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Is the home and business lending surge about to slow down?

The total amount of new home loans financed in Australia has fallen for the first time in 13 months, according to Savvy’s latest home and business lending report.

The report, which analyses the latest Australian Bureau of Statistics (ABS) lending indicator data, showed housing loan commitments dropped 1.6 per cent in June.

Until that point, the finance broker said home loan commitments had risen unabated for more than a year.

But it appears that June dip could be little more than a slight glitch, with the Savvy report highlighting that new home loans financed in May totalled $32.57 billion, which is up from $16.66 billion in May 2020.

The previous peak of $22.68 billion occurred in May 2017.   

PRD Real Estate Chief Economist Dr Diaswati Mardiasmo said the current climate of government stimulus, low interest rates, and a narrow gap between owner-occupier and investment loans had “stirred the pot” when it comes to the current surge in lending. 

“The climb started when we were hit with COVID, because the government came out with schemes such as HomeBuilder,” she said.

“HomeBuilder came at the same time as us having historically low interest rates and the cash rate has been kept the same at 0.1 per cent. 

“You’ve got that very stable base. Banks are offering very low interest rates, big first-home buyer interest rates.

“In combination between what’s happening in the interest rate market and government stimulus in terms of increasing home ownership access, those two factors have worked together… pushing up the amount of lending that is being granted and the people who are now eligible to gain funding for buying homes, such as the First Home Buyer guarantee.” 

Interestingly, personal fixed term loans, such as for cars, consolidating debts, or other types of personal investments rose by 5.6 per cent in May this year, only to fall 12.6 per cent in June.

Business construction loans, a type of loan the ABS has labelled as a ‘volatile’ series, dipped about 20 per cent over the two-month period. 

Dr Mardiasmo went on to explain there was no current need to differentiate potential customers based on demographics, as people are eager to buy a home no matter what. 

“We all know that property transactions are at their highest in most places,” Dr Mardiasmo said.

“We’ve seen record breaking sales. We’ve seen anecdotal evidence of agents saying that properties were flying out of the door, they’re getting multiple inquiries, and all of those sorts of things.

“But all of that worked hand-in-hand; the evidence is there that people are definitely buying more.

“Whether you’re a first-home buyer, owner-occupier, or investor, everyone is transacting more.” 

Household lending

Owner-Occupier

Owner-occupier lending almost doubled over the past 12 months, reaching a series (series being the range of data on offer by the ABS – in this case, May 2003 to May 2021) peak of $23.48 billion in owner-occupier loans, only to drop for the first time in June 2021.

In seasonally adjusted terms, this indicated a rise of 1.9 per cent.

ABS lending data
Source: ABS via Savvy

Investor

Investor mortgages followed the same trend as owner-occupier loans, ending up at a six-year high of $9.13 billion in May 2021.

The previous peak was April 2015 ($10.08 billion). This was a significant increase of 13.3 per cent.

However, the average gross rental yield for all types of houses, averaged around the country, remained steady at 3.9 per cent according to SQM Research

new loan lending report
Source: ABS via Savvy

Business

Property acquisition

In the business sector, property buying had a precipitous drop compared with the previous month’s peak of $6.57 billion in loans approved.

May 2021 saw a 27 per cent fall to $4.79 billion, only to rebound; surpassing the April high and reaching $7.160 billion.

It’s a far cry from the 12-month low of July 2020 of $3.2 billion; but a curious trend emerges with any ‘splurge’ month – new loans fall off considerably the month or two after any large increase. 

Construction

Unusually for the construction side of business, new loan commitments levelled off at about $2.36 billion, before dropping to $1.9 billion in June.

The construction business loan market has wild swings and roundabouts – for example, in October 2012, construction loans hit a massive peak – $4.42 billion – while the next month contracted to a quarter of that size – $1.1 billion.

Analysis of Australian states’ results

New South Wales is the breakout leader in owner-occupier lending, peaking at $7.716 billion in May. Victoria was close behind at $7.109 billion. As they are the most populous states, this isn’t unusual.

All have tracked upwards in the past year, beginning May of 2020, at over half value of lending.

The ABS said that the eight capital cities’ property prices rose 5.4 per cent this quarter, which is a 7.5 per cent increase over the past twelve months.

The recent dips from the lofty May highs could indicate a turning of the tide, or simply a correction.  

The outlier seems to be Western Australia, which has an approximate population to South Australia (1.7 million).

Perth’s house prices, according to the Real Estate Institute of Western Australia (REIWA), were “the lowest median house value in any capital city in Australia” – which has seen a flock of people buying rather than renting in Perth.

They estimated a rise of 6 per cent to 10 per cent in house prices over 2021. 

Source: ABS via Savvy

Housing finance by purpose

Existing dwellings 

New South Wales and Victoria saw significant rises in the value of new loan commitments for the purchase of existing dwellings – loans approved for existing dwelling purchases surged to $17.2 billion, far and away the leading reason for taking out a mortgage loan. 

Construction 

Construction of dwellings dipped by 2.3 per cent in May compared to the month previous, totalling $3.13 billion. This was followed by a fall to $2.59 billion in June 2021, down from a series peak of $4.04 billion in January of this year.

New dwellings 

The purchase of new dwellings (just constructed, ready to move in) fell by 2.3 per cent, – the third month of negative growth in a row, according to the May 2021 ABS Lending Data. This may be due to the reduction of the HomeBuilder grant from $25,000 to $15,000 in January of this year.  

First-home buyers 

The amount of owner-occupier lending to first-home buyers shrank by 0.8 per cent in seasonally adjusted terms, although Victorian and NSW first-home lending remains at historic highs.

Owner-occupier first-home lending accounted for 32.7 per cent of all owner-occupier loans – about $7.67 billion worth of loans. The number of first-home buyers stood at 13,869 in June, down from a January 2021 peak of 16,257 (seasonally adjusted). 

Renovations 

Renovation lending has surged in the past year, going from a low of $216 million in August 2020 to a near-series peak of $453 million in May. 

LENDING OWNER-OCCUPIERS
Source: ABS via Savvy

Locking in the low rates

Variable rate home loans are the most popular type of loan, with approvals topping $28.6 billion in May 2021.

However, the gap between fixed and variable loans has narrowed, with fixed rate loans coming in at $24 billion.

This month’s result was the gap between variable rate loans and fixed rate loans in March 2020 – $24.71 billion. 

Savvy Managing Director Bill Tsouvalas explained that home buyers want to lock in the historically low interest rates.

“It makes sense to hedge your bets and lock in the lowest interest rates this country has ever seen, or ever will see, for as long as possible,” Mr Tsouvalas said.

“If you can lock in while the RBA cash rate is at 0.1 per cent, or at least partially lock your mortgage in at that rate, it’s a no-brainer.

“There’s little wonder why the gap has tightened to such a degree since the pandemic began.” 

A redirect from elsewhere? 

Unsurprisingly, personal finance for funding travel and holidays has been close to nil since the Federal Government banned international travel in March 2020, in response to the COVID-19 pandemic.

In April 2020, only $2 million of loans were issued – a record low across the entire series. In May 2021, $7 million in loans were approved for travel – which is a drop in the ocean compared to housing and other personal finance commitments.

Across April-May 2021, there was another peak in the Household and Personal Goods indicator, with approvals reaching $100 million over both months. This overtook the previous peak in January 2020, which stood at $92 million. 

Safer than the bank – houses for investors

Investing in homes is now more attractive due to higher rental yields, low returns from deposits, and a narrowing gap between investor mortgages and home owner mortgages.

“It’s not quite the same, but it is very close at the moment,” Dr Mardiasmo said.

“Previously, there used to be a bigger gap between home loan rates for investors and home loan rates for owner-occupied.

“But at the moment, that gap is actually narrowing and it’s very small. Investors see this and they go, ‘Ok, investor loans are currently at the lowest point, so it makes sense to invest.’ 

“People who are seasoned investors know that this would be the best time to get that loan on a much lower repayment and almost for the same rate as homeowners.” 

Vacancy rates are also plummeting and addressing the rental shortage by offering new sources is a guaranteed winner, according to Dr Mardiasmo. 

She said vacancy rates were as low as 0.4 per cent in Tasmania.

“These are numbers that we haven’t seen before,” she said.

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