APRA taps on the brakes: Pete Wargent

APRA taps on the brakes: Pete Wargent
APRA taps on the brakes: Pete Wargent
Total ABS Housing Finance for the month of May 2015 came it at a seasonally adjusted print of above $31 billion for the third time on record, with all three of the strongest months taking place consecutively over the three months to May.
On a trend basis, therefore, monthly total housing finance surged to its highest ever level at $31.9 billion.

This was in spite a seasonally adjusted dip in the month of May after lending in April had threatened to explode off the top of the chart.
APRA taps on the brakes: Pete Wargent
On a rolling annual basis total owner-occupier lending has blazed upwards by 9 per cent over the past year to a record $212 billion.
Meanwhile investor lending has screamed 22 per cent to $148 billion, obliterating all previous records by an enormous margin.
APRA taps on the brakes: Pete Wargent
That said, total housing finance on a seasonally adjusted basis had been higher in April at a downwardly revised $32.5 billion, and therefore the less exuberant May result of $31.1 billion represented a decline of 5.3 per cent for owner-occupier lending and 3.2 per cent for investment loans.
This suggests that initial action taken to tighten lending standards may have been taking some effect by the end of May.
Overall this should be healthy news for the housing market over the medium term - rampant lending growth had been becoming far too skewed towards investors, and therefore it is doubly important for Australia that robust lending standards are maintained.
The May figures showed investor lending as being "only" 19 per cent higher than in the prior year corresponding period following a blistering 23 per cent year-on-year increase in April - which suggests that APRA will have more work to do over the near term.

Premature extrapolation?

This will doubtless result in the regulation "housing gloom" headlines, with commentators choosing to highlight the lower seasonally adjusted monthly figure rather than the trend hitting the highest level in history (the opposite of what they recommend we do when observing surprisingly strong Labour Force data). 
You can make your own "captain's call" on this.

Below is the raw "Original" data - not seasonally adjusted - which shows May 2015 to be the third highest result on record for Housing Finance at $32.6 billion, with total lending actually well up on April, but a little below the $33.1 billion level seen back in March.

Westpac has already noted that the seasonal adjustment may be suffering from a technical glitch this month.
APRA taps on the brakes: Pete Wargent
Note that the May figures naturally would not have been affected by the latest interest rate cut, with market activity through June and July having suggested something of a lift.

whether or not mortgage approvals and in turn property markets begin to tee off again around October/November time remains to be seen.
4 observations
A few points to make here. 
Firstly, commentators have been calling a housing market slowdown for years now, yet over the three years from May 2012 the "Original" data shows owner-occupier lending has steadily increased to be 24 per cent higher, while investor lending has roared upwards by a whopping 73 per cent.
Given the above it would be prudent to digest more than one month of near-record high figures before coming to too many hard conclusions.
Secondly, a number of media observers seem to be labouring under the misapprehension that regulators would like to see dwelling prices declining, which is patently not the case.
APRA sees its role at the present time as weeding out riskier lending and slowing the rate of investor credit growth down to a more sustainable pace.

One suspects that even at the first inkling of significantly falling prices the regulator will once again take a back seat.
Thirdly, the cost of mortgage debt remains almost absurdly cheap - it's possible to obtain mortgage rates with a "3 handle" right now - so if credit is not unduly restricted there is plentiful untapped demand for mortgage credit with a strongly expanding population and around 225,000 new jobs created in the past 12 months.

The market hasn't run out of willing buyers and nor has underlying demand mysteriously dried up overnight; rather it has been temporarily curbed by regulatory intervention.

Recall that the latest ABS Finance & Wealth data showed that in aggregate currency and deposits, superannuation balances and housing equity are all at new record highs, with total household wealth surging past a record $8 trillion.

Fourthly, if anything the softer result for May increases the likelihood of a further interest rate cut by November 2015.
Generalisation trap
By far the most important point, though, is that there is no "property market" (singular) in Australia, so it would be unwise to generalise too broadly, although due to necessity all of us do so at times.
We already know that many resources regions are moving the process of experiencing very sharp corrections, particularly in Western Australian and Queensland.
Owner-occupier lending has now been sliding lower in aggregate in Western Australia for 12 months, albeit fairly moderately, implying that some sectors of Perth property markets are set to lose ground.

Owner-occupier lending has also now been slipping lower in aggregate in the Northern Territory for the past seven months, so the outlook for Darwin looks to be soft too.

