they are a product of the globally low interest rate environment. The RBA’s cash rate was reduced to 2.00 per cent in May 2015 - the lowest in a generation. </span></p>
<p>"Interest rates on fixed rate loans are also very low at below 5 per cent. The proportion of loans which are fixed rate is now falling. Around 10 per cent of new loans are fixed rate, which is about half the proportion in 2013. </p>
<p>"Household finances are in good shape. Dwellings are the single largest component of household wealth at $5.1 trillion, with superannuation at $1.9 trillion. </p>
<p><span style="line-height: 1.3em;">"The ratio of housing debt-to-housing assets is around 28 per cent, with every $1 of debt being matched by over $3 in house value."</span></p>
<p><span style="line-height: 1.3em;">Although households are increasing their borrowings for housing, they are also prepaying their loans to a greater degree. As a result of this, households are now on average the equivalent of 28 months, or more than two years, ahead on their mortgage repayments </span></p>
<p><span style="line-height: 1.3em;">A change in the mix of property taxes away from stamp duty, and with greater emphasis on land tax would likely improve turnover in the housing market, improving the efficiency of the use of the existing stock of housing</span></p>
<p>The ABA supports the recommendation of the Committee (recommendation 9.70) that Treasury should prepare and publish a study on the influence of negative gearing on the housing market.</p>
<p><span style="line-height: 1.3em;">ABA also believes there is not enough evidence to support that current CGT arrangements combined with negative gearing encourage speculative investment as deductions are made at the taxpayers’ marginal tax rate, but gains are taxed at half of that rate. </span></p>
<p><span style="line-height: 1.3em;">"Removal of stamp duty on housing transactions would simplify taxation arrangements. It would improve efficiency by increasing the level of beneficial transactions and by improving the allocation of resources. </span></p>
<p>"Abolishing stamp duty would result in a more efficient allocation of housing, as it would no longer act as a barrier to downsizing or moving to a more suitable property. It would also cease to act as a barrier to workers seeking to move for better employment opportunities. </p>
<p>"An abolition of stamp duty would be expected to result in an increase in property values, particularly in an environment of constrained supply. </p>
<p>"For banks this would improve (reduce) the LVRs of existing borrowers, with a concomitant reduction in the riskiness of the existing housing book. It would lift the effective available deposits for new borrowers although the effect of this on improved housing affordability may be offset by higher purchase prices. </p>
<p><span style="line-height: 1.3em;">"Land tax is a more efficient form of property tax than stamp duties, particularly when it is broad-based. </span></p>
<p>"Broadening the scope of land taxes provides an opportunity to lower the rate of tax. </p>
<p>The revenue implications of changing the rate of land tax vary markedly depending on its scope. </p>
<p><span style="line-height: 1.3em;">"The only argument in favour of higher rates of land tax is to increase government revenue. Due to the low excess burden of land tax, changing the rate of land tax to increase government revenue would be one of the least distortional methods to boost receipts. </span></p>
<p>"However, a change in rate by itself does not address the issues of complexity or fairness."</p>
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Finance providers maintaining high lending standards: ABA

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<div>It's mainly a been a week of furious tax debate. Admittedly it's been quite a few years since I was employed in a tax position of any note, and even longer since I sat my tax exams.</div>
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<div>No matter, for almost everyone in Australia is a tax expert, and nearly all of us are in agreement that someone needs to pay more tax...just as long as it isn't us!</div>
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<br>Higher stamp duty levies, land tax, income tax, capital gains tax, imputed rental charges, corporation taxes, and superannuation taxes are just a handful of the tolls and contributions being demanded by the baying mob. We are suddently all sure loving the idea of higher taxes!<br><br>A couple of things I can recall from studying tax, particularly with regards to the interdependent sectors of the housing market, are that firstly it's far easier to tweak tax rates and sections of the tax legislation than it is to rip them up entirely, and secondly most modelling and scenario analysis falls over miserably because it fails to account accurately for behavioural change triggered by new tax legislation. </div>
