Mortgage Lending

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<p>GUEST OBSERVER</p>
<p>Some say that economics is “the dismal science” and perhaps this is because many economic theories do not seem to work in practice.</p>
<p>One contemporary example is negative interest rates, where instead of interest being added to their savings, individuals find that value is lost.</p>
<p>Negative rates have been introduced by some central banks worldwide. In theory doing so should both devalue their currency, making their exports cheaper and imports more expensive, and at the same time encourage consumer spending. It should also boost lending by financial institutions, as the value of capital being held by both individuals and banks is ever decreasing.</p>
<p>Sadly this theory when put into practice has been found wanting. The Bank of Japan introduced a negative interest rate of minus 0.1 percent in January 2016 and the yen subsequently increased in value compared to its competitor currencies. Indeed in 2016 the yen is the best performing G10 currency against the US$.</p>
<p>Similarly the Swiss National Bank flagged a negative interest rate of minus 0.25 percent to be introduced in January 2015, but the inflow of funds into the Swiss franc continued and the rate was finally reduced on its introduction to minus 0.75 percent, with the aim of discouraging capital inflows. However despite these moves the Swiss National Bank continued to accumulate foreign exchange reserves into the second half of 2015.</p>
<p>The European Central Bank (ECB) further increased its negative interest to minus 0.4 percent, on bank deposits held at the ECB in mid March 2016, as it attempted to manipulate downward the value of the Euro. The impact of this was undermined somewhat by allowing the European banks to borrow from their central bank at the same minus rate, depending on how much they lend to businesses and consumers. An initial dip in the value of the Euro when the minus 0.4 percent was announced was then followed by a sharp rise, as the implications of the whole package became clearer.</p>
<p>The aim of this is to lower the cost of borrowing for both consumers and corporations, as the banks borrow money from the ECB at no cost to them. This is intended to help stave of the threat of deflation in the eurozone by stimulating investment and consumption.</p>
<p>Recently published research from the Bank for International Settlement (BIS) found that in some cases savings accounts had been insulated from the impact of negative interest rates and that some mortgage rates in Switzerland had “perversely increased”. The conclusion from the BIS was then,“if negative interest rates do not feed into lower lending rates for households and firms, they largely lose their rationale”.</p>
<p>The Governor of the Bank of England has argued that if central bank policies are structured in ways that shield retail bank customers from minus interest rates, then they are unlikely to do much to stimulate domestic demand. Instead the main effect will be on exchange rates and this will result in the provoking of currency wars, as central banks attempt to out do each other in negative interest. Negative interest rates are intended to boost domestic demand by forcing banks to lend money out and encouraging consumers to both borrow and spend.</p>
<h2>Consumer behaviour is unpredictable</h2>
<p>Once again the “dismal science” comes up against the unpredictable behaviour of individuals and organisations, when they enter the territory of negative interest rates.</p>
<p>Take Japan in February 2016. One month on from the Bank of Japan’s decision to unleash negative interest rates, applications to join the loyalty clubs of Japanese department stores such as Mitsukoshi, Daimaru and Takashimaya were 100-200 percent higher than in the same month of 2015. The explanation is that these loyalty clubs offer a 5 to 8 percent annual bonus to their members, a far better return than any Japanese bank can offer, even if it encourages them to spend their money where they have their account(s).</p>
<p>So will negative interest rates continue to be used as a weapon from the central bank armoury, or will the unpredictable behaviour of consumers and investors undermine the intentions of the central banks?</p>
<p>If the weapon of negative interest rates does not work as expected on currency values or domestic consumption and investment, what else is there left to deploy to prevent deflation and a further slow down in economic actively? Economics indeed truly is dismal science.</p>
<p><em><span class="fn author-name">Steve Worthington is a</span><span style="line-height: 1.3em;">djunct professor, Swinburne University of Technology and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/steve-worthington-138" target="_blank">here</a>.</span></em></p>
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Negative interest rates – are there any positives?

