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Friday, 11 May 2018

Housing finance beyond the headlines (squeezed)

Housing finance declines

There was the expected decline in housing finance reported today by the ABS, which presumably led to predictions of a housing market apocalypse by the usual overseas investment banks and bloggers. 

I haven't looked yet, but one can safely assume some things in life. 

OK, let's take a deep breath, and look at what's really going on. 

Grab a coffee - or perhaps a lemon squash - as there's a little bit to look at. 

Approvals slowed up

Firstly, finance approvals are going to take a bit longer to process at the moment, because there's the small matter of a Royal Commission and daily headlines about financial services misconduct to grapple with.

That's pretty much a given, and we saw the same thing during Britain's Mortgage Market Review (MMR) of 2014. when lending volumes stalled for three months. 

Secondly, the amount of money that portfolio investors can borrow has been dialled back over time through a range of regulatory measures. 

I wrote a report about this for fund managers, with some of the headline findings summarised here

On to the March 2018 numbers, and the first thing to note is that the value of investor loans is in a clear decline, with total housing finance lower than a month earlier at just under $32 billion (for context, total housing finance is also now lower than a year earlier). 

Slower mortgage approvals are impacting across the board with fewer home loans being approved everywhere in recent weeks. 

Real estate groups have begun putting out regular releases highlighting the Perth market's long-awaited turnaround, but there isn't much evidence of that in these figures, although vacancy rates are tightening. 

Given the above, how, then, are we still seeing sporadic articles about suburb records being broken for sought-after homes?

Upgraders dominant

The reason is that although investors have seen borrowing capacity reduced, many homebuyers have seen only marginal shifts in serviceability.

And moreover the price of money for owner-occupiers is still very cheap. 

The average loan size being written to upgraders over the first few months of 2018 to date is as high as we've ever seen. 

And that's true in each of the major markets.

Furthermore, even though we know that some of the non-banks are becoming busy, there's not too much recent evidence that owner-occupiers are having to go elsewhere to find the loans they want. 

Finally, after a few false dawns, this time it looks as though loans written for the purchase of new homes may have moved beyond the cyclical peak. 

The wrap

Overall, mortgage volumes were lower as the market expected, and there was some solid evidence to support our view that borrowing capacity has been cut for portfolio investors far more so than for homebuyers. 

This is a credit squeeze not a credit crunch. 

And make no mistake banks are still going to be uncommonly keen to lend to owner-occupiers as the Royal Commission headlines ease off. 

I'll take a look at where the investor squeeze has impacted the most early next week.