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<div>To be frank, I'll believe any fundamental changes when I see them. Deductibility of mortgage interest for investors has effectively been a bi-partisan policy for decades, and it's only now in Opposition that the ALP is proposing a second stab at grandfathering negative gearing rules. My guess is that the most likely change to housing market taxes would be caps on deductibility, but that really is just a guess.</div>
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<br><strong><span style="text-decoration: underline;">Record residential construction boom</span></strong>
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<div>Perhaps the most curious part of the entire issue is the timing. A surge of investor lending has seen rental growth careering to 20 year lows, and with the supply response now in full swing a record nadir is almost certainly in the post. In fact, we're already there according to CoreLogic-RP Data's data series.<br><br>It's a well worn argument that investors don't add to the dwelling stock, but if you've ever worked in the development space you'll know that developers don't <span style="text-decoration: line-through;">give a</span> <span style="text-decoration: line-through;">care a toss</span> give a fig whether a property is bought by a homeowner or an investor, negatively geared or otherwise.<br><br>What creates new supply is declining financing costs, rising demand in aggregate, and thus rising prices, and as this cycle has progressed we have been getting all of these in spades, particularly resulting in a surge of new units, townhouses &amp; apartments, which in turn has already cooled these parts of the housing market naturally.<br><br>The strongest prices gains have been seen in Sydney and Melbourne and these cities have played host to the bulk of the supply response, though a combination of rising prices, low interest rates and, let's be blunt about this, a fresh market of Chinese mainland buyers of new apartments, has seen construction activity increase sharply in Brisbane and elsewhere too.<br><br>Only a couple of years after the system was apparently busted (which would allegedly march us into a recession) residential construction activity hit its highest ever level. So much for negative gearing restricting the dwelling stock - it's the greatest residential construction boom on record!</div>
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<strong><span style="text-decoration: underline;">Rents?</span></strong><br><br><span>As for whether falling demand from investors would lead to rents rising, logically the answer is obviously "yes" as rental supply diminishes, for not all renters want to buy, and many could not afford to do so without borrowing the full purchase price and associated closing costs, a dynamic regulators have been nervously edging away from ever since the financial crisis.</span><br><br><span>Unfortunately I don't have much hard Australian-based evidence upon which to base this assertion, since there have only been two instances where rents have spiked in Australia over the 33 years of available data, but one might reasonably expect that these coincided with downturns in investor activity.</span>
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<div>Incidentally, another quirky facet to the negative gearing debate has been the so-termed "Fact Check" articles which instruct us that rental growth indices "must" be adjusted for inflation i.e. the price of consumer goods (such as the price of cheese, pork, sewerage costs, goat, and so on). "Must" they, fact checkers? According to whom are these "facts" actually facts?<br><br>While there may conceptually be a very loose relationship between inflation and rental price growth, at best it is a link bound by a mile-long rubber band. I've never once come across a landlord adjusting rents for the growth in price of a tub of ice cream, or a dozen eggs, or a packet of smokes, the price of having a root canal, or whatever. It's an absurd notion, really.<br><br>Typically rental price growth is simply one function of the wider property market cycle, specifically supply (the number and type of rentals available for lease) and demand (the volume of renters in the market, and the product collectively in demand from them), although household income growth does indirectly play its part.</div>
<br><div>We can see in the chart below that investor lending more than halved from $0.210 billion in May 1985 to $0.099 billion by early 1986, so evidently the amendments to the tax legislation at that time did change investor behaviour, while dwelling starts also immediately collapsed as charted here previously.</div>
<br><div>Unfortunately the ABS data on investor loans is sawn off at January 1985, so it's not possible for me to put the drop into a wider context, although if you believe what property-loving folk wrote nearer to that time, investor sentiment fell dramatically, which contributed to rent increases in Sydney and Perth in the short space of time that interest deductibility was quarantined.</div>
