Demand for mortgages waning - home value growth will not be far behind
The November 2014 housing finance data from the Australian Bureau of Statistics (ABS) indicates that demand for mortgages is starting to wane.
We would expect that this trend will continue over the coming year as APRA crack down on higher risk mortgage lending and focus on curtailing growth to the investment segment of the market.
Source: CoreLogic RP Data, ABS
In November 2014, the total value of housing finance commitments fell by -1.0%. The total value of owner occupier housing finance commitments fell by -0.2% with owner occupier refinance commitments 0.1% higher while owner occupier new loan commitments fell by -0.3%.
The investor segment of the market recorded a sharp fall in lending over the month down -2.2% following rises over the previous six months. Year-on-year housing finance commitments have increased by 7.3% which is their slowest rate of year-on-year growth since January 2013.
The year on year increase in the value of housing finance commitments has decelerated from a peak of 26.6% in December 2013. Owner occupier refinance commitments rose 18.2%, owner occupier new loan commitments fell -1.8% and investment finance commitments rose 13.0%.
Although lending to the housing investment segment is up 13.0% over the year, this represents the lowest year-on-year growth rate since December 2012.
The first chart above shows the total value of housing finance commitments over time broken down by owner occupier refinances, owner occupier new loans and investors.
While lending for home refinance and investment purposes have continued to trend higher over the past year there has been clear weakness in the new loans to owner occupiers segment. Investor commitments fell -2.2% in November and with APRA trying to slow the growth in lending to investors we would expect the investment segment will follow the lead of the owner occupier new loan segment over the coming year with growth continuing to slow.
Source: CoreLogic RP Data, ABS
The total value of housing finance commitments in November 2014 was recorded at $29.0 billion. Over the month there was $11.8 billion in commitments to owner occupier new loans (40.5%), $5.5 billion in owner occupier refinances (19.1%) and $11.7 billion in investment loans (40.4%).
The proportion of lending to investors eased over the month however, if refinances are excluded the proportion of lending to this segment is still extremely high, accounting for 49.9% of lending commitments for housing.
Source: CoreLogic RP Data, ABS
The third chart shows the rolling annual change in housing finance commitments (excluding refinances) versus the rolling annual change in combined capital city home values.
Refinances are excluded because the data is used as a proxy for demand for new borrowings to purchase a home. As you can see there is a correlation between growth in housing finance commitments slowing and growth in home values slowing.
Currently we are seeing growth in both housing finance commitments and home values trending lower and we expect that this trend will continue over the coming year.
Demand for mortgages remains strong despite the fact that it has started to ease over recent months. With APRA writing to Australian banks, building societies and credit unions late last year reinforcing sound residential mortgage practices we would expect a further slowdown in mortgage demand in 2015.
Consequently we would also anticipate that this will result in a slowdown in the rate of growth in home values as demand eases. We have already seen demand from the owner occupier market segment slow over the past year.
With APRA advising Australia’s banking sector that they will be watching closely those that grow their investor mortgage book by materially more than 10% year on year, the investor segment may well follow suit in 2015.