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Housing loan values continue to rise | Investors at most risk

The total value of housing loans continued to climb in January, lifting 2.6% on the prior month to $33.66 billion. That result was a very hefty 18.2% higher on a year-on-year basis as low interest rates and lack of other investment opportunities continued to be drivers for dramatic growth in the value of dwellings and the loans that support their purchase and building.

As ever, the devils are in the details, and in that light, loans to investors continued to grow their share, totalling $10.97 billion in January, an increase of 6.1% on December. Although investors had their colours lowered during the pandemic, those who hoarded cash are back in the market seeking elusive yield, if not exactly vengeance.

On the flip side, loans to first home buyers were down 5.0% to $5.39 billion in January. That is still well above – as the chart here shows – the long-term average, but it does appear the fervour and intent is rapidly waning from market newcomers. It might indeed be the case that the demand for a house (and thus a loan) has been largely soaked up in the recent boom. The absence of new migrants feeds into that possibility, of course.


It is useful to understand that one of the main drivers for the value of loans increasing has been the rising cost of dwellings purchased by owner occupiers in particular. The best way to examine this is to take the total value of loans and divide it by the number of loans.

Here, we can see that although the monthly total value of loans has been growing (LHS), it has done so more slowly than the average value of the loans (RHS).

In January 2022, the average value of owner occupier loans was $618,729, up a huge 21.0% on the prior year! If that continued, it would mean the average price of a house would double in less than four and a half years – and that is not sustainable.


The next chart addresses the same question, but shows the difference between total average loans and average loans to first home buyers. The growing gap is obvious and the implication is that affordability is diminishing for first time borrowers.


With loans to owner occupiers relatively steady at $22.69 billion, the increase in investor activity has meant first home buyers are continuing to be squeezed.

With first home buyer loans valued at $5.39 billion, their overall share of loans by value was 17.3%, down from a high of 26.1% in January 2021. Oh, what a difference a year can make!

This impact on first home buyers is also reinforced in the Annual report on market conditions released by the National Housing Finance Investment Corporation (NHFIC). Earlier in their lives, and typically earning lower incomes, first home buyers are especially sensitive to price and thus, affordability of housing.

An analysis based on the affordability of mortgage repayments (based on repayments of a total of 30% or less) shows affordability for first home buyers has deteriorated by about 5% for each income quintile. In short, rising house prices diminish affordability for first home buyers.


To flip this back around, in some respects, the pressure on first home buyers can be a boost in confidence for investors, who were heavily impacted by COVID 19. Interestingly, this increased pressure and withdrawal from the market saw the proportion of non-performing loans to investors exceed those for owner occupiers throughout 2020.


This is important information, underscoring the fragility of different market participants at different points in the home lending cycle: rising prices hurt first home buyers most and it seems uncertainty and tighter prudential regulation hit investors hardest.

As Shane Wright and Jennifer Duke pointed out in the Age in mid-February, the NHFIC report “…also reveals a looming demographic shift that will change the property market, with a surge in the number of single-person and couple-only households.”

In finishing, it is always useful to understand the status of loans for alterations and additions – the cream on the cake has been fairly substantial the last two years and goes some way to explaining the added supply chain pressures.

As we can see below, after kicking along nicely until November, a sharp downturn in loans for renos was experienced over both of the last two months.


We can only speculate at this point, but it could be the great national renovation is starting to wind back.

Posted Date: March 3, 2022

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