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<span>The inverse link between investor activity and rental price growth in these two charts above could not be any clearer.</span><br><br><span>Moreover, the property markets of today aren't readily comparable unless population growth is dialled back, since in the major markets of Sydney and Melbourne absolute population growth is much higher. Victoria's population grew by 42,781 in 1985, for example, but has been tracking at around 2.5 times that level recently.</span><br><br><span>Mostly old ground. But what about more recently when annualised rental growth soared to 8.4 per cent in December 2008? Was there also a dip in investment lending then which led to the rental supply shortage and some wrecthed rent increases in parts of Sydney and elsewhere?</span><br><br><span>Again, clearly yes, the figures show that investor lending all but halved from $10.1 billion in June 2007 to just $5.1 billion by January 2009, coinciding exactly with the spike in rents as investors deserted the market, spooked by the onset of the global financial crisis and various predictions of a crash by market commentators.</span><br><br><span>As you can see in the chart below, investor lending rebounded strongly from the month of February 2009, which was the month within which Kevin Rudd announced his famous $42 billion stimulus package, and rental growth quickly cooled again.</span>
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<div>Overall the figures suggest that sharp rental price increases do follow declines in investor activity, pretty much exactly as you would expect.<br><br><strong><span style="text-decoration: underline;">Recent pullback</span></strong><br><br>At the end of the above chart, we can see that monthly investor lending has recently fallen from a peak of $15.5 billion in June 2015 to $12.6 billion by December. Despite this pullback, which was driven by APRA's interventionary measures, I actually don't see strong rental growth returning any time soon for a few reasons. </div>
<div> </div>
<div>Firstly because the rate of dwelling construction and work in the pipeline remains at very high levels. Secondly because such a high proportion of new dwellings is presently being bought by foreign buyers (and thus are not captured by this data). And thirdly because I also have a sneaking suspicion that a fair percentage of deemed "owner-occupiers" are magically switching to become investors post-purchase.<br><br>There may also be some small impacts from subtle shifts in rental practices such as the growth of Air B&amp;B, although these will surely be less influential than the key trends.</div>
<div> </div>
<div>Overall, despite media articles assuring us over and over again that hosing down investor activity would not lead to increasing rents, market experience tells me that in the largest capital cities this is precisely what would play out. </div>
<div><strong><span style="text-decoration: underline;"> </span></strong></div>
<div><strong><span style="text-decoration: underline;">Changes to tax?</span></strong></div>
<div> </div>
<div>Penultimately, few figures have been tortured more enthusiastically of late than those showing who claims negative gearing benefits or deductions for net rent. Of course, the highest deductions in dollar value terms are claimed by high income earners, since this cohort pays the highest rate of tax - and thus the most tax - and also tends to buy more expensive rental properties, which naturally have a weaker rental return. </div>
<div> </div>
<div>The data presented objectively by Cameron Kusher of CoreLogic-RP Data below show that negative gearing is used right across the spectrum of taxpayers by income bracket, although it <strong><em>is </em></strong>true that you are more likely to claim net rent deductions if you have taxable income of $80,000 or above (25.8 per cent of taxpayers in this cohort) than if you earn $80,000 or below (13 per cent).</div>
<div> </div>
<div><a href="/images/2016/02/23/ATO.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2016/02/23/ATO.jpg" alt=""></div>
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<div>
<div>This rings true. From my own experience, none of my friends owned a rental property when we worked in part time jobs at university or in the years immediately after high school, but a fair few did so over time as they grew older, got full time and better paying jobs, met life partners who were incumbent property owners, and so on.</div>
<div> </div>
<div>The figures show that the overwhelming majority of taxpayers with rental properties never own more than one property, and most of the remainder own only two (this can easily happen by default as a couple leave their respective starter home apartments in order to cohabit), while my experience in the market tells me that everyday people in full time employment claim rental deductions just as frequently as CEOs and surgeons. You can see this for yourself every weekend at opens and auctions. </div>
<div> </div>
