Housing finance data analysis

Over the month of May there were 52,092 owner-occupier housing finance commitments, 17,463 of which were refinances and 34,630 which were non-refinances or new loans.  Refinance commitments were 2.1 per cent higher over the month and are 10.1 per cent higher year-on-year.

New loan commitments were -1.0 per cent lower in May and are only 2.0 per cent higher over the month.  Refinance commitments are at their highest level since April 2008 while new loan commitments are -2.5 per cent lower than their recent peak in November 2013. Although owner-occupier housing finance commitments are higher over the year they do seem to be at or very close to a peak.

In May there was $27.5 billion worth of housing finance commitments, which was slightly lower than the all-time peak of $27.7 billion the previous month. Over the month, owner-occupier refinance commitments were up 0.8 per cent, owner-occupier new loans were -1.4 per cent lower and investment finance commitments were -0.9 per cent lower. Despite weaker results over the month, year on year there have been some significant increases, with owner-occupier refinances 17.7 per cent higher, owner occupier new loans 8.3 per cent higher and investment loans up 23.8 per cent. Again, the rate of increase has definitely slowed of late potentially pointing to a peak.

Looking at how much housing lending each component is attracting, the data shows that in May 2014, 42.9 per cent of lending was to owner occupiers for new loans, 18.0 per cent was for refinances by owner occupiers and 39.1 per cent is for investment purposes. As a proportion of total lending in May, owner-occupier non-refinance commitments are at their lowest level on record, while refinances are at their highest level since July 2013, and investment lending remains at around its highest level since late 2003. The pick-up in investment and refinance lending has caused the proportional fall in owner-occupier non-refinance lending. If we exclude lending for refinances, 52.4 per cent of lending over the month was for owner occupiers while 47.6 per cent was for investors. This was equal to the second highest level of lending for investment purposes, behind the 49.0 per cent of all loans to investors in October 2003.

Lending finance data released by the ABS on Monday for May 2014 revealed that investor activity is significantly higher in New South Wales than in all other states.  Nevertheless, New South Wales (29.9 per cent), Victoria (22.5 per cent), Queensland (7.8 per cent) and South Australia (2.1 per cent) have each recorded a year-on-year rise in investment lending. Investment housing finance commitments account for an historic high 46.9 per cent of all housing finance commitments in New South Wales, and elsewhere the proportions are recorded at: Victoria (39.1 per cent), Queensland (34.4 per cent), South Australia (31.5 per cent), Western Australia (31.0 per cent), Tasmania (13.8 per cent), Northern Territory (40.2 per cent) and the Australian Capital Territory (33.9 per cent).  The data shows that although investment levels are generally rising it is much more exacerbated in New South Wales and Victoria, which are of course proxies for rising investment in Sydney and Melbourne.

Interestingly, when we track the annual change in the value of housing finance commitments, excluding refinances to reflect home sales we can see that it correlates closely with the annual change in combined capital city home values.  The recent slower rate of growth in capital city home values is happening in concert with a slowdown in the growth in housing finance commitments.

The housing finance data also shows that first home buyers continue to play only a minor role in the housing market. In May, the number of owner-occupier first home buyer commitments was up 17.1 per cent over the month. However, as a proportion of total owner-occupier lending activity it remains quite low, at just 12.6 per cent.

Across the individual states, the level of activity by first home buyers remains very low in the three largest states (New South Wales, Victoria and Queensland).  Elsewhere, the percentage of owner-occupier housing finance commitments for first home buyers is lower now than at the same time last year except in Tasmania and the Northern Territory.

Looking ahead, the RP Data Mortgage Index (RMI) indicates a slowing of demand for mortgages in June. With value growth seemingly having peaked and transaction volumes lower than they were late in 2013, we anticipate that demand for housing finance is likely to remain at fairly similar levels to those current over the coming months. The real test from here will be throughout the spring selling season when housing demand typically escalates.

With affordability factors anticipated to slow the rate of value growth, we may also see slightly lower levels of mortgage demand. As we have noted plenty of times previously, rental yields are generally low, which suggests most investors are seeking capital growth. This is further highlighted by the high levels of investment activity in New South Wales and Victoria, with Sydney and Melbourne having recorded the greatest increases in home values across the capital cities over the past year. The test will be once the value growth in the market abates what then happens with all these investor-owned properties? Do they wait it out for the next growth phase or do they exit the market and move to a more liquid asset class? Only time will tell but it is certainly something that lenders and regulators should be considering with such a high level of investment lending currently taking place.