Investment Property – Page 5 – Digital Finance Analytics (DFA) Blog

Urgent Action Required To Boost Business Lending

Today the data from RBA and APRA showed the strength of lending in the housing sector, and only 33% of lending is business related. This over-emphasis on property investment in particular is a systemic problem, and must be addressed if we are to drive growth in the right direction. Business needs more focus.

To illustrate the point, the mix between business lending and housing (both owner occupied and investment) is worth examining from 1990 onwards. Back then, business lending accounted for about 65% of all lending. Today it is 33%. As a result we know from our SME surveys that many businesses are finding it difficult to get funding on reasonable terms. On the other hand, we see lending for housing, and especially investment lending inflating the banks balance sheets and house prices, but this is not truly productive.

Its time to impose additional controls on investment lending, and to re-balance lending towards businesses who will be able to generate real economic growth for the country. The current situation, where household net worth grows…

… thanks to over-high house prices is not sustainable when it is powered by ever more household debt.

HouseholdRatios2

From our surveys, a quarter of households are less comfortable with the amount of debt they have compared with 12 months ago.

Any further interest rate cuts without these measures would be irresponsible.

DFA Video Blog On First Time Buyers Switching To Investment Property

DFA analysis shows that more first time buyers are leaping into investment property instead of purchasing a property for owner occupation. This short video explains why.

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.

You can read the detailed analysis of the household survey results here.

Property Investors Latest Attitudes – DFA Survey

Continuing our series on the latest DFA survey results, today we look at the investment sector. We start by looking at the barriers which Investors believe may influence their investment decisions. Whilst the impact of budgets changes are off the agenda now, there is a growing concern about upcoming regulatory changes and how they may impact the investment market. In contrast the RBA warnings appear to have lost their immediate focus. Investors are less concerned about potential interest rate rises now and a greater proportion have already bought. High prices are having an impact, but it appears obtaining funding is not an issue for most. We found that, unlike first time buyers, investors were easily able to find appropriate properties to purchase, and gain finance.

Looking at solo investors in particular, they are driven by tax efficiency, and expectation of appreciating property values. They see net returns from property a better bet than deposits.

The picture for portfolio investors is somewhat similar. They are move motivated by the hope of appreciating values than solo investors and the tax advantages of leveraged property investment.

Those investors considering investing in property via a SMSF wrapper, are clearly driven by tax strategies and the expectation of rising property values.

We see these SMSF investors are getting their advice from a number of sources, mortgage brokers, and internet sites have the greatest impact, and we noted a rise in advice from real estate agents as an influence. (In this survey, investors could score multiple advice sources).

Finally, we asked about the property distribution within a SMSF, and the greatest proportion is between 20 and 40 per cent of the portfolio.

ADI Residential Property Exposures Up Again

APRA published their quarterly ADI property statistics today to September 2014. ADIs’ total domestic housing loans were $1.3 trillion, an increase of $103.4 billion (9.0 per cent) over the year. There were 5.2 million housing loans outstanding with an average balance of $239,000. The proportion of investment loans moved higher again to 34% of all loans on book. DFA survey data shows a correlation between interest only and investment loans, (thanks to the benefits of negative equity), but APRA does not provide any linked data on this.

Looking at total loan stock, we see a continued rise in interest only mortgages, and loans with offset facilities. Reverse mortgages, low documentation loans and other non-standard mortgages are relatively controlled by comparison.

Turning to the flow data (loans written each month), ADIs with greater than $1 billion of residential term loans approved $85.4 billion of new loans, an increase of $9.1 billion (11.9 per cent) over the year. Of these new loan approvals, $53.5 billion (62.6 per cent) were owner-occupied loans and $31.9 billion (37.4 per cent) were investment loans. Thus we see that overall monthly totals continue to rise, and investment loans are growing faster than owner occupied loans. The 37.4% of investment loans September is understated because the owner-occupied lending data includes refinances, which should be removed from the analysis, to give a true picture of new lending.

Looking in more detail, we see the value of interest only loans rising in recent months, and also a small rise in the number of loans approved outside serviceability. Low documentation loans remain controlled.

Looking at lending by LVR bands we see about 40% of loans being written are above 80% loan to value, and of these around 10% are above 90%. No data is provided on the proportion of loans covered by lender mortgage insurance. This should be.

Brokers are having a field day at the moment, with commissions being increased, and values written rising. The APRA data shows 43.2% of all loans by value were originated via third party channels.

So, the RBA’s plan that the property sector should take up some of the slack left by the evaporating mining sector is still playing out. However, lending for investment property, and interest only lending have higher risks attached, and we think changes to capital rules are still likely to emerge to try and address some of the implicit risks.

Finally, ADIs’ commercial property exposures were $225.5 billion, an increase of $13.5 billion (6.4 per cent) over the year. Commercial property exposures within Australia were $187.4 billion, equivalent to 83.1 per cent of all commercial property exposures.

ABC Covers Macroprudential

The ABC The Business last night covered the property market, “The RBA’s Property Problem” – including comments from the RBA and APRA. Industry analysts also make the point that the tax incentives for investment property will work again the intention of macroprudential – we discussed negative gearing yesterday.

Foreign Property Buyers Are Market Significant – nab

The results from the National Australia Bank’s latest residential property survey shows that foreign buyers are flocking to buy Australian property, snapping up one out of every six new homes – and that number is set to get higher.

Foreign buyers were more prevalent in new housing markets in Q3. Foreign buyers accounted for 16.8% of total demand (about 1 in 6 of all buyers), and this share is tipped to rise further next year (17.3%). Foreign buyers were more active in all states, especially VIC where they accounted for an estimated 24.8% of demand (or 1 in 4 sales). In contrast, local investors were less active in Q3, with their share of national demand falling to 27% (32.5% in Q2). Local investors accounted for a smaller share of demand in all states.

Foreign buyers were slightly more active in established property markets in Q3, with their share of total national demand rising to 8.2% (7.2% in Q2). Foreign buyer demand for established property increased in all states except NSW. VIC led the way, with foreigners accounting for a record high 11.5% of established property demand.

NAB chief economist Alan Oster said first-home buyers were not competing with foreign investors for property, because foreign buyers opt for high-end apartments – “they’re not buying cheap stuff”. It’s local investors creating the most difficulty for first-timers, he said, spurred on by low interest rates, superannuation changes and a tax system that encourages property investment.

While there are restrictions on what properties foreign investors can buy, the Foreign Investment Review Board has been criticised for failing to enforce those rules and a parliamentary inquiry into foreign investment in residential real estate is due to deliver its recommendations in November.