Cut it up and things actually look robust.
Where is the market fundamentally at?
This is an important question in any asset class, but it’s particularly true of property. And that’s because the market can get buffeted about by all sorts of ‘extra-market’ factors. And by that I mean things like the kind of restrictions APRA’s had in place for last two years.
And you’d be forgiven right now for thinking that the market is fundamentally softening. Headline numbers are soft, prices are actually slipping in Sydney, investor lending is cooling.
But in my mind, these things are more sea-foam than sea – more noise than signal.
A few charts will help tell this story I think.
First, let’s look at what investor lending is doing – this is amount of finance going to investors.
You can see that investor lending growth slipped into negative territory in September last year. At that point, the amount lent to investors was less than it was at the same time a year earlier.
So ‘the market’ is getting softer right?
Well, maybe. But if you showed this to the staff at APRA, they’d be saying ‘job well done, boys.” This is exactly the kind of outcome they were trying to engineer. Investor lending had been growing too quickly (growing at more than 40% a year in 2014!) so it was time to rein it in a bit.
What followed was a bunch of restrictions at the individual bank level, and investor lending, predictably, started to fall.
So while it looks like a cycle, it’s has nothing to do with the normal cycle of the market, and everything to do with APRA.
To make that point clearer, come over and have a look at the same chart on housing finance, but this time, just to owner-occupiers.
The first thing to note is that these charts are on the same scale, so the smaller hills and valleys on the owner-occupier chart tells you that the cycle of owner-occupier lending is generally much smoother and gentler.
The other thing to note is that growth in owner-occupier lending peaked about the same time as investor growth turned negative. So just as investor lending was cooling, owner-occupier lending was pumping.
Partly, I think this was about a bunch of lending that would have normally been classified as ‘investor’ was instead classified as ‘O-O’ – just to get around the APRA restrictions. But that can only be a small part of the story.
Rather, it shows that as the APRA restrictions were taking effect, the fundamental demand in the market was strong.
O-O lending has since followed investors down, but even then, we haven’t dipped into negative territory. We’re still lending more to owner-occupiers than we were this time last year.
Lending is still growing.
And the other interesting thing in all that is that lending to first-home buyers is actually picking up.
And now, the percentage of O-O lending going to first time buyers is back to around ‘normal’ levels, after freaking everybody out for a bit there.
So to me, when I look at these charts together, what I see is this: Yes, investor lending is falling thanks to the APRA restrictions. But looking through that, owner-occupier lending is still growing, particularly to first time buyers. To me that suggests that fundamental demand is still strong, even though the investor segment and the market overall appears to be cooling.
It’s just not as bad as the headline data suggest.
The fear-clouds are gathering.
Soon it will be time to be greedy.