Investment mortgages crunch all-time record high

I never used to think of myself this way, but as I get older, I'm increasingly becoming quite a traditionalist and something of a curmudgeon.

Don't really like change too much. Used to hate white weddings in churches, but now don't mind them - as long as they aren't mine, of course. Would probably keep the Australian flag the same given a choice (and, despite not being anything remotely close to a monarchist, probably inclined towards the status quo there too).

I vote for centre-right parties. Still like to buy weekend newspapers and prefer hard copy books written on paper, though I do buy e-books too. If I wasn't vegetarian, I'd probably be described as a meat-and-three-veg type.

When it comes to finance and investment, I'm generally conservative and like to stick to the tried and tested, and prefer to diversify broadly rather than gamble too much on individual stocks.

I believe in the endurance of traditional market cycles, although they may appear to be shorter than in times past with the advent of faster information flow and especially since cycles are no longer to be carried along on a tidal wave of inflation. 

When I read in press articles that "Gen Y are lazy" or "young people are opting out", I generally don't believe them. Most younger people will be pragmatic and forge their way in life, just as previous generations always have.

While the specifics will always change, I believe that history repeats.

And having been around through a few market cycles, most unfashionably of all, I believe that monetary policy generally still works.

Low rates

If you have been reading my blog since late 2011, you'll know that my absolute conviction has been that cuts in interest rates would dramatically change the way people invest their dollars.

As I clarified the other day, and has been known about for decades, when it comes to investment markets, interest rates are like gravity - ultimately, you just can't get away from them.

Since Australia is not in recession and credit markets have remained liquid, if my belief is correct then after an initial lag the delivered cuts in interest rates should see property investors flooding back into the markets and share markets catapulted higher.

Markets 

The Australian Bureau of Statistics (ABS) released its Housing Finance data this week, which is a key indicator of what to expect in the property markets in the months to come.

I pulled out the housing finance data specifically as it relates to investment loans, which printed as below:

The value of investment loans jumped by 4.4% after a fall last month and are now up by a monster 32.3% year on year to the highest level ever recorded in Australia's history.

To me this represents proof beyond any reasonable doubt that monetary policy still works and property markets remain sensitive to the cost of borrowing.

Most lenders offer interest-only loans to investors for five years, at which point they flip into principal and interest loans or must be renegotiated by the borrower. 

The total value of dwelling commitments chart prepared by the ABS tells its own story.

Source: ABS

None of this is surprising when you consider that we have an interest rate of 2.50% yet an inflation rate of 2.60%.

After tax is paid on interest income, returns from bank accounts and term deposits are so dismal that return-seeking investors have been practically forced into the share markets or property investments.

Owner occupier mortgages and first home buyers

Owner occupiers can tend to march to their own drum to some extent, although of course fear of missing out can often see would-be home buyers jump into the market too.

But in the event owner occupier non-refinance commitments have also roared upwards by 17.5% over the past 12 months and owner occupier refinance commitments are a whopping 27.9% higher.

The first home buyer data, however, continues to be a complete waste of everyone's time since it fails to record the large number of first-timers who are electing to buy investment property first instead of a home, which, in Sydney at least, is a very regular occurrence.

There is no way to quantify this at present, but since every second inquiry I get as a property buyer fits into that category, it must surely be a significant factor - in New South Wales at any rate. 

As noted two years ago, if you don't listen to what the data is telling you, then you will certainly misinterpret it. 

Naturally a certain percentage of buyers are unquestionably priced out of the locations they want/need to buy in. 

But the recorded data is not commensurate with "an entire generation" of the population casually sitting out of the market, particularly when high LVR mortgages remain so widely available, making saving deposits less of a hurdle than would otherwise be the case. 

Dwelling construction?

If the Reserve Bank's grand rebalancing plan is to work then new dwelling construction needs to take off, and there was healthy news from the data here too. I can't plot this any more clearly than the Housing Industry Association (HIA) has already done, so let's go with their chart:

 

Source: HIA

Monthly figures were down a bit after an exceptionally strong month in January, but on a moving annual basis the number of finance commitments for new homes and construction was up by more than 14%. The trend since August 2012 is tremendously strong which bodes well for a large pick-up in dwelling construction.

History repeats 

At such times, experienced heads tend to speak the most sense. 

Back in 2004 at the end of Sydney's last boom the AFR's David Bassanese attracted a level of ridicule for suggesting that "housing affordability is just about where it should be". 

Prices in Sydney subsequently fell a little and were flat for some years, yet with dwelling prices having underperformed household incomes significantly over the past decade, now they are catching back up again. 

Steve Keen's old sparring partner Rory Robertson has been quite outspoken this week on the same subject, suggesting that buy-and-hold on Sydney property for the long term is a "no-brainer", and as for whether the market is demonstrating irrational exuberance...

Other experienced heads such as economist Stephen Koukoulas also added that he wouldn't be surprised by higher prices....

Tight market 

It's very rarely noted that during the last boom period in 2003, the REIA recorded that Sydney's property markets had a vacancy rate as high as 4.4%. The rate of vacant properties was at an even more elevated 5.3% in the outer ring suburbs.  

By way of contrast, today's vacancy rate in Sydney is just 1.6%, and much lower still in certain popular market sectors, such as in the inner west: e.g. Erskineville 0.6%, Enmore 0.8%, and so on. 

Our capital cities and their infrastructure are bursting at the seams, and with 2.3 million more people expected to live in Australia in the next five years alone, we're going to have a heck of job keeping up.

If I learned one thing from the experience of the United Kingdom property markets since 2007, it's how the right properties in the right locations fare so much better when each cyclical downturn inevitably arrives, particularly the types of properties which are most in demand such as. For example, well-located dwellings close to the median price for the suburb. 

You can visit AllenWargent property buyers (London, Sydney) or Pete's blog.

His new book 'Four Green Houses and a Red Hotel' is out now.