Warning issued over credit slowdown ramifications

Pointing to the latest housing finance data from the Australian Bureau of Statistics (ABS), CoreLogic’s  head of research, Tim Lawless, said that slowing credit demand, driven by tighter underwriting standards, could spark a broader downturn in the Australian economy.

“Anyone directly or indirectly associated with housing finance has likely felt the pinch of heightened regulation and tighter credit policies,” Mr Lawless said.

“Mortgage brokers and lenders are the first industry participants that come to mind. However, the slowdown in lending activity has broader implications for a wide range of peripheral industries and revenue streams.”

Mr Lawless continued: “Less lending implies fewer home sales for real estate agents and developers, a reduction in building and pest inspections, less conveyancing for lawyers and a slump in stamp duty revenue for state governments. 

“Generally, when people buy a home, they also splurge on household items such as appliances, white goods and home furnishings, so there is strong relationship with household consumption.”

Mr Lawless claimed that less spending from households has direct implications for Australia’s economic prosperity, which he said comprises close to 60 per cent of Australia’s gross domestic product. 

The CoreLogic analyst reflected upon ABS figures that highlight the slowdown in housing finance, noting that the overall value of housing finance commitments was down by 5.1 per cent between July 2017 and July 2018. 

“Since the peak in the value of housing finance in August last year, the value of commitments has reduced by 7.0 per cent, a reduction of about $2.35 billion,” Mr Lawless stated.

“The decline has been most visible for investment loans where the value of lending is down by 15.7 per cent over the 12 months ending July 2018 and almost 31 per cent lower since peaking in April 2015. 

“Owner-occupier lending has held much firmer, actually rising by 1.1 per cent over the past 12 months (including refinanced loans) and only 1.0 per cent lower than record highs.”  

Mr Lawless added: “Clearly, those industry participants who are more exposed to investment channels have borne the brunt of the credit downturn.”

Mr Lawless also noted that investors now comprise 41 per cent of overall mortgage demand, down from a record high of nearly 55 per cent in May 2015, adding that on average, over the past 10 years, investors have comprised approximately 45 per cent of mortgage demand, which he said highlights that “investment concentration has been tracking below the decade average since November last year”.

Further, Mr Lawless said that the value of investment lending has trended lower across every state and territory over the past year, except Tasmania, where he said investment lending was up by 16.3 per cent between July 2017 and July 2018.

However, Mr Lawless claimed that the despite the fall in overall investment, the states where investment has been the most concentrated, citing NSW and Victoria, “continue to show the highest share of investment lending based on value”. 

“Investors still comprise almost 49 per cent of lending in NSW and almost 41 per cent in Victoria, well above the long-term average,” the analyst said.

“Considering the short- to medium-term prospects for capital gains in these states is relatively low and rental yields remain close to the record lows, the concentration of investment activity in these states doesn’t make much sense.”

However, Mr Lawless said that he believes investment activity would continue to trend lower, particularly in NSW and Victoria, due to “mortgage rate premiums for investors, tighter lending criteria, low rental yields and soft prospects for capital gains”. 

Mr Lawless concluded: “Additionally, with a federal election around the corner, potential changes to negative gearing and capital gains tax concessions could be weighing on investor sentiment.” 

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