Why is Australia’s Investment lending on a downswing?

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Australian Economy, Uncategorized

 

The month of April witnessed a 5% drop in investment lending for homes while private lending rose sharply. As per Housing Industry Association (HIA), new home sales dropped 4.7% in April after seasonal adjustments while there was 8.9% rise in March. In fact, new investor loans for the month went under A$11.3 billion down from the March’s A$11.9 billion and the lowest level since June 2014. Thus, the investment lending scenario brought a drop of 1.8% in the overall monthly total of new housing finance in April to A$32 billion. Overall, home investment lending in Australia is slowing down, but loans to business are showing an increase. The month of April saw a rise in value of refinancing of owner-occupier loans to $7.307 billion which is the second highest level from December 2015. The same depicted a 16.3% growth compared to the levels of April 2015. The combination of investor and owner occupied lending led the value of total housing loans drop.

In terms of monthly trend, the number of commitments for owner occupied housing finance was unchanged in April 2016; while number of commitments for the purchase of new dwellings dropped 3.1%, the number of commitments for the construction of dwellings fell 0.4%, however, the number of commitments for the purchase of established dwellings rose 0.3%.

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Value and number of dwelling commitments (Source: Australian Bureau of Statistics)

On the other hand, the ratings agency, Moody’s Investors Service have stated about seeing signs of recovery in Australian house prices. However, coupled with increasing household debt, the Australian banks may witness a tough time going forward. Particularly, the factors impact the sensitivity to downside risk in the housing market. Still, the Australian Bureau of Statistics indicated that would-be first home buyers are looking for opportunities to enter the market and accounted for 14.4% of home loans approved. The figure is slightly up from the previous month but still a 12-year low.

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Lending Finance (Source: Australian Bureau of Statistics)

On other areas, the trend series for the value of total personal finance commitments surged 2.0%. There was a 5% jump in seasonally adjusted series for the value of total personal finance commitments. The value of total commercial finance commitments fell 0.3% while seasonally adjusted series for the value of total commercial finance commitments fell 3.3%. Similarly, the trend series for the value of total lease finance commitments fell 1.6% in April 2016 but the seasonally adjusted series rose 0.4% post 7.8% decline in March 2016.

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Given the above, the market has pointed towards a more vigilant approach to lending in certain segments. Whether the drop in investment lending comes at the back of recent curbs on loans is difficult to be predicted as seen as a trend earlier last year wherein investor lending was soft in response to the tight lending regulations. Particularly, last year, the Australian Prudential Regulation Authority had instructed the banks to restrict growth in loans to investors to a clip of 10% a year that led to tightening of lending criteria. Many experts believe that the recent decisions of the Reserve Bank with regard to further interest cut rates are related to the investment lending drop as well.

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