Investment Lending – Page 6 – Digital Finance Analytics (DFA) Blog

How Dangerous Is The Rise In Investor Loans?

The public statements from the Reserve Bank suggests they are monitoring the situation, and working with APRA on potential measures should the need arise. However, the recent freedom of information request reveals a significant and important dialogue within the bank about the potential impact of investor loans. A highly restricted document from 2014 makes the following points. Two concerns on increase in investor lending:

Macroeconomic:

Extra speculative demand can amplify the property price cycle and increase the potential for prices to fall later. Such a fall would affect household spending and wealth. This effect is likely to be spread across a broader range of households than the investors that contributed to the heightened activity.

Concentration risk:

Lending has been concentrated in Sydney and Melbourne, creating a concentrated exposure in these cities. The risk could come from a state-based economic shock, or if the speculative upswing in demand brings forth an increase in construction on a scale that leads to a future overhang of supply.
In Sydney, the risk of oversupply appears limited because of the pick-up in construction follows a period of limited new supply and it has been spread geographically and by dwelling type. While the unemployment rate has picked up a little over the past 18 months, the overall economic environment in NSW is in a fairly good state.
In Melbourne, there has been a greater geographic concentration of higher-density construction in inner-city areas. Some developments have a concentration of smaller-sized apartments that may only appeal to some renters, or purchasers in the secondary market. Economic conditions are not as favourable in Victoria and the unemployment rate is 6.8%.

In addition there were concerns about the low interest rate environment:

While a pick-up in risk appetite of households is to some extent an expected outcome given the low interest rate environment, their revealed preference is to direct investment into the housing market.
Historically low interest rates (combined with rising housing prices and strong price competition in the mortgage market) means that some households may attempt to take out loans that they would not be able to comfortably service in a higher interest rate environment.
APRA’s draft Prudential Practice Guide (PPG) emphasises that ADIs should apply an interest rate add-on to the mortgage rate, in conjunction with an interest rate floor in assessing a borrower’s capacity to service the loan. In order to maintain the risk profile of borrowers when interest rates are declining, the size of the add-on needs to increase (or the floor needs to be sufficiently high).

… and on Lending standards

In aggregate, banks’ lending standards have been holding fairly steady overall; lending in some loan segments has eased a little, while lending in some other segments has tightened up a bit.
The main lending standard of concern is the share of interest-only lending, both to owner-occupiers and investors. For investors, 64% of banks’ new lending is interest-only loans and for owner-occupiers the share is 31%.
The typical interest-only period is 5 years, but some banks allow the interest-only period to extend to 15 years. During this period, the loan is amortising more slowly than a loan that requires principal and interest (P&I) payments. If housing prices should fall, this increases the risk that the loan balance may exceed the property value (negative equity). There is some risk that the borrower could face difficulty servicing the higher P&I payments when the interest-only period ends, although this is typically mitigated by banks assessing interest-only borrowers on their ability to make P&I payments.

Then, we noted the Reserve Bank of NZ view that the risks in investment loans are different from owner occupied loans and should have different capital rules applied.

We continue to stress the fact the lending for investment property is unproductive, we need more finance for business, which can create productive growth.

Finally, we note the capital regulatory discussions on forthcoming changes to the capital rules under Basel IV, and where investment loans fit in.

Put all this together, and the risks to the broader economy, and the banking system from higher investment property loans, at a time of low interest rates, and high prices are significantly higher than acknowledged in public by the regulators in Australia. In addition, the recent interest rate cut makes even less sense.

Lending Up Thanks To Housing and Commercial, In March – ABS

The ABS released the Lending Finance data for March 2015 today. Comparing March with February, Housing for owner occupation excluding alterations and additions rose 0.8% in trend terms, and the seasonally adjusted series rose 1.6%. The trend series for the value of total personal finance commitments rose 0.3% although the seasonally adjusted series fell 0.9%. The trend series for the value of total commercial finance commitments rose 2.0% whilst the seasonally adjusted series rose 0.4%. The trend series for the value of total lease finance commitments rose 1.4% in March 2015 and the seasonally adjusted series rose 3.0%, following a rise of 3.6% in February 2015.

Looking at all lending, 43% was for residential property – including investment property loans, and we see a slight downward drift, as lending for other business purposed improved a little.

