Non-banks come to the party

Investor loans rise

The Reserve Bank of Australia (RBA) released its Financial Aggregates for the month of March 2017, which showed year-on-year growth in investor credit rising to 7.1 per cent, with total housing credit moving a notch higher at 6.5 per cent.

With average credit card balances well down in recent years as I analysed in more detail here, other personal credit continues to shrink. 

Business credit growth also moderated to 3.4 per cent over the year to March, leading to total annual credit growth of 5 per cent. 

Fibonacci ratio!

The Reserve Bank of Australia (RBA) figures therefore showed that investor loans were still accelerating in March, with total housing credit rising to $1.66 trillion. 

As housing credit outpaces business and personal lending the total share of outstanding private sector accounted for by housing has increased to a record high of 61.8 per cent. 

Alas, I don't believe that the magical 61.8 per cent figure is the trigger for a Fibonacci retracement - not least because the lines between 'housing' credit and redrawn equity that is used for the purposes of small business became blurred long ago.

The rise of non-banks

APRA also released its Monthly Banking Statistics for the month of March, which also showed an increase in housing investment loans, but with credit increasing at a somewhat slower pace than reported by the RBA.

This all but confirms that some of the higher risk business has been flowing to institutions not governed by APRA, or non-bank lenders such as Liberty Financial and Pepper Group, both of which have recorded strong loan growth lately.

Indeed, we've seen plenty of evidence of this first hand in the market in recent times. 

Whether they admit it publicly or not, valuers tend to treat transactions financed through some of the non-banks with added caution, often reflected in lower or more conservative valuations.

Other transaction types which are seeing valuations come in low include off the plan apartments and new homes on fringe housing estates where there are few directly comparable sales. 

The Commonwealth Bank of Australia (ASX: CBA) has the largest total housing loan book, though Westpac Banking Corporation (ASX: WBC) reports a higher volume of housing investment loans in aggregate. 

Looking at the growth in investment loans for a few of the selected banks shows how some of the majors have been gradually winding back the growth rates in their investment mortgage books so as to avoid bumping up against APRA's arbitrary 10 per cent cap (Westpac's figures included a substantial revision in October 2015, accounting for the apparent jump). 

Several of all the banks with smaller market caps still have growth in investment loans tracking at above 10 per cent limit, leading AMP to cease refinancing investor loans and ME Bank to give higher loan-to-value (LVR) loans the flick.

AMP may also be offering some customers incentives to switch from interest-only to principal and interest loans. 

APRA viewpoint

A speech this week by Chairman Wayne Byres pointedly remarked that APRA does not target house prices, but noted that recent regulation is likely to see an increasing differential in mortgage rates between owner-occupier and investment loans. 

We have certainly seen plenty of reporting of increase in investment loan mortgage rates - particularly on interest-only loans - although these are coming from an exceptionally low base, and conversely some owner-occupier products have seen rates dropped a bit. 

Perhaps not surprisingly the speech revealed that APRA opted not to reduce its 10 per cent cap due to the high volume of new apartments in the pipeline in the eastern capital cities, although a new cap has been introduced on interest-only lending. 

Lenders most likely to experience imminent impairments include those with a heavy exposure to the housing markets of regional Queensland and Western Australia.

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