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<p><span style="line-height: 1.3em;">Housing finance data for November 2015 was released this month by the Australian Bureau of Statistics (ABS) showed that on a seasonally adjusted basis, the value of housing finance commitments rose by 1.8% in November to $33.3 billion.</span></p>
<p><a href="/images/2016/01/18/Chart-1-1-580x208.jpg" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/01/18/Chart-1-1-580x208.jpg" alt=""></span></p>
<p> </p>
<p>Looking at the different components of mortgage lending, it shows that the value of commitments to owner occupier non-first home buyers (subsequent buyers who are generally either upgrading or downgrading) is now greater than the value of commitments to investors. </p>
<p>With mortgage rates remaining low and competition from lenders being fierce, refinance activity continued to trend higher while demand from the first home buyer segment of the market remains quite weak.  As investment demand has faded, this demand has been replaced by demand from owner occupiers, mainly those upgrading or downgrading.</p>
<p><a href="/images/2016/01/18/Chart-2-1-580x207.jpg" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/01/18/Chart-2-1-580x207.jpg" alt=""></span></p>
<p> </p>
<p><span>In November 2015 there was $21.8 billion worth of housing finance commitments to owner occupiers.  These commitments were split between $1.9 billion for construction of dwellings, $1.2 billion for purchase of new properties, $7.1 billion for refinances and the remaining $11.6 billion for purchase of established properties.  </span></p>
<p><span>A</span><span style="line-height: 1.3em;">s the chart shows, demand for new properties (construction and purchase of new) is fairly flat while refinance commitments and those for the purchase of established homes continues to rise strongly. Interestingly after its recent low of $17.6 billion in commitments in May 2015, the value of owner occupier commitments has increased by 23.3% to November 2015. </span></p>
<p><span style="line-height: 1.3em;">If you look at the actual number of owner occupier housing finance commitments over the same period they have increased by a much lower 11.8%. This would suggest that although the number of commitments to owner occupiers is rising, the increase in the value of commitments is being exacerbated by borrowers taking out larger mortgages.</span></p>
<p><a href="/images/2016/01/18/Chart-3-580x210.jpg" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/01/18/Chart-3-580x210.jpg" alt=""></span></p>
<p> </p>
<p>The value of investor housing finance commitments was recorded at $11.5 billion in November 2015.  Investor mortgage demand has fallen sharply since peaking at $14.2 billion in April 2015, down -18.7% to November 2015.  Although investor mortgage demand has slowed sharply over recent months, it actually rose by 0.7% over the month.</p>
<p>It is important to remember that the Australian Prudential Regulation Authority’s (APRA) guidelines aim to limit housing credit (total value of outstanding mortgages) to investors at 10% per annum.  Investor credit growth was recorded at 9.1% over the year to November 2015, comfortably within these guidelines.  Given this, it is no surprise we have seen a small bounce in investor mortgage demand and we may see further moderate increases over the coming months as lenders aim to grow investor credit at close to the 10% threshold.</p>
<p>Demand remains for mortgages despite the fact that banks have lifted mortgage rates independently of the Reserve Bank cash rate and have increased mortgage rates to investors. Understandably this has seen a slowing of demand from the investor segment of the market however, demand from owner occupiers is rising and currently filling the space. As previously mentioned demand from the investment segment may actually start to pick-up a little due to the fact investor credit growth is now comfortably below 10% per annum. </p>
<p>With home value growth in Sydney and Melbourne now showing signs of slowing it will be interesting to see over the coming months whether mortgage demand continues to grow. </p>
<p>If it does it may indicate that although demand in Sydney and Melbourne is slowing it is picking up elsewhere.</p>
<p><em>Cameron Kusher is research analyst for CoreLogic RP Data. You can contact him <a href="https://blog.corelogic.com.au/about/" target="_blank">here</a>.</em></p>
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Housing finance demand still growing, driven by owner occupier demand: Cameron Kusher

