Housing Finance Overview

Over the start of 2021, ABS housing finance data has corroborated the momentum in housing market conditions.

Since the official cash rate target was lowered to 0.1% in November, the average new lending rate for owner-occupier mortgages has fallen 15 basis points and 12 basis points for an average property investment loan.

This has created a surge in mortgage activity over the year.

The month of February showed interesting dynamics in secured housing for the purchase of property which may point to some broader trends to be expected over 2021.

Finance lent for the purchase of Australian dwellings totaled $274.6 billion in the 12 months to March 2021, up 25.9% from the previous year.

Through the year to March 2021, owner-occupier finance secured, excluding refinancing, increased 32.4% on the previous year, including a 47.4% uplift in first home buyer finance.

Finance for the purchase of investment property also grew in the period, but by a more modest 9.1%.

For this reason, investors have remained a proportionately low part of the market.

A summary of secured finance by borrower type is presented below, showing first home buyer participation remained elevated relative to the past decade.

Interestingly, the months of February and March saw a - 4.8% reduction in first home buyer borrowing.

Property investor financing was up 17.7% in March compared with January, pushing up the share of financing secured by investors to 25.9% in the month, compared with a recent low of 23.1% in January.

It is likely that this trend of declining first home buyer participation, and increased investor participation, will continue over 2021.

This is because first home buyers are likely to face more affordability constraints.

Additionally, some incentives such as the HomeBuilder grant, and certain state-based offerings, have ended or will end over the course of the year.

With first home buyer participation already declining over the past few months, housing affordability is likely to be a renewed challenge over the year.

The Budget will help first home buyers

The 2021-22 federal budget has outlined some targeted measures to address this, which include a renewed focus on the ‘leg-up' over the deposit hurdle.

Measures include:

• The Family Home Guarantee: the government will guarantee 18% of a home loan for 10,000 eligible single parents – essentially enabling property purchases with a 2% deposit without paying lenders mortgage insurance. The 10,000 places are to be provided over 4 financial years;

• The New Homes Guarantee: The First Home Loan Deposit Scheme (FHLDS) (new homes) will be re-deployed and re-branded, enabling eligible FHBs to purchase new property with as little as a 5% deposit;

• Expanded eligibility of age for downsizer contributions by 5 years: From July 2022, Australians 60 and older (as opposed to 65 and older) will be able to access the downsizer contribution to superannuation of up to $300,000; and,

• Changes to the Super Savings Scheme: the maximum amount of voluntary contributions that can be released under the First Home Super Saver Scheme will increase from $30,000 to $50,000.

While borrowings for property purchases have risen fairly consistently since May last year, refinancing activity has been a little more volatile.

The value of external refinances peaked through the start of the pandemic, off the back of two cash rate target reductions in March 2020.

Between May and November, refinancing values declined to pre-COVID levels, then rose again off the back of a further cash rate reduction in November

Finance conditions could be the tipping point for the housing market in 2021

One of the triggers for a housing market downturn this cycle seems more likely to be a change to lending conditions than another large negative economic shock.

With housing values sitting at a record high, constraints to the volume of lending, or lower demand for lending through higher mortgage rates, may cause a downswing in housing values.

A change in lending conditions, or some other macro-prudential regulation, would likely stem from a rise in potentially riskier lending conditions.

An example was the national housing boom in the mid-to-late 2010s, during which interest-only housing loans comprised over 50% of new loans funded in June 2015.

Most of that interest-only lending was being borrowed for property investment.

While some metrics of lending risk have increased along with house prices through the December quarter, investment participation remains relatively low, and interest-only lending remained well below previous highs at 19.2% of new loans funded through the December 2020 quarter.

Other metrics such as the portion of high debt to income ratios, high loan to income rations, and high loan to valuation ratios also rose in the December quarter.

However, the messaging from the Council of Financial Regulators is that this is not a concern; partly because the ratios are still at a reasonable level, and also because the ratio increases reflect increased participation of first home buyers.

First home buyers are considered to be less risky than investors as mortgage holders because they tend to pay down debt more quickly.

Low Investor finance activity

Due to investors remaining a fairly low portion of housing lending, the nature of enforcing more prudent lending standards may look different from previous years.

There may be more focus on loan to valuation ratios, serviceability assessment, or increased capital requirements for the banking sector around mortgages.

There are also ‘softer’ signs of regulators trying to reinforce strong lending standards.

Deputy Chair of APRA, John Lonsdale recently flagged a “notable” increase in high LVRs among mutual bank lenders, which may prompt more conservative lending measures in this space.

Another factor that could shift the Australian housing market into a downswing would be an increase in bank lending rates.

As of May, bank funding costs remained very low. In a recent address, deputy RBA Governor Guy Debelle noted that while the cash rate target is at 10 basis points, other expansive monetary policy measures, which has led to a very high supply of cash in exchange settlement accounts, has put the actual cash rate at closer to 3 basis points.

The Bank Bill Swap Rate, which is a major determinant of housing and business lending rates, is at a similarly low level.

While other funding costs may prompt an increase in mortgage rates, the increases are unlikely to cause instability in the housing market.

Many lenders have begun increasing longer-term fixed interest rates, but even a full 100 basis point rise in fixed rates to owner-occupiers would still put rates lower than where they were mid-2019, at the start of a strong market upswing.

Furthermore, Australians entered the current upswing with relatively prudent lending standards.

This is in part because of a more cautious lending approach following the Financial Services Royal Commission, and a 2.5 percentage point buffer on mortgage serviceability assessments.

Overall, lending conditions and the cost of debt seem the most likely factor in cooling housing market conditions over the next few years.

Editor's Note: This is an extract of Corelogic's Quarterly Economic Review

About Eliza Owen Eliza is head Of Residential Research Australia for Corelogic and a respected property market commentator. Eliza holds a first class honours degree in economics from the University of Sydney