Looking at all commercial lending (fixed and revolving), we see that 28.8% was for residential investment property purchases, down from a high of 29.9% at the end of last year. This again shows that non-residential property lending to business lifted a little, and could suggest investment lending growth may be slowing a tad. However, investment lending remains at unprecedented levels.

To reinforce this view, we can compare the proportion of all commercial fixed term loans to those relating to housing investment.

The point we make again is that lending for investment property, whilst inflating house prices and bank balance sheets is unproductive. We need more lending to productive businesses to sustain growth, but the banks are finding it easier and more profitable to extend credit to investors, thanks to lower loss experience and capital benefits. This continues to be a significant structural problem, which needs to be addressed.

NZ Property Investors Highly Geared – RBNZ

In the May Stability Report the RBNZ have drilled into the Investment Property sector. They say they will be publishing more detailed data, but the current article makes interesting reading. Housing investors have consistently accounted for over one-third of property purchase transactions over the past decade, with the share rising slightly following the introduction of loan-to-value ratio (LVR) restrictions in October 2013 (figure A1). Sales to investors in the Auckland market have picked up in line with the rise in sales activity since November, and this is likely to be contributing to recent strength in Auckland house prices. Investors are also a key source of new mortgage credit demand, with property investors accounting for approximately one-third of new mortgage lending over the six months ended March 2015.

Although New Zealand has not experienced a financial crisis associated with the housing market, a range of international evidence suggests that defaults on investor lending tend to be significantly higher than for owner occupiers during severe downturns. For example, Irish investor mortgage default rates were around 20 percent higher than total mortgage default rates in the two years following the GFC. Default probabilities were estimated to have been significantly higher than owner-occupiers at any given LVR. Evidence from the UK and the US also finds that default rates were relatively high among investors in severe downturns. The Reserve Bank’s proposal to apply higher risk weights to investor lending, and introduce a differential LVR threshold for investors relative to owneroccupiers in Auckland, is consistent with this evidence.

A key driver of the higher default propensity of residential property investors is higher debt-to-income ratios (income gearing) relative to owner-occupiers. For example, an investor who has borrowed to buy four houses will end up with much larger negative equity relative to their labour income, if house prices fall, than an owner-occupier with just one house and a similar LVR. Higher income gearing reduces the incentive for the investor to continue servicing the outstanding loans, resulting in a greater tendency for investors to default when they have negative equity.

Another possible reason for the higher risks associated with investor lending is that investor house purchases have, in some countries, tended to be concentrated in areas with high expected capital growth. These expectations are often based on recent house price appreciation.

Evidence from the US suggests that increases in house prices prior to the GFC were particularly pronounced in regions where the investor share of house purchases increased. In turn, areas with rapid house price inflation experienced relatively large house price falls in the aftermath of the crisis.

In New Zealand, a significant proportion of property investors have large portfolios, implying a large degree of gearing relative to their underlying labour income. For example, the 2014 ANZ Residential Property Investment Survey shows that 26 percent of surveyed investors held seven or more investment properties (figure A2). Around half of investor commitments are at LVRs of more than 70 percent. Preliminary Reserve Bank survey data suggests that investors tend to make greater use of interest-only loans, which may partly reflect investors’ ability to offset mortgage expenses against personal income for tax purposes. As a result, investor loans are likely to retain a higher level of gearing over the long term than their owner-occupier counterparts.

The risks associated with investor lending are likely to be greatest in the Auckland region. Rapid house price appreciation in Auckland has compressed rental yields, and this is likely increasing income gearing among Auckland investors. Auckland rental yields are at record lows, while national yields are close to their 10-year average (figure A3). Relatively strong capital gain expectations among Auckland investors may explain why they are willing to accept such low rental yields. According to the 2014 ANZ Residential Property Investment Survey, investors in Auckland expected house price inflation to average 12 percent per annum in the region over the coming five years, compared to 8 percent nationwide. CoreLogic data also show that investors in the Auckland region are more likely to use mortgage finance than investors outside the Auckland region.

New Zealand’s Potential New Capital Rules on Investor Mortgages are Credit-Positive – Fitch

Fitch Ratings views positively the Reserve Bank of New Zealand’s (RBNZ) consultation on the capital treatment for mortgages to residential property investors. Higher capital requirements for investor loans combined with the existing loan to value ratio (LVR) limit could help protect banks against material losses in the event of a property price correction.

