The following is an extract from the June Quarter edition of the Quarterly Economic and Property Review.
Housing finance data over the June quarter revealed subdued new lending for dwelling purchases, and a pivot toward refinancing of existing loans to help reduce housing costs.
In May, the value of new lending for the purchase of dwellings fell 11.6%, the largest decline on record. This represented a month-on-month decline of about $2.2 billion.
The fall in the value of finance commitments in May was likely due to a decline of 33.7% in sales volumes over April. ABS housing finance data has, at times, has lagged CoreLogic sales volumes. This is because the date of a sale record from CoreLogic is generally indicative of the contract date, whereas a secured loan is dated at the point of acceptance of the loan by the borrower.
The lag between the contract date and full processing of the finance may have been blown out over this period as social distancing measures slowed valuations and process work, and banks were processing a high volume of deferrals and refinances. As sales volumes began recovering in May and June, this saw an increase in secured loans recorded across the ABS datasets.
Over the June quarter, lending to owner occupiers for the purchase of property fell -9.9%, while lending for investment property fell 12.6%. As a result, investor housing finance as a percentage of total housing finance fell to 25.4% of total lending, which is well below the decade average of 36.3%. As rental markets remain subdued and property prices fall, this share may continue to decline.
The share of first home buyer commitments as a portion of total owner occupier commitments sat at 29.5% in June, which is well above the decade average of 23.2%. The expansion of the first home loan deposit scheme and other first home buyer incentives announced over June and July is likely to see a boost in first home buyer participation over the second half of 2020.
While new housing finance took a hit in the quarter, refinancing has reached record highs. ABS data suggests the total value of externally refinanced loans increased 25.1% in May. Since March, over $40 billion in home loans has been externally refinanced. While ABS data suggests external refinancing has historically made up about 26% of total lending, the ratio was up to 43.3% in June.
The refinancing has been enabled by a record-low cash rate target of 0.25%, which is part of the comprehensive monetary response laid out by the RBA in mid-March. The actual cash rate has hovered well below the target. Since late April, the actual cash rate has fallen to around 13 to 14 basis points.
The record low cash rate setting has enabled low mortgage rates, which are summarised in the table below.
In a recent address, RBA Governor Phillip Lowe outlined there would be no near-term changes to the monetary response established in mid-March.
Specifically, he referred to lower or negative interest rates, intervention in the foreign exchange market, or changes to the term funding facility, with these sorts of interventions dependent on the global economic environment.
But Lowe stressed that there was a limit to the effectiveness of such policies to stimulate demand, with fiscal responses needed to increase demand and inflation. The dynamics in the housing finance space has amplified this, where low rates led to an increase in refinancing to save money, rather than spend money on housing.
Keeping perspective around mortgage risk and the ‘September cliff’
COVID-19 exacerbates the risk that high housing debt has to the Australian economy. In the March quarter, the ratio of household debt to annualised household disposable income sat at near-record highs of 142.0%.
With widespread unemployment, there is increased likelihood borrowers could fall behind on mortgage repayments, with the potential to generate forced sales. This in turn could increase the supply of listings, and put further downward pressure on dwelling values.
Many banks offered a pause on mortgage repayments early in the pandemic to reduce this risk. As of June 2020, the value of housing loans deferred was $195 billion, or 11% of total housing loans.
These ‘mortgage holidays’ are temporary, and were initially in place for 6 months from March 2020. This led to concerns over a ‘September cliff’, where mortgage holiday repayments and fiscal support policies would be repealed as the economy was yet to recover.
However, it is important to remember that no entity has an interest in seeing residential mortgages fall off a ‘cliff’ come September. Residential mortgage lending accounts for about 60% of bank lending. Housing accounts for about 53% of household wealth, and the accumulation of wealth in housing eases pressure on the government to fund Australians in retirement.
Thus, it is unsurprising to see that both banks and statutory authorities are looking to extend repayment deferrals where it is needed. In a letter to banks, APRA advised that for loan repayment deferrals provided prior to September 30 2020, ADIs could continue to apply a ‘temporary capital treatment’ to a total deferral period of 10 months, or up to the end of March 2021. The ‘temporary capital treatment’ means that APRA does not count a deferred loan as in arrears, or as restructured.
Interestingly, of this deferred volume, only 8% had a loan-to-value ratio of more than 90%. In addition to the national property price upswing of 8.9% between July 2019 and April 2020, it likely that relatively few of the borrowers deferring their mortgage repayments are in a negative equity position.
This is important, as recent research from the RBA has highlighted that foreclosure on mortgages is far less likely when the borrower is in a positive equity position.
It is also worth keeping in perspective that not every Australian has the same level of risk when it comes to housing and debt. For example, around 30% of Australian households own their home without a mortgage. RBA research suggests that over 50% of loans had prepayments of at least 3 months, and about 30% of loans had prepayments of at least 3 years. However, this is not to say parts of the market are without risk.
The same data set showed just under one third of mortgage holders had less than one month of prepayment, and that this group with low repayment buffers were more likely to experience financial stress.
The markets more likely to see a dangerous combination of negative equity and mortgage arrears have recently been mining regions, such as the north western region of WA.
More recently, there is evidence to suggest more severe price falls and disruptions to loan repayments could occur across inner-city apartment markets of Melbourne, and potentially Sydney. These risks are further explored in the June quarter edition of the Quarterly Economic and Property Review.