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<p>EXPERT OBSERVER</p>
<div>Total seasonally adjusted housing finance resumed its slowdown in declining by 1.6 per cent to $31.23 billion in June 2018, with slower mortgage processing times and tighter lending procedures biting.</div>
<div> </div>
<div>You might argue the toss over the classification of loans between investors and owner-occupiers, but the smoothed trend figures for total housing finance confirmed a continuing decline for an 11th consecutive month. </div>
<div> </div>
<div><a href="https://4.bp.blogspot.com/-CT5aAEtbmjw/W2q05bketOI/AAAAAAAArb8/ZXCZh6MCPWEoEEsvYPHSR8Bl7kV8ASOzQCLcBGAs/s1600/HF1.jpg"><img src="https://4.bp.blogspot.com/-CT5aAEtbmjw/W2q05bketOI/AAAAAAAArb8/ZXCZh6MCPWEoEEsvYPHSR8Bl7kV8ASOzQCLcBGAs/s640/HF1.jpg" width="640" height="372" data-original-height="801" data-original-width="1378"></a></div>
<div> </div>
<div> </div>
<div> </div>
<div>Housing finance tends to have a fairly good correlation with dwelling price action, though economists try a bit too hard on this point, curve-fitting charts with warped y-axes trying to prove a faultless correlation that doesn't quite exist. </div>
<div> </div>
<div>There are more factors at play, of course, as the residents of Hobart, Geelong, or indeed many suburbs of Brisbane would attest.<br><br>The share of the stock of outstanding loans pertaining to investors continued to decline on the ABS numbers, broadly mirroring what has been reported by the Reserve Bank. </div>
<div> </div>
<div><strong>State versus state (macropru hurts WA)</strong></div>
<div><strong> </strong></div>
<div>New South Wales has seen an ongoing trend decline in the number of owner-occupier commitments, with Queensland the only state to record an increase in the month of June (up 2.1 per cent). </div>
<div> </div>
<div>Sydney's housing market downturn has now spanned 12 months, the same length of time as the 2008-9 downturn, and already longer than those seen in 1985, 1994-95 and 2015-16 respectively (hat tip to Cameron Kusher of CoreLogic for the stats). </div>
<div> </div>
<div>One of the consequences of macroprudential measures has been to hinder markets that are already struggling.</div>
<div> </div>
<div>In Western Australia the number of home loans dropped to 4,602 in June, the lowest figure since May 1995 (when the population of the state was 1.7 million, compared to 2.6 million today, as highlighted by Shane Wright of the West Australian). </div>
<p> </p>
<div><a href="https://4.bp.blogspot.com/-PA8_Q5rUHWs/W2q05d2JAPI/AAAAAAAArb4/UpthfNlEW4Q-w52DCPEdAMvhVQAlfRUGACLcBGAs/s1600/HF2.jpg"><img src="https://4.bp.blogspot.com/-PA8_Q5rUHWs/W2q05d2JAPI/AAAAAAAArb4/UpthfNlEW4Q-w52DCPEdAMvhVQAlfRUGACLcBGAs/s640/HF2.jpg" width="640" height="370" data-original-height="791" data-original-width="1361"></a></div>
<div>While some applications are clearly being knocked back, for borrowers of sound credit quality, there is robust competition from lenders.</div>
<div> </div>
<div>Indeed, the average loan size remains 5.6 per cent higher than a year earlier. </div>
<div> </div>
<div>First homebuyers accounted for more than 18 per cent of owner-occupier commitments, a 6-year high, with the average loan size at $349,800 the highest figure recorded for any month to date. </div>
<p> </p>
<div><a href="https://2.bp.blogspot.com/-JkWsPF8C85A/W2q05TCi2uI/AAAAAAAArb0/2ViXbcb80kc1Krt7TcbgC-vp9HC5fGUowCLcBGAs/s1600/HF3.jpg"><img src="https://2.bp.blogspot.com/-JkWsPF8C85A/W2q05TCi2uI/AAAAAAAArb0/2ViXbcb80kc1Krt7TcbgC-vp9HC5fGUowCLcBGAs/s640/HF3.jpg" width="640" height="370" data-original-height="804" data-original-width="1390"></a></div>
<p><br>There was a sharp 4.9 per cent drop in the number of commitments for new dwellings.<br><br><strong>Non-banks emerge</strong></p>
<div>A final point for today: Commonwealth Bank's release noted a loss of market share, a trend which is being echoed across the major banks.</div>
<div> </div>
<div>The trend in non-bank lending on the other hand is benefitting entities such as Liberty Financial, Pepper, Firstmac, RESIMAC, and others.</div>
<p> </p>
<div><a href="https://1.bp.blogspot.com/-6DEfTzpqOjI/W2q77TZr5WI/AAAAAAAArcY/6ZDWrIe6yX8wi-5Ep0d90bVnH5hBA_LjwCLcBGAs/s1600/HF4.jpg"><img src="https://1.bp.blogspot.com/-6DEfTzpqOjI/W2q77TZr5WI/AAAAAAAArcY/6ZDWrIe6yX8wi-5Ep0d90bVnH5hBA_LjwCLcBGAs/s640/HF4.jpg" width="640" height="378" data-original-height="792" data-original-width="1337"></a></div>
