In last week’s RP Data Research Blog I discussed what I believe are some of the potential pitfalls of such a high level of investment activity in the housing market.
The housing finance data for October 2013 was released by the Australian Bureau of Statistics earlier this week and it showed an ongoing escalation in investment activity which is a potentially worrying development and one that APRA and the RBA will have a close eye on.
According to the October housing finance data, there was $10.3 billion worth of housing finance commitments for investment purposes over the month, up from $9.5 billion in September. The value of investment loans is at a record high up from its previous high in September.
It is important to also keep in mind that housing finance data only looks at finance commitments to local authorised deposit-taking institutions (ADIs). We hear a lot of talk about overseas investors and often that money is not sourced locally. Given this, the true amount for all investors could be much higher.
The $10.3 billion of commitments to investors is still lower than the $11.6 billion worth of commitments to owner occupiers for non-refinanced loans but is also much larger than the $4.6 billion in owner occupier refinance commitments.
As a proportion of the $26.5 billion in housing finance commitments over October, investment loans accounted for 38.9%. Although this amount may not sound that substantial, it was the highest proportion of investment finance commitments since December 2003 (39.3%) and not all that far from the record high proportion of 41.2% in October 2003.
If we look back to the peak in investor activity in October 2003, the annual rate of capital growth across the combined capital cities was recorded at 17.7% at that time. From there on, the annual rate of capital growth started to decelerate. This may suggest that as investment activity peaks (whenever that may be) it could be a precursor to a slowdown in overall capital growth conditions.
It looks as if much of the investor activity currently taking place is pure speculation on capital growth. Home values across the combined capital cities are 8.0% higher over the year which has significantly outperformed the 2.9% growth in rental rates.
As the above chart shows, both the annual rate of rental growth and rental yields are falling which will result in a lower rental return. This is highlighted by the fact that we have seen capital city gross rental yields fall from 4.3% a year ago to 4.1% currently, which is not particularly attractive from an investment return perspective without the capital growth.
Of course this heightened level of investment activity with little focus on rental returns is likely to result in an even greater number of negatively geared owners of investment properties.
The latest data from the Australian Tax Office (ATO) based on the 2010-11 financial year showed that 1,811,175 individuals claimed rental income and two thirds of which claimed rental losses of $13.285 billion.
With investment activity currently so high and investors seemingly focused on capital growth it seems inevitable that the number and value of losses on residential investment properties is set to increase.
This heightened level of investment activity is also coming at the expense of first home buyers. Based on the number of owner occupier finance commitments, first home buyers accounted for just 12.6% of all owner occupier finance commitments in October, slightly higher than the record low of 12.5% the previous month.
As the above chart shows on both a volume and percentage basis, first home buyer participation in the market is at near record low levels.
We know that the trend has been towards a greater proportion of the population renting however, there must be a sense that the high level of investment activity is to some degree locking potential first home buyers out of the market.
The latest housing finance data shows that first home buyers and owner occupiers who are non-first time buyers have both recently started to increase their borrowing amounts. Obviously value escalation is partly responsible however, values were rising in 2009 and 2010 without any significant lift in borrowings.
The data potentially indicates that investors are driving values higher and both first home buyers and non-first home buyers have a fear of missing out and are increasing their borrowings in order to enter the market.
If this trend continues it could be quite worrisome as it may lead to both increasing levels of household leverage along with increasing demand for loans with a higher loan to value ratios (LVR) meaning that buyers are using smaller deposits in order to enter the market.
The heightened level of investment activity and the potential long-term repercussions for the housing market must surely now call for close scrutiny by both the RBA and APRA.