The RBNZ proposes to modify existing capital rules by requiring banks to include investor mortgages in a specific asset sub-class, and hold appropriate regulatory capital for those assets. Investor mortgages in New Zealand have performed similarly to owner-occupied mortgages but the experience in other markets has shown weaker asset quality performance in a downturn. The consultation paper seeks to define the terminology of investor mortgages in order to make policy decisions by end-April 2015. Currently investor mortgages are treated the same as owner-occupier mortgages for regulatory capital purposes in New Zealand.

The introduction of higher capital rules for investor mortgages may also slow the growth rates of property prices, particularly in Auckland. Increased investor demand and a rise in investor mortgages appear to be a contributor to this strong growth, and the RBNZ’s proposed limit could address some of the risks associated with these loans. The agency expects banks to charge higher interest rates on investor mortgages to offset the higher capital requirements which may deter some of the more marginal investment activity in the market. Price rises in Auckland have exceeded 10% per annum over the last 24 months which is unlikely to be sustainable in the long-term.

Investor mortgages typically have lower LVRs relative to owner-occupier loans and therefore are less susceptible to the RBNZ’s existing LVR restrictions, introduced in October 2013. Banks are only allowed to underwrite a maximum of 10% of new mortgages with an LVR in excess of 80% which has reduced some potential risk in the banks’ mortgage portfolios.

The new measures could also indirectly help to limit growth in household indebtedness by reducing house price appreciation closer to income growth. New Zealand’s household debt, measured as a percentage of disposable income stood at 156% at end-September-2014, which is high relative to many peer countries and has increased by 5pp since 2012. Although interest rates are still low compared to the historical long-term average, a rise in the official cash rate could place borrowers at risk of being unable to service their mortgages, and may eventually lead to asset quality problems for the banks. However, this risk is partly mitigated through bank affordability testing, which includes adding a buffer above the prevailing market interest rate when assessing serviceability.

Lending For Housing Investment Higher Still

The ABS published their finance statistics today to November 2014. It appears to me we have an unbalanced economy, where more and more lending is flowing into property, stoked by investment demand (and encouraged by negative nearing). As a results, house prices rise, inflating the bank’s balance sheets, and personal assets. But there is less lending for productive commercial purposes.

The total value of owner occupied housing commitments excluding alterations and additions rose 0.5% in trend terms, and the seasonally adjusted series fell 0.2%.
The trend series for the value of total personal finance commitments rose 0.2%. Fixed lending commitments rose 0.5%, while revolving credit commitments fell 0.2%. The seasonally adjusted series for the value of total personal finance commitments fell 2.2%. Revolving credit commitments fell 3.1% and fixed lending commitments fell 1.4%.
The trend series for the value of total commercial finance commitments fell 2.8%. Revolving credit commitments fell 7.7% and fixed lending commitments fell 1.2%. The seasonally adjusted series for the value of total commercial finance commitments fell 2.6%. Fixed lending commitments fell 4.6%, while revolving credit commitments rose 3.8%.
The trend series for the value of total lease finance commitments fell 2.3% in November 2014 and the seasonally adjusted series fell 4.4%, following a fall of 4.6% in October 2014.

		Oct 2014	Nov 2014	Oct 2014 to Nov 2014
		$m	$m	% change

TREND ESTIMATES
	Housing finance for owner occupation(a)	17 169	17 248	0.5
	Personal finance	8 729	8 746	0.2
	Commercial finance	39 471	38 357	-2.8
	Lease finance	428	418	-2.3
SEASONALLY ADJUSTED ESTIMATES
	Housing finance for owner occupation(a)	17 309	17 282	-0.2
	Personal finance	8 922	8 730	-2.2
	Commercial finance	39 011	37 992	-2.6
	Lease finance	421	402	-4.4

Looking at the data in more detail, we see that commercial lending represent 59% of lending.

However, within commercial lending, we have lending for investment property. Cross matching the data. we see that of all commercial lending, more than 30% directly relates to residential investment property. Lending for other purposes has dropped.

Looking specifically at the housing sector, the growth in investment lending stands out.

In fact in trend terms half of all lending was for investment purposes, a record.

2015 should be the year when Government recognizes that it is time to act. The current settings will continue to risk financial stability and economic growth.

