Is the housing bubble about to burst?

The sharp drop in investor lending 18 months ago, spurred by a regulatory crackdown, has been virtually reversed, which raises questions about whether an impending mortgage crisis is brewing.

New figures released by the ABS on Tuesday show that investor lending has grown 4.9 per cent over November. Owner-occupier growth for November was comparably modest at only 0.9 per cent.

Growth in the investor lending sector has seen the total amount of investor finance returning to $13.3 billion, a figure not seen since mid-2015.

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The sharp drop that followed was the result of the Australian Prudential Regulation Authority announcing new recommendations for banks on investor lending, including a suggested 10 per cent growth cap on property investment portfolios.

This was followed by the 2016 federal election which saw negative gearing become a major political battleground, leaving some investors feeling uneasy about further borrowing.

Investor finance - ABS Housing Finance Data, November 2016

Data insights director at RateCity.com.au, Peter Arnold, said that this return to mid-2015 investor levels is being spurred on by a renewed confidence.

“Lenders have been loosening their lending standards slowly since APRA’s investor lending crackdown in 2015 and borrowers are taking advantage of this.

“Tax reform talk has also quietened down since last year’s election and investors are fairly confident that negative gearing is here to stay.”

Even recent out-of-cycle interest rate increases for investors don’t appear to have been a deterrent for those who wanted a piece of the Australian property market. But that doesn’t mean they’re immune to mortgage stress.

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“When banks start feeling the pressure to hike rates, it’s investors who will feel the consequences first.

“They’re a less sensitive area of the market to go after than the working family with an owner-occupier loan and as a result, investors have experienced a series of rate hikes since late last year.

“At the end of last quarter we saw the average investor rate sit at 4.8 per cent compared to 4.4 per cent for the average owner-occupier rate,” said Arnold.

Even so, higher rates haven’t stopped the rush to invest. But Arnold warns there’s a red flag when you look at the historical trend.

“Historically, we see financial bubbles follow a pattern similar to what we are experiencing now in the investor lending market.”

As the below graph depicts, before the bursting of a financial bubble, there is generally a dip, followed by a return to what is seemingly normal followed by a fast descent.

 

Stages in a bubble – Source: https://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubble.html

 

For many investors, who have been capitalising on recent favourable conditions, the question must be asked: is it all about to come to an end?

The answer seems to vary depending on whose analysis you look at, with no clear consensus on what 2017 may hold for the housing investment market.

Fitch Ratings, an international credit rating agency, released a report in January on the Australian banking sector warning that the ongoing increase in household debt and house-price growth is a potential recipe for disaster when mixed with certain external factors.

These include changes to the global funding market, the labour market and low wages growth.

The Australian regulator, however, seems to think there has been little to change the level of risk in the national banking industry.

In the annual Information Paper released by APRA this week it was announced that after continued monitoring of the financial industry in Australia – with a spotlight on the housing sector – there was no need to change the countercyclical capital buffer from 0 per cent.

The only thing that appears to be a certainty for investors at this stage is that interest rates are back on the rise.

Patricia Babalis is a personal finance writer for RateCity.com.au