Housing finance data reveals possible slowdown in investment demand

The total value of housing finance commitments increased by 1.0% in June 2014. 

The total value of housing finance commitment is 15.6% higher year-on-year.  Meanwhile the number of housing finance commitments to owner occupiers has increased by 0.2% over the month and has increased by just 2.4% over the 2013/14 financial year.

The total value of housing finance commitments continues to trend higher however; the strength of the investment segment has waned over recent months. 

Over the month the owner occupier segment fuelled the increase with refinances up 1.6% and non-refinances up 1.9% while investment lending fell by -0.3%.It was the first time investment lending has fallen over consecutive months since December 2012. 

Year on year, the value of housing finance commitments is 15.6% higher with owner occupier refinances up 14.8%, owner occupier non-refinances up 9.4% and investment loans rising 23.8%.

As a proportion of total lending, the level of lending for investment purposes remains inflated on an historic basis although it has eased slightly. 

Owner occupier non-refinance commitments accounted for 43.4% of total lending in June compared to 18.1% to owner occupiers for refinances and 38.5% for investors. 

Although investment lending has eased it continues to hover at around its highest levels since late 2003. Remember 2003 was the final days of the housing boom in both Sydney and Melbourne which commenced in 2001.

The number of housing finance commitments to owner occupiers increased by 0.2% over the month and was 2.4% higher year on year. 

The year-on-year increase is the slowest rate of increase since February 2013.  This indicates that although demand for housing demand has increased, the rate of growth in this demand is slowing. 

Looking at the more detailed components, refinance commitments are -0.7% lower over the month and 5.1% higher year on year.  Non-refinance commitments have increased by 0.6% over the month and are 1.2% higher year-on-year.

The number of owner occupier housing finance commitments can be further broken down in to the type of commitments the finance is for.  The three categories we analyse here are: construction of dwellings, purchase of new dwellings and purchase of established dwellings (excluding refinances). 

Over the month, construction of dwellings rose by 1.1%, purchase of new dwellings was 4.6% higher and purchase of established dwellings edged just 0.1% higher. 

Year on year, the market strength has been associated with construction of new dwellings (+17.0%) rather than purchase of new dwellings (-2.1%) and purchase of established dwellings (-1.7%).  In fact the number of owner occupier finance commitments for construction of new homes is at its highest level since February 2010.

Keep in mind that in June 2014, 17.9% of these non-refinance commitments were for construction of dwellings, 8.2% were for purchase of new dwellings and 73.9% were for purchase of established dwellings.

The number of owner occupier housing finance commitments for first home buyers fell by -3.6% in June 2014 and are -6.2% lower year-on-year.

First home buyers continue to play little role in the market, accounting for just 13.2% of total owner occupier housing finance commitments in June. 

Interestingly the average loan size for first home buyers is increasing.  As home values rise they need to borrow a greater amount, this is highlighted by the 7.1% year-on-year rise which is the largest since December 2009.

RP Data’s Mortgage Index (RMI) which provides a lead indicator to the number of owner occupier housing finance commitments indicates that there is likely to be a lift in July.  Activity levels were 6.7% higher in July 2014 compared to June suggesting a likely rise in housing finance commitments over the coming month.

The data shows that while demand for housing finance is holding, we are potentially seeing a slowdown in demand from the investment segment.  Meanwhile demand for owner occupiers is steady, albeit the rate of growth is slowing with the strongest increases arising for those constructing their own home. 

Spring will be the real test for the market from here, investment activity remains elevated, auction volumes and results have been strong throughout winter and we wait to see if this momentum continues for the remainder of the year.  Particularly given that although values are continuing to increase, they are doing so at a more moderate pace than they were throughout late 2013 and early 2014.

Although mortgage demand has picked-up over the past two years, it is important to note that the number of finance commitments remain well below 2009 and much lower than activity levels prior to the financial crisis.