Private sector financial aggregates data shows that investor housing credit growth is continuing to slow, how low will it go with most lenders now well below the 10% pa limit providing scope to increase lending to this market segment.
Each month the Reserve Bank (RBA) publishes financial aggregates data.
A feature of this data is the insight into growth in housing credit which looks at the change in the total value of mortgages outstanding.
The latest data for May 2016 showed that housing credit increased by 0.5% over the month to be 6.9% higher over the year.
The annual growth in housing credit most recently peaked in November 2015 and has been trending lower since.
Housing credit growth data is further split into credit for owner occupiers and investors.
Owner occupier housing credit increased by 0.5% in May 2016 to be 7.4% higher over the year.
The annual growth in owner occupier housing credit is occurring at its fastest pace since August 2010 and has increased from a recent low of 3.9% in January 2013.
Monthly and annual change in housing credit
Investor housing credit increased by 0.4% in May to be just 6.0% higher over the past year.
The 6.0% annual increase is the lowest since July 2013.
Annual growth in investor housing credit has slowed markedly since peaking at 11.0% in May 2015.
The Australian Prudential Regulation Authority (APRA) who is the regulator to most mortgage lenders, has implemented a 10% pa limit on the growth in credit to investors.
The cap has worked very quickly and has been effective as highlighted in the chart.
Monthly and annual change in owner occupier housing credit
From here it will be interesting to see if investment starts to pick-up given that credit growth for most lenders is now increasing at a pace which is well below 10% annually.
On one hand we have seen lenders tighten their lending policies to overseas investors which will result in less lending to these borrowers.
On the other hand, some lenders have started easing some of their policies which saw their growth fall below 10%.
Finally, record low rental growth and yields and deteriorating affordability in Sydney and Melbourne may result in lower overall levels of investment demand overall.
What the data does show is the growing prevalence and importance of lending to housing investors.
While owner occupier credit remains much larger than investor, the fall in investor credit has actually dragged total housing credit growth lower.
Of the $1.564 trillion in outstanding credit, $1.012 trillion (64.7%) is to owner occupiers with the remaining $552.3 billion (35.3%) is to investors.
A decade ago, investors accounted for 33.0% of total housing credit.
Its also important to consider that many investors will use an interest-only mortgage while owner occupiers generally pay principal and interest so outstanding mortgage debt to owner occupier will tend to get repaid quicker than investor debt.
Proportion of total outstanding housing credit to owner occupiers and investors
It is anticipated that over the coming months growth in investment housing credit will start to pick-up a little but is unlikely to approach growth of 10% pa.
As noted earlier, low investment returns and deteriorating affordability are likely to deter a return of investment lending to previous heights.
What may occur is increasing investment activity in more affordable parts of the country (outside of Sydney and Melbourne) where yields are higher.
Recent global volatility caused by the Brexit vote and a looming US election may also result in an increase in housing investment domestically as people look for higher returns in assets which are perceived to be safe.
Nevertheless, although we expect some pick-up in investor mortgage demand it is likely to be only moderate.
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