It may pay to apply for an investment home loan now

Chris Caton, Chief Economist, BTFG.

House prices have risen rapidly in the past year, leading many analysts (particularly those overseas) to conclude we have a bubble on our hands and it all must inevitably end in tears.

My view remains there is no bubble, and concerns about house prices come from a possible over-interpretation of recent RBA rhetoric aimed at talking down both the housing market and the Australian dollar.

House prices are rising everywhere across Australia, but most action has been confined to capital cities. Despite recent double-digit increases, on average we’ve seen house prices increase just 4.7% over 10 years overall (if there is a bubble to be found anywhere it is in Darwin and Perth, where prices have risen 8.5% and 7.1% on average over the past 10 years, respectively).

Investors being watched

The growth of investor home finance is significantly outpacing growth in household incomes. Across the board, investors account for nearly 50% of new housing loan approvals.

The RBA holds particular concern about the strength of investor activity in Sydney and Melbourne, pointing out, for example, that investor housing loan approvals have risen by about 90% in Sydney in the past two years and by more than 50% in Melbourne.

Increased investor activity has had material impact on house prices. In 2014 through to the end of August, we saw rapid double-digit rises of 16.2% in Sydney and 11.7% in Melbourne.

House prices – % increase year to August 2014

1410_Blog_HomeLoan2

Source: RP Data

The market is still relatively affordable

The RBA reports housing prices are broadly rising in line with disposable incomes. Over the past three decades, average housing loan repayments have varied between 20-30% of disposable incomes.

Currently the metric is at the lower end of this range, with the rise in prices offset by the drop in the cost of finance.

Repayments on New Housing Loans – per cent to household disposable income

1410_Blog_HomeLoan1

Sources: ABS, CBA/HIA, RBA, REIA, RP Data-Rismark

I’ve also mentioned in a previous blog that Australians have the largest houses in the world – we may be getting best value for money anyway.

Could the RBA put the banks’ money where its mouth is?

Of course, the easiest way to cool off a housing market is to raise interest rates. The problem is that neither the growth nor inflation outlook suggest the need for higher rates. So the RBA has at least raised the possibility of more targeted “macro-prudential” measures.

Macro-prudential measures aim to shore up the resilience of the financial sector and to prevent systemic financial instability. Almost invariably, they work by changing the relative price of credit for various sectors of the economy. In this case, the aim would be to restrict credit growth to investors without, for example, impeding first-home buyers.

The RBA could increase the capital required to be held by the banks against investment loans versus owner-occupier loans, making the investment loans relatively unattractive and/or forcing the banks to increase the rates on investment loans versus owner-occupier.

My suspicion is that the RBA is hoping that its recent jawboning will be enough to turn down whatever heat still remains in the (investor) housing market. This may turn out to be the case; house price inflation appears already to be on the wane.

The RBA stayed somewhat quiet on house prices in their October meeting. Any more troubling price action that does eventuate will remain confined to Sydney and Melbourne.

 

Subscribe

Related Articles