Earlier last week, the Australian Bureau of Statistics (ABS) released its monthly housing finance data for January 2018 while the Australian Prudential Regulation Authority (APRA) released their quarterly ADI property exposures data for December 2017. Each of these releases provide really valuable insight into the state of the mortgage lending environment.
Firstly looking at the more up-to-date housing finance data, there was $33.1 billion worth of housing finance commitments in January 2018 which was a 0.7% increase on the previous month but -2.2% lower year-on-year. Splitting these figures out there was $21.2 billion worth of owner occupier housing finance commitments, of which $6.4 billion were refinances and $11.9 billion of investor mortgages. The value of both owner occupier (+0.5%) and investor (+1.1%) mortgages increased over the month however, owner occupier mortgages were higher year-on-year (+4.4%) while investor mortgages were down significantly (-12.1%).
The ABS also publishes some data on first home buyers (FHB). Since the end of June 2017, FHB that have purchased under certain price thresholds in NSW and Vic have been exempt from stamp duty. This has led to a surge in first home buyer commitments in these states. The latest data shows a fall in volumes however, the data isn’t seasonally adjusted and January is a quiet time of the year. In fact the decline in volumes from December to January is lower in NSW and Vic than it was 12 months earlier. If the analysis is done looking at the share of total owner occupier commitments that are to FHB there has been a pull-back over the month in NSW and the share is steady in Vic. Elsewhere, FHB as a share of all owner occupier loans are above 20% in Qld, WA and NT, slightly below than in ACT and less than 15% in SA and Tas.
Moving to the APRA data it contains a lot of valuable data that we get updates on less frequently including what is happening with interest-only lending and loan to valuation ratios (LVR) of new mortgages being written.
Over the December quarter, the APRA data shows that there was $15.272 billion worth of interest-only mortgages created. This $15.272 billion was the lowest quarterly value of interest-only loans written on record (data dates back to March 2008). As a proportion of the $100.33 billion in mortgages written over the quarter, interest-only accounted for an historic low 15.2% which is down from 17.2% over the September 2017 quarter. This is substantially lower than the peak in new interest-only mortgages in June 2015 when they accounted for 45.6% of all new mortgages over the quarter.
In terms of LVR, this measures how much of a deposit a borrower has, so an LVR of 80% means the loan covers 80% of the mortgage meaning 20% is equity (deposit) from the borrower. The higher the LVR the lower the deposit and vice versa. Looking at the four ranges in which APRA splits the data, $27.646 billion (27.6%) worth of new mortgage over the quarter had an LVR of less than 60%, $51.780 billion (51.6%) had an LVR of between 60% and 80%, $13.694 billion (13.6%) had an LVR of between 80% and 90% and $7.209 billion (7.2%) had an LVR of greater than 90%. Over the quarter, a record low 20.8% of all new mortgages had an LVR of more than 80%. At its peak in March 2009, 37.6% of all new mortgages had an LVR in excess of 80%.
Overall the data shows that demand for mortgages remains strong, yet if anything the lending is becoming somewhat less risky. Fewer borrowers are utilising interest-only mortgages which means that more mortgagees are paying down the principal as well as paying interest. The data also indicates that an increasing number of borrowers are using larger deposits when taking out a new mortgage. A higher LVR means that borrowers are stumping up more of their own cash and relying on a smaller proportion of borrowed funds.
While this all looks quite positive, the proportion of new interest-only mortgages remains well below APRAs cap which limits new interest-only lending to less than 30% of the total value of lending. Although lenders are substantially lower than this benchmark, recent comments from APRA about potentially loosening some of the macroprudential policies, specifically the 10% cap of investor credit growth, and lenders cutting interest rates for investors and some interest-only products, could see demand re-inflate. Remember that investors, many of which have utilised interest-only mortgage have been a major driver of growth in Sydney and Melbourne dwelling values over recent years. Just as values have stopped growing in each of these cities the regulator is talking about relaxing some of the policies that have bought about the slowdown and lenders are reducing mortgage rates. The next few months and quarters of data will be very interesting to analyse to see how borrowers and lenders adjust to the ever changing mortgage market and what impact this has on housing market activity and the pace of capital gains.