<p><strong>The wrap</strong><br><br>Soft housing finance result for June, and more softness is certainly expected for July.<br><br>How long the tightness in lending persists is unclear, but it's all pointing down at the moment.</p>
<p><em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em></p>
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Housing finance resumes slowdown: Pete Wargent

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<p>At the end of 2014, the Australian Prudential Regulation Authority (APRA) wrote to mortgage lenders reinforcing what they saw as sound mortgage lending practices. </p>
<p>The key points from that letter were that serviceability policy limits should be based on mortgage rates at least 2 percent above the product loan rate with a minimum floor assessment of 7 percent. </p>
<p>The second point was that APRA was going to impose a speed limit on investment credit growth to lenders of 10 percent per annum. It is important to note investment credit refers to total outstanding mortgages not new lending.</p>
<p>The impact of these policies was likely to be that as interest rates fell, more buyers weren’t encouraged into the market because mortgages were being granted based on the ability to repay a mortgage at 7 percent interest which was well above standard rates at that time.  The other impact was that the 10% cap on investor housing credit growth would slow demand from the investment segment as there was less new lending to go around.</p>
<p>While the serviceability limits mean that new first time buyers are unlikely to come into the market as interest rates fall, it does nothing to discourage current owners from buying investment properties or upgrading homes.  Given that the vast majority of home loans are on a variable rate, interest rate cuts have an almost immediate impact on household budgets. </p>
<p>While the serviceability limits won’t result in marginal purchasers entering the market, as interest rates have come down it appears that home owners that weren’t previously considering buying an investment property or upgrading have come out of the woodwork and decided to purchase.</p>
<p><a href="/images/2016/09/21/Chart-1-1-580x176.jpg" target="_blank">Click to enlarge</a></p>
<p> <img src="/images/2016/09/21/Chart-1-1-580x176.jpg" alt=""></p>
<p>It is somewhat difficult to gauge exactly how effective the serviceability changes have been, but the 10% cap on investor housing credit led to a significant decline in growth in lending to that market segment.  Shortly following the implementation of the investor lending cap we also saw lenders place an interest rate premium on investment mortgages.  This muddied the waters somewhat because a lot of mortgages which were previously designated as investment mortgages were reclassified as owner occupier mortgages. </p>
<p>Nevertheless, annual investor housing credit growth peaked at 10.8 percent in May 2015 according to Reserve Bank data and the latest data shows that it has slowed to growth of 4.8% over the year to July 2016.  Investor housing credit growth has slowed dramatically since its recent peak following these curbs and over the past year has increased at its slowest annual pace since November 2009.</p>
<p><a href="/images/2016/09/21/Chart-2-1-580x210.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/21/Chart-2-1-580x210.jpg" alt=""></p>
<p>Housing finance data which tracks new lending, has showed a bounce in new lending to investors over the three months to July 2016.  Over that period, the monthly value of investment lending has increased by 9.2 percent from $10.8 billion in April 2016 to $11.8 billion in July 2016, new lending to investors is at its highest level since August 2015.  With investor housing credit growth well below 10 percent per annum, it is clear that lenders have scope to now offer more lending to the investment segment and clearly there are investors grabbing that opportunity.  </p>
<p>But why is this the case when you have a record supply of new housing under construction, record low rental yields and a historically weak rental market? We are about to delve into some possible reasons why, for some investors, housing investment still makes sense however, investors looking to purchase residential properties should be aware of the potential risks on the horizon.</p>
<p><strong>Capital growth</strong></p>
<p><a href="/images/2016/09/21/Chart-3-1-580x211.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/21/Chart-3-1-580x211.jpg" alt=""></p>