Investment Loans 50.8% Of Mortgages

The ABS released their finance data to October 2014. The total value of owner occupied housing commitments excluding alterations and additions rose 0.2% in trend terms, and the seasonally adjusted series rose 1.0%.

The trend series for the value of total personal finance commitments rose 0.7%. Fixed lending commitments rose 1.1% and revolving credit commitments rose 0.1%. The seasonally adjusted series for the value of total personal finance commitments rose 6.5%. Revolving credit commitments rose 11.2% and fixed lending commitments rose 3.0%.

The trend series for the value of total commercial finance commitments fell 2.6%. Revolving credit commitments fell 7.9% and fixed lending commitments fell 0.6%. The seasonally adjusted series for the value of total commercial finance commitments fell 2.2%. Revolving credit commitments fell 11.5%, while fixed lending commitments rose 0.9%.

The trend series for the value of total lease finance commitments rose 0.8% in October 2014 and the seasonally adjusted series fell 4.7%, following a fall of 0.9% in September 2014.

The housing lending data shows another record was achieved last month with 50.8% of mortgages for investment purposes. Another record.

This is starkly show by plotting the flows of owner occupied versus investment loans over the past few years.

Housing Finance Regulation – Tweaked, Not Reformed

Fresh on the heels of the FSI report, the core thesis of which is that the Australian Banks are too big to fail, so capital buffers must be increased to protect Australia from potential risks in a down turn (a “mild” crash could lead to the loss of 900,000 jobs and a $1-2 trillion or more cost to the economy), it was interesting to see the publication yesterday by APRA of the guidelines for mortgage lending, and ASIC’s targetting interest only loans. This action is coordinated via the Council of Financial Regulators (CFR). This body is the conductor of the regulatory orchestra, and has only had an independant website since 2013. It is the coordinating body for Australia’s main financial regulatory agencies. It is a non-statutory body whose role is to contribute to the efficiency and effectiveness of financial regulation and to promote stability of the Australian financial system. The Reserve Bank of Australia (RBA) chairs the Council and members include the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and The Treasury. The CFR meets in person quarterly or more often if circumstances require it. The meetings are chaired by the RBA Governor, with secretariat support provided by the RBA. In the CFR, members share information, discuss regulatory issues and, if the need arises, coordinate responses to potential threats to financial stability. The CFR also advises Government on the adequacy of Australia’s financial regulatory arrangements.

Whilst FSI recommended beefing up ASIC, and introducing a formal regulatory review body, it did not fundamentally disrupt the current arrangements. Interestingly, CFR is a direct interface between the “independent” RBA and Government.

So, lets consider the announcements yesterday. None of the measures are pure macroprudential, but APRA is reinforcing lending standards by introducing potential supervisory triggers (which if breached may lead to more capital requirements, or other steps) using an affordability floor of 7% or more (meaning if product interest rates fell further, banks could not assume a fall in serviceability requirements) and at least an assumed rise in rates of 2% from current loan product rates. In addition, any lender growing their investment lending book by more than 10% p.a. will be subject to additional focus (though APRA makes the point this is not a hard limit). These guidelines relate to new business, and does not directly impact loans already on book (though refinancing is an interesting question, will existing borrowers who refinance be subject to new lending assessment criteria?) ASIC is focussing on interest-only loans, which are growing fast, and are often related to investment lending.

The banks currently have different policies with regards to serviceability buffers. Analysts are looking at Westpac in the light of these announcements, because it grew its investment housing lending book fast, uses 180 basis points serviceability buffer and an interest rate floor of 6.8%. Investment property loans make up ~45% of WBC’s housing loan portfolio (compared with the majors average of ~36%), and has grown at ~12% year on year this financial year (compared with the average across the majors of ~10%). WBC made some interesting comments in their recent investor presentation relating to investment loans, highlighting that investors tended to have higher incomes than owner occupied loans.

Other banks have different underwriting formulations with buffers of between 1.5% and 2.25% buffers. ASIC has of course also stressed that lenders must consider borrowers ability to repay and take account other expenditure. There is evidence of the “quiet word from the regulator” working as recently we have noted some slowing investment lending at WBC (currently they would be below the 10% threshold) and amongst some other lenders too. However, some of the smaller lenders may be impacted by APRA guidance, given stronger recent growth.

