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Investor loan softness feeding into prices

Investor influence in the Australian housing market is gradually being squeezed as the value of loans to investors fell to 41.0% in July 2018, their lowest level since mid-2012. It was only in January 2017 that the alarm bells were rung most loudly, when investors accounted for a whopping 49.2% of total loans.

The chart shows – over a relatively short timeframe to accentuate the point – that as the share of loans to investors has fallen, the opportunities for first home-buyers appear to have risen. Though it is important not to over-conflate the two, there is a relationship of some sort, within the loans data.

fig7

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

We have to be cautious about the relationship because First Home Buyer’s share of total loans peaked (in this cycle) at 13.4% of the total in November 2017. Most recently, they accounted for 13.3% of the total, on a monthly basis.

So, we can observe that overall, the role of investor finance has diminished in total housing finance over the last year. But how has it fared on a full-year basis?

The data shows that over the year-ended July, investor lending for new construction was actually 7.5% higher than it was over the prior year, totalling $13.437 billion. Over the same period, loans to Owner Occupiers for construction of new dwellings were up 5.0% and totalled $23.949 billion. At this point, we could be forgiven for considering that investors were still having their way with the market.

However, loans to Owner Occupiers for purchase of new dwellings were up a stronger 11.8% to $14.438 billion over the same timeframe.

We can see this in the chart below. This data goes some way to understanding that there are multiple factors and elements making up the local housing market, but importantly, when it comes to finance, investors have an important but proportional role to play.

fig8

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

There is some evidence that when loans to investors are at higher proportions, average property prices are more inflated than might otherwise be the case. At lower levels, there is essentially less money chasing the market, which can soften pricing to more acceptable levels.

As Greg Jericho wrote in The Guardian on 13th September:

“While the value of owner-occupier housing finance is just 1.2% below its most recent peak, investor housing finance is 22% below its recent peak of December 2016 and 28% below its record level of April 2015.”

And he went on to add:

“Given the link between the growth of housing finance and house prices, we can expect house prices, which according to some measures have been falling for nearly a year, to continue to weaken for some time yet.”

We live in some strange times with housing finance. Prices, fuelled in part by cheap debt (low interest rates) and other ‘accommodative’ policy settings on the one-hand are getting out of hand, but when on the other hand, they start to fall, as is now the case, a disaster is pending.

But as Jericho wrote:

“…worries about a collapsing housing market might be not as great as it would seem given our level of debt. But largely that is because the economy has not had a major external shock for nearly a decade.”

Look deeper at the data and you see lower housing prices might mean that one form of borrower (investors), are being replaced by another cohort (first home buyers). There are other features to the market of course, but this trend is no bad thing.

The risk, as Jericho explains, is that slow incomes growth, matched by some form of external shock, could reduce the capacity to repay loans that could well be more expensive to service. As Jericho states it:

“The overriding problem, however, is unless incomes begin to grow faster than debt, the ratio of debt to income will continue to grow, and that means when we do have our next economic downturn it will be at a time when households are in more debt than at any time in our history.”

Posted Date: October 10, 2018

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