By Cameron Kusher

Chart 1

Housing finance data for April 2014 was released today by the Australian Bureau of Statistics (ABS). The headline figure for the number of owner occupier housing finance commitments was flat over the month however, dig a little deeper and there are some differing trends emerging.

As mentioned, the number of owner occupier housing finance commitments was flat over the month following on from a -0.8% fall in March. This data is split into commitments for refinance purposes and commitments for non-refinances (or new loans). Refinance commitments rose by 0.6% compared to a -0.3% fall in non-refinance commitments. Non-refinance commitments fell over consecutive months and it was the first time this has happened since December 2012. Given the number is a count it is important to look at the trend and it is clear from the first chart that the number of owner occupier commitments, whether it be for non-refinances or refinances is beginning to flatten. Year-on-year, refinance commitments are 8.6% higher compared to a 5.7% rise in non-refinance commitments.

Chart 2

The number of owner occupier housing finance commitments for the construction of new dwellings and the purchase of new dwellings have shown a strong rise recently however, as the above chart shows there has been some recent weakness in commitments for the purchase of new dwellings The number of commitments for construction of new is almost three times greater than the number for purchase of new nevertheless, the recent weakness is certainly something to keep track of.

Chart 3

The data on the number of commitments is important however it is narrow in its scope given it does not include investors. From a banking perspective, the value of the funds they are lending is arguably more important than the number of loans written. The total value of housing finance commitments (which includes investor commitments) increased by 1.7% in April and increased by the same amount if you remove refinance commitments. Over the month, owner occupier refinance commitments were 1.6% higher, owner occupier non-refinance commitments were 1.3% higher and investment loan commitments increased by 2.3%. As the above chart shows, investment and owner occupier lending is at record high levels whereas non-refinance loan commitments are still -5.7% lower than their previous peak. In terms of the value of finance commitments all three segments continue to record a rise and are trending higher. Year-on-year the total value of housing finance commitments are 20.4% higher with owner occupier refinances up 19.1%, owner occupier non-refinances up 13.4% and investment loans 29.8% higher.

Chart 4

It’s also important to look at the make-up of lending across owner occupiers and investment loans. Over the month of April, 43.0% of all lending was to owner occupiers for non-refinances, 39.4% was to investors and 17.6% was to owner occupiers for refinances. As the above chart shows the proportion of lending to investors is high on an historical basis. In fact investment lending is sitting at levels not seen since late 2003. It is clear from the data that there is significant demand for housing from investment currently. The big question of course is how sustainable is that demand given there was a sharp slowdown in this segment of the market shortly thereafter lending last reached similar heights.

Chart 5

It is interesting to pair this data with recently released quarterly data from the Australian Prudential Regulatory Authority (APRA) about Authorised Deposit-taking Institutions’ (ADIs) exposure to property. The latest data showed that interest-only loans accounted for 39.4% of all loans over the quarter (a similar proportion to these investor figures). However, the data also suggested that loans with a loan to value ratio (LVR) of more than 90% may be getting harder to find with 13.5% of new loans over the quarter with an LVR of more than 90% which was the lowest proportion since September 2011.

Chart 6

Focussing on lending to first home buyers, there were 6,074 housing finance commitments to first home buyers in April 2014. This figure was -7.3% lower over the month and -12.7% lower year-on-year. As a proportion of all owner occupier housing finance commitments, first home buyers accounted for an equal record low of just 12.3% of the commitments over the month.

Chart 7

The RP Data Mortgage Index (RMI) which is an index of mortgage events across RP Data’s proprietary platforms has a strong correlation with housing finance data and is a weekly index. The RMI predicted a softening of activity some six weeks ago and is indicating a sharp rebound in the housing finance data once the May data is released. Note that the RMI data is correlated strongly to the raw housing finance data not the seasonally adjusted figures which are referred to elsewhere throughout this post.

The data seems to suggest that the growth in the number of new owner occupier housing finance commitments is starting to (or has) topped out. There is still plenty of activity in the owner occupier refinance and investment segments of the market. Of course our chief concern remains the high level of investment activity in the market. Total returns from residential property have been strong over the past 12 to 18 months however, we believe that the peak level of capital growth has now passed and rental yields continue to fall. Although total returns are still strong they are likely to diminish from here and where will that leave these investors especially if they were simply chasing the short-term value appreciation which has been particularly prevalent in Sydney and Melbourne over the past year. The good news is that the higher risk, high LVR loans are reducing however, there are still a lot of instances in which mortgagees are only paying back the interest component of the mortgage.

Source: RPD

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