As for the Sydney market commentary - where pundits have been calling the peak every month for at the past two years - well, it's been pretty bad, hasn't it?
There have been indicators of the market mania waning for a little while now, yet auction clearance rates are still tracking at ~80 per cent or a little above, and the warmer months will be rolling around once again before we know it.

Meanwhile stock on market in Sydney remains at remarkably low levels.

Charted below is the rolling annual owner-occupier lending data at the state level.
APRA taps on the brakes: Pete Wargent
Lending standards tightened
On a seasonally adjusted basis owner-occupier lending declined in all states and territories in May, and fairly sharply in some cases.
The question now is largely one of whether the regulator APRA continues to apply further pressure to outlying lenders, and if so, for how long.
This is all somewhat reminiscent of what we saw in England back in 2014, when the Mortgage Market Review (MMR) gummed up lending processes for several months, often with seemingly aimless box-ticking exercises and paper shuffling.
The pen-pushing and the SOX-style administrative obstacles certainly had the desired effect, taking the speculative heat out of the market for a fair period of time.
Yet borrowing rates remain remarkably cheap in Britain and average UK house prices have risen again to new record highs this month while quarterly mortgage approvals are up by 6 per cent according to the latest Bank of England data. 
I expect that any material slowdown in Australian mortgage lending will be temporary and this housing market cycle will have a long way to run yet in Brisbane, Hobart, Canberra, and even Adelaide, despite its desperately weak full time employment trends.
Sydney's property markets are still gravitating higher for now, but must necessarily be closer to the end of their growth phase of the cycle than the beginning.
Greater Melbourne is also still humming along, but is waving through for approval extraordinary volumes of unit and apartments, which should stall rents and growth in that sector in time.
APRA taps on the brakes: Pete Wargent
Rhetoric has long suggested that the Reserve Bank needs lending finance and the housing market to be strong in order to drive consumption, particularly given the parlous state of other sectors of the economy.
Supply of homebuyers
An interesting aspect of this market cycle has been that the number of owner-occupier mortgage commitments has been considerably lower than we have seen in previous cycles.
APRA taps on the brakes: Pete Wargent
One key driver of this has been the sheer number of first time buyers who are opting to buy an investment property as their first step onto the housing ladder.

Surveys indicate that the first time investor figures are very much material, a trend which has long been evident to anyone who works in capital city real estate, especially in Sydney.

Given the high transaction costs of buying and selling property - and with young people changing jobs and even careers more frequently than ever before - it makes a great deal of sense for many young buyers to rent where they live and invest elsewhere (provided they do so sensibly and with a long term time horizon).
As for fading demand from homebuyers? Again, it's wrong to generalise too broadly, but here are the rolling annual numbers of mortgage commitments written by state.
APRA taps on the brakes: Pete Wargent
I know that in some inner Brisbane suburbs where house prices are now rising resolutely, only today in mid-2015 after years of stagnant prices since 2007/08 are many homeowners able to contemplate selling to downsize or move elsewhere.
Some have been effectively trapped having paid top dollar at a preceding market peak - after stamps and holding costs only now are some vendors able to justify selling in order to move on. 
At the same time there increasingly appears to be a surge of interest from interstate investors, from New South Wales in particular.

In rolling annual terms the number of owner-occupier commitments has continued to increase in the three most populous states plus the Australian Capital Territory, but on the other hand has been declining moderately in Western Australia, South Australia, Tasmania and the Northern Territory.
The wrap

It's worth remembering that most market commentary which looks for trends over the short to medium term is little better than educated guesswork.

After all, how many commentators were predicting Sydney prices would be up by close to 50 per cent since 2012? Not many!

The fundamentals haven't changed too much and demand for property remains close to its highest ever level.

Unemployment has declined steadily from 6.3 per cent to 6 per cent following 225,000 new jobs created over the past 12 months. Population growth has slowed to around 330,000 per annum, with the declines to be felt most keenly in the resources states. Mortgage rates are as cheap as we have ever seen.

X-factors may include heavy pressure on lenders from APRA, an implosion in China, or a black swan event.
Finally for today, without properly dissecting the allocation of investor credit by state it is impossible to draw too many firm conclusions given that more than 40 per cent of credit is presently being written to investors.

I'll be back to analyse the Lending Finance figures in more detail - including investor loans by state.
Recall that the April 2015 figures showed Lending Finance leaping to a 7 year high.
PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

His latest book is Four Green Houses and a Red Hotel.

Pete Wargent

Pete Wargent

Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.


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