- Lending to Australian housing investors plummeted in March, recording the largest percentage drop since September 2015.
- The value of investor finance slumped by 16.1% over the year, reflecting the impact of tighter restrictions on interest-only lending introduced by APRA in March 2017.
- Sydney and Melbourne property prices are usually influenced by changes in investor lending.
Lending to Australian housing investors plummeted in March, a factor that could lead to further property price declines in the months ahead.
According to the Australian Bureau of Statistics (ABS), the value of investor housing finance tumbled 9% in seasonally adjusted terms to $10.88 billion, the smallest monthly total since January 2016.
In percentage terms, it was the largest monthly decline since September 2015.
Over the year, investor lending slumped 16.1%, the largest decline since May 2016. At the start of 2017, year-on-year growth to investors was running at 26.8%.
“Despite the macro-prudential measures in 2017, investor loans held up reasonably well, particularly compared to the response to the previous round of measures in 2015,” said Matthew Hassam, Senior Economist at Westpac.
“The March drop puts the segment decline more on a par with the earlier episode.”
In December 2014, APRA, Australia’s banking regulator, introduced a 10% annual cap on housing investor credit growth. It followed that move up in March 2017 with a 30% limit on interest-only lending as a proportion of total new mortgage loans.
APRA subsequently removed the 10% annual cap on investor credit growth last month for some lenders, acknowledging that it had served its purpose to cool investor activity in the housing market.
Henry St John, Economist at JP Morgan, says this is reflected in the split between investor and owner-occupier lending in March.
“The share of new lending in dollar terms attributable to investors has slid to its lowest level since January 2012, at 34.1%,” he said.
While not to the same scale as the decline reported for investors, the ABS said the value of finance extended to owner-occupiers also fell, slipping 1.9% to $21.01 billion after seasonal adjustments.
From a year earlier, that saw growth in owner-occupier lending slow to 3.2%, down from 7.2% in the 12 months to February.
Combined, the total value of housing finance slumped 4.4% to $31.89 billion in seasonally adjusted terms, the largest percentage decline January 2016.
The sharp reversal left the total value of lending down 4.3% over the year, the steepest drop in nearly two years.
Mirroring the decline in the value of home loan lending, total loans issued to owner-occupiers also fell during the month, dropping 2.2% to 53,017 in seasonally adjusted terms.
Compared to a year earlier, that represented a drop of 3.5%.
Loans to buy established property fell 1.9% to 44,391, outpaced by declines of 4.4% and 1.4% respectively for the construction and purchase of new dwellings.
With the value and number of loans falling in March, Westpac’s Hassan says this suggests a renewed weakening in demand, a trend that he expects will continue.
“More weakness looks likely near term as lenders tighten loan criteria and borrowing capacity assessments, with more stringent assessments also potentially slowing loan processing times,” he says.
St John at JP Morgan agrees with Hassan’s assessment.
“Given the intense scrutiny both the regulator and the Royal Commission are placing on high loan-to-income lending standards, we expect investor lending will continue to deteriorate through 2018,” he says.
“These developments in investor and high loan-to-income lending are likely unfolding on a faster schedule than APRA may have originally intended.
“To this point, it is likely that the scrutiny the Royal Commission is placing on the lending practices of the mortgage-broker channel, upon which the major banks have historically relied on for new lending growth, is acting as an additional catalyst.”
Should investor housing finance continue to cool, St John says that could also lead to further weakness in Sydney and Melbourne property prices.
“Sydney and Melbourne dwelling prices have exhibited the strongest covariance with investor lending through the cycle, and as house prices continue to cool in these cities, it should also reinforce the negative feedback loop between lending activity and nominal outcomes,” he says.
As seen in the charts below from JP Morgan, it’s clear that changes in investor housing finance are often influential on house prices, especially in Sydney.
And here’s the chart for Melbourne.
Given the historic relationship between the two, there could well be further price declines to come in Australia’s largest and most expensive housing markets.