The expansion of housing credit continues to slow

The latest housing credit data highlights that annual credit growth is the slowest it has been since late 2013 with investor credit growth the slowest on record.

The latest housing credit data released by the Reserve Bank of Australia highlights ongoing sluggish credit growth.

From the monthly housing finance data it is clear that demand is easing but what is less clear is how much of the slowdown is due to people paying off their mortgages quicker, especially as more borrowers switch from interestonly to principal and interest mortgages.

In September 2018, housing credit rose by 0.3% with owner occupier credit increasing by 0.5% and investor credit rising by just 0.1%. 

Both owner occupier and investor credit growth is slowing and this matches trends seen in housing finance data whereby new commitments are falling for each borrower type.

Over the 12 months to September 2018, housing credit increased by 5.2% which was its slowest annual growth since November 2013.

The growth in housing credit was split between 7.3% growth for owner occupiers (slowest annual growth since November 2015) and an historic low credit expansion of 1.4% for investors.

While the slowing of credit expansion has overwhelmingly been driven by investors, there has more recently been a slowdown in demand from owner occupiers.

Investors as a share of total credit have fallen to 33.1% while still significant, it is the smallest share of credit to investors since June 2012 and substantially lower than their peak of 38.7% in June 2015.

Monthly housing finance data shows that demand for new mortgages has clearly slowed with both owner occupier and investor lending trending lower.

Less regular data released quarterly from the Australian Prudential Regulation Authority (APRA) shows that the pull-back in new interest-only lending is also slowing credit expansion.

Furthermore, quarterly updates to the market by listed banks show that many interestonly customers are switching to principal and interest before expiry which would also be having an impact.

As the third chart shows, there has been a significant fall in new interest-only mortgages that have been written. 

Over the latest quarter (June 2018) just 16.6% of new mortgages were on interest-only terms, which is well down from its peak of 45.6%.

While there have been fewer new interest-only mortgages written, the switching from interest-only to principal and interest has seen a fall away in the share of total credit.

At one point, interest-only mortgages accounted for 39.5% of total credit, by June 2018 the share had fallen to a record-low of 28.8%.

With less overall demand for mortgages, particularly owner occupier and investor, and many interest-only borrowers switching to paying down their principal, the anemic growth in housing credit seems set to remain for some time.

Add to this the fact that lenders are reducing their exposure to high levels of borrower debt relative to incomes and increasing their focus on borrower serviceability and the outlook for housing credit could contract further from here.

About Cameron Kusher Cameron Kusher is Corelogic RP Data’s senior research analyst. Cameron has a thorough understanding of the fundamentals such as demographics, trends & economics. Visit www.corelogic.com.au