The housing market soared to new heights in July on the back of a rejuvenated owner-occupier segment. Investor activity remains elevated but may have already passed its peak as regulatory intervention makes it more difficult for investors seeking loan approval.
The Australian property market has rarely been more interesting. There are significant forces at work that continue to impact most aspects of the market.
Low interest rates mean that households are finding it easier to service new and existing debt burdens; subdued wage growth has made it more difficult for younger households to get into the market and could provide some issues for other households down the track.
The end of the mining boom looms as a dark spectre on the horizon; threatening havoc across both the housing market and the broader economy. The property sector across Sydney and Melbourne continues to defy Australia’s income recession; the other capitals haven’t been so convincing.
The property sector has, over the past couple of years, been a tale of two sectors: owner-occupiers and investors. It is clear which of these two has driven recent price developments and the sector that has been most sensitive to looser policy.
The value of loan approvals to owner-occupiers, excluding refinancing, rose by 1.7 per cent in July and is now 9.8 per cent higher over the year. The value of new mortgages to this sector has increased to its highest level in history.
What is interesting though is that the number of new loan approvals -- a rough proxy for the number of property transactions -- has actually declined by 3.3 per cent from its peak. The property market is increasingly driven by bigger mortgages rather than a rising number of buyers.
This is one of those trends that may not strike readers as particularly important but it is definitely worth keeping an eye on over the next six months. There is a strong historical relationship between housing turnover and dwelling prices and this is a sign that housing turnover has either peaked or may peak very soon.
The value of loan approvals to investors rose by 0.5 per cent in July, following two consecutive monthly declines, to be 16.5 per cent higher over the year. Recent regulatory intervention by APRA means that investors are not able to take advantage of a lower cash rate in the same way that other buyers can.
The major banks have lifted their mortgage rate to the investor segment of the market, while the likes of AMP have stopped offering new mortgages for property investors.
Nevertheless, investor activity remains remarkable compared with what was once considered normal. Investors accounted for around 52 per cent of new loan approvals in July. First home buyers (FHB), by comparison, accounted for just 10.8 per cent of new loans. However, it is important to note that there is a small but growing share of FHB who are buying investment properties and are excluded from the FHB data.
The sharp rise in investor activity reflects a range of structural and cyclical factors, perhaps the most important is Australia’s tax system. Our tax laws are designed in such a way as to channel investment through the property sector via sizable tax advantages associated with the capital gains discount and negative gearing. These tax policies also apply to other asset classes but using leverage isn’t as widely accepted to finance the purchase of stocks or bonds which reduces the tax benefit somewhat.
Growing inequality and subdued wage growth is another factor that has hit the lower end of the property ladder and allowed investors to snap up a greater share of the market. This is unlikely to change in the near-term but it is worth noting that investors are generally more sensitive to price movements and there could be a significant sell-off if the market begins to underperform.
Investors are mainly interested in buying existing property. Around 92 per cent of investor activity is directed towards that segment. The remainder is accounted for via new construction, which only highlights how important foreign investment has become as a means towards improving Australia’s housing supply.
The property sector is tentatively poised. There is a wide divergence between conditions in Sydney and Melbourne compared with those in the other capital cities. Recent price growth in our two most populous cities is unsustainable in the medium term but could offer some short-term gains for savvy investors.
That window though continues to close and new property investors must be getting nervous as regulatory authorities look to rein in mortgage lending. The market cannot defy weak wage growth forever and further rate cuts may be the only thing that can maintain recent valuations and provide a sufficient return for investors focused primarily on capital appreciation rather than income flow.