The high proportion of investment lending remains our biggest cause for concern

The Australian Prudential Regulation Authority (APRA) released their quarterly Authorised Deposit-taking Institution (ADI) Property Exposures data for June 2014 yesterday.

The data always provides a valuable insight into current and historic mortgage lending by ADIs. This quarter’s data showed some very interesting trends.

Based on the value of all outstanding mortgages by households to Australian ADI’s, there $811.7 billion outstanding to owner occupiers (66.2%) at the end of June 2014 and $413.5 billion to investors (33.8%). Over the 12 months to June 2014, the total value of outstanding mortgages to owner occupiers has increased by 7.5% compared to a 10.9% rise in outstanding credit to investors.

At the end of June 2014, 36.0% of loans outstanding had an offset facility, up from 34.0% a year earlier. 35.7% of all outstanding mortgages were interest-only which was the highest on record and up from 34.3% a year earlier. 

Just 0.2% of all outstanding mortgages were reverse mortgages and 2.9% were low documentation which was down from 3.9% a year earlier. Other non-standard loans accounted for just 0.1% of all outstanding mortgages.

The average balance on all outstanding mortgages at the end of June 2014 was $237,200.  The average balance has increased by 3.2% over the past year.  Loans with an offset facility ($282,900) and interest-only mortgages ($299,000) have much higher average outstanding loan balances.  It is interesting to note that the annual growth in average outstanding loan balances has been much more moderate for mortgages with an offset and interest-only mortgages at 1.6% and 1.8% respectively.  Encouragingly, the data also indicates that outstanding balances are reducing for low documentation and other non-standard loans as they become less common.  Over the past year the average balance has fallen by -3.5% for low-documentation loans and by 5.9% for other non-standard loans.

Turning the focus to new loans written over the June quarter, 62.1% of lending was to owner occupiers and a record high 37.9% was to investors.  Compared to the June 2013 quarter, owner occupier lending is up 2.0% and investment lending is 14.4% higher.

Over the quarter, 0.7% of new loans approved were low-documentation, 43.2% were interest only, 0.2% were other non-standard loans, 43.0% were third party originated loans and 3.7% were loans approved outside of serviceability.  The 43.2% of new loans which were interest only was a record high, interest only loans tend to be (but not always) reflective of lending for investment purposes. 

The ADIs seem to be increasing the usage of their broker channels with the 43.0% of loans originated by third parties the highest proportion since June 2008.  Although only 3.7% of loans were approved outside of serviceability over the June quarter, this was the highest proportion on record. 

This may indicate that there has been some relaxation of lending standards over the quarter, however it is difficult to conclude any firm conclusions.  Nevertheless it is something to keep an eye on over the coming few quarters.

Looking at the loan to value ratios (LVR) of loans written over the June quarter, 24.0% of new loans had an LVR of less than 60%, 42.2% of loans had an LVR of between 60% and 80%, 21.3% had an LVR of between 80% and 90% and 12.5% had an LVR of 90% or more. The 12.5% of new loans with an LVR of more than 90% is the lowest proportion since June 2011. This suggests there are proportionally less high-risk mortgages being written.

The data has certainly shifted quite significantly over the past quarter and year. There is definitely a significant level of activity by investors and clearly ADIs appear happy to lend to them.  The rise in the proportion of new loans written outside of serviceability is a potential concern. However, it is positive to see that the proportion of loans with an LVR of 90% or more falling.  The high level of interest only lending is also a cause for concern.  Of course interest rates are currently very low but such a high level of interest only lending in light of low interest rates may cause some issues when rates eventually start to rise.

As we have mentioned previously, the high proportion of investment lending is our biggest cause for concern in the current market. The lure of strong capital growth in Sydney and Melbourne is attracting the attention of investors as risk-free investments offer very low returns. 

Of course, that growth in values won’t continue forever and once it slows or values fall our chief concern remains that many investors may look to exit the asset class.  Should this occur, inner city unit markets (where investor activity is most prevalent) could see a more significant drop in values than they otherwise would have as investors exit at a time when demand also falls.  This scenario could have greater repercussions for the overall market, not just the inner city areas.