<p>Since the current growth phase commenced in June 2012, combined capital city home values have increased by 39.9%.  As the above chart shows, the growth has been very uneven with Sydney and Melbourne leading the way in terms of value growth and rises relatively moderate elsewhere.  After such a long growth phase, the question must be asked as to how much longer the growth can continue for in Sydney and Melbourne, particularly considering the affordably obstacles that are becoming more pronounced and the diminishing yield profile caused by the fact that dwelling values are rising at a much faster pace than rents.</p>
<p><strong>Housing supply</strong></p>
<p><a href="/images/2016/09/21/Chart-4-1-580x197.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/21/Chart-4-1-580x197.jpg" alt=""></p>
<p>The supply of new housing under construction is at a record-high with an historic high level of units under construction.  The 2011 national Census showed that units were much more likely to be occupied by renters than houses.  At that time, and across homes occupied on Census night, 21.8 percent of houses and 57.8% of units were occupied by renters. </p>
<p>Of course housing choices are likely to have shifted somewhat since that time but the fact is likely to remain that units are much more likely to end up as rental accommodation than houses are.  As a result a large proportion of these units recently built and under construction will end up as rental accommodation.  In many cities we are also already seeing a significant difference in the rate of growth for houses as opposed to units.</p>
<p><a href="/images/2016/09/21/Chart-5-1-580x212.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/21/Chart-5-1-580x212.jpg" alt=""></p>
<p>Rental markets are showing the weakest growth conditions on record, in fact, capital city rental rates are -0.5 percent lower over the past year.  In the two cities where the highest level of investment activity is occurring, Sydney and Melbourne, rents are unchanged in Sydney and 2.4 percent higher in Melbourne.  For units specifically, rental rates are 0.7 percent higher over the year across the combined capital cities with rental rates 1.8 percent higher for Sydney units and 1.3 percent higher for Melbourne units.</p>
<p>There is a large supply of housing stock that is going to be added to the market over the coming year(s) in these cities and others.  Most of the supply is in the form of units, which as shown are more likely to be rental properties.  Subsequently it seems as if landlords are set to find it more difficult to keep renters and may have to reduce rents in order to keep their properties tenanted over the coming years.  Higher vacancy rates may be felt by those landlords who own units that are in need of repair or refurbishment as tenants look for higher quality or new rental accommodation that may be more comfortable at a similar rental rate.</p>
<p><strong>Rental returns</strong></p>
<p><a href="/images/2016/09/21/Chart-6-580x209.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/09/21/Chart-6-580x209.jpg" alt=""></p>
<p>Rental yields are expressed as gross figures so the net returns are likely to be much lower than the headline figure.  The gross rental yield has been forced lower over recent years due to little rental growth (and falls in some areas) coupled with comparatively high levels of home value growth. As a result, at the end of August 2016 the combined capital cities gross rental yield was recorded at an historic low 3.3 percent with figures of 3.0 percent in Sydney and 2.9 percent in Melbourne.  </p>
<p>A couple of things to note about the yield figures; firstly they assume that a property is occupied for 100 percent of the year and secondly they are based off current values, most investors would not borrow 100 percent of the loan value for an investment property.  Given these two points, lower than 100 percent occupancy would reduce the yield however, borrowing less than 100% of the property’s value would increase the yield.</p>
<p>As pointed out earlier, units are much more likely than houses to be used for rental accommodation and there is a record pipeline of unit stock under construction.  Gross rental yields for units specifically are higher than those for houses and recorded at 4.1 percent for combined capital city units, 3.9 percent in Sydney and 4.0% in Melbourne.  Each of these figures are at historic lows and have trended lower over recent years.  Nevertheless, when you factor in a level of equity used to purchase investment properties the returns are still far superior to most other asset classes.</p>
