Credit Tells the Real Property Story

Australian property investors, non-bank lenders and record RMBS deals are reshaping the outlook for house prices, bank profits and credit markets.

There are a couple of records getting broken in Australia right now, but you probably haven’t noticed. Let me fill you in on the whole lot of action going on in… property finance. Admittedly, it’s not sexy like AI, Sam Altman’s blue eyes or a potential copper price breakout. But it sets the direction for where house prices go, and, largely, bank profits. Those are pretty important to most of us.

On November 12, the ABS released its latest lending figures. What did we see? Property investors are back, and in a big way. New investor loan commitments rose 17.6% in value. The Australian Financial Review reported that they rose at the fastest rate in four years.

41% of total loans went to investors. This is an (approx.) figure that’s acted as something of a “red line” for the regulator to step in and cool the market down in years gone by. APRA’s already been warning of doing something like this. Then again, the latest statistics in other areas might do something of the job anyway