Investors returning to housing

Housing investors are making a comeback with stronger borrowing that bodes well for house prices.

Owner-occupier loans rose 1.9 per cent, with loans for established property up 2.1 per cent and new property up 1.1 per cent.

Housing investors are making a comeback with stronger borrowing that bodes well for house prices, particularly while the Reserve Bank continues to cut interest rates.

Investor loans jumped 5.7 per cent in August, the biggest month-on-month rise in three years. Owner-occupier loans rose 1.9 per cent, with loans for established property up 2.1 per cent and new property up 1.1 per cent. Renovation loans jumped 4.5 per cent and first-home loans surged 5.9 per cent, reaching a decade high 19.6 per cent share of loans. The total value of loans rose 2.9 per cent.

Home loans have surged 12 per cent in the past three months, boosting house prices at annualised rates of about 10 per cent in the past two months. However, much weaker data elsewhere in the economy means the Reserve Bank is likely to cut interest rates again next month, according to UBS.

“Loans have boomed a cumulative 12 per cent in the past three months, reversing a significant share of the 27 per cent peak-to-trough collapse from August 2017 to May 2019,” UBS chief economist George Tharenou said.

Year-on-year loan growth lifted to minus 5 per cent from minus 21 per cent in May.

“This reinforces our view of a ‘mini boom’ for loans towards 20 per cent year-on-year growth and house-price growth nearing 10 per cent on year, especially with the RBA likely to keep cutting,” he said.

Despite interest rate cuts, macroprudential easing and fiscal stimulus in recent months, business confidence slipped to a six-year low in September, according to the NAB Monthly Business Survey, while the Westpac-Melbourne Institute Consumer Sentiment index for October hit a four-year low.

Mr Tharenou said if home loans and prices “continue to boom”, it would be an “upside risk” to our below-consensus view of the economy and could stop the RBA from easing next year. “But for now, given recent materially dovish RBA comments on housing, and otherwise much weaker data, we still expect the RBA to cut rates by 25 basis points in November, and again in the first half of 2020, to a record low of 0.25 per cent,” he said.

Volatile loans to property developers still dropped 10 per cent in the month and 14 per cent year-on-year, indicating limited spillover from strong established housing prices to still-weakening new housing activity, Mr Tharenou said. And in a negative sign for personal credit and retail sales, personal loans slumped 15 per cent on year, while business loans fell 6 per cent on year.

The lift in lending to owner-occupiers over recent months has occurred across all states and territories with the exception of the NT, while investor loans are up in all jurisdictions over the past three months. Victoria and Queensland were the standouts with a growth of 19 per cent since May. The smallest increases were in Western Australia and South Australia.

The Reserve Bank recently played down the resurgence in the property market.

After a speech in Armidale last month, RBA governor Philip Lowe noted that rising house prices and lending would only become an issue for monetary policy if credit growth accelerated rapidly.

“The RBA is not expecting to see a rapid acceleration in credit growth with tighter bank lending standards keeping a lid on supply and already high household debt levels containing demand for new loans,” said CBA senior economist Kristina Clifton. “We are not so sure.

“While lending standards are tighter, changes to serviceability metrics mean that households can borrow more than before, and the three cash rate cuts delivered this year work to increase the attractiveness of borrowing money. These factors help explain the recent surge in lending.”

ANZ senior economist Catherine Birch said the surge in investor loans “supports concerns that the RBA’s rate cuts are flowing through more intensely into housing compared with other key parts of the economy, including household consumption and businesses”.

“While we believe we’re currently seeing a ‘pop’ rather than the beginning of a V-shaped recovery in the housing market, the increases in prices and mortgage demand will likely be a concern for the RBA, particularly given record high household debt,” Ms Birch added.

Despite a limited pass through by banks of official interest rate cuts to mortgage rates, regulatory easing in July — whereby the Australian Prudential Regulation Authority relaxed the previous 7 per cent mortgage serviceability floor — has heightened the effects of rate cuts by more directly affecting mortgage serviceability assessments.

Instead, lenders can now set their own minimum rate floor and use a 2.5 per cent buffer, which the prudential regulator acknowledged could mean larger loans for some.

“Optimism in the housing market following a sharp uptick in Sydney and Melbourne prices may have also spurred on extra demand from investors,” Ms Birch said.

But the RBA has been very clear in recent comments that the rise in mortgage lending, auction clearance rates and dwelling prices is not a constraint to further cuts in the cash rate, especially while overall credit growth remains lacklustre, according to JPMorgan chief economist Sally Auld.

“These data provide further evidence to the RBA that the first 50 basis points of cuts are being transmitted to the broader economy via the traditional channels.

“Clearly regulatory easing from APRA in recent months has also helped this dynamic.

“But with headline lending rates no longer falling in line with the reduction in the overnight cash rate, this effect is likely to be more muted going forward.”