Housing finance data for July 2016 was released by the Australian Bureau of Statistics (ABS) earlier today. The release showed that the total value of mortgage lending in July 2016 was recorded at $31.8 billion which was -1.8% lower compared to the $32.4 billion worth of mortgage lending in June 2016. The value of mortgage lending is now -4.1% lower than its peak of $33.2 billion recorded in April 2015. With home values continuing to rise it would tend to support the evidence that there are fewer transactions occurring on the back of fewer properties being listed for sale.
Looking at the two major components of mortgage lending; owner occupier and investor lending, the value of each over the month was recorded at $19.9 billion and $11.8 billion respectively. Over the month the value of owner occupier lending fell by -3.1% and investor lending increased by 0.5%. The value of owner occupier mortgage lending in July 2016 was -6.4% lower than its historic peak of $21.3 billion in December 2015 and the value of investor lending was -19.1% lower than its record peak of $14.6 billion in April 2015. While the value of owner occupier housing finance commitments was lower over the month, the value of investor commitments has now increased for three successive months suggesting that demand from this segment is coming back.
Looking more closely at the $19.9 billion worth of owner occupier housing commitments shows that the fall in lending over the month was being largely driven by commitments for purchase of both new and established dwellings. Over the month the $19.9 billion worth of commitments consisted of: $1.8 billion in finance for the construction of dwelling, $1.0 billion for purchase of new dwellings, $6.9 billion for refinancing of established dwellings and $10.3 billion for the purchase of established dwellings. For commitments to purchase established dwellings which account for the largest slice of owner occupier lending, it was the lowest value since January 2016.
The $11.8 billion worth of investor housing finance commitments in July 2016 was made-up of $1.1 billion for the construction of dwellings and $10.8 billion for established properties. The total value of investor housing finance commitments in July was at its highest level since August 2015. The value of commitments for construction of dwellings was -9.5% lower over the month while commitments for established dwellings increased by 1.6% to their highest level since September 2015.
The value of housing finance commitments for new housing (defined as owner occupier construction of dwellings, owner occupier purchase of new dwellings and investor construction of dwellings) was recorded at $3.8 billion in July 2016. This was the lowest value of mortgage lending for new housing since October 2015. Of this $3.8 billion, 27.9% was lending to investors with the remaining 72.1% to owner occupiers.
CoreLogic’s Mortgage Index which tracks valuation activity across of proprietary platforms and acts as a lead indicator of mortgage demand, suggests that mortgage demand is likely to remain fairly stable over the coming months. It will be interesting to see what the composition of this demand is; whether it is a further slowing of owner occupier demand and a further pick-up in the investment segment or if the trends start to change.
Investor participation has slowed significantly since APRA introduced the 10% cap on annual growth in investor credit however, over recent months it has started to pick up again. Although gross rental yields are at historic low levels, you can still understand why demand from this market segment is rising. Even with record low yields, returns are still superior to term deposits and other safe asset classes. When you factor in the capital growth along with the rental returns, the asset class remains much more attractive than others. The challenge for investors from here will be ensuring that their property remains occupied throughout the year as rental growth slows and vacancy rates shift higher.
Owner occupier demand has slowed however, much of this can probably be attributed to a significant reduction in newly advertised homes for sale, particularly in Sydney and Melbourne. With interest rates at historic lows, demand remains strong however, at the moment it seems as if there just isn’t enough new stock being listed for sale. Over recent months we’ve seen low stock levels drive auction clearance rates higher and result in an uplift in home value growth. It will be interesting to see whether newly advertised properties for sale ramp-up significantly over the coming months in Sydney and Melbourne. If potential vendors feel that they have missed the best opportunity to sell and upgrade they may choose to wait and renovate their current home. Of course the high entry and exit costs when moving home are also likely to be a deterrent for some sellers and subsequent purchasers in the current market.