<p><strong>Total returns</strong></p>
<p>Click to enlarge</p>
<p><img src="/images/2016/09/21/Chart-7-580x208.jpg" alt=""></p>
<p>When you factor in rental returns and capital growth, the total returns from residential property remain attractive.  Over the past year, total gross returns across the combined capital cities have been recorded at 10.7% with each capital city other than Perth and Darwin recording total returns in excess of 7.0% over the past year. Since home values ended their most recent declines in May 2012, combined capital city total returns have been recorded at 62.7% and no capital city has recorded returns of less than 25% over the period</p>
<p><strong>Other asset classes</strong></p>
<p>A major reason why investors remain attracted to residential property is due to the fact that with low interest rates and low economic growth internationally, returns have reduced.  Based on the most recent end of month data, 10 year Australian Government bonds were yielding 1.88 percent, 1 year term deposit rates were 2.65 percent and total returns from the ASX 200 were 9.3 percent.  The safe investment classes of bonds and term deposits are providing extremely low returns.  At the same time total returns from equities have been much stronger however, equities are a more volatile asset class than housing.</p>
<p>While the housing market has provided relatively strong investment returns over recent years and may continue to provide comparatively strong returns over the coming years, there are certainly some headwinds that investors need to be aware of.  Keep in mind too that the purchase cost of a residential property is significantly greater than investing in other asset classes.  The additions to housing supply underway and the weakening rental market should provide a level of caution for investors. </p>
<p>Given the cost of housing and the looming challenges we would expect that although there is likely to be some further uplift in investment demand it is unlikely to result in growth in investor credit to head back towards the 10%pa speed limit.  Investors will also need to be much more selective around which properties they choose given achieving strong returns are seemingly going to be more difficult to achieve over the coming years given the looming headwinds described within.</p>
<p><em>Cameron Kusher is research analyst for CoreLogic. You can contact him <a href="https://blog.corelogic.com.au/about/">here</a>.</em></p>
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Investors re-entering the housing market but should do so with caution: Cameron Kusher

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<p>EXPERT OBSERVER</p>
<p>Since the federal election there appears to have been some strength returning to the housing market.  A number of factors have contributed to this apparent improvement in housing confidence, including:</p>
<p><strong><span>1.<span>       </span></span></strong><strong>An unexpected election win to the Coalition.  </strong>Typically a change of government wouldn’t have too much of an impact on housing sentiment however, the Labor opposition took to the election some policies which would have influenced the market, particularly the investor segment.  Specifically these were reforms to negative gearing which would have seen this taxation policy reserved for new dwellings only (with grandfathering provisions for current investment property owners) as well as a halving of capital gains discounts.</p>
<p><strong><span>2.<span>       </span></span></strong><strong>Two 25 basis point cuts to official interest rates.  </strong>Since the election, the Reserve Bank has now cut official interest rates in both June and July by 25 basis points.  While lower interest rates signal a requirement for economic stimulus, for mortgage holders lower rates mean cheaper mortgages if they refinance, a potential to reduce repayment amounts or paying off more of the principal component if they choose to make no changes to their mortgage.</p>
<p><strong><span>3.<span>       </span></span></strong><strong>The Australian Prudential Regulation Authority (APRA) has proposed amending guidance on mortgage lending.  </strong>Since the inception of macroprudential tools in December 2014, APRA has required lenders to assess the ability of borrowers to repay their mortgage at either an interest rate of above 7% (typically 7.25%) or a buffer of 2% over the loans interest rate, whichever is the larger.  With mortgage rates the lowest they have been since the 1960s the buffer has become restrictive and APRA is now proposing to remove the 7% benchmark and change the requirement to an interest rate buffer of 2.5% above the loans interest rate.</p>