<div>In this regard, market experience is as instructive as the tortured data. Not dissimilarly it was obvious during the so-called "homebuyers strike" in Sydney that every second person who called me was a first-time buyer, but rightly or wrongly they were buying an investment property as a first step onto the ladder rather than a home (and as such were not being captured or classified as "homebuyers").</div>
<div> </div>
<div>There have been calls to halve the capital gains tax discount, but with a Coalition Prime Minister with a net worth of well over $100 million, this seems to me to be a seriously remote prospect.<br><br>It's worth noting that the introduction of the capital gains tax discount did not halve tax payable as is frequently implied, rather it replaced the old indexation of the cost base system which ran from 1985 and was not discontinued until 1999, inflicting a searing pain upon tax exam students and preparers of tax returns alike.<br><br>Capital gains tax (CGT) is a crappy tax, especially when it does not account for inflation, effectively a punitive double <a href="https://www.themoneyillusion.com/?p=7091" target="_blank">taxation of savings</a> which discourages investment. The optimal rate of CGT is zero. In any case new housing is already one of the most heavily taxed commodities there is.</div>
<br><strong><span style="text-decoration: underline;">New builds?</span></strong><br><br><div>Finally, on paper, Labor's proposal to limit negative gearing deductions to new builds sound plausible, but in practice this would simply replace one market distortion with another. In particular buyers of new-build investment properties benefitting from tax deductions would discover that their resale market had been ripped out from underneath them, effectively leaving them sitting on six-figure paper losses or "negative equity" from the date of settlement.</div>
<div>
<br>Indeed this already happens to buyers of new properties today, albeit to a less dramatic extent, which is why in the absence of homebuyer grants for new builds developers often sell to self-managed super funds lured by tax incentives and bad advice from accountants, or to foreign buyers. Chris Bowen's assertion that buying new property is not "in any sense" more risky than buying established is discredited by all available research.<br><br>Most of the debate this week has really been about intergenerational equity rather than budget repair, which is sensible, but perhaps overlooks the high level of supply of construction in the pipeline.<br><br>In my opinion changing negative gearing rules - which after all, is a timing difference rather than a genuine tax concession - would generate close to zero additional tax revenue after behavioural change, reduced stamp duty excise and soaring public housing costs are accounted for. In any event, net rental losses have declined since even in nominal terms in 2008, while net rental profits have increased by well over 50 percent.</div>
<div> </div>
<div>
<p><span><em>PETE WARGENT 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><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Record residential construction boom: Pete Wargent

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<div>If anyone doubted APRA's commitment or ability to quell interest-only lending, then they definitely shouldn't any more.</div>
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<div>New interest-only loans have been smashed to smithereens, down from 45.6 per cent of the market at the 2015 peak to just 16.9 per cent.</div>
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<div>Banks continue to wind back high loan-to-value ratio (LVR) lending, continuing a trend that has been underway for 4 years now. </div>
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<div>Property buyers will not only need to pay back principal, they'll need to have a decent deposit too.</div>
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<div>Despite this, the total value of residential mortgages on ADI books rose by +6.9 per cent over the year to September, as the pendulum swings from investors to homebuyers.</div>
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<div>A seismic shift in the market then, as more borrowers will now be compelled to pay back some debt.</div>
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<div>With interest-only lending peaking in 2015, the greatest volume of rollovers will occur in 2020 - <a href="http://petewargent.blogspot.co.uk/2017/10/p-cliff" target="_blank">see here</a> for my thoughts on what might happen then. </div>
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<p class="p1"><span class="s1">PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank"><span class="s2">AllenWargent</span></a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank"><span class="s2">blogger</span></a>.</span></p>
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APRA strikes back to quell IO lending

