Australian investor home lending falls 32% in Q3 as tax changes and RBA hikes weigh

The scale of the decline in home lending gives the central bank fresh confirmation that this year's five rate increases are taking effect. That bolsters the argument for holding rates steady following November's divided decision, and it represents a slight drag on the Australian dollar. Yields on short-term Australian government bonds could react to any further indication that the housing market is slowing more rapidly than the RBA anticipates. Banks are likely to see weaker mortgage growth, particularly in investor lending, a segment that has historically delivered strong profits. With energy-driven inflation still the RBA's primary concern, oil prices remain the key variable in determining whether housing weakness alone can keep rates unchanged.

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Tax reforms, borrowing restrictions and five rate hikes have all weighed on Australian property investors simultaneously, and the outcome has been a sharp drop in landlord borrowing.

Summary:

• Australian home loan values dropped 15.5% quarter-on-quarter in Q3, versus an anticipated 8% decline and a prior 5.2% fall in Q2
• Investor lending fell 32.3%, after a 10.2% decrease in Q2
• Owner-occupier loan values slipped 5.3%, following a 1.9% drop in Q2
• The May budget ended negative gearing for established homes acquired after budget night and reduced the capital gains tax discount
• APRA has restricted high debt-to-income lending since February, and the RBA has raised rates five times this year to 4.85%

The total value of new Australian home loans fell 15.5% in the September quarter, almost double the 8% slide that economists had forecast, with lending to property investors crumbling after government tax measures and a series of Reserve Bank of Australia rate rises over the past year.

Investor lending was the primary driver of the decline, dropping 32.3% from the previous quarter, after a 10.2% fall in the June quarter. Owner-occupier loan values declined by a smaller 5.3%, following a 1.9% decrease earlier. The overall figure marked a significant acceleration from the 5.2% decline seen in the prior three months.

The divergence between investor and owner-occupier lending points to policy changes having a significant impact. In the May federal budget, the government moved to terminate negative gearing for established homes bought after budget night, restricting it to newly built properties, and also introduced limitations on the capital gains tax discount for existing dwellings. Negative gearing permits investors to offset rental losses against other income. The government contended that the housing market required rebalancing, as most investor credit was directed at existing homes rather than new construction. The major banks quickly adjusted how they process investor loan applications, lowering borrowing capacity for many landlords.

Those changes were layered on top of stricter lending requirements. Starting in February, the Australian Prudential Regulation Authority mandated that banks cap new loans at six times or more a borrower's income at 20% of new mortgage lending, calculated separately for owner-occupiers and investors.

Monetary policy has added additional strain. The RBA has lifted its cash rate five times this year—in February, March, May, September, and November—bringing it to 4.85%, the highest since 2008, as it contends with inflation driven up by energy costs. The November meeting was divided 6-3, and the accompanying statement omitted earlier language about further increases.

The RBA's own November Statement on Monetary Policy had already anticipated a sharp decline in investor lending, characterising the reduction in investor loan commitments as the largest in any hiking cycle on record. Governor Michele Bullock stated that a pullback in investor demand was typical during a housing downturn. However, the more pronounced fall relative to owner-occupiers indicates that the budget changes are exerting an influence.

The data reinforces the notion that housing is cooling rapidly, which could factor into the RBA's evaluation of whether its tightening measures have been sufficient.