Australia’s system of housing finance may not be as ‘fit for purpose’ as we have long thought. Fuelled by decades of near unabated housing price improvements and a decade of historically low interest rates, cracks are starting to appear. The role of investors as a driver of additional dwellings is changing, renting is a longer-term consideration for many and the role of capital gifts remains contentious.
Let us start with the latest numbers. In August the value of all loans fell -3.4% to $A27.39 billion. The average loan size for owner occupiers for purchase of new, construction of new and purchase of existing was $589,141 a decrease of -3.3% on the previous month, as the chart here shows.
If the chart shows anything else of interest, it may well be that the turn down in total loan value – the black line – is now clearly facing “south”, albeit declining gently. Well, it would after such a rapid and enormous banking of approvals that need to be financed. The slow-down will continue, but will also decline slowly, for that reason, if no other.
Because we are about to delve into the roles of investors and first home buyers, the next chart is useful for setting the scene. It shows the value of loans for different classes of investors are following similar paths.
The value of loans to owner-occupiers dropped 2.7% in August, for investors by a chunky 4.8% and first home buyers gained back a bit of ground, lifting 7.0% after two pretty nasty months prior. The trends are down and the only thing holding the market up are those who intend to live in the dwelling they have just financed.
With that in mind, what happening over there in investor land?
Investor Loans
The value of investor loans in August was $A8.85 billion, down 4.8% on the prior month.
At the recent AFR Property Summit, Leanne Pilkington, the CE of real estate agency Laing+Simmons outlined data that shows a decade ago, investors bought 25% of the homes sold in Australia and sold around 7%. Today the figures are reversed.
Obviously, if you are selling properties faster than you are buying them, you will be reducing the total value of your loan book. That appears to be the experience for the investor sector in Australia.
But as old Julius Sumner Miller would have asked: ‘Why is it so?’
There is no one reason, but there’s plenty of speculation about the role of, ummm, speculators:
- Interest rates are rising and there are returns available elsewhere, or…
- Interest rates are rising, their wages are not and they need to reduce their leverage on the principal residence, and…
- Increased equity ratios imposed by banks and regulators
- The investor cohort is ageing and needs cash for new hips or just as likely, to fund the renovations to the principal residence as they prepare for retirement
- Transaction costs associated with investor-owned properties are increasing – as evidence we can point to the situation in Queensland where land taxes will increase.
Regardless of the reason peculiar to them, investors are winding their way out of the housing market. That means, net-net, the dwellings are making their way into the hands of owner-occupiers.
So, what’s that doing for first time buyers?
Loans to First Home Buyers
Loans to first home buyers, as a percentage of all loans, increased during August, lifting to 17.2%, but are still below the peak of 26.1% recorded in December 2020. Loans to first-timers have hovered around the 10,000 per month mark for most of 2022 and around $A485,000 per loan, over the same period. That’s a stability other borrowers have not managed, underscoring how tightly managed the funds of the average first-time buyer must be.
Interestingly, the little rise in the proportion of loans to first-timers appears to have come because they are stable in the market and investors in particular, are not.
We can all understand the desire of the first home buyer and that drives a lot of sympathy for them and their situation. In recent decades, that has meant thrusting money at them in the form of ‘first home buyer grants’, which may have had little economic effect other than to increase the value of dwellings as they come onto the market.
Like most blunt objects, grants to first home buyers can also offer the illusion that a household can afford a loan that it cannot actually afford. In days of rising interest rates, that is utterly counter-productive.
Recent analysis by the Productivity Commission lays this bare. As Michael Bleby wrote in the Australian Financial Review, the Productivity Commission didn’t say outright that grants are counter-productive. Rather, it found there were ‘reasons to be sceptical’ grants made ownership either more accessible or affordable.
Damning the practice of handing out around $A2.7 billion per annum ($A2.0 billion in concessions and around $0.7 billion in direct grants) to people who would buy a house anyway, one of the Commissioners told Bleby the money would be better spent in social housing developments and supporting those who without support would not ever have a dwelling of their own.
For those reading all the items on housing in this edition of Statistics Count, the point will not be lost: there is a direct relationship between housing affordability and where public money is spent to support those seeking to get access to a dwelling of their own.
The Productivity Commission report can be downloaded here.
