Chill out time for property investors

9th Sep 2015By: Tim Lawless

The 10% speed limit on investor housing credit growth has been the focus of much attention since the policy change was announced by APRA in December last year. Since this time, the pace of credit growth for investment purposes has failed to fall below the APRA benchmark, however recently there have been signs that investment lending is starting to slow down.

The most recent RBA credit aggregates (to July 2015) showed the pace of investment credit growth slowed to a monthly rate of 0.6% – its slowest monthly increase since October 2013. With many banks now placing a premium on investment mortgage interest rates, and also increasing serviceability limits on all mortgages, we may be seeing the first evidence of a cooling in investment housing demand.

The latest stats

The latest set of housing finance data from the Australian Bureau of Statistics (ABS) provided another hint that investment lending was starting to slow. The value of housing finance commitments for investment housing fell in both May and June and increased by just 0.5% in seasonally adjusted terms in July.

The May/June fall was the first consecutive month-on-month fall since late 2012, and, followed by the relatively low July reading, may provide a further indication that investment lending is peaking out. No doubt both APRA and the RBA will see the slower credit numbers as a positive evolution in housing market conditions, however investor numbers remain substantial in the most active markets.

Across NSW, investors comprise 62% of the value of all new housing finance commitments and 53% of the value of new housing finance commitments across Victoria. In these two capital cities, dwelling values have risen the most, with Sydney values now 49.5% higher over the growth cycle to date and 76.4% higher since the beginning of 2009. Melbourne values are 32.1% and 61.6% higher over the same time frames.

Rental yields

While dwelling values surged higher in Sydney and Melbourne, rental markets have remained relatively sedate. Sydney values are up nearly 50% over the current growth cycle, with weekly rents in August rising by just 9.6%. The trend has been similar in Melbourne. This has resulted in rental yields now at record lows across both cities.

The additional impost of higher capital requirements for residential mortgages, which is another policy decision from APRA aimed at ensuring Australian ADI’s hold enough capital against their mortgage books, means that many lenders are now charging a premium on interest rates for investment loans, tightening the number of loans issued with low deposits and reducing the number of loans on interest only terms.

The cumulative effect of tighter lending conditions, more expensive mortgage rates for investors and lower rental yields, as well as natural affordability constraints and higher levels of new housing supply, has the potential to dampen some of the exuberance we have seen across the Sydney and Melbourne housing markets.