Is the housing market on the verge of easing? Not if property investors get their way. Easing growth within the owner-occupier segment -- including fewer transactions -- continues to be offset by surging demand from investors in the Sydney market.
For better or worse, mortgage lending has established itself as the central pillar in Australia’s rebalancing process. Higher household lending boosts asset prices, which in turn supports household spending and new construction -- or so the theory goes.
There has certainly been a construction response -- a sizeable one in fact -- but it’s much harder to identify the consumption response. It’s created a weird dichotomy between investors who aren’t afraid to take on increasing leverage and other households who are reluctant to even use their credit cards.
The latest set of housing finance data only reinforces this contrast. There is strength and weakness in equal abundance; one part of the market is booming while the other appears poised for a significant decline.
The value of loan approvals to owner-occupiers, excluding refinancing, rose by 1.3 per cent in February and is now 3.3 per cent higher over the year. Momentum has clearly eased over the past year, although the level of mortgage activity remains elevated by historical standards.
This has occurred against a backdrop of fewer property transactions -- down 4.4 per cent from their peak on a trend basis -- which has historically preceded weaker house price growth.
One area where owner-occupiers have been particularly active is via refinancing their existing loan balances. It makes sense given interest rates are at a historically low level. Refinancing activity rose by 2.2 per cent in March, following growth of 4.8 per cent last month, to be 33 per cent higher over the year.
Investor activity -- which is increasingly behind the Sydney property boom -- is also set to benefit via lower interest rates. Investor activity rose by 6.4 per cent in March, offsetting a brief period of weakness, to be 21 per cent higher over the year.
Investors continue to account for over half of all new mortgages. That rate differs significantly by state, with the share of activity much higher in New South Wales than in the other states.
First home buyer activity, by comparison, remains subdued and accounted for only around 10 per cent of new mortgages. It is worth noting, however, that there is a small but growing number of younger Australians who are choosing to buy their first property (often with their parents help) with the intention of renting it out rather than moving in.
Nevertheless, it appears reasonable to classify the FHB segment as weak by historical standards.
Investor activity continues to be concentrated within established housing. Purchases of existing property account for 93.5 per cent of total investor activity; new construction accounts for the remainder.
It’s one of the reasons why home ownership rates -- across most age groups -- have declined over recent decades. Investors -- looking for immediate gains -- are snapping up as much existing property as they can afford, which has slowly transformed Australia from a country of home owners to a country of landlords and renters.
In many ways, the data this month is a mere continuation of recent trends. Investor activity remains a concern; not just for house price growth but also for system wide stability. It appears inevitable at this point that APRA will need to do more to curtail excessive growth within the sector, particular after the RBA decision to cut rates at their May board meeting.
A market that is dominated by investors -- who tend to be more price sensitive -- will inevitably be more volatile than a more balanced housing sector. With house price growth already beginning to moderate -- everywhere but in Sydney -- there is a very real risk that new investors have already missed the boat.
Low interest rates might prolong the fun for a bit longer but new investors now find themselves in uncharted waters; battling history and a regulatory environment that is increasingly dominated by concerns about the long-term sustainability of recent developments.