Credit slowdown likely to impact economic conditions more broadly than just dampening housing prices

Anyone directly or indirectly associated with housing finance has likely felt the pinch of heightened regulation and tighter credit policies. 

Mortgage brokers and lenders are the first industry participants that come to mind, however the slowdown in lending activity has broader implications for a wide range of peripheral industries and revenue streams.   

Less lending implies fewer home sales for real estate agents and developers, a reduction in building and pest inspections, less conveyancing for lawyers and a slump in stamp duty revenue for state governments.

Generally, when people buy a home, they also splurge on household items such as appliances, white goods and home furnishings, so there is strong relationship with household consumption.

Less spending from households has direct implications for Australia’s economic prosperity, considering consumption comprises close to 60% of our gross domestic product.

The latest data from the Australian Bureau of Statistics shows the overall value of housing finance commitments was down 5.1% between July 2017 and July 2018.

Since the peak in the value of housing finance in August last year, the value of commitments has reduced by 7.0%; a reduction of about $2.35 billion.

The decline has been most visible for investment loans where the value of lending is down 15.7% over the twelve months ending July ‘18 and almost 31% lower since peaking in April 2015.  

Owner occupier lending has held much firmer, actually rising 1.1% over the past twelve months (including refinanced loans) and only 1.0% lower than record highs.

Clearly those industry participants who are more exposed to investment channels have borne the brunt of the credit downturn.

Investors now comprise only 41% of overall mortgage demand, down from a record high of nearly 55% in May 2015.

On average, over the past ten years, investors have comprised approximately 45% of mortgage demand, highlighting that investment concentration has been tracking below the decade average since November last year.

Over a longer period, say the last 30 years, investment levels have averaged much lower, averaging just 37% of the overall value of housing finance; a reminder that the past decade is a high benchmark for investment activity.

The value of investment lending has trended lower across every state and territory over the past year, except Tasmania where the value of investment lending was up 16.3% between July 2017 and July 2018.   

Despite the trend towards less investment, the states where investment has been the most concentrated, NSW and Vic, continue to show the highest share of investment lending based on value.

Investors still comprise almost 49% of lending in NSW and almost 41% in Vic, well above the long term average.  

Considering the short to medium term prospects for capital gains in these states is relatively low and rental yields remain close to the record lows, the concentration of investment activity in these states doesn’t make much sense.

In all likelihood, we will continue to see investment activity trending lower, especially in NSW and Vic due to mortgage rate premiums for investors, tighter lending criteria, low rental yields and soft prospects for capital gains.

Additionally, with a federal election around the corner, potential changes to negative gearing and capital gains tax concessions could be weighing on investor sentiment.

About Tim Lawless Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au