Row over $2.5bn investor home loan surge
The Australian 12:00am January 18, 2017
David Uren
A $2.5 billion surge in monthly property investment loans threatens to reignite the political row over negative gearing as owner-occupiers battle to compete amid a further projected spike in house prices this year.
The value of loans approved for individual property investors has soared 28 per cent since last May, when the Reserve Bank cut rates and the government promised, with the July election looming, that it would leave negative gearing and capital gains tax concessions in place.
More than $11bn in loans to individual property investors were written in November compared with $8.6bn in April.
New loans for owner-occupiers in the established housing market have not responded at all to the Reserve Bank’s rate cuts, with the $10.5bn in loans approved in November down 5.4 per cent from the same time a year earlier.
Both bank economists and property market analysts believe the investor property rush will force the Reserve Bank and banking regulator, the Australian Prudential Regulation Authority, to make another attempt at reining in the banks.
The strong investor demand is expected to fuel double-digit growth in house prices this year, creating problems for the regulators, with the Reserve Bank worried about excessive household debt, and potentially also for the government.
Labor seized on the figures yesterday with opposition Treasury spokesman Chris Bowen arguing Australia’s property investors were granted “the most generous tax concessions in the world” and this was sending house prices soaring beyond the reach of ordinary owner-occupiers. The $11bn in loans approved for investors in November exceeded the value of owner-occupier mortgages for established homes, according to the Australian Bureau of Statistics’ report on housing finance released yesterday. Traditionally, investors have accounted for only a third of the market.
The government dismissed Labor’s attack. Acting Treasurer Kelly O’Dwyer said the level of new investor credit was still lower than it was when APRA introduced so-called “macroprudential” measures to limit bank lending to property investors in December 2014.
“We have seen investor credit growth more than halve from its peak following those measures,” she said.
Deutsche Bank economist Phil Odonaghoe said the Reserve Bank would “not be entirely comfortable with the strength in investor activity,” while Common- wealth Bank economist Kristina Clifton said the Reserve Bank had already expressed its concern about rising housing debt levels.
The head of property research group SQM, Louis Christopher, said further action was likely.
“If we continue to see very strong investor lending numbers, the authorities will not be happy and you might see APRA step into the market again,” he said.
When investor lending last soared in 2015, APRA ordered banks to restrict growth in their investment property portfolios to no more than 10 per cent a year and started more intensive monitoring of bank lending practices.
For a time this seemed to be working. The pace of monthly lending to individual property investors plunged by almost a third in the 12 months to April last year, leading the RBA to conclude that it could afford to cut rates without sending the housing market soaring again.
But by late last year, there were signs that lending standards were easing again, with reports of banks allowing higher loan-to-value ratios on investment property loans.
While overall growth in banks’ investment property loan portfolios has come down from a peak of 10.8 per cent to the latest level of 5.8 per cent, banks are finding they have scope to lift the growth in their new lending.
Residential property analyst with research firm CoreLogic Cameron Kusher said investors were being lured back to the market by the RBA’s rate cuts and by the very strong capital gains being delivered in the major capital cities.
“The two rate cuts didn’t all get passed on to borrowers, but people parking money in banks were getting less for it and this encouraged people to look around for something offering better returns. If you bought an investment property in Sydney or Melbourne, the returns were strong and hard to find in any other asset class,” he said.
Including both rental income and capital gains, CoreLogic shows investors in the Sydney market achieved an average return of 19 per cent last year, while investors in the Melbourne and Hobart markets generated returns of just above 17 per cent.
The Canberra market also ran hot, with returns of 14 per cent while profits of between 6 and 9 per cent were achieved in Brisbane, Adelaide and Darwin. Perth was the only capital city where prices fell.
Mr Kusher said there was some grounds for concern that investors were squeezing owner-occupiers out of the market. “Investors generally already have a property and their ability to use that equity to invest is greater than people who are looking to come in as first-home buyers. Also, upgraders can’t jump on things as quickly as investors and may have to take their property to market before they can buy.”
Ms O’Dwyer noted that there has been a pick up in the first-home buyer share of the market, which has risen from a low of 12.9 per cent to 13.8 per cent since last March. “The number of loans to first home buyers is up 8 per cent over the past year, the strongest result since the end of 2013,” she said.
However a number of bank economists noted the first-home buyer share was still well below long-term average levels of 17 or 18 per cent of the market.
Mr Christopher said he expected the strong investor demand to keep prices rising rapidly over the year ahead, forecasting increases of between 10 and 15 per cent in Melbourne and between 11 and 16 per cent in Sydney.