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<div>Anyone who implies you that they have any genuine clarity around what is happening with Housing Finance data at the moment is telling you porkies, but since the September data was released today, let's at least see what we can deduce!</div>
<div> </div>
<div>At the margin there are evidently blurred lines between loans that are being classified as investor lending, and those which are determined to be owner-occupier approvals. </div>
<div> </div>
<div>The figures reported for new investor lending dropped sharply in September to $12.3 billion on a seasonally adjusted basis, having pulled back from a record peak of above $14 billion in April. </div>
<div> </div>
<div>As sure as night follows day, however, with Australia's major lenders continuing to target high returns on equity (ROE) there will certainly be a strong push to promote owner-occupier lending (ask for a mortgage discount!), and this was once again in evidence with another 3 per cent seasonally adjusted surge in the value of commitments in September to more than $21 billion.</div>
<div> </div>
<div>Thus while the monthly value of investor lending is now broadly flat year-on-year, the total value of owner-occupier commitments has leapt more than 23% higher.</div>
<div> </div>
<div><a href="/images/2015/11/12/HF1.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/11/12/HF1.jpg" alt=""></div>
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<div>
<div><strong><span style="text-decoration: underline;">Blurred lines</span></strong></div>
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<div>Given the blurred lines in relation to loan classifications and refinancing right now, the most straightforward measure of housing market activity is simply to look at the aggregate value of housing finance. </div>
<div> </div>
<div>There was more than a slight suspicion that the rocketing value of owner-occupier commitments in the preceding month was partly a result of the mis-classification of refinancing as new lending.</div>
<div> </div>
<div>While this story remains somewhat unclear for now, the housing finance data showed another very strong month of lending in aggregate at a seasonally adjusted $33.4 billion, taking the trend estimate up to a fresh high.</div>
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<div><a href="/images/2015/11/12/HF2.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/11/12/HF2.jpg" alt=""></div>
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<div>
<div>Classification issues or no, given that total seasonally adjusted monthly housing finance breached $25 billion for the first time only two years previously in September 2013, a total result of $33.4 billion is a phenomenally high level of activity by any reckoning.</div>
<div> </div>
<div>Ultimately, as pointed out by Reserve Bank Governor Stevens recently, borrowers can still source mortgage rates of close to 4 per cent despite the recent tightening on some investor loans, and there is still a good deal of appetite for borrowing where finance can be successfully sought.</div>
<br><strong><span style="text-decoration: underline;">Unintended consequences</span></strong><br><div> </div>
<div>Macroprudential measures taken to cool housing markets will inevitably have some unintended consequences, one of which may be that lenders demanding a high ROE target potential borrowers with existing equity, which in a curiously reflexive manner might skew lending towards markets which have already outperformed through the cycle.</div>
<div> </div>
<div>That is, cooling measures could accidentally spill fuel onto raging fires, since banks still have a desire to lend even in the face of stricter loan-to-value ratio (LVR) controls. </div>
<div>
<br>Certainly in London we saw the Pommie equivalent Mortgage Market Review (MMR) gum up UK market activity in aggregate, yet by the end of Q2 2014 the London housing market was blowing off in a spectacular starburst of bubbliness, recording its fastest annual rate of price growth in nearly three decades at +26 per cent.</div>
<div> </div>
<div>Nor has the underlying problem remotely gone away since, with record low mortgage rates helping to thrust the average London house price considerably <a href="https://petewargent.blogspot.co.uk/2015/10/average-london-house-price-500000" target="_blank">hig</a><span><a href="https://petewargent.blogspot.co.uk/2015/10/average-london-house-price-500000" target="_blank">her still to <span>£</span>500,000</a>, </span>and the latest <a href="https://www.cityam.com/228290/uk-house-prices-london-property-prices-to-rise-a-third-by-2019-as-demand-continues-to-outweigh-supply" target="_blank">forecasts</a> projecting another kamikaze 31 per cent boom in London house prices by 2019. </div>
<div>
<br>Commentary suggesting that Auckland house prices would be curbed by macroprudential measures also proved to be misguided, at least in the near term, with house prices thereafter bubbling up in rampant fashion towards the million dollar mark, although a reversal may at last now be falling due.</div>
<div> </div>
