Proportion of investment lending hits record high in September

Proportion of investment lending hits record high in September
Proportion of investment lending hits record high in September

The Australian Bureau of Statistics (ABS) published housing finance data for September earlier this week. The data showed that the proportion of lending to investors hit a record high in September. 

t the same time the data indicates that demand from owner occupiers is starting to slow.

Chart 1

Over recent years the data on the value of housing finance commitment has, to my mind, become much more important to focus on.  The main reason being that this is the only data from the ABS that tracks the level of investment lending. 

The above chart uses raw (not seasonally adjusted) data and uses a 12 month average to smooth the volatility of the data.  Nevertheless you can see the ongoing decline in demand from owner occupier first home buyers and more recently a dip in commitments by owner occupiers that already own a home. 

Across the four borrower types listed you can see that investors now account for the greatest proportion of borrowings from Australian Authorised Deposit-taking Institutions (ADIs).

Chart 2

Seasonally adjusted data for September 2014 showed that the value of owner occupier refinance commitments was 0.6%, owner occupier commitments (excluding refinances) rose 1.8% and investor commitments were 3.7% higher. 

Year on year, owner occupier refinance commitments are 13.7% higher, owner occupier commitments (excluding refinances) are 3.4% higher and investor finance commitments are 25.4% higher. 

The above chart highlights a couple of important things.  Firstly, while owner occupier refinances and new loans (those excluding refinances) have flattened over recent months it seems as if there has been a resurgence in investor demand.  Secondly, this is the first time ever that the value of monthly investment loans ($11.9 billion) has been greater than the value of owner occupier new loans ($11.8 billion).

Chart 3

The seasonally-adjusted data for September showed that investor finance commitments accounted for an all-time high proportion of lending by Australian ADIs. 

Comparing lending to investors against owner occupier refinances and owner occupier new loans investors accounted for 41.4% of lending, owner occupier new loans were 40.8% and owner occupier refinances were 17.9%. 

The proportion of lending to investors is at a record high while the proportion of lending for owner occupier new loans is at a record low. 

Of course, there is only a certain amount that can be borrowed each month but it is clear demand is strongest from the investment segment.  In fact, if you exclude refinances, a record high 50.2% of new loans written are to investors.

Chart 4

The headline result that gets reported on each month is the number of owner occupier loans.  Although it is a very valuable statistic, it should be read with caution because it is missing a significant proportion of the market, those represented by investors. 

Over the month, there were 51,465 owner occupier housing finance commitments, the lowest number since January 2014. 

Month on month the number of loans for refinancing of established dwellings was -2.9% lower while non-refinances increased by 0.5%.  Like the value growth chart presented earlier, the above chart indicates that the number of loans to owner occupiers has flattened over recent months.

Chart 5

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As investor activity has risen, there has been a sharp drop-off in the number of loans to first home buyers. 

Although there is no data to support it there are plenty of anecdotal suggestions that many first home buyers are choosing to purchase investment properties rather than homes for owner occupation. 

Unfortunately, the ABS data only captures those homes purchased by first home buyers for owner occupation.  Owner occupier first home buyer numbers continue to languish at near record low levels. 

In September, first home buyers accounted for 12% of all owner occupier finance commitments however the number of loans actually rose by 4.7%. 

As mentioned earlier, the value of investment loans is at a record high, the previous peak was October 2003 and at that time investors accounted for a slightly higher 13.6% of all owner occupier housing finance commitments. 

What is more alarming is the drop off in volumes over recent years with that 13.6% actually being 8,481 finance commitments.

The Reserve Bank (RBA) has already highlighted a number of times that they have some concerns with the heightened level of investment activity, particularly in Sydney and Melbourne.  With the proportion of loans to investors hitting a new record high in September it will further re-iterate those concerns.

The RBA has already flagged that themselves along with other regulators are already looking at ways to curb the level of investment however, they flagged in early September that any announcement would likely come by December. 

In the meantime, it looks like investor finance commitments have got another leg up and over the coming months we may see a further flurry of activity as investors look to enter the market prior to the implementation of any macroprudential curbs.

With investor focus t -date very much on Sydney and Melbourne, it will be interesting to see if this remains the case when the lending finance data for September is released on Wednesday.  If so, you do have to ask yourself what some of these investors are thinking. 

The housing markets in Sydney and Melbourne have been recording value growth since June 2012 and over that time value have increased by 29.8% and 20.7% respectively.  Gross rental yields have fallen from 4.5% to 3.7% in Sydney and from 3.8% to 3.3% in Melbourne.  

I understand that investors need a return and aren’t getting that from keeping their cash in the bank but after almost two and a half years of value growth and a significant compression of rental yields you wonder how much value growth is left in these markets. 

Furthermore, with yields so low if there is little or no growth investors will be left with an asset that provides very little rental return.

Cameron Kusher

Cameron Kusher

Cameron Kusher is senior research analyst at CoreLogic RP Data.

Finance Cameron Kusher


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