Near record level of investment lending a concern for the market

The Australian Bureau of Statistics (ABS) released housing finance data for December 2013 yesterday.  The data provides a good summary of the mortgage lending environment throughout 2013.  It shows that 2013 was clearly a year where there was a strong rebound in demand for mortgages.

The total number of owner occupier housing finance commitments in December 2013 was 14.1% higher than in December 2012.  This figure is split into refinances of established dwellings and non-refinances or new loans.  The number of refinance commitments is 12.5% higher over the year and the number of new loan commitments is 14.8% higher. 

The data shows that demand for mortgages has increased measurably throughout 2013.  This is also reflected in home values data, the RP Data-Rismark Home Value Index showed that capital city home values rose by 9.8% in 2013.

The number of owner occupier finance commitments for the construction of new dwellings was 14.5% higher over the year, commitments for the purchase of new dwellings were 13.2% higher and non-refinanced commitments for the purchase of established dwellings were 15.1% higher over the year.  It is important to note that non-refinanced purchases of established dwellings accounted for 75.8% of all owner occupier new loan commitments in December 2013.

Over the 12 months of 2013 there were 598,364 total owner occupier housing finance commitment, up 9.5% from a year ago.  Refinance commitments accounted for 32.4% of all housing finance commitments in 2013 and the remaining 67.5% was for new loan commitments.

In December 2013, the total value of housing finance commitments (the amount borrowed) was $27 billion.  From a banking perspective, the money lent is much more important than the number of loans and the total value of finance commitments was 27.0% higher over the year.  

Looking at the value of commitments, commitments to owner occupiers for refinances were 20.4% higher year on year, owner occupier new loan (ex-refi) commitments were 19.0% higher while investment loan commitments increased by 40.7%.  The total value of housing finance commitments, excluding refinanced loans increased by 28.5% year on year.

Looking at the proportion of housing finance commitments provides further insight into how much is being lent to different cohorts of the market. 

As a whole, 60.2% of lending over the month was to owner occupiers made up of 43.4% for new loan commitments and 16.8% for refinances.  The rest (39.8%) was lending for investment purposes.  The 43.4% of lending to owner occupiers for new loans was the lowest proportion since January 2004.  The 16.8% of lending for refinances by owner occupiers was the lowest proportion for that segment since September 2010.  The 39.8% of lending for investment purposes was the greatest since October 2003 (41.2%).  The 41.2% of total lending for investment in October 2013 was also the highest proportion of investment lending on record.

In my opinion the level of investment lending is a concern from the market, given it is currently at near record levels.  Obviously with mortgage rates low and returns on relatively risk-free asset classes so low, investors are moving into other, slightly more risky, asset classes such as residential property.  This is what the RBA was hoping for – however, the high level of lending to investors is not without potential risks in the future. 

The move to residential property investment seems to be purely a move chasing capital growth.  In strong investment driven markets such as Sydney and Melbourne home values increased by 14.5% and 8.5% respectively in 2013.  Gross rental returns on residential property in these cities is extremely low at 4.0% and 3.5% respectively at the end of last year. 

If these investors are not necessarily committed to the housing market long-term, then we could potentially see an influx of investment-grade properties come to the market in the future as these investors look to exit the housing market and place their investment dollars elsewhere.

Despite the fact that we have near record low mortgage rates and home values had been falling through 2011 and the early part of 2012, the level of activity by first home buyers has been extremely low. 

In December 2013, the number of first home buyer finance commitments was actually 1.9% higher than the previous December (note these figures are not seasonally adjusted).  Throughout 2013 there were 82,599 first home buyer housing finance commitments indicating that they accounted for just 13.8% of all owner occupier finance commitments over the year.  The number of first home buyer finance commitments in 2013 was a record low for a calendar year period.

Overall the data highlights that 2013 was a strong year for mortgage lenders with escalating demand for mortgages.  The increase in demand has largely been driven by subsequent purchasers (upgraders or downgraders) and investors. 

The rising level of demand for mortgages has subsequently resulted in an increase in property sales and fuelled the 9.8% annual increase in capital city home values.  As noted the heightened level of activity by investors in the market is potentially a cause for concern and no doubt one that the RBA and APRA will be keeping a close eye on. 

Keep in mind that in many instances investors are using interest-only loans and these are obviously attractive when interest rates are at record low levels, but potentially not as attractive when/if interest rates are normalised.

With mortgage rates still at low levels and the market expectation that there will be no increase in the cash rate until 2015, it is difficult to see how there won’t be a further lift in housing finance commitments throughout 2014.  It will be interesting to see if we see a further lift in investment activity in the market and whether or not we see a rebound in first home buyer volumes throughout the year.

Cameron Kusher is senior research analyst at RP Data.