<div>Another of the unintended consequences of macroprudential measures may be a premature end to Australia's residential building boom, with loans for the construction of new homes sinking almost right across the board over the past year, and investor loans for the construction of new residential properties having tanked by nearly a quarter.<br><br>Thirdly, tighter lending measures will almost certainly knock more budding first time buyers out of the market, with market share tumbling from 15.8 per cent to 15.4 per cent in the month, and first time investors or "rent-vestors" doubtless befalling a similar fate due to their lack of existing equity.</div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Granularity of markets</span></strong></div>
<div>
<br>In this context it will be interesting to see what happens to lending in Sydney and Melbourne over the year ahead, since there exists tentative evidence of similar patterns unfolding.</div>
<div> </div>
<div>Of the 23 per cent boom in the value of monthly owner-occupier commitments over the past year, New South Wales has accounted for nearly two thirds of that increase, and Victoria one third.<br><br>The two most populous states - and home to the two capital cities which have overwhelmingly played host to the housing value growth through this cycle to date - have accounted for almost all of the increase in the value of lending.</div>
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<div><a href="/images/2015/11/12/HF3.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/11/12/HF3.jpg" alt=""></div>
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<div>
<div>Queensland is home to any number of regional markets which have floundered in contrast to their supposed hotspot status of 2012 - Moranbah, Dysart, Emerald, Bowen, Chinchilla, Roma, and Gladstone, to name but a few - so in this context the relatively moderate uptick in lending commitments at the state level can be no surprise.</div>
<div> </div>
<div>Indeed the figures conversely augur well for housing market activity across the Greater Brisbane area given that the original data for Queensland in September showed solid total owner-occupier lending of $3.44 billion, taking lending volumes up to a 67 month high on a 12mMA basis.</div>
<br><div>As for the New South Wales figures in September, there has never been a month of home lending like it in Australia, with the original data busting out a +46.2% year-on-year increase in the value of lending to an astonishing $8.55 billion.</div>
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<div><a href="/images/2015/11/12/HF4.jpg" target="_blank">Click to enlarge</a></div>
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<div>
<p><span><em>PETE WARGENT 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><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Investor lending cools: Pete Wargent

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<div>The Lending Finance data released yesterday for the month of June 2015.</div>
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<div>Total lending was once again superficially very strong at a seasonally adjusted $74.7 billion for the month.<br><br>While this was only a moderate increase for the month, on a rolling annual basis total lending has increased to a new high of $857 billion.</div>
<div> </div>
<div>Note that the "commercial loans" category includes property investment loans, so the recovery in credit growth is rather more housing-focused than first it may appear.</div>
<p><a href="https://3.bp.blogspot.com/-hLjERfYhiNk/VcgOlQzorcI/AAAAAAAAXg4/GdmpPCJx3a4/s1600/A4.jpg" target="_blank">Click to enlarge</a></p>
<p><br><a href="https://3.bp.blogspot.com/-hLjERfYhiNk/VcgOlQzorcI/AAAAAAAAXg4/GdmpPCJx3a4/s1600/A4.jpg"><img src="https://3.bp.blogspot.com/-hLjERfYhiNk/VcgOlQzorcI/AAAAAAAAXg4/GdmpPCJx3a4/s640/A4.jpg" width="640" height="280"></a></p>
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<p><strong><span style="text-decoration: underline;">nvestor loans - Sydney investor credit explodes</span></strong><br><br></p>
<div>Drilling into the commercial lending figures we can see that the property investment loans by state data is telling. </div>
<div> </div>
<div>Up until the month of June, while the investor loan crackdown by the regulator APRA may have had an impact in aggregate, investor lending in Sydney was still rising fast.</div>
<div> </div>
<div>In fact, New South Wales investor loans accelerated in June to a record $6.55 billion to record a rolling annual total of an astounding $64.9 billion.</div>
<p><a href="https://3.bp.blogspot.com/-Abb1wPadxP0/VcgOkqurF_I/AAAAAAAAXgs/o7VArJh790s/s1600/A3.jpg" target="_blank">Click to enlarge</a></p>
<p><a href="https://3.bp.blogspot.com/-Abb1wPadxP0/VcgOkqurF_I/AAAAAAAAXgs/o7VArJh790s/s1600/A3.jpg"><img src="https://3.bp.blogspot.com/-Abb1wPadxP0/VcgOkqurF_I/AAAAAAAAXgs/o7VArJh790s/s640/A3.jpg" width="640" height="278"></a></p>
