Monday, November 14, 2016

Mortgage demand from investors continues to lift

The September 2016 housing finance data was released by the Australian Bureau of Statistics (ABS). piggy bank save mortgage house property gold loan deposit

The data showed that there were $32.3 billion worth of housing finance commitments in September 2016 nationally which was the highest monthly value since June 2016.

The value of housing finance commitments increased by 2.3% over the month but was -0.2% lower year-on-year.

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The $32.3 billion in mortgage lending over the month consisted of $19.9 billion in lending to owner occupiers and $12.4 billion to investors.

For the owner occupier segment, it was the first increase in three months with lending up 6.9% in September 2016 but -5.4% lower year-on-year.

Lending to investors has continued to trend higher up 4.6% over the month and now 14.5% higher since April 2016.

Although investor lending is lifting, it remains -15.2% lower than its peak in April 2015.

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Housing finance commitments to owner occupiers consists of four main categories: construction of dwellings, purchase of new dwellings, refinancing of established dwellings and purchase of established dwellings. 

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In September 2016 there was $1.8 billion in commitments for construction of dwellings, $1.0 billion for purchase of new dwellings, $6.9 billion for refinancing and $10.2 billion for purchase of established dwellings.

Demand for mortgages for established stock by owner occupiers is trending lower, of course this is partly to do with lower levels of stock available for sale.

Over recent months, commitments for refinances had been trending lower however, it did increase in September following an interest rate cut in August which most lenders did not pass on in full.

The other two segments of owner occupier lending remain relatively flat.

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Borrowing by investors has really rallied over the past few months however, as the chart above shows the rally has been for established housing stock rather than new.

There was $0.9 billion worth of housing finance commitments for new construction by investors in September 2016 and $11.5 billion for investment in established housing.

The value of lending to investors for established housing has increased by 17.8% since it reached a recent low point in April 2016 however, it remains -15.7% lower than its recent peak.

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There has been plenty of commentary about how investors are able to beat-out owner occupiers, particularly first home buyers, in the housing market.

Of course owner occupiers still borrow a greater amount than investors, once you strip out refinances which aren’t really new lending as such.

Owner occupiers borrowed $13.0 billion in September 2016 and investors borrowed slightly less at $12.5 billion. property investment

Looking at demand in the established housing segment it becomes clear that investor demand has been stronger than demand from owner occupiers over most of the past three years.

After fading recently, investors in the established housing market are now borrowing a greater amount than owner occupiers.

Keep in mind these figures are based on the value of lending (not volume) so these figures are likely to be also influenced by the loan to valuation ratios (LVRs) at which mortgagees borrow.

Because of the taxation benefits associated with negative gearing, many investor choose to use greater leverage (i.e. a smaller deposit/higher LVR) in order to maximise their deductions.

Nevertheless, this has been a feature of the market since late 1999 and outside of a short period in late 2003, owner occupiers purchasing established properties have typically borrowed a greater amount than investors.

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Looking at new lending (excluding refinances) for new housing and existing houses shows that lending for new housing is trending lower while lending for existing housing is lifting.

Over the month, $3.7 billion worth of housing finance was approved for new housing stock and $21.7 billion was approved for existing housing stock. property purchase home

The value of lending for new housing stock is at its lowest level in 12 months while lending for existing housing is at its highest level in 12 months.

With a record pipeline of new housing (most of which are units) under construction, over the coming months and years as these units come up for settlement we would expect (hope) that finance commitments for new housing picks up.

The data clearly shows that the bulk of demand remains for established housing, keeping in mind that there are significantly more established homes than there are new homes.

Demand from the investment segment is clearly growing again now that most lenders are well below the APRA mandated cap for investor housing credit growth of 10% pa.

Obviously investors still have an appetite for housing which is no wonder when you factor in the still strong value growth conditions in the two largest markets and much higher rental returns on offer outside of Sydney and Melbourne.

With the lowest interest rates since the 1960s and low returns on most asset classes many still view housing as a solid investment choice despite the significant cost.

Over the coming months we would expect a further uptick in demand from the investment segment of the market as home values have continued to rise and even gather pace post September 2016.

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