Housing finance and credit data released earlier this month by the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA) make it clear that investor interest in the housing market is starting to decline.
“It remains to be seen if this slowdown lasts or, if once the rationing of credit eases, the investor segment of the market returns to residential property,” said Cameron Kusher, research analyst at CoreLogic, in a recent Property Pulse report.
Factors that are contributing to this slowdown include the rationing of credit to the investor segment, as well as the lifting of mortgage rates.
“The mortgage rate premium for investors appears to finally be biting into the market with weakness in both total investor credit and investor housing finance commitments,” Kusher said.
The RBA’s lending aggregates data for April 2017 showed that investor credit rose 0.55% over the month, its lowest monthly increase since August 2016. At the same time, housing finance data for April 2017 showed that there was $12.6bn in investor housing finance commitments over the month, the lowest value since September 2016.
Since August and September 2016, standard variable mortgage rates for investors have risen 30 basis points, compared to a five-basis-point increase for owner-occupiers.
“There are individual states and territories in where a slowdown in mortgage demand by investors will have more of an impact, namely New South Wales and Victoria,” Kusher said.
Why are investors holding back and how long will this trend last?
While CoreLogic listed some of the factors that were contributing to the slowdown, we wanted to dissect the issue further and understand the possible ramifications of the trend.
We asked Philippe Brach, CEO at Multifocus Properties & Finance, for his insights.
When asked about the slowdown in mortgage demand from investors, Brach said it’s not because of high interest rates. “Right now, on average, an investor will pay about 4.7% to 4.8% on an interest-only loan. This is much lower than what an interest-only investor would have paid prior to the GFC, when they paid well over 8% for their loans,” he said.
Brach believes it’s the current climate of uncertainty that is causing many property investors to hold back and wait for the market to stabilise.
“I believe it’s the uncertainty that has been created with the banks changing their lending policies every five minutes. It’s pretty much on a daily basis,” he said. “You almost need a full-time guy in your mortgage broking office to keep up with all the changes that the banks are putting together. Every day, we get three to four press releases outlining the latest changes. Banks are raising interest rates and some are changing their assessment standards. This is causing investors to hold back.”
Moreover, while regulating interest rates is normally the job of the RBA, the banks have temporarily taken over this role. “What’s happening today is that the RBA is not lifting rates because they want the boost the economy and incentivise businesses to invest. Consequentially, all the large banks are doing all the heavy lifting for the RBA by jacking up interest rates. This has had the desired effect and is beginning to cool the market,” Brach said.
When asked if investor interest in the housing market will continue to decline, Brach said he thinks there will be a conspicuous slowdown because the banks have not finished restructuring their loans.
“I hope they’ll end up stabilising their policies over the next few months so that we’ll have a clearer picture of what’s going on, which in turn will help us assess the landscape over the long term. If the banks continue to increase interest rates, it will continue to slow down the rate of mortgages for sure.”
As for the effects on property prices, particularly in the eastern capitals, Brach said prices will dampen, but won’t crash. “Prices are going to stabilise a bit more in Sydney and Melbourne, especially in the apartment market. Melbourne will probably be a bit more affected than Sydney in terms of apartment prices because there’s an oversupply there. In Sydney, there is strong demand and limited supply, which should keep prices up.”
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