<div>Thus while investor lending growth in aggregate had begun to slow by June, Sydney investors are now sitting on deep pools of equity following years of strong capital growth and this equity can often be used as 20 per cent deposits.<br><br>As a result as this stage investor loans may have been more impacted in other capital cities and regional centres where capital growth has been much weaker or in many cases non-existent.</div>
<div> </div>
<div>My information is that we should start to see investor loans slowing in the July and particularly August figures.</div>
<div> </div>
<div>However, as I looked at last week, the housing finance data also shows that owner-occupier commitments in New South Wales have now responded to low interest rates in booming to a record high $6.6 billion on a seasonally adjusted basis in June.</div>
<div> </div>
<div>Housing markets are the sum of their parts and therefore below I have charted the raw unadjusted "Original" data for New South Wales in a stacked columnar format.</div>
<div> </div>
<div>As you can see in the chart below, the month of June was by a significant margin the biggest month of lending on record for any state in Australia's history.<br><br>
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<div><a href="https://3.bp.blogspot.com/-pPjg2ax1nkM/VckXlsIKhOI/AAAAAAAAXiA/764PBQJU-qc/s1600/A9.jpg" target="_blank">Click to enlarge</a></div>
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<span>A couple of observations here.</span><br><br><div>Firstly, note that the ABS Lending Finance data series records loans written domestically, suggesting that the boom in Sydney dwelling prices has been primarily driven by domestic investors (and now homebuyers).</div>
<div> </div>
<div>That said, foreign capital is playing its part to some extent too, as I've written here previously, particularly relating to new dwellings.</div>
<div>
<br>Recall that foreign buyers without Australian residency are generally granted permission to buy new residential property.</div>
<div> </div>
<div>Foreign buyers with no Australian residency typically cannot buy established residential property unless they have specific permission to do so from the Foreign Investment Review Board (FIRB).</div>
<div> </div>
<div>This permission may be granted in some instances, such as for development projects.</div>
<div> </div>
<div>Licensed real estate agents, buyers agents and solicitors have simple procedures in place to ensure that they only deal with legal purchasers of established property.</div>
<div>
<br>As the above chart clearly shows there is more than enough domestic business from Australian residents without needing to seek business from buyers without Australian residency. </div>
<br><strong><span style="text-decoration: underline;">Around the states</span></strong><br><br><div>As noted above New South Wales investor loans accelerated in June to a new high of $6.5 billion in June. </div>
<div> </div>
<div>On a 12mMA basis investor loans in New South Wales rose to a record high $5.4 billion.</div>
<div> </div>
<div><a href="https://1.bp.blogspot.com/-7KU4Mf3dxnY/VcgOkrmanCI/AAAAAAAAXgo/XHBtOBINfEE/s1600/A1.jpg" target="_blank"><span style="line-height: 1.3em;">Click to enlarge</span></a></div>
<div><span style="line-height: 1.3em;"> </span></div>
<div>
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<br><div>Low interest rates and expectations of future price growth have also impacted investor loans in Victoria. </div>
<div> </div>
<div>It's impossible to call the market peak accurately, but it's my belief that - unlike Sydney - Melbourne has been overbuilding in the unit and apartment market in particular, and this will result in stagnant rents and prices in due course for certain sectors of the market. </div>
<div> </div>
<div>There may be a material price correction in time too, especially for new and off-the-plan builds.</div>
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<div><a href="https://4.bp.blogspot.com/-CqPJELW4MwI/VcgVHrv8GeI/AAAAAAAAXhY/WgovxM2s70o/s1600/A6.jpg" target="_blank">Click to enlarge</a></div>
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<br><div>Queensland's resources regions and regional centres may be struggling as the mining investment boom turns to bust, but house prices are now rising in inner Brisbane.</div>
<div> </div>
<div>For my money, Brisbane may well be the best performing capital city housing market in 2016, although asset selection will be important here (there is much high-density building taking place).</div>
<div>The trendline below which records investor loans on a 12mMA basis shows that Queensland investor lending in aggregate is now tracking at their highest level since April 2008.</div>
<p><a href="https://3.bp.blogspot.com/-QTEbjM-b_nE/VcgOklLIqVI/AAAAAAAAXgk/5ASN33dV5wE/s1600/A2.jpg" target="_blank">Click to enlarge</a></p>
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<div class="separator">Western Australia's property markets are now demonstrably into their downturn phase, and consequently despite low interest rates investor loans volumes are trending down.</div>