What does this all mean. First, we see now what APRA meant in their earlier remarks “collecting additional information, counselling the more aggressive lenders, and seeking assurances from Boards of our lenders that they are actively monitoring lending standards. We’re about to finalise guidance on what we see as sound mortgage lending practice”. Second, we do not think this will materially slow down housing investment lending, and this is probably what the RBA wants, given its belief consumer spending should replace mining investment as a source of growth. The regulators are trying to manage potential risks in the system, by targetting higher risk lending whilst letting housing lending continue to run. Third, it leaves open the door to macroprudential later if needed. Lastly, existing borrowers may be loathe to churn if they are now required to meet additional buffers. This may slow refinancing, and increase longevity of loans in portfolio (and loans held longer are more profitable for the banks).

APRA Reinforces Sound Residential Mortgage Lending Practices

The Australian Prudential Regulation Authority (APRA) has today written to authorised deposit-taking institutions (ADIs) outlining further steps it plans to take to reinforce sound residential mortgage lending practices. These steps have been developed following discussions with other members of the Council of Financial Regulators.

In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead.

At this point in time, APRA does not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector. However, APRA has flagged to ADIs that it will be paying particular attention to specific areas of prudential concern. These include:

higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
strong growth in lending to property investors — portfolio growth materially above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action;
loan affordability tests for new borrowers — in APRA’s view, these should incorporate an interest rate buffer of at least 2 per cent above the loan product rate, and a floor lending rate of at least 7 per cent, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.

In the first quarter of 2015, APRA supervisors will be reviewing ADIs’ lending practices and, where an ADI is not maintaining a prudent approach, may institute further supervisory action. This could include increases in the level of capital that those individual ADIs are required to hold.

APRA Chairman Wayne Byres noted that while in many cases ADIs already operate in line with these expectations, the steps announced today will help guard against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment.

‘This is a measured and targeted response to emerging pressures in the housing market. These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual ADIs’ he said.

‘There are other steps open to APRA, should risks intensify or lending standards weaken and, in conjunction with other members of the Council of Financial Regulators, we will continue to keep these under active review.’

The steps announced today build on the enhanced monitoring and supervisory oversight of residential mortgage lending risks that APRA has put in place over the past year, which has included a major stress test of the banking industry, targeted reviews of ADIs’ residential mortgage lending and the release of detailed guidance to ADIs on sound residential mortgage lending practices.

APRA’s heightened supervisory focus on lending standards will be conducted in conjunction with the review of interest-only lending announced today by the Australian Securities and Investments Commission (ASIC). APRA and other members of the Council of Financial Regulators will continue to work closely together to monitor, assess and respond to risks in the housing market as they develop.

Today’s letter to ADIs can be found on the APRA website here: www.apra.gov.au/adi/Publications/Pages/other-information-for-adis.aspx
BACKGROUND

Q: What impact does APRA expect this announcement to have?
A: The aim of this announcement is to further reinforce sound residential mortgage lending practices in the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating housing credit growth. We expect this announcement will help guard against any relaxation of lending standards, and also prompt some ADIs to reinforce their lending practices where there is scope for a more prudent approach in the current risk environment.

Q: What ‘higher risk lending’ practices will APRA be focussing on?
A: APRA will be focussing on the extent to which ADIs are lending at high multiples of borrower’s income, lending at high loan-to-valuation ratios, lending on an interest-only basis to owner-occupiers for lengthy periods and lending for very long terms.

Q: How was the 10 per cent threshold for investor lending determined?
A: The 10 per cent benchmark is not a hard limit, but is a key risk indicator for supervisors in the current environment. The benchmark has been established after advice from members of the Council of Financial Regulators, taking into account a range of factors including income growth and recent market trends.

Q: How was the 2 per cent buffer and 7 per cent floor lending rate determined?
A: The guidance on serviceability assessments was based on a number of considerations, including past increases in lending rates in Australia and other jurisdictions, market forecasts for interest rates, international benchmarks for serviceability buffers, and long-run average lending rates.

Q: Is the 10 per cent growth in investor lending, or the 2 per cent buffer, a hard limit?
A: No. These figures are intended to be trigger points for more intense supervisory action. Where banks are achieving materially faster growth, utilising a lower buffer, and/or otherwise materially growing the other higher risk parts of their portfolio, it will be a trigger for supervisors to consider whether more intensive supervisory action, including higher capital requirements, may be warranted.

