APRA’s handbrake on investment lending is having the desired effect

From June 2015 it has become somewhat more difficult and expensive for investors to access housing and finance which has contributed to the sharp fall away in investor related housing demand.

At the end of last year the Australian Prudential Regulation Authority (APRA) wrote to Australian Authorised Deposit-taking Institutions (ADIs) to detail what they saw as sound lending practices. This was followed with individual liaison with the ADIs which, according to APRA, revealed lending standards which were ‘somewhat weaker than had originally been thought’. In June the ADIs started to make changes to lending practices, many of which revolved around lending conditions for investment purposes; not surprisingly this has contributed towards a substantial slowdown in lending to that cohort.

Other factors such as higher mortgage rates, low rental yields and a mature housing cycle are also likely to have contributed to the slowdown in investment activity. Additionally, investor loans being reclassified to owner occupier loans is also muddying the clarity of the housing finance data. The first chart shows the monthly value of lending to: owner occupiers for new loans, owner occupiers for refinance and to investors based on seasonally adjusted data. There has been a noticeable slowdown in lending to investors over recent months. In fact, after the value of lending to investors peaked at $14.1 billion in April 2015 it has fallen by -12.8% to $12.3 billion in September 2015. The value of lending to investors is also now lower than the value of lending to owner occupiers for new loans. The Australian Bureau of Statistics (ABS) have noted that over recent months many ADIs have been reclassifying some investor loans to owner occupier loans.

At a state level the data is not published in seasonally adjusted terms, only raw figures. According to this data the value of lending to investors peaked in June 2015 and as ADIs have made changes to their lending policies, investor demand has waned. Between June 2015 and September 2015, the value of lending to investors has fallen in each state.

% of new lending to investors, Sep-15

As a result of the slowdown in lending to investors across each state, the value of new lending in most states is now greater to owner occupiers than it is to investors. It is important to note that historically it has been very unusual for investors to be a greater part of the new lending environment than owner occupiers, but that has been the case for most of the past year and a half. In fact New South Wales is the only state where the proportion of new lending to investors is still greater than lending to owner occupier (51.7%). Three months ago the proportion of new lending to investors was higher than 50% in New South Wales, Victoria and the Northern Territory.

% of new lending to investors, by state

One of the key policy changes implemented by APRA on Australian ADI’s was the limit in annual investor credit growth to 10%. The latest data from the Reserve Bank shows that investor housing credit has increased by 10.4% over the year. Given this there is still some further slowing in lending within the investor space which needs to occur. Furthermore, most ADIs now have a higher interest rate for investment mortgages along with requirements for larger deposits. These factors are likely to contribute to a further slowing of mortgage demand from the investment segment of the market.

First published by Cameron Kusher in www.corelogic.com.au on 23 November 2015