It seems that lenders were already scaling back their appetite for investment lending as early as January this year, with the value of housing finance commitments for investment purposes falling by almost 6% in February; the largest fall in lending for investment purposes since September 2015. While this is only one month of data, it is likely that investment lending has moved, or is moving through the peak of the cycle.
The February 2017 housing finance data which was released today by the Australian Bureau of Statistics (ABS). The data showed that in February 2017 there was $32.9 billion worth of housing finance commitments which was -2.7% lower over the month but 3.5% higher compared to the value in February 2016. To highlight how much lending is going to housing it is interesting to note that five years earlier, $20.4 billion worth of housing finance commitments was recorded in February 2012.
The $32.9 billion of housing finance commitments in February 2017 consisted of $20.0 billion to owner occupiers and $12.9 billion to investors. The value of lending to owner occupiers has changed very little over the past eight months and was -0.5% lower over the month and -2.3% lower year-on-year. The value of lending to investors fell by -5.9% in February but is still 14.0% higher year-on-year. The -5.9% monthly fall in the value of lending to investors was the largest monthly fall since September 2015 and is a dramatic change in direction for investment lending which has been trending higher since January 2016.
Owner occupier housing finance commitments are split into four types: construction of dwellings ($1.8 billion), purchase of new dwellings ($1.0 billion), refinancing of established dwellings ($6.2 billion) and purchase of established dwellings ($11.0 billion). Construction of dwellings and purchase of new dwellings rose over the month and were also the only commitment types higher year-on-year. Lending for refinances in particular have been in a steady decline since December 2015, at that time there were $7.3 billion in commitments over the month with the $6.2 billion in February 2017 tracking -15.6% lower. This does seem a little counter-intuitive given that since December 2015 there has been substantial repricing of mortgage rates since that time and investors have returned to the market which could have involved refinancing of their owner-occupied properties to fund the investment.
Lending to investors slowed markedly in February 2017 with the two components: new construction ($1.0 billion) and established dwellings ($11.9 billion) each recording a fall over the month. Lending for construction was -13.6% lower in February while lending for established dwellings fell by -5.2%. The decline in housing finance commitments predates the new policy announcement from APRA to lenders a week ago notifying them of changes to lending policies, in particular for interest-only lending which is popular amongst investors. Although the letter was only recently published, the discussions about the lending policy changes have probably been ongoing with lenders for a number of months and may help to explain the fall in investor lending in February. Over the next few months it will be interesting to see the direction of lending to investors, if it falls like it did after April 2015, it could lead to a slowdown in the rate of value growth in the housing market although there is little evidence of this occurring as yet.
The above chart shows the value of lending for new housing compared to the value for existing housing, note that refinances are excluded from this data. New housing is defined as: owner occupier construction of dwellings, owner occupier purchase of new dwellings and investment construction of dwellings which totalled $3.9 billion in February 2017 compared to $22.9 billion for existing housing. New housing accounted for 14.5% of total housing finance commitments over the month. Even though we are in the midst of a housing construction boom there has been no substantial increase in the value of finance commitments for new housing over recent years. Keep in mind though that there are substantially more established properties than new with the 9.8 million dwellings nationally only increasing by 1.8% over the past year.
The next few months of housing finance commitments data will be interesting to follow to see if the softness in investor demand continues. Also with many lenders repricing mortgage rates since February there may be an increase in refinance activity which has been slowing since the end of 2015. Overall the nature of the mortgage market is changing with higher interest rates and a fresh round of macroprudential controls recently implemented. The next few months should provide insight into whether these tools can ultimately slow some of the current exuberance being shown by investors.