Are we seeing the early days of a bubble in the making in the housing sector as investors, especially self-managed super funds, continue to pile in?
Investors are now becoming vital to the continued growth of the Australian housing market and their impact was very much underlined in the October’s housing finance report from the Australian Bureau of Statistics yesterday.
While the value of home-loan approvals rose a seasonally adjusted 4.1% in October from September, the Bureau of Statistics said the seasonally adjusted value of loans to investors jumped by double that – 8.2% – from $7.701 billion a year ago to $10.3 billion in October.
The number of home loans approved was up a more sedate 1%, seasonally adjusted, to more than 52,300, or 0.6% on the more accurate trend basis, to 51,923.
The ABS said that approvals to buy new homes rose 3.6% and approvals to buy existing houses was up 0.8% in the month.
That was a solid result (the seasonally adjusted and trend figures were both new all time highs for the number of finance approvals), but it was the growing importance of investors that stood out in yesterday’s report.
Investor finance for home purchases showed a 33% jump from October last year to October this year – from $7.333 billion to an all time high of $9.772 billion (on a trend basis, which irons out the month to month changes).
That was more than the $2.058 billion trend rise in owner-occupied finance in the same time – from $13.842 billion to $15.9 billion.
Overall housing finance jumped $4.107 billion in the same 12 month period to $25.671 billion.
In fact a comparison of the October this year and October 2012 reports from the ABS shows just how the growth in investor finance has overtaken the growth in finance for owner-occupiers.
The ABS reported that the dollar value of investor housing finance in October rose 8.2%, seasonally adjusted, double the overall 4.1% rise in the total value of home finance in the month.
On a trend basis, which attempts to smooth out month to month volatility, the value of investor home loans was up 2.9%, against a 1.8% rise in the value of all home loan commitments.
Investor home loans totalled $9.772 billion (on a trend basis, or $10.3 billion seasonally adjusted).
In October 2012, investor home loans on a trend basis were valued at $7.332 billion (and $7.7 billion seasonally adjusted).
That’s a jump of 33% compared with the much slower rise in owner-occupied lending over the 12 months from $13.058 billion (trend basis) in October of last year, to $15.900 billion this October, a rise of almost 15%, or less than half the growth rate in the value of investor finance commitments.
The ABS does not break out actual figures for the number of investor loans, but the growth in outstanding finance from authorised deposit taking institutions rose 0.7% last month, compared to an 0.6% rise in the total amount of housing finance and an 0.5% growth rate for owner-occupied housing loans.
Investors now in the housing driving seat
The housing finance data was more important than the monthly reports on business confidence and conditions from the NAB, also out yesterday.
Confidence showed a small improvement, and conditions edged higher, except for employment which fell sharply.
But with the Reserve Bank wanting to see faster growth from sectors such as housing, the country is becoming hostage to the attractions of negative gearing for investors looking for yield, especially in self-managed funds.
The growth in investor housing is accelerating – earlier in the year the annual rate of growth was much less than the 33% seen in the year to October. For example, the growth rate in the year to March was a still solid 18%, but there has been a significant acceleration in the past nine months.
And while some of it is going into new home building, much of the investment is unproductive because it is buying existing houses which don’t generate the same positive impact on GDP, the labour market or consumption that new home construction does. Only when such investment heads into new developments is there some impact on the wider economy.
But it is now clear the home construction and finance sector are the strongest areas of activity outside the fading resource sector and the national economy could be in danger of becoming hostage to continued demand from investors.
That could get dangerous for borrowers and lenders alike and it’s no wonder the RBA and APRA, the two main bank regulators, have been warning about the growth of investor housing because much of it is coming from self-managed super funds.
The sharp rise in investor lending in the housing sector in the past year also underlines the warning in yesterday’s Financial Review from Steve Harker, the local head of US investment bank Morgan Stanley.
He told the paper that the boom in self-managed super funds investing in housing is sowing the seeds of a future economic wreck.
“We have a tax system and culture that drives property investment in a way that can lead to its own strong risks”, he argues. “At present, people can take what amounts to a triple bet on property.
“They own their own home, which is capital gains tax free. They can also negatively gear investment properties to the point where it eliminates all income from other sources and now people can gear their self-managed super funds into property.
“It’s the third aspect of the triple bet that concerns me. I think the single biggest economic wreck – and one that will occur in this country in the next five to 10 years – will be in the SMSF space.”
The losses, he says, won’t be triggered by a collapse in the property prices, but by the proliferation of unviable property schemes that are now being peddled.
“The SMSF space is ripe for property spruikers and promoters, high-yield schemes and fraud. We’re talking about potentially $200 billion in superannuation savings being completely blown up. It will make Storm and Pyramid look like insignificant blips,” Mr Harker said.
And there’s a fourth area of concern. Many self-managed super funds are also big investors in the big four Australian banks for the huge franked dividends. Any problems in housing, especially from the self managed investor sector, has the potential to rebound on these investors via a lower share price for the banks and possible lower dividends.
