Australian investor home lending plunges 32% in Q3 as tax curbs and RBA hikes bite harder

A drop in home lending this sharp gives the RBA more evidence that its five hikes this year are biting. That supports the case for a pause after November’s split decision, and it is a modest headwind for the Australian dollar. Short-dated Australian government bond yields may be sensitive to any further sign that housing is cooling faster than the central bank expects. Bank stocks face slower mortgage growth, especially in investor lending, which has traditionally been a profitable segment. With energy-driven inflation still the RBA’s main worry, oil prices remain the swing factor for whether housing weakness is enough to keep rates on hold.

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Tax changes, lending caps and five rate hikes have all hit Australian property investors at once, and the result is a collapse in landlord borrowing.

Summary:

• Australian home loan values fell 15.5% q/q in Q3, against expectations of an 8% drop and a 5.2% fall in Q2
• Investor lending plunged 32.3%, after falling 10.2% in Q2
• Owner-occupier loan values fell 5.3%, after a 1.9% fall in Q2
• The May budget ended negative gearing for established homes bought after budget night and curbed the capital gains tax discount
• APRA has capped high debt-to-income lending since February, and the RBA has hiked five times this year to 4.85%

The value of new Australian home loans fell 15.5% in the September quarter, nearly twice the 8% decline economists had expected, as lending to property investors collapsed in the wake of government tax changes and a year of Reserve Bank of Australia rate hikes.

Investor lending was the main drag, plunging 32.3% on the quarter after a 10.2% fall in the June quarter. Owner-occupier loan values fell a more modest 5.3%, following a 1.9% decline previously. The overall drop was a sharp acceleration from the 5.2% fall recorded in the prior quarter.

The split between investors and owner-occupiers suggests policy is doing much of the work. In the May federal budget, the government moved to end negative gearing for established homes bought after budget night, keeping it only for newly built properties, and also announced curbs to the capital gains tax discount on established dwellings. Negative gearing lets investors offset rental losses against other income. The government argued the housing market needed rebalancing, with most investor credit going towards existing homes rather than new supply. The major banks moved quickly to reflect the changes in how they assess investor loan applications, reducing borrowing capacity for many landlords.

Those measures came on top of tighter lending rules. From February, the Australian Prudential Regulation Authority required banks to limit new loans at six or more times a borrower’s income to 20% of new mortgage lending, measured separately for owner-occupiers and investors.

Monetary policy has added further pressure. The RBA has raised its cash rate five times this year, in February, March, May, September and November, taking it to 4.85%, the highest since 2008, as it fights inflation that has been pushed higher by energy costs. The November decision was split 6-3, and the statement dropped earlier language about further increases.

The RBA’s own November Statement on Monetary Policy had already flagged a steep fall in investor lending, describing the drop in investor loan commitments as the largest in any hiking cycle on record. Governor Michele Bullock said a pullback in investor demand was normal in a housing downturn. The bigger fall compared with owner-occupiers, though, suggests the budget changes are having an effect.

The figures strengthen the case that housing is cooling quickly, which may feed into the RBA’s assessment of whether its tightening has gone far enough.