Housing finance data released yesterday by the Australian Bureau of Statistics (ABS) for March 2015 showed that despite the recently released guidelines for sound lending practices released by APRA and repeated warnings from the RBA, lending for investment purposes continues to surge.
While values are still rising, the prospect of very low yields remain no deterrent to prospective investors.
Based on the value of mortgage lending over the month there was $31.6 billion worth of mortgage lending by Australian authorised deposit-taking institutions (ADIs) over the month which represented an increase of 3.5% over the month and 15.4% year-on–year.
Where did the money go?
Looking at the segments, $18.7 billion was borrowed by owner occupiers with $12.3 billion for new loans and $6.4 billion for refinances.
New owner occupier loan commitments are now 1.3% higher over the month and 3.3% higher year-on-year.
Owner occupier refinances have experienced much stronger growth over the year, up 33.0% and rising by a further 2.2% over the month.
Over the month, investors committed to $12.9 billion in mortgages with the value of these rising 6.4% and by 20.9% year-on-year.
As can be observed, new lending to investors is outweighing lending to owner occupiers once refinances are excluded.
Since home values started rising in the current growth phase, the values of investment housing finance commitments has increased by 86.6% compared to a 59.5% increase in refinances by owner occupiers and a 29.8% rise in new mortgages (ex-refinances) to owner occupiers.
It is clear that investors have played a significant role in the increase in home values across the current growth phase.
Looking at the owner occupier segment of housing finance; $1.7 billion was borrowed for construction, $1.0 billion for purchases of new homes, $6.4 billion for refinances and $9.5 billion for purchase of established stock.
Over the month, the change in borrowings was recorded at; -2.7% for construction, +2.2% for purchase of new, +2.2% for refinances and +1.9% for purchase of established stock.
Year-on-year, the changes have been recorded at; -4.0% for construction, +10.7% for purchase of new homes, +33.0% for refinances and +4.1% for purchase of established stock.
Growth is clearly strongest across the refinance segment whilst there is a clear weakness in the data for commitments for construction of new homes.
The growth in refinance is reflective of consumers shopping around for a better home loan deal. It may also indicate that some home owners are drawing down on their equity.
Switching the focus to the investment segment, in March there was $0.9 billion committed to for construction of new dwellings and $12.0 billion committed to established investment housing.
Over the month, the change in investment was recorded at +35.6% for construction of new dwellings and +4.6% for established homes.
Year-on-year the increases were recorded at +68.5% for construction of new and +18.3% for established housing.
Along with refinances by owner occupiers, investment borrowing is clearly a key driver of the current market.
In terms of magnitude, investors are overwhelmingly more inclined to target established stock rather than new stock.
In terms of the total value of housing commitments which was recorded at $31.6 billion, only $3.7 billion or 11.7% of total commitments were for construction or new dwellings across owner occupiers and investors.
Over the month the total value of commitments for new housing stock has increased by 6.4% and it is 12.4% higher year-on-year.
Although this is quite solid growth, it does pose the question of just who is buying all this new stock with a record high level of new construction activity currently taking place.
The proportion of total commitments which are for new homes at 11.7% has trended lower over recent months.
We know that legally, foreign investors can in most cases only purchase newly built stock so the data seems to suggest that a growing proportion of the new housing stock is being purchased by foreigners.
Most of the foreign borrowings are not collected in the housing finance data due to the fact that its coverage is only for Australian authorised deposit-taking institutions (ADIs).
If funds are borrowed from overseas, the housing finance data provides no visibility of them.
From now, it will be interesting to see in which direction housing finance data heads.
We know that APRA and RBA have repeatedly expressed concerns about the level of investment lending and have reiterated minimum lending standards that they would like ADIs to target.
The surge in investment lending over the month coupled with another interest rate cut in May could potentially create even more challenges for the two institutions.
There are also tentative signs that new mortgage commitments by owner occupiers (those excluding refinances) may also be starting to pick-up.
The next couple of months of housing finance data will be very interesting to watch to see if investor housing finance commitments begin to cool and whether the owner occupier segment is buoyant enough to continue its recent uptick.
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