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<div class="separator">Some property experts have painted themselves into a corner with regards to South Australia and will continue to recommend investing there come hell of high water.</div>
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<div class="separator">With very little building activity in the detached housing sector the Adelaide market has certainly been tightening nicely, yields are comparatively strong, and after 7 or 8 years of weak dwelling price growth there is plenty of value of money to be found, even close to the centre of Adelaide.  </div>
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<div class="separator">On a 12mMA basis investor loans in South Australia are now tracking at their highest ever level at $437 million.</div>
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<div class="separator">A word of warning, however,</div>
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<div class="separator">Barely a week passes without further news of redundancies in South Australia, with the unemployment rate having trended up alarmingly from 5.2 per cent in October 2011 to 7.9 per cent today...and rising.</div>
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<div class="separator">In fact, if you have a low budget, my personal belief is that a combination of foreign capital, a n ongoing depreciation of the Aussie dollar, record Chinese tourism spend and a tightening market will see Hobart emerge as the surprise package capital city housing market over the short term.</div>
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<div class="separator"><span>The longer term economic and demographic fundamentals in Tasmania are admittedly uncertain.</span></div>
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<p><span><em>PETE WARGENT 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><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Pace of NSW investor lending accelerates: Pete Wargent

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<p>Lending finance data for August 2015 was released by the Australian Bureau of Statistics (ABS). </p>
<p>The latest data paired with the previously released housing finance commitments data shows that lending to investors has slowed sharply over recent months following the regulatory changes from APRA and the subsequent changes to lending policies from most mortgage lenders.</p>
<p><a href="/images/2015/10/13/Chart-13.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2015/10/13/Chart-13.jpg" alt=""></p>
<p><span>The above chart shows the proportion of new lending to investors across each state and territory in August 2015.  Note that when we say new lending we exclude refinances as they are not associated with a new purchase of property.  New South Wales had the greatest proportion of new lending to investors over the month however, we have seen lending to this segment of the market slow across each state and territory.</span></p>
<p><a href="/images/2015/10/13/Chart-22.jpg" target="_blank"><span>Click to enlarge</span></a></p>
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<p>Mortgage lending to investors peaked in May 2015 prior to most Australian ADI’s implementing changes to lending policies relating to investment mortgages.  At that time, the proportion of new lending to investors was much higher in each state and territory than it is currently.  In each state and territory there has been a significant decline in the value of new lending to investors between May and August of this year.  Across each state and territory the magnitude of the fall in investor lending has been recorded at: -10.5% in NSW, -14.0% in Vic, -15.2% in Qld, -17.0% in SA, -10.1% in WA, -10.0% in Tas, -35.6% in NT and -23.5% in ACT.</p>
<p>While new lending to investors has fallen away over recent months, there has been a rise in new lending to owner occupiers across some states and territories while others have seen falls across owner occupier lending too.  Between May 2015 and August 2015 the changes in the value of new lending to owner occupiers have been recorded at: +22.1% in NSW, +16.5% in Vic, +4.2% in Qld, +4.1% in SA, -2.4% in WA, -8.3% in Tas, -8.1% in NT and -10.8% in ACT.</p>
<p>As investor lending is slowing in NSW and Vic, lending to owner occupiers is generally picking-up which should help offset some of the slowdown in investment loans.  Elsewhere there has been no significant increase in owner occupier lending, or owner occupier lending has fallen; given this the data release may point to ongoing weaker housing market conditions outside of the two most populous states.</p>
<p>It’s important to note that this data only includes mortgage lending domestically.  What is not clear is to what extent the weakness in investor demand domestically over recent months is being offset by an uptick in demand from overseas.</p>
<p><em>Cameron Kusher is research analyst for CoreLogic RP Data. You can contact him <a href="https://blog.corelogic.com.au/author/cameron-kusher/" target="_blank">here</a>.</em></p>
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