The Recent Slump in Investor Mortgage Demand Slowed in June 2017
According to the latest housing finance data released by the Australian Bureau of Statistics, demand from the investor segment increased slightly in June 2017 while owner occupier mortgage demand was steady over the month. In June 2017 there was $33.3 billion worth of housing finance commitments which was 0.8% higher than the previous month and 2.9% higher than June 2016.
In June 2017 there was $20.7 billion in housing finance commitments to owner occupiers with a further $12.5 billion to investors. The total value of owner occupier housing finance commitments was 0.3% higher over the month and 1.2% higher year-on-year. The value of owner occupier housing finance commitments in June 2017 was the highest since December 2015. The value of finance commitments to investors was 1.6% higher over the month and is 5.7% higher year-on-year. Despite a moderate increase in investor mortgage demand, finance commitments in June 2017 were -17.8% lower than their historic peak in April 2015.
Across the four components of owner occupier housing finance commitments, the value committed to over the month was: $2.0 billion for construction of dwellings, $1.2 billion for purchase of new dwellings, $6.0 billion for refinancing of established dwellings and $11.5 billion for purchase of other established dwellings. The year-on-year change in the value of lending across these components was recorded at: +14.8% for construction of dwellings, +14.4% for purchase of new dwellings, -12.9% for refinancing of established dwellings and +6.7% for purchase of other established dwellings.
There are two components of investor housing finance commitments, construction of dwellings and established housing and the value of commitments in June across these two components were $1.3 billion and $11.3 billion respectively. The increase in investor mortgage commitments over the month was driven by a 26.8% increase in commitments for construction of dwellings while commitments for established dwellings was -0.6% lower over the month. The overall increase may have been driven by a lot of settlements of investor owned units over the month.
Housing finance commitments to investors have been trending lower for some time now and we expect that despite a slight increase in June that this trend will continue. This is due to the fact that policies have been applied that specifically discourage investment in the housing market.
Firstly, the banking regulator, APRA, has bought in dual caps, the first being a 10% speed limit on annual growth in credit (the total amount owing to lenders by borrowers) to investors. This cap limits the amount of credit that is available to investors at a given institution. The second cap is the limit to interest only lending which cannot account for more than 30% of new mortgage originations. Given these caps, if you are in investor you are limited in availability both by the availability of credit and by the availability of interest only mortgages. By comparison, the only discouragement in the market for an owner occupier is if you want to access an interest-only mortgage.
As part of the capping of lending to investors many lenders have now also started charging mortgage rate premiums for both investor and interest-only mortgages. The Reserve Bank doesn’t publish statistics on average interest-only mortgage rates however, their data does show that the typical investor on a variable rate mortgage is now paying an additional 60 basis points on their mortgage interest rate compared to an owner occupier.
The combination of these factors is likely to continue to drive demand for investment mortgages lower over the coming months. At the same time, a number of states are introducing greater incentives for first home buyers from July. As a result it is anticipated that over the coming months demand will continue to slow for investors while it is likely to growth for owner occupiers both from subsequent purchasers in the market and a moderately higher level of activity from first home buyers.