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Housing Finance Gets Ugly Again

Mounting public policy issues, left unaddressed by successive rounds of policy makers, are nothing new in Australia. One of the most vexing issues is housing affordability and the implications of one or more generations being unable to afford a house (or other dwelling unit) of their own. Latest data shows that despite regulator efforts to curb their borrowings, Investors are again growing their share of national housing finance, with a rise in July 2016 to 47.6% of total loan values, up 1.3% from the prior month.

Meanwhile, and almost inevitably, First Home Buyers saw their share slip to 10.2% of the total, down 1.0% from the prior month. The chart below provides the details.

fig 6

To go straight to the dashboard and take a closer look at the data, click here.

First Home Buyers are battling to get into the market, but as the chart shows, Investors are winning market share against them, as well as against Owner Occupiers in general.

To quote Tim Woods, Industry Edge part of the Statistics Count team:

“This is a serious issue. Our policy makers continue to bury the next generation of home-buyers and our political system doesn’t seem to be addressing this. It is so clear from the correlation between the Investor and First Home buyer share of housing finance that low interest rates and our tax laws with negative gearing is creating a massive market distortion.”

The ‘issue’ here is the macro position around housing affordability and equality, and that is serious for a secular, inclusive society in its own right. But, to be clear

To counter the inequality issue and to address prudential risks for banks and the entire banking system, the Australian Prudential Regulatory Authority (APRA) placed prudential limits on investor loans. They were seeking to limit the potential for a domino effect of loan defaults if interest rates were forced higher, especially under the type of economic stress that could reduce the cash income of Investors (like higher unemployment for instance).

The impact of these policies has been variable, and also highly influenced by the Reserve Bank of Australia’s (RBA’s) monetary policy.

The data, presented in the table below, shows the prudential limits worked from the get-go, pushing Investor’s share of total loan value down each month through to November 2015 when they fell to 43.8%, after they peaked at 54.6% in May 2015. There must have been some summer holiday relief for policy makers when in December 2015, First Home Buyers won 13.1% of total loan value.  This period is shown in blue in the table below.

However, RBA interest rate cuts (mainly aimed at managing the exchange rate to keep the Australian Dollar at approximately USD0.70) has seen investor activity grow with a consequent impact on First Home Buyers (and also on other Owner Occupiers).


The critical point in time, and its marked in red, is the period immediately following the latest interest rate cut. From there, Investors grew their share of the total loan book from 44.9% to 47.6%. At the same time, First Home Buyers’ share headed south again as they were squeezed from the market by Investors.

It seems reasonable to state that monetary policy is already stressed. It has a lot of work to do in the economy as a whole and sometimes, as in this case with housing, it works against the policy interests of the nation. Regulators have a role to play still – the prudential limits actually worked for a time – and so do the legislators, even though they don’t want to be seen to meddle in ‘the market’.

At days end, they will need to act because the housing market is distorted by policies, like negative gearing, over which they alone have control.

Posted Date: September 28, 2016

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