Investor mortgage demand steadies in December as new lending to owner occupiers start to flatten
Last week both housing and lending finance data for December 2015 was released.
The data sets provide a nice summary of mortgage lending throughout 2015.
According to the housing finance data there was $390.7 billion worth of mortgage lending undertaken in 2015.
In December 2015, the total value of housing finance commitments was recorded at $33.5 billion.
If we broadly split the data into three categories: owner occupier new loans (non-refinances), owner occupier refinances and investor mortgages the data indicates that early in 2015 the market was being driven by owner occupier refinances and investor mortgages.
Over the second-half of the year investor demand faded, largely due to regulatory changes, and despite investor demand falling, owner occupier new loans picked-up to offset this slowdown.
The data shows a sharp slowdown in investment lending that is almost perfectly compensated by a rise in owner occupier lending, however it is likely that a proportion investor loans are now being reclassified as owner occupier loans as home owners seek to get best mortgage rates (investor mortgages have been attracting a mortgage rate premium since August 2015) which is contributing to the swing.
The chart above shows owner occupier housing finance commitments nationally split out by four components.
The data highlights surging refinance activity and increases to purchase of newly built dwellings however, commitments for the purchase of established dwellings has eased over the past month.
In December 2015 there were $21.9 billion worth of owner occupier housing finance commitments which is comprised of $1.9 billion worth of commitments for construction of new dwellings (+0.2% mom, +1.6% yoy), $1.3 billion worth of commitments for the purchase of new (+10.4% mom, +42.0% yoy), $7.4 billion worth of commitments for refinances (+3.9% mom, +36.3% yoy) and $11.2 billion for purchase of established dwellings (-1.8% mom, +14.8% yoy).
Turning attention to the investor segment of borrowing, the above chart shows that there has been a clear downturn in investor demand over the second half of 2015 however the downwards trend has leveled over recent months.
The total value of investment housing finance commitments was recorded at $11.6 billion in December 2015 with the value fairly flat over the past three months.
Looking at the two components, commitments for construction of dwellings was recorded at $1.0 billion in December having increased by 3.1% month-on-month however, it is -13.4% lower year-on-year.
Commitments for the purchase of established dwellings were recorded at $10.6 billion in December having increased by 0.4% month-on-month but falling by -13.4% year-on-year.
It should be noted that investors are typically purchasing established stock rather than new.
In December 2015, of the value of all lending for new construction, just 23.9% of these commitments were by investors with the average recorded at 19.9% over the past decade.
This indicates that investors largely target established housing stock rather than new.
The lending finance data allows similar analysis of the split between the value of owner occupier and investor housing finance commitments across each state.
It should be noted that the previous charts have used seasonally adjusted data where the following charts and analysis are based on data which aren’t seasonally adjusted.
Much like the annual change in home values which has been greatest in Sydney and Melbourne, New South Wales and Victoria have led the way in terms of the year-on-year change in the value of owner occupier housing finance commitments.
Elsewhere the increases have been fairly moderate with falls also recorded in the Northern Territory.
The chart showing year-on-year change in new (excluding refinances) owner occupier refinance commitments shows that the changes are generally more moderate than they are if we include refinances.
New South Wales and Victorian results are much stronger than elsewhere which is indicative of the increasing demand which has occurred as home value have increased in Sydney and Melbourne.
Refinance commitment activity is quite strong in most states. It is reflective of the fact that mortgagees are shopping around for a better home loan deal.
Particularly in markets like New South Wales and Victoria where they are probably utilising the equity gained through recent strong housing markets to refinance their mortgages.
With investment demand waning over the second half of 2015 most states are seeing a year-on-year decline in the value of investor housing finance commitments.
It is important to note that during 2015 we saw investor activity as a proportion of the overall market rise to record highs.
Although demand has eased it has eased from, and remains at, high levels on an historic basis.
More recently the declines in the value of investor housing finance commitments has started to stabilise.
If we strip out refinances, investor participation reached a record-high level in May 2015. Since that time it has fallen sharply although it has begun to stabilise.
The decline coincided with some sizable changes in the lending environment.
Firstly banks tightened their lending criteria and increased mortgage rates for investment loans by an average of 30 basis points.
Following this and due to new regulations for banks to increase their capital, banks lifted all mortgage rates by between 15 and 20 basis points independently of the Reserve Bank.
Subsequently we have seen a falling away of investor demand with the changes having an impact quite quickly as highlighted by the chart.
Again, the important point to note is that investor participation, although it has eased, remains high on an historic basis, just not at record highs.
So where is mortgage activity likely to trend in 2016?
Low interest rates are likely to persist however, borrowers won’t be able to access mortgage finance as easily as they have over recent years, particularly investors.
We would expect further growth in mortgage demand but that rate of growth is likely to slow.
In terms of the states and territories we would expect the rates of growth in mortgage demand to still grow but at a slower pace in New South Wales and Victoria.
Western Australia could start to see demand fall along with ongoing falls in the Northern Territory.
South Australia is likely to see continuing moderate growth in demand for mortgage finance while we can expect a further pick-up in Queensland, Tasmania and the Australian Capital Territory.
Refinance activity is likely to remain strong as interest rates remain low at a time where there remains plenty of mortgage market competition.
Although overall growth in mortgage finance demand is likely to slow in New South Wales and Victoria we would expect refinance activity to still show strong growth given home owners in Sydney and Melbourne have built a lot of equity over recent years and may look to utilise this equity however, more re-investment in the housing market is likely to flow to areas outside of these states where homes are more affordable, have seen little recent value growth and have a much stronger yield profile.