<p>The federal election was held on the 18 May and the result was known that evening.   APRA published their proposal to amend their guidance on mortgage lending on 21 May and was given the go-ahead by APRA on 5 July and the first of the two cuts to the cash rates occurred on 4 June.  The week following the election, auction clearance rates was slightly lower in Melbourne while in Sydney it increased from 56.5% to 62.1%.  Over the weeks following the election, auction clearance rates in Melbourne have averaged 64.4% compared to an average throughout 2019 prior of 53.6%.  In Sydney, auction clearance rates have averaged 62.5% since the election compared to 53.6% prior.  </p>
<p>Importantly, the CoreLogic Home Value Index has been showing moderating declines each month throughout 2019 and although values are still falling nationally, Sydney and Melbourne recorded their first increases since 2017 in June.</p>
<p>Although all of these factors are seemingly positive for the housing market it is important to note that APRA has only just announced that they are actually amending their guidance on mortgage lending. </p>
<p>Furthermore, from July 1 there were some further changes that will impact on the mortgage lending space, the details of which are below:</p>
<p><strong><span>1.<span>       </span></span></strong><strong>The expansion of positive credit reporting. </strong>This change will provide lenders with more information on lenders credit history.  Specifically, credit account histories including: type of account, date the account was open, current credit limit and account closed date as well as two years of repayment history of accounts including information on late or defaulted payments.  Given this lenders will have a lot more information about borrower’s credit histories and will seemingly have fewer excuses for providing loans to those that aren’t credit worthy.  By the end of September, lenders will be required to share 100% of specified credit data, providing a more complete profile of borrower debt levels and credit worthiness. </p>
<p><strong><span>2.<span>       </span></span></strong><strong>The adoption of the new Banking Code of Conduct.  </strong>While this is not a legally enforceable document, it does set out the standards of practice and service for the banking sector.  It has been significantly amended and according to the Code in some areas, it sets higher standards than the law.  You can see the code here: <a id="LPlnk427005" href="https://www.ausbanking.org.au/wp-content/uploads/2019/06/Banking-Code-of-Practice-2019-web.pdf" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">https://www.ausbanking.org.au/wp-content/uploads/2019/06/Banking-Code-of-Practice-2019-web.pdf</a></p>
<p>So on one hand you can see the borrowing is going to become somewhat easier as APRA makes the changes it is proposing and mortgage rates have reduced on the back of the two interest rate cuts we’ve had.  On the other hand, the expansion of comprehensive credit reporting gives lenders much more insight into the creditworthiness of borrowers and the new banking Code of Conduct appears to be requiring much higher standards from the banks, as well as executive accountability for conduct as prescribed under the Banking Executive Accountability Regime (BEAR).  Furthermore, banks continue to have a very close focus on living expenses assessment when deciding whether a borrower is credit worthy.</p>
<p>Given all of this, we believe that mortgage credit is going to become a little more accessible however, there will remain a level of conservatism and caution from lenders.  Especially given the Royal Commission that has recently occurred and the fact that they have much more data available to them in order to make decisions about the credit worthiness of borrowers.</p>
<p><em>CAMERON KUSHER is the head of research for the Australian division of CoreLogic</em></p>
<p><em>Kusher regularly posts on the <a href="https://www.corelogic.com.au/news" target="_blank">CoreLogic website</a>.</em></p>
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What APRA (potentially) giveth does comprehensive credit reporting take-away? CoreLogic's Cameron Kusher

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<p>EXPERT OBSERVER</p>
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<p><span>The latest data from the Australian Prudential Regulation Authority (APRA) on property exposures data from authorised deposit-taking institutions (ADIs) shows that the tougher lending policies of recent years continue to reduce mortgage risks. </span></p>
<p><span><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/2019/6/21/new-mortgage-annual-change.jpg" alt=""></span></p>
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<p><span>Over the March 2019 quarter, APRA reports that there was $72.395 billion in residential mortgages to households, which was -17.9% lower than the previous quarter and down -16.5% on the March 2018 quarter. </span></p>
<p><span>As the chart shows the value of lending to investors and owner-occupiers is falling. </span></p>
<p><span>Over the quarter the value of lending to owner-occupiers was -17.6% lower and it was down -15.2% year-on-year. Lending to investors was -18.7% lower over the quarter and -19.6% lower year-on-year. </span></p>
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<p><span>The heightened level of interest-only lending has been seen as a key risk in the market and new interest- only lending has fallen over the quarter both on a value and share of total basis. </span></p>
<p><span>Over the quarter there was $10.785 billion in interest-only lending which was the lowest on record. </span></p>
<p><span>As a share of total lending, interest-only was also at a record low of 14.9% which is a far cry from its peak at 45.6% in June 2015. </span></p>
<p><span>As a proportion of the total portfolio of outstanding loans, interest-only now accounts for a record low 23.3% which is down from a peak of 39.5% in June and September 2015.</span></p>
<p><span><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/2019/6/21/quartlery%20new%20lending.jpg" alt=""></span></p>
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<p><span>Interest-</span><span>only lending isn’t the only are</span><span>a in which there has been a reduction riskier lending. The value of low documentation loans, other non-standard loans and loans approved outside of serviceability all fell over the quarter in terms of both value and their share of total lending. </span></p>
<p><span>In fact at 0.1% of total lending over the quarter, both other non-standard loans and low documentation loans were at an historic low share of mortgages while the 4.3% of loans that were approved outside of serviceability was the lowest share since December 2017.</span></p>
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<p><span>While most areas of riskier lending recorded a reduction over the quarter, there was a slight increase in the share of new mortgages written with a loan to value ratio (LVR) of more than 80%. Over the quarter there was $15.772 billion worth of new mortgages with an LVR of more than 80%. </span></p>
<p><span>Although that was the lowest value on record, that is more a function of reduced overall demand for mortgages. The share of mortgages with an LVR in excess of 80% was recorded at 21.8% over the quarter which was its highest share since March 2017. The share of higher LVR loans is still well below its peak of 37.6% in March 2009 and most new borrowers have more than 20% equity in the property they are purchasing. </span></p>
<p><span>Nevertheless, it is a little surprising that given the current tight credit conditions and falling dwelling values that there is an increased willingness to lend to borrowers with less than a 20% deposit. </span></p>
<p><span>Overall, the data reflects the ongoing improvements in mortgage quality and the shift towards reducing the build-up of risk in the mortgage market. We would expect the current conditions to continue over the next quarter. Thereafter it will be interesting to see what happens given that there has been an interest rate cut and it looks as if APRA will be relaxing some of the serviceability limits in place on mortgages. </span></p>
<p><span>On the other side of things, comprehensive credit reporting is being implemented which is likely to mean even more scrutiny on borrowers debts and subsequently increased pressure on lenders to write high quality mortgages. </span></p>
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<p><em><span>CAMERON KUSHER </span> is the head of research for the Australian branch of CoreLogic</em></p>
<p><em>Kusher regularly posts on the <a href="https://www.corelogic.com.au/news" target="_blank">CoreLogic website</a>.</em></p>
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