Property investors are increasingly sitting on the sidelines as rates rise and values fall

The housing market retreat is picking up pace and investors, in particular, are turning away from the sector as rate hikes bite.

New loan commitments fell across the board in the first month of the financial year, with home lending plunging $2.6bn as households responded to the Reserve Bank’s aggressive tightening regimen and falling property prices.

And the trend is “just getting started’’, according to AMP Capital chief economist Shane Oliver, with a combination of lower borrowing capacity, more rate rises and home buyers hoping to time the bottom of the market contributing to a lacklustre outlook.

Investment property lending took a particularly steep hit in July, falling 11.2 per cent month on month after a 6.3 per cent drop in June, figures released on Thursday by the Australian Bureau of Statistics show.

While total new loan commitments across housing for owner occupiers, investors and first-home buyers all fell, the first two measures remain historically high, with the $19.05bn in new owner-occupied housing commitments in July falling by 7 per cent, but still coming in 40 per cent higher than pre-pandemic levels in February 2020.

AMP Capital chief economist Dr Shane Oliver.

While new investor housing loans fell 11.2 per cent to $9.3bn, this was 78 per cent higher than pre-pandemic levels, the ABS said.

For first-home buyers the numbers were also weak. The number of new loans to owner occupiers fell 10.7 per cent to 8388, which was the lowest number since May 2019.

Dr Oliver on Thursday said he believed the weakening trend would persist. “Buyers who are still in the market have seen their borrowing capacity reduced as a result of higher rates, particularly in the rise of fixed rates from 2 per cent a year or so ago to now 5 per cent or more,’’ he said.

“Transactions have fallen substantially and prices are going down so we’re seeing less borrowers generally in the market.

“The reality is this is probably going to go further. We saw all of the three sectors (first-home buyers, owner occupiers and investors) come down. Investors particularly were off more than 11 per cent. I suspect there’s a lot more downside ahead here.’’

Dr Oliver said that similar to the share market, real estate buyers would be keen to sit on the sidelines until prices bottomed out, which definitely had not happened yet. “I suspect property prices are only in the early stages of the downswing and we’ll see a 20 per cent fall,’’ Dr Oliver said.

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“National prices have come down about 3 per cent depending on whose data you look at so we’re still in the early stages … we’ve yet to see all of the interest rate hikes feed through and there’s more rate hikes ahead of us.’’

The RBA has increased the cash rate at its monthly meeting four consecutive times this year, starting in May, and is tipped to follow up with another 50 basis points increase when it meets next Tuesday. If it occurs, this would be the longest tightening streak since the RBA started targeting inflation in the early 1990s and would result in the cash rate having increased from 0.1 per cent in April to 2.35 in September.

Westpac chief economist Bill Evans. Picture: John Feder

Westpac chief economist Bill Evans said another 50 basis points increase on Tuesday would move the cash rate into the “neutral zone” and he expected that following next week’s meeting the RBA board would move in 25 basis point increments to a peak cash rate of 3.35 per cent by February.

“At that point we expect that it will become evident that the Australian economy is clearly slowing, with clear evidence of continuing deterioration as the series of rate hikes and high inflation weigh on households and business,’’ Mr Evans said.

“Holding the cash rate at 3.35 per cent through 2023, well above the neutral setting of 2.0 per cent, is a necessary condition for the bank to bring inflation down close to the 3 per cent target – the top of the 2-3 per cent range.

The RBA’s financial aggregates figures released on Wednesday show that credit grew overall, albeit marginally, with total credit up by 0.7 per cent in July and 9.1 per cent year on year.

In terms of the impact of the slowdown on the major banks, equities analysts at Macquarie wrote in a note to clients that credit growth started to slow in July “as cash rate increases began to impact borrowing capacity, and turnover activity slowed’’.

“Majors’ housing credit growth in July slowed materially and converged, as NAB went from the sector-leading position last month to growing below peers,’’ the analysts wrote.

“Both ANZ and Westpac continued to show signs of a turnaround, albeit based on current pricing trends; we don’t expect recent growth to be accretive to earnings.’’

In the first month of the new financial year, loan commitments fell across the board.

Meanwhile, equities analysts at Morgan Stanley said all of the major banks’ home-loan growth rates slowed in July, and it expected that trend to continue through the September quarter.

“For the 2023 financial year, our current forecasts factor in average Australian housing loan growth of about 2 per cent at the major banks and about 4 per cent at the regional banks,’’ they wrote to their clients.

This compares with July’s annualised growth rate of about 6.5 per cent, with that monthly figure dipping below a 7-8 per cent run rate for the first time since May last year.

Based on RBA data, business loan growth remained strong at an annualised rate of about 15 per cent in July, Morgan Stanley said.

The tightening market for home lending appears to be translating into a potential margin squeeze for the banks, with Commonwealth Bank chief executive Matt Comyn last month saying the lender shied away from participating in “elevated levels” of price competition for home loans in the six months ended June 30.

He cited that as the reason behind the bank’s mortgage growth coming in at 7.4 per cent for the fiscal year, at the time slightly trailing the average of its peer group. “Some of the offers that are in market are well below cost of capital … it doesn’t tend to remain the case for a persistent period of time but we’ll have to see,” Mr Comyn said at the time.

“We’ve been conscious … the most recent origination cohorts are also higher risk given the cycle we’re in.”