Investors driving a red-hot market

Investor lending is running hot and analysts say the frenzy will continue unless lending standards are tightened.

Reserve Bank governor Philip Lowe.

Investor lending in the property market is running hot and analysts say the frenzy is likely to continue unless there is a “dramatic” tightening of lending standards.

Data from the banking regulator shows Commonwealth Bank grew its investor loan book at twice the rate of the entire banking system during the seasonally slower month of January.

Meanwhile, a report released by ratings agency Standard & Poor’s yesterday said “a continued build-up of economic imbalances” was heightening the risk of a “low probability scenario of a sharp correction in property prices”. “There is a significant risk of continued build-up of private sector debt and house price growth” due to low interest rates and the lack of housing supply, S&P credit analyst Sharad Jain said.

RBA governor Philip Lowe continues to push the message that a “sobering combination” of high household debt and sluggish wage growth risks crushing the economy. Last week Dr Lowe argued that changes to capital gains tax and negative gearing could take some heat out of the market. The government has taken both tax reforms off the table.

Curbing capital gains in tandem with negative gearing would “reduce investor demand for a while”, which “would take some of the current heat out of the housing market”, Dr Lowe told a parliamentary hearing.

While Australian Prudential Regulation Authority chairman Wayne Byres recently reaffirmed the bank regulator’s annual 10 per cent limit on investor loan growth and a number of banks unilaterally tightened access to loans and refinancing in February, auction clearance rates in Sydney and Melbourne at the weekend showed property buyers’ appetite has not diminished.

APRA’s latest figures released yesterday show the Commonwealth Bank grew its investor loan book 0.6 per cent during January to a total of $138 billion.

That rate was double the growth of the overall banking sector’s investor loan growth, which rose 0.3 per cent during January. Excluding CBA from system growth, investor lending was up 0.2 per cent over the month, meaning Australia’s biggest bank was growing three times as fast as the sector.

CBA did not return requests for comment.

Separate figures released yesterday from the Reserve Bank showed investor lending had outpaced the owner-occupier ­segment for a fifth straight month, with growth of 0.6 per cent in January eclipsing the owner-occupied lending increase of 0.5 per cent. Over the 12 months to the end of January, investor lending has grown 6.6 per cent compared to owner-occupied lending of 6.3 per cent.

“Home lending continues to lift, dominated by investor credit growth,” said CommSec senior economist Savanth Sebastian.

“In fact annual growth in investor finance is now at an
11-month high. The measures taken by regulators to curb investment lending had a temporary impact that is now fading.”

APRA’s 10 per cent growth cap on lending to investors cooled the market as all major lenders sought to comply, reducing system credit growth from 10.8 per cent in mid-2015 to a low of 4.6 per cent in August.

But investor credit growth has recently picked up to more than 6 per cent as lenders returned to chasing loans. David Murray, head of the government’s financial system inquiry, recently told The Australian the APRA limit was too generous and investor lending was creating complex instability in the debt-laden housing market.

During January, CBA’s 0.6 per cent growth led its big four rivals. National Australia Bank grew its portfolio 0.5 per cent while Westpac investor loans increased 0.2 per cent. ANZ’s investor loan book continued to shrink, down 0.15 per cent during the month, according to APRA figures. Since late January, when a sharp focus returned to the investor market, CBA and its Bankwest subsidiary stopped refinancing investor loans from rival lenders. The lender also increased rates on investor loans. AMP also ceased some lending and raised rates.

CBA chief Ian Narev a fortnight ago said the bank had not breached APRA’s cap and it was tightening policies to ensure sound underwriting.

“We are under the benchmark, we take (it) very seriously and in this environment of pretty significant growth we will take steps to make sure we remain under the benchmark and some of that requires policy and pricing changes,” Mr Narev said.

Although many banks have made changes to loan conditions to dampen investor demand, auction clearance rates have continued to surge. Last weekend was the biggest February weekend on record for the Melbourne and Sydney property markets. Sydney cleared 81.5 per cent of auctions — the third consecutive weekend above 80 — while the Victorian capital had a clearance rate of 80.1 per cent, according to CoreLogic.

Martin North, of Digital Finance Analytics, said his surveys showed there was still a great demand from property buyers: “Investors are absolutely hot to trot, particularly on the east coast. I’m not expecting any huge withdrawal from the investor market any time soon.’’