Q: What sort of supervisory action might be considered if banks exceed these thresholds?
A: There are a range of actions that APRA can take, depending on the circumstances. These could include some or all of increased reporting obligations, additional on-site reviews, mandated reviews by external parties, and higher capital requirements.

Q: How may this affect borrowers from obtaining home loans from ADIs?
A: APRA does not expect this to have any effect on the availability of credit for people borrowing within their means to purchase a home. ADIs already conduct affordability tests to ensure that new borrowers are not overstretching themselves to purchase property, or relying on expectations of future increases in house prices to afford to do so. This guidance will primarily guard against any further relaxation in standards.

Q. Why has APRA not introduced high LVR or serviceability limits, as in other countries?
A: In short, we do not see those sorts of limits as necessary or appropriate at this stage. APRA’s response has been targeted on the specific areas of prudential concern in the current environment: these include risks around serviceability when interest rates are at historically low levels, strong investor loan growth and broader considerations of each ADI’s risk profile. The impact of any APRA actions will therefore be felt by those banks pursing higher risk lending strategies and/or using lower loan underwriting standards.

There is, of course, a range of further actions that could be taken in relation to residential mortgage lending practices if the risk outlook intensifies, and APRA will continue to keep these under review as market conditions and lending standards evolve.

Q: What role did the Council of Financial Regulators play in the decision-making?
A: Given that these supervisory tools sit within APRA’s supervisory and regulatory framework, APRA is ultimately responsible for determining the appropriate supervisory response. However, we have taken advice from other members of the Council of Financial Regulators in developing our approach, and will continue to do so. ASIC has also today announced a review that it will be carrying out a review of interest-only lending, which will support APRA’s efforts to reinforce sound lending practices.

Q: Why is there a threshold for growth in investor lending, not total housing credit?
A: There is currently very strong growth in lending to property investors, as highlighted by the Reserve Bank in its most recent Financial Stability Review (FSR). This is leading to imbalances in the housing market; the RBA noted in the FSR that “the direct risks to financial institutions would increase if these high rates of lending growth persist, or increase further.” APRA’s approach has therefore sought to target the higher areas of risk.

Q: Does this relate to the recommendation on risk weights in the Financial System Inquiry report?
A: No. The recommendation on risk weights in the FSI report is focused on competitive issues with risk modelling, whereas the announcement today is in relation to further supervisory steps to address specific risks in residential mortgage lending.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees Australia’s banks, credit unions, building societies, life and general insurance companies and reinsurance companies, friendly societies and most of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding $4.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.

First Time Buyers Get The Investment Bug – Big Time

The most recent ABS data continues to underscore the fact that Owner Occupied First Time Buyers are sitting out of the market. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 11.8% in August 2014 from 12.2% in July 2014.

However, this is not telling us the full story. We have been tracking the rise and rise of first time buyers who are going direct to investment property. The chart below shows the state of play, and the significant rise in the number of first time buyers going to the investment sector, especially in Sydney and Melbourne.

Another way to look at the data is the percentage of FTB who went for investment housing. In the latest data we estimate that around 30% of potential first time buyers went for the investment option. These are not identified in the official figures. I would also add that the small sample sizes prior to 2012 may impact the trend data, but the DFA samples, into 2013 and beyond are large enough to be meaningful and significant.

From our surveys, we found that:

1. Most first time buyers were unable to afford to purchase a property to live in, in an area that made sense to them and were being priced out of the market.

2. However, many were anxious they were missing out on recent property gains, so decided to buy a less expensive property (often a unit) as an investment, thanks to negative gearing, they could afford it. They often continue to live at home meantime, hoping that the growth in capital could later be converted into a deposit for their own home – in other words, the investment property is an interim hedge into property, not a long term play. Some are also teaming up with friends to jointly purchase an investment, so spreading the costs.

3. About one third who purchased were assisted by the Bank of Mum and Dad, see our earlier post. More would consider an investment property by accessing their superannuation for property investment purposes, a bad idea in our view.

Given the heady state of property prices at the moment, this growth in investment property by prospective first time buyers is on one hand logical, on the other quite concerning. We would also warn against increasing first time buyer incentives, as we discussed before.

Our analysis also highlights a deficiency in the ABS reporting, who are currently investigating the first time buyer statistics (because in some banks, first time buyers are identified by their application for a first owner grant alone). They should be tracking all first time buyer activity, not just those in the owner occupation category.