Investors continue to drive Australia’s property market, accounting for 51 per cent of new mortgages in January, but how long can the investor boom last? Low interest rates should support investor activity in the near-term but could APRA spoil the party?
The value of loan approvals to owner-occupiers, excluding refinancing, fell by 2.4 per cent in January, to be 1.1 per cent lower over the year. Momentum within this sector eased throughout 2014, to the extent that owner-occupier activity now accounts for less than half of all new mortgages issued -- its lowest level on record.
In recent months, there has been a growing divergence between the number and value of loan approvals to owner-occupiers. The number of loan approvals to owner-occupiers, excluding refinancing, fell by 7.3 per cent over the year.
We are witnessing two distinct phenomenon here. First, rising house prices -- mostly due to investor activity -- continue to push the average loan size higher. Second, the supply of potential owner-occupiers is slowly becoming exhausted, since there is only a finite supply of people able to enter the housing market for the first time or move between homes.
The first trend should continue as long as investor activity remains elevated. Approvals to that segment were broadly unchanged in January but with interest rates falling, and expected to continue falling, the underlying trend should remain strong in the near-term.
The one caveat is that APRA could choose to intervene and slow investor activity through macroprudential means. They are currently assessing domestic banks on a bank-by-bank basis and those where annual investor credit growth exceeds 10 per cent could be asked to tighten standards.
The second trend should also continue, reflecting the ongoing weakness among first home buyers. First home buyers accounted for around 14 per cent of owner-occupier activity but just 9.5 per cent of total activity (excluding refinancing but including investor activity) -- the lowest level in around 11 years.
This appears unsustainable but there has been a clear long-term trend favouring increased investor activity. That’s not surprising given the Australian tax system provides a clear set of incentives in favour of property investment rather than home ownership.
The combination of these trends point to an increasingly unbalanced housing sector. Property investment is important, it helps create a supply of rental properties, but it is not necessarily ideal to create a society of landlords and renters.
And that is precisely what housing policy is creating right now. What are investors buying? Around 93 per cent of investor approvals are for established housing, with just 7 per cent increasing the housing supply. With statistics like that it’s no surprise that home ownership rates continue to fall across most age cohorts.
Beyond the investor boom there are a few other trends worth emphasising.
First, refinancing activity continues to be popular, rising further in January to be 28.5 per cent higher over the year. The combination of low interest rates and high mortgage debt make a sound case for refinancing your existing debt. It will be interesting to see whether refinancing activity responds to both the rate cut in February and also to those cuts expected to flow through later this year.
Second, the value of loans for the construction of new property fell in January and is now just 1.5 per cent higher over the year. Based on the building approvals data, which points to ongoing strength in residential construction, we should be seeing stronger loan approvals towards this segment.
On balance, there were no big changes to the mortgage market during January. The market continues to be unbalanced, with the outlook for property prices increasingly determined by investor demand. First home buyer activity remains weak, even after the ABS made revisions to the series, and that suggests that housing is viewed as unaffordable by many younger Australians.
House prices should continue to climb during the first half of 2015, but a market that is driven by investor activity is naturally more volatile. If investor activity eases then prices will inevitably follow suit; the big question is when that will happen.