Westpac chief economist Bill Evans says it is unlikely that Australian non-bank lenders will be able to meet demand for investor mortgages as the banks curb investor credit growth with higher borrowing costs.
In a research note yesterday, Mr Evans observed that immediately preceding the GFC the non-banks controlled around 20 per cent of the investor market.
“With funding conditions deteriorating sharply post-GFC and still not really having recovered, particularly in Europe, the non-banks have been restricted to around eight per cent of the market,” he said.
“No doubt these entities will now be supporting more than eight per cent of the new flow but are still too small to relieve any major distortion in the market.”
However, Mr Evans says distortions will emerge as a result of changing market dynamics.
“For example, consider the risks of an investor committing to purchase ‘off the plan’ with, say, a two-year settlement,” he said.
“Uncertainty around the availability of funding in two years’ time is likely to unnerve investors and developers.”
Mr Evans stressed that going forward investors and new developments will be important in driving growth in weak housing markets like Perth, Brisbane, Adelaide and Hobart.
Meanwhile, he believes competition for funding from the active centres in Sydney and Melbourne is likely to represent “damaging headwinds for those cities”.
Commenting on the banks’ efforts to slow investor demand by upping rates on investment loans, coupled with lower LVRs, Mr Evans said he was surprised to see that markets have persisted in maintaining a 90 per cent probability of another 25-basis-point rate cut by the RBA by mid next year and a 50 per cent probability of a cut by November.
Mr Evans is not alone in thinking that recent price hikes on investor loans are unlikely to curb demand, or see banks limit their investor lending growth to 10 per cent.
“Even higher rates for investors may well be an attractive policy option for the banks to further slow investor growth,” he said.
“For example, a further investor rate increase of, say, 0.5 per cent would be equivalent to 0.2 per cent across the mortgage market.”