Zero growth in mortgage settlements in 2016

The findings came in the Deloitte Australian Mortgage Report 2017, in which co-author of the Deloitte Australian Mortgage Report financial services partner James Hickey said it was “quite unique” for the annual growth figures to be nearly identical, as the absolute numbers for the 12 months to December 2015 and the 12 months to December 2016 were both $384 billion.

Before this zero per cent growth, settlements had been growing at a rate of around 16 per cent per annum for the previous three years.

Mr Hickey explained that this moderating settlement growth was due to:

• APRA’s 10 per cent limit for new annual growth to investors, which reduced lending to investors in 2015 and the first half of 2016 (although it has grown since the second half of 2016);
• More stringent serviceability criteria, especially around non-regular and offshore income sources, and borrowers’ capacity to repay in times of higher interest rates;
• Greater pricing for risk, particularly for higher loan-to-value ratio (LVR) lending, investor lending and interest-only repayments; and
• More selective lending e.g. reduced participation in certain parts of the market, such as lending to property developments or off-the-plan.

He commented: “In terms of actual housing commitments across the country, they were largely flat and that has been a combination of the bedding down of the various macro-economic policy changes that were introduced by the regulator as well as the repricing, which the banks have been doing around different segments of their portfolios.

“It also reflects the fact that national housing finance commitments are more than just Sydney and Melbourne; they also include the other capital cities and the regional areas.”

He added: “If you look underneath the statistics, owner-occupied grew at 4 per cent but lending to investors fell by 6 per cent over the 12 months. Once those two were averaged out, it was effectively a zero per cent growth rate across the two categories.

“The 10 per cent cap on investor growth lending that was placed by the regulator upon lenders led to either restrictions on lending to investors and/or certain lenders pulling out of the investment market for a period of time — and others certainly doing more selective decision making around which investors would be included in its 10 per cent growth. That had an impact on the first 6 months of 2016… We also had another factor being differential pricing being introduced during 2016 to a far more noticeable degree than we've seen in past.”

Mr Hickey added that there was, however, a “bit of a tailwind happening” in investor lending in the second half of 2016, which is expected to “push its way in to 2017” (however, his comments came before APRA and ASIC's announcements regarding interest-only scrutiny).

Industry reaction

The Deloitte Australian Mortgage Report 2017, asked 10 industry leaders — including representatives from AFG, Bank of Queensland, Commonwealth Bank, eChoice, Homeloans, NAB, Pepper Money, and Suncorp — their thoughts on the mortgage market in 2016 and what they expected the home lending environment to look like in the year ahead.

According to the respondents, there will be a “more subdued” mortgage market this year, largely due to the fact that the market is “still bedding down 2016’s macro-policy changes”.

Half of the 10 respondents said that they expected settlement volumes to “reduce further” in 2017, when compared to 2016, with 20 per cent saying they expected it to remain at zero growth.

At Deloitte’s roundtable on the report, Scott McWilliam, chief executive officer at Homeloans Ltd, said: “Settlement growth peaked at around 22 per cent in the middle of that period, between 2000 and now, when it has come back to more normalised numbers. However, the size of the pool now, and the size of the origination of mortgages, and the fact that it has been fuelled by property appreciation, is potentially unhealthy.”

Meg Bonighton, general manager of home lending at NAB, added: “Given the number of changes in the market around investors and overseas borrowers, I think we’ll see the macro policies that were put in place in 2016 continuing to moderate these segments in 2017. In general, it will soften the impact on house price growth that we’ve seen over the past couple of years, while pockets of major cities are likely to continue with solid growth.”

Nearly a third (30 per cent) of the 10 respondents said that they thought there would be a “modest return to growth” of between 1 and 5 per cent. This was expected to be largely driven by refinancing.

Malcolm Watkins, executive director of AFG, commented: “Of the multiple reasons for the moderate outlook in 2017, the primary ones are the cost of housing and modest supply. Putting aside CBD apartments, there is only a relatively modest supply of urban residential housing. Couple this with population growth and net migration to the larger cities, and it is reasonable to predict demand and the cost of housing will not subside.

“We don’t believe there will be a ‘bubble’ or a massive correction. In my view, we are over the ‘nervous nellies’ and any talk of the market collapsing. We think prices will stay high. Which means we won’t see those historical 10 per cent growth levels.

“Affordability will remain an issue as we start to see the interest rate come up a bit, as most lenders will put some margin back into their businesses. Also, APRA is prudentially regulating, and demanding more from the industry, which ultimately adds costs to consumers wishing to borrow. So, for those reasons we predict settlement growth somewhere in the order of 5 per cent.”

[Related: Prudential policy ‘greatest concern’ for mortgage market]