Housing credit data released earlier this week from the Reserve Bank (RBA) showed a further slowdown in investor housing credit growth. This week we investigate the likelihood that this slowing continues.

Each month the RBA releases financial aggregates data. The latest data to January, 2016 was released earlier this week and showed that private sector housing credit was recorded at $1.536 trillion having increased by 7.3% year-on-year to January 2016.

The first chart shows two things; on an annual basis, housing credit has done nothing but expand over the period shown. The second thing it shows is that on an historic basis credit is expanding at a slow annualised pace. Of course this is a function of the fact that with low interest rates households are paying back credit faster as well as the value of outstanding credit is so much higher than in the past. Housing credit has been expanding at annual rate of between 7.0% and 7.5% for the past 15 months.

Monthly and annual change in housing credit


Since January 1991, housing credit data has been split between houses and units. As Chart 2 shows, investor housing credit has typically increased at a faster pace than owner occupier credit. Over the past year investor housing credit has increased by 7.9% which is its slowest annual pace of growth since February 2014 and well down on the recent peak rate of growth of 11.0%pa. Meanwhile, owner occupier credit growth is recorded at 6.9%pa which is its fastest annual rate of growth since October 2010. Between 1991 and 2015, investor housing credit has increased from 16.0% of total housing credit to 35.8%, highlighting how popular housing investment has become since the early 1990’s.

Annual change in housing credit, Owner-occupier vs investor


It has been well publicised that late in 2014 the Australian Prudential Regulation Authority (APRA) provided guidelines to lenders that annual investor housing credit should not expand by more than 10%pa. These changes were largely implemented from the middle of last year. Given this it would seem there is some scope for lenders to ease their policies on investment lending and lift the level of lending for investment purposes given credit growth is now well below 10%pa.

The latest housing finance data, to December 2015, which tracks the value of new lending shows that following a large fall over the second half of 2015, investor lending has started to pick-up a little. Meanwhile the value of housing loans to owner occupier has continued to trend higher.

Value of housing finance commitments
Owner-occupier vs investor


Given the tentative signs of a pick-up in investor demand in the housing finance data, investor housing credit growth now well below 10%pa and home values still rising, why wouldn’t investor demand ramp back up? There are a few possible reasons why investor demand may not rebound. Firstly investors now face not only higher mortgage rates due to the out of cycle lift in mortgages rates by lenders last year but they also experience an average of 30 basis points higher mortgage rates because they are an investor (due to the higher capital requirements for investment loans implemented by APRA in 2015). Secondly, the home value growth phase in Sydney and Melbourne is now very mature having run for almost 4 years, perhaps there is some concern as to how much longer it can run. Elsewhere value growth is and has been moderate with values falling in Perth and Darwin. With potential concerns of a slowing of value growth, rental yields are virtually at historic lows with rental rates unchanged over the year with each acting as a potential disincentive.

Mortgage rates over time with recent changes to investor rates*



Alternatively, investors may still be attracted to housing because total returns are still substantially higher than all other asset classes. The Federal Opposition has signalled changes to negative gearing rules and it is unclear as to how investors will react to the policy should Labor be elected. Arguably the proposed changes to negative gearing may bring forward investment purchases due the grandfathering provision included in the Labor policy; but there is also the argument that the uncertainty in taxation policy relating to housing may act as a disincentive to prospective investors. There is still significant mortgage market competition so despite the recent increases in mortgage rates if borrowers are prepared to shop around they can still get extremely competitive home loan rates.

We anticipate that from here there may be a bit of a pick-up in investment borrowing largely because mortgage rates remain low and housing returns are much stronger than most other asset classes. Although a pick-up in investment activity is a possibility, it is unlikely that the annual rate of housing credit growth will return to or breach its 10% pa limit.