Owner-occupier numbers cloud housing picture

UBS analyst Jon Mott noted investor housing credit growth has fallen sharply this year and owner-occupier growth is fast filling the gap. But he questioned whether some borrowers are reclassifying themselves in a bid to avoid higher interest charges.

Over recent months, investor lending has slowed considerably, from a peak of 0.76 per cent in December, down to 0.41 per cent in June.

However, the slowdown in total housing lending has been much more muted, bouncing between 0.50 per cent and 0.55 per cent per month.

To Mott, this implies that owner-occupiers are filling the investor housing void.

“Given first home buyers are still near record low, this implies a rapid acceleration in "upgraders' purchasing bigger homes.”

“Some investment borrowers are telling their lender they intend to occupy the property to benefit from lower interest rates," he argued.

"While it is plausible that there has been an increase in upgraders, we would not be surprised if borrowers are tempted to apply for or re-classify themselves as owner occupiers given the 60 basis point differential in interest rate between owner occupiers and investors."

The analyst said this is consistent with UBS research that revealed that 28 per cent of mortgagors stated their application was not factually accurate – 32 per cent via brokers

"Substantial cuts to mortgage broker commissions look inevitable."

Mott also drew client attention to borrowers who will need to migrate from interest-only to principal and interest home loans, putting pressure on cash flows.

Borrower concerns

While interest-only loans provide flexibility and a higher tax deduction for investors, he argued, they cost substantially more over the life of the loan.

"Customers who select those mortgages are likely to be doing so as the initial repayments are lower or they cannot afford the increase in repayments from switching.

“Therefore, we ask the question – are customers that stay in interest-only loans the borrowers we should be worried about?”

While UBS has called the top of the housing market, the slowdown to date has only been moderate.

In addition to resilient household credit growth, house prices have risen 4.1 per cent in Melbourne and 2.2 per cent in Sydney during the three months to July.

Moreover, this is after APRA's latest macro prudential tightening and auction clearance rates settling in the mid 70s.

“While it is likely to take time for the banks' recent mortgage repricing to take effect, we believe that if the housing market does not slow, we can expect APRA to turn-the-dial-up on macro -prudential policies.

This is consistent with experiences in Singapore and New Zealand where macro prudential tools have been used more frequently.

"In both these cases macro prudential continued to tighten until the housing markets in Singapore and Auckland slowed."

Mott's overall advice to clients is to tread carefully when it comes to the banks although the analyst does accept that the near-term rally could continue.

“Multiples are off their highs and money is likely to flow into the banks as investors trim underweight positions and avoid US dollar plays into reporting season. That said, the medium-term outlook is clearly challenging which caps the upside potential.”

 

 

 

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