Home Loan Lending Falls, But Is It Really Cooling Off?

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Home loan lending fell by 6.1% in May, easing concerns over Australia’s emerging housing bubble. Collectively, financial regulators are breathing a sigh of relief.

It would appear that tightening banking credit is finally starting to rub off on investors.

What’s particularly interesting is that this fall came against the backdrop of a rate cut. The RBA had reduced interest rates by 0.25% in May. At the time, this prompted fears it would lead to an expansion in home loan lending.

But the data clearly shows that banking regulations largely offset the rate cut. Crucially, that suggests that the housing market may be cooling off permanently.

But is that really the case?

Well, it’s certainly possible. But the true effects of the banking regulations will take more time to show up in official figures.

That’s particularly the case when we look at data relating to investor lending.

On a seasonally adjusted basis, investment lending fell by 3.2% in May. But the actual volume of investment lending ticked up by 1% month on month.

That’s still a worrying trend as far as financial regulator APRA is concerned. They’ve been actively trying to reduce investor lending since November 2014.

One of their main recommendations concerns investor credit growth. They want lenders to limit annual growth to under 10%. Currently however, credit growth is sitting at just over 10.4%. That ensures APRA will keep chipping away at lenders.

Nonetheless, APRA have reasons to be optimistic about lending rates falling further in the future.

There’s little doubt that stricter banking regulations are resulting in fewer home loan approvals.

Recently, lenders have introduced a raft of new measures making it harder to qualify for home loans. The early signs are promising, if somewehat inconclusive. But the effects of these regulations should become clearer in the second half of the year.

Banks are hitting investors hard

Attempts to limit home loan lending have been targeted squarely at investors. After all, authorities have no reason to be concerned about owner-occupiers.

What really worries regulators is speculative property investing. This practice of flipping houses only makes homeownership less affordable for others. And it’s the single biggest factor in rising house price growth.

As a result, it’s largely investors who are feeling the brunt of recent banking regulations.

One of the ways they’ve done this is by measuring borrower sensitivity to interest rates.

Essentially, this gauges a borrower’s ability to repay their loan in the case of higher interest rates.

The recommended level for lenders has typically been set at 7%. But that hasn’t stopped banks from lowering this threshold in the past. It’s still commonplace to find lenders setting this figure below 5%.

That’s not a big issue with falling interest rates. But interest rates will eventually rise. When they do, many borrowers could find themselves at threat of defaulting on their loan.


What will have the biggest impact on loan approvals?

The most recent banking measure is likely to make the largest difference in limiting home loan approvals.

Banks have recently started to increase their loan-to-valuation limits. Basically, this simply requires investors to put down much larger deposits.

Westpac will require property investors pay a deposit of at least 20% on the purchase price. This 80% loan-to-valuation ratio is the strictest limit imposed by any big bank so far.

This measure is likely to put off a good number of investors from buying. In the case of Sydney, where median prices are above $900,000, it would make a huge difference to investor confidence.

Yet there’s no guarantee other banks will follow suit.

Some banks, like Westpac and NAB, have a much larger share of investor lending than others. Banks that are less exposed to investors may choose to keep the LVR closer to 10%.

But we can say with some confidence that home loan approvals are likely to fall again in the future.

The most interesting thing to watch will be what, if any, effect it has on house prices.

The Daily Reckoning’s property expert, Phillip J. Anderson, believes that house prices will continue rising. In fact, he says that property prices are set to continue growing for another decade.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade. He was right on both accounts.

In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Mat Spasic,

Contributor, The Daily Reckoning

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