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Property Investor Lending Slows

Tighter lending regulations and rising bank interest rates have caused a slowdown in property investment across Australia. While investors still represent a healthy share of new property lending, the value of owner-occupier commitments is growing as the market finds a new balance. First home buyers are also storming back into the market, with the value of investor loans forecast to shrink over coming months as other segments of the market put down their stake. 

According to data from the Australian Bureau of Statistics, the value of investor loans decreased by 1.4% in May, after falling by 2.5% in April. The slowdown in lending followed a second round of tougher lending restrictions imposed by the Australian Prudential Regulation Authority (APRA) in March, measures which limited interest-only loans to 30% of new residential mortgages. The banks started raising interest rates in response to tighter lending rules, with the spread between principal-and-interest loans and interest-only loans, favoured by investors, widening to between 45 and 60 basis points over the period.

The tough new limits imposed by APRA were designed to reduce risk in the sector by going beyond the existing 10% investor loan growth "speed limit". "APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile," said APRA chairman Wayne Byres in a statement, adding "We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each lender, and will consider the need to impose additional requirements... when the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending."

Investor lending declined from more than 40% of market share at the start of the year to 37.3% in May. While this represents a significant decrease, especially in NSW and Victoria, levels are forecast to drop much further in coming months. According to Henry St John from JP Morgan, investor lending has contracted at an annualised pace of almost 15% over the last six months, after having grown by more than 26% in January. "Our view is that investor lending values will continue to shrink in the coming months, and that this will begin to materialise in investor credit growth as well," he said.

Despite a slowdown in investment activity, total mortgage lending still managed to rise by 1.3% in May, or $33 billion. Owner-occupier lending has grown for the fourth consecutive month, with the value of loans up 2.9%. Refinancing loans were also up by almost 3% for the month, to an annualised pace of 6.9%. According to Mr St John, this may mean that "investors are rediscovering themselves as owner-occupiers following comparative changes in market lending rates." The number of first home buyers in the market is also up, with new property owners now accounting for 14% of total mortgage commitments, up from 13.8% in April. According to economist Stephen Koukoulas, 8,439 first home buyers took out loans in May, the biggest number in two-and-a-half years.


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