What do record Sydney investor loans mean for property? | Pete Wargent

The ABS released its Lending Finance data for October recently, which revealed some interesting trends.

Part 1 – Commercial Finance Rolls

While on a rolling 12 monthly basis total lending is still increasing (just), on a monthly basis we have now seen four months of steady decline, with another miss being recorded for the month of October.

Commercial finance fell by another seasonally adjusted 2.2 percent in October to be some 7.5 percent below the levels being hit back at the end of Q2 2014.

Housing finance for owner-occupiers increased by 1 percent in the month of October 2014, but as we analysed here earlier in the week, owner-occupier lending is looking set to pass its peak imminently.

Renovation activity has ticked up a little, but barely enough to even register a blip in the National Accounts, and the net contribution to GDP in Q4 is likely to be essentially be nil.

Lease finance commitments and personal finance commitments are still rising, but are of a comparatively lesser importance to the economy.

Lending finance

In aggregate, then, this leads us to another soft result which suggests that the previous upward trend in lending finance is set to roll over fully in 2015.

Perhaps not the most ringing of endorsements for the end of the interest rate easing cycle argument, particularly given the slack inherent in the labour market.

Part 2 – Impact on Interest Rates

Monetary policy twitchers will have noted the importance of one word in particular from the most recent decision statement media release. It’s highlighted below:

“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”

Cash rate futures markets had previously assumed that subsequently weak economic data potentially superseded the importance of the word “likely”, and as recently as Monday markets were pricing in a 38 percent chance of an interest rate cut at the very next Reserve Bank Board Meeting in February.

Since that time we have had some (moderately) better than expected Labour Force figures and the Reserve Bank’s own Governor Stevens also went to some lengths in an interview with the Australian Financial Review to allude to a leaning towards policy stability.

Markets have duly absorbed this information with ASX 30 Day Interbank Cash Rate Futures February 2015 contracts now trading at 97.54, indicating only an 18 percent expectation of an interest rate decrease to 2.25 percent at the next Board meeting in February – less than half of the odds equivalently assigned earlier in the week.

February rates decision

That said, given that also Stevens noted his preference for the Aussie dollar to decline to around the 75 cents level, rates may well still need to fall in due course, especially given that we have:

  • inflation appearing very likely to head towards the bottom of the 2-3 percent range;
  • sub-trend growth expected in 2015;
  • sharply declining commodity prices;
  • a national unemployment rate ticking up to a 12 year high of 6.3 percent and rising; and
  • a number of other weak indicators.

For these reasons while futures markets don’t anticipate a cut in February or even March (as noted here previously, this would give the Board the opportunity to ditch the “period of stability” line from its media releases) further rate cuts are still on balance to be expected in the year ahead.

Cash rate futures

Part 3 – Sydney Investor Loans Explode; Brisbane Improving

The other part of the Lending Finance release which is of interest to market analysts, buried deep within the data tables, is the allocation of investment housing fixed loan credit by state.

One of the key themes of this blog over the years has been that since Australia hit its effective “peak household debt” in 2006/7, the inner Sydney property market will clearly be the star performer, for a whole range of inter-related reasons that we don’t need to re-cap on here.

Mirroring what we have seen in Britain, however, we don’t see there being nearly so much growth for smaller city markets and regional centres since Australia hit its own equivalent of peak household debt.

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In particular, as noted here in the earlier in the week, $200k fringe suburb detached housing where land values are a low component of a property’s value are unlikely to be performing investments in an era where household debt has already peaked.

Even if fringe land values were to boom by 50 percent from, say $50,000 to $75,000, this is unlikely to make for much of an investment return on the total value of the asset (12 percent, to do the maths for you) given that the replacement build cost of detached housing greenfield sites is now not increasing in real terms.

Project home builds are increasingly representing outstanding value for money today, meaning that the substitutability of established outer suburban dwellings has shifted favourably for new homebuyers.

This is not a popular viewpoint with many property commentators we understand, but the statistics are pretty much speaking for themselves since 2008, with Sydney standing head and shoulders above every other significant property market.

The best performing suburbs have largely, though not solely, been located in the inner west over that time.

In October, some $12.1 billion of investor credit was written with New South Wales accounting for a massive $5.24 billion of that amount.

The data shows New South Wales (i.e. Sydney) loans continuing to explode higher, with some $5,243,985,000 of loans written in the month of October.

This is the highest quantum of investment loans ever recorded in any state in Australia’s history.

Over the past year an unprecedented $54 billion of investment loans have been written in NSW, a huge number but pretty much what we have been expecting to see due to low interest rate settings, the only question being how long this rate of increase might be sustained.

What’s more, the rolling annual value of loans is set to run at least 10-15 percent or more higher unless regulators can find a way to halt the market trend (the case that they even feel strongly compelled to do so seems to remain at best unconvincing).

Investor loans by state

Over the past year on a rolling annual basis NSW investor loans have boomed by a massive 55 percent to be some 86 percent higher than only two years ago.

Markets in Victoria (+30 percent year-on-year), Queensland (+23 percent) and Western Australia (+18 percent) have also responded to cuts in borrowing rates.

Investor activity in South Australia is flat.

Part 4 – State Level – The Good, Bad & Ugly

We’ve run a handful of charts from our packs below to highlight the contrasting fortunes of certain states and as a guide to where we see markets heading in 2015.

Sydney clearly still has some momentum with yet another new record for NSW loans written in October 2014.

The value of monthly loans written is now an extraordinary 2.5 times the levels we were seeing in early 2010, a huge increase.

NSW investor loans

In a country with strong population growth of around 1.7 percent per annum and a 2-3 percent target range of inflation, it would perhaps not be unreasonable to expect that the value of investor loans might increase increase at a 3 to 5 percent per annum pace on average though the course of a full cycle.

The below chart shows why it has been hard for us to take the regular “Adelaide property boom” pieces  too seriously over the years given that investor loans today make up almost half of Australia’s mortgage market ex-refinancing.

The 5 year investor loans chart reveals no discernible ramp up in investor activity at all in South Australia, while owner-occupier commitments in the state have fared only marginally better.

SA investor loans

As for where else we see out-performance in 2015? In a word: Brisbane.

Reflecting a similar trend in owner-occupier finance commitments, the value of Queensland investor loans on a monthly trend value basis have increased very sharply by another 30 percent in the past 12 months to be at the highest level we have seen in nearly seven full years since November 2007.

After a laborious intervening period for the sunshine state capital, it’s time for Brisbane to have some time in the…well, sun.

QLD investor loans

Two points of warning, though.

1 – Watch out for a looming oversupply of inner-Brisbane attached dwelling stock, and be equally wary of recommendations to buy off-the-plan from “advisers” the sole aim of whom is to snare hefty commissions.

Plenty of emails have been hitting the ol’ inbox of late promising no less than SIX percent commissions (think about that…6 percent!) to all-too-willing agents who can hook a sale, frequently under the execrable guise of “investment advice”.

Personally I would avoid this type of stuff like the plague right now. Correction – avoid it always.

2 – Queensland housing finance is looking very robust at the state level, but be very cautious of some of the regional markets being recommended for investors. The mining construction boom is unwinding at apace and the trend in unemployment in many regions is simply up, up, up and away.

Whatever anyone may tell you, leveraged investing in a secondary or regional market where unemployment rates are high (say ~7.5 percent plus) and are running higher may carry a material risk premium that could result in significant financial loss.

We’ll cover again which regions have elevated and rising unemployment in more detail later in the month.



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Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog

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