Investor Loans Surge as Owner-Occupiers Hold Back: What's Behind the Trend?

New loan commitments for investment loans increased 2 percent throughout September, while owner occupier loans were down 0.1 percent for the month, according to the latest ABS lending statistics.

The data points to a widening gap in the sentiment of investors and home buyers, with investment loans up a total of 2.6 percent annually, while owner occupier loans have dropped off by 8.4 percent over the year.

The emergence of this data raises some questions - why the sudden uptick in investment activity, and what might be deterring owner occupiers? 

Owner occupiers holding back

Driving factors that might be pushing owner occupiers to hold off on their property purchases are likely a combination of the current cost of living crisis, inflationary pressures and rising interest rates.

Owner occupiers have become acutely aware of mortgage serviceability constraints, as higher interest rates have eaten away at their borrowing capacity due to the RBA’s most recent and aggressive rate hiking cycle.

The required portion of median income to service a new mortgage is now sitting at 45.5 percent, nearing an all-time high according to the CoreLogic ANZ Housing Affordability report. 

That same report also named limited wage growth as a hurdle for first home buyers, who are now battling rent increases, rising house prices and stagnant wages, while trying to build enough savings for a house deposit. 

Quarterly income growth in this year’s June quarter was sitting at just 1 percent (quarter on quarter), slipping well behind the growth that the median house price experienced (2.6%) in the same period.

It’s leaving prospective buyers hesitant to enter the market in the current economic climate, for fear that they won’t be able to sustain their mortgage repayments, or achieve the deposit needed. 

Buyers could also be factoring in another potential rate hike in the near future, as Christmas spending threatens to send the CPI upwards, adding to buyer hesitancy.

But with all of that said, it’s widely expected that wage growth will pick up in the coming year, and CoreLogic’s Affordability report recognises this, naming now as a profitable time to enter the property market, despite increased costs.

“First home buyers who can get into the market now may experience property value gains as real incomes rise in 2024, and there is modest easing in the cash rate towards the end of the year and through 2025,” read the report.

It’s this kind of mindset that’s driving investors to the market.

Investors are recognising the current opportunity

Investors are seeing Australia’s current housing market as an opportunity rather than a risk, and for some of the same reasons that owner occupiers are backing out.

Australia is currently facing a critical housing shortage, driving prices upwards at such a rate that CoreLogic’s national Home Value Index has forecasted a new house price record will be achieved in the coming weeks.

Rents are also being propped up by sky-high demand, and while mortgage serviceability might be an existing challenge, the prospect of rate cuts in the near future is providing comfort to buyers.

Ultimately, investors are being enticed by the prospect of high rental yields, and optimistic capital growth.

In CoreLogic’s Quarterly Rental Review for the September quarter, rents were found to have risen by 8.4 percent in the year to September. 

Additionally, the national vacancy rate dropped to a new record low of 1.1 percent, and the total figure of national rental listings dipped to levels not seen since November 2012.

While mortgage repayments are increasing, so too are rents, and a dire supply shortage is skewing the market to be in favour of landlords.

Kaytlin Ezzy, economist at CoreLogic, says that demand is being driven by multiple external factors, and supply is just not keeping up.

“After recording a small dip over the first few months of COVID, national rents have risen for 38 consecutive months, taking rental values 30.4 percent higher since July 2020 and adding the equivalent of $137 to the median weekly rent.

“The situation of low rental vacancy rates and insufficient housing supply is a broad issue impacting regions around the country to different extents. 

“Record high net overseas migration, fuelled by a combination of an increased flow of new arrivals and weaker departure numbers, coupled with a continued shortfall in rental listings, saw the vacancy rates falling to new record lows across both the combined capitals (1.0%) and combined regional markets (1.2%),” said Ms Ezzy.

Rising rents are not the only thing on investors' minds. The growth in housing values over the past eight months is likely enough to convince investors that we’re at the beginning of a new growth cycle, with the increased likelihood that future buy-in costs will be greater than they are right now. 

Increasing house prices translate to greater capital growth, and it’s entirely possible that investors are identifying the current climate as a golden opportunity, particularly in areas of high population growth, and high demand.