Getting the lowdown on the housing credit "crunch"

The term “credit crunch” has become a common phrase recently as lending criteria has tightened. But after looking at data and commentary from banking regulator APRA, CoreLogic research analyst Cameron Kusher thinks the term might be a “little overzealous” despite falling dwelling values and reduced credit growth.

Since late 2014, APRA and the Council of Financial Regulators have launched a series of macroprudential policies that brought a number of changes to the lending environment. These changes include a 10% per annum speed limit for lenders on investment credit growth, increased scrutiny of borrower’s actual expenses instead of using benchmark measures, and restrictions on lending growth in higher risk segments, such as loan-to-income loans and high LVR loans.

“As a result of all these changes, the mortgage market has changed,” Kusher said in a report. “While the last two decades have largely been about credit becoming more freely available, accessing credit has become less straightforward. The amount borrowers can borrow relative to their income has generally been reduced, investors and interest-only borrowers are being charged interest rate premiums and the flow of higher LVR lending has reduced.” 

Growing housing credit
The value of outstanding credit to lenders at the end of May 2018 reached a historic high of $1.8trn, while housing credit over the last 12 months to May 2018 increased by 5.8%, the slowest annual growth since February 2014.

The historically low annual growth rate in investor credit highlights that the tightened credit policies impact investor mortgage demand more than owner occupier demand. Another possible reason is the increasing number of investors going from interest-only mortgages to principal and interest because of the mortgage rate saving.

Flow of new lending peaks
Housing commitments in May 2018 reached $31.9bn, the highest monthly value in three months but      -5.5% lower than its historic value of $33.7bn in August 2017. Investor housing finance commitments were the only category to experience a fall over the month.

According to the report, when analysing the current flows in credit data, “it is fair to say that there has been a credit crunch for investors but a credit crunch is not really evident for owner occupiers”. It also said that another point to consider is that the cohort has been mostly active in Sydney and Melbourne where values have begun to decline, and investor demand has waned and has not really peaked elsewhere.    

“While investor demand could be characterised as experiencing a crunch at the moment, owner occupier demand, for now, remains quite solid,” the report said.

Dwelling values in Sydney and Melbourne are expected to continually drop over the coming months, placing pressure on headline growth rates because of the larger number of dwellings in the cities.

“Given this, the overall value of housing finance commitments is anticipated to fall and the expansion in housing credit will likely continue to slow.”