Low interest rates driving investor resurgence

Buyers are rushing to take advantage of record low interest rates, as new data revealed lending commitments hit a record high in March.

Housing finance data released on Tuesday by the Australian Bureau of Statistics showed the value of new loans rose 5.5% to an all-time high of $30.2 billion in March, as investors looking to take advantage of rising house prices and cheap money more than offset a reduction in first home buyers.

It comes as the Reserve Bank of Australia left the official cash rate on hold at a record low of 0.1% for the sixth month in a row on Tuesday, reiterating its message that interest rates will remain there until inflation sustainably sits within its 2-3% target range, which it said is “unlikely” until 2024 “at the earliest”.

RBA Governor Philip Lowe acknowledged the role low interest rates are playing in the housing market, and said the central bank is watching the home lending “carefully”.

“Housing markets have strengthened further, with prices rising in all major markets,” said RBA governor Philip Lowe in a statement.

“Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained,” he added.

The RBA doesn’t specifically target house prices, however as the chair of the Council of Financial Regulators, it does monitor risks in the lending market. The council in March issued a statement saying they’re prepared to clamp down on lending conditions if standards deteriorated and banks began issuing too many risky loans, as was the case in the last housing boom.

Investor resurgence drives record home lending

After sitting on the sidelines for much of 2020 record low borrowing costs now appear to be too good to resist for investors, as ABS data showed new loan commitments to investors surged 12.7% in March to $7.7 billion – the strongest monthly rise in almost 18 years – and 54.3% higher than a year earlier.

“Investor lending has seen a sustained period of growth since the 20 year low seen in May 2020,” said ABS head of Finance and Wealth, Katherine Keenan.

“The rise in March is the largest recorded since July 2003 and was driven by increased loan commitments to investors for existing dwellings,” she added.

ANZ economists noted investors now account for a quarter of new loans, a nine-month high.

“This is occurring despite persistently high rental vacancy rates, particularly in Melbourne,” said ANZ Economist Adelaide Timbrell.

“Strong investor lending may eventually pique the attention of regulators, along with recent up-ticks in higher debt-to-income loans and more low-deposit loans,” she added.

Owner occupier home loans, which still made up the bulk of new lending rose 3.3% to $22.4 billion, to be 55.6% higher than March 2020.

The rollback of government stimulus and rising house prices resulted in a 0.9% fall in the value of first home buyer loans to $6.8 billion. The second straight month of declines.

“First-home buyers look to have peaked as incentives are reduced, demand has been brought forward and worsening affordability is starting to bite,” said AMP Capital chief economist Shane Oliver.

Households borrowing more

Economists at the Commonwealth Bank said low interest rates are allowing people to service larger mortgages, noting the average size of a loan has been trending higher for both owner‑occupiers and investors.

“The RBA’s suite of policy easing measures has lowered borrowing costs. Lower borrowing costs mean that people can service a large mortgage more than before all things being equal,” said CBA Senior Economist, Kristina Clifton.

But she said that doesn’t mean lending standards are deteriorating.

“Lending standards still look sound and we don’t expect any macro‑prudential policies to be reintroduced this year,” said Ms Clifton.

The bank’s CEO Matt Comyn last month told a parliamentary committee he wasn’t concerned about a deterioration in financial stability because conditions are very different to the 2015 housing boom, when investors made up more around 60% of mortgage applications at the bank, compared to around 25% currently.

Ms Clifton said lending to owner-occupiers is currently running at levels almost double the previous peaks, while lending to investors is still below levels seen in 2014 to 2017.

Westpac Senior Economist Matt Hassan said investor activity will continue to strengthen through 2021.

“We expect the regulators will still be very comfortable with what they are seeing now but to be less so as investor activity heats up and overall housing market momentum remains strong,” said Mr Hassan.

“Our forecasts envisage a strong year in 2021 but prudential tightening coming into frame in 2022,” he added.