In an attempt to reduce what were perceived to be building risks within Australia’s housing market, the nation’s banking regulator, APRA, announced in late 2014 new macroprudential measures designed to reinforce “sound residential mortgage lending practices” by lenders.
“In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead,” the group stated in December 2014.
In particular, APRA flagged concern about a sharp acceleration in lending to housing investors, announcing that it would introduce a 10% annual cap in credit growth to this segment for each authorised deposit-taking institution (ADI) in Australia.
A speed limit, in other words, something that it said would be “an important risk indicator for APRA supervisors in considering the need for further action”.
Nearly two years on it appears that speed limit is working, at least based on recent private sector credit and housing finance figures released by the RBA and the ABS.
From April 2015 to July this year, annual growth in investor credit slowed from 10.8% per annum to just 4.8%, a level that had not been seen since November 2009.
The slowdown has been mirrored by recent housing finance data released by the ABS that revealed the value of new lending to investors fell by 9.3% year-on-year in July to $11.842 billion.
Even quarterly property statistics released by APRA have shown a movement back from investment to owner-occupied lending over this period.
Credit growth is slowing, and new lending is weaker than the levels of a year ago. Seemingly, it points to reduced risks in the housing market, exactly what APRA were looking for.
However, the slowdown may not be all that it seems.
According to a recent in-depth survey conducted by UBS’ Australasia equities and economics teams, the exact opposite may be occurring: investor lending may be accelerating, rather than slowing, right now.
For some background on the survey, it took responses from 1,228 Australians who had taken out a residential mortgage over the last 24 months, dividing them into what UBS calls the 2015 and 2016 “vintage”.
374 people took out a loan in the 12 months to August 2015, the remaining 854 in the year to August this year.
Each respondent was asked 63 separate questions — a deep dive in anyone’s language — to ascertain what exactly was happening with home loan lending standards at present.
What it uncovered was in stark contrast to what the other indicators suggest.
“When customers were asked the ‘current use of the property’ (not the bank classification at the time of application) 60% of respondents in the 2016 Vintage said it was for primary residence or holiday home, down from 69% in the 2015 Vintage. This reduction is statistically significant at a 95% confidence interval,” said UBS.
“Investment properties picked up to 33% of properties purchased in the 2016 Vintage compared to 28% in the 2015 Vintage. This rise in the financing of investment properties is also statistically significant and is the opposite of official statistical releases.”
The chart below from UBS puts that into visual form:
Though these are new loans, not lending in dollar terms, it casts doubt as to whether investor lending is really slowing.
Like the broader survey which uncovered that more than a quarter of home owners who took out a mortgage since 2014 lied on their application, UBS believes that some respondents may not have been “factually accurate when stating the purpose of the loan, especially given the higher interest rate which has now been introduced on investment property compared to owner-occupied mortgages”.
According to the bank, the survey suggests that the shift from owner-occupier to investor loans between 2015 to 2016 was predominantly through “bank proprietary channels which have seen a statistically significant movement towards loans currently used for investment property and fewer loans currently used for primary residence or holiday homes”.
No statistically significant relationship was seen through loans originated through brokers.
While the survey findings are likely to be dismissed by some groups, UBS believes that given the size of the sample and broad spread of respondents “the results are representative of Australian mortgage borrowers”.
“Conclusions based on the total sample have a potential sampling error of just +/-2.71% at a 95% confidence level,” it said.
Even forgiving that the results will create some fierce debate, perhaps the most concerning thing is that it continues a worrying trend where no one is really sure what’s happening in the residential property market, a $6 trillion behemoth that is the main store of household wealth in Australia.
Take house prices, for example. Some indicators say prices are moderating right now while others say they’re accelerating. What indicator should we believe, if any!
The RBA, tasked with making critical calls on the direction for interest rates, has made an even money bet, suggesting in its October 2016 monetary policy statement that “the rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently”.
Before that, in September, it stated that “the best available information suggests that dwelling prices overall have risen moderately over the past year and growth in lending for housing purposes has slowed”.
Best available? Hardly confidence inspiring.
All this after learning that the median house price in Sydney and Melbourne, Australia’s largest and most expensive housing markets, grew by more than 80% in the decade to June this year.
With so much uncertainty over what exactly is happening, particularly with residential construction booming at present, it all points to a need for greater levels of scrutiny.
Of lenders, the reliability of housing data and the oversight of both by regulators. Everything.
Given the importance of the housing market to Australia’s prosperity, perhaps it’s even time to have a federal housing minister to help coordinate and lead this task.
The alternative is to pretend that everything’s OK, taking a “she’ll be right attitude”. With so much uncertainty, that heightens the risk of a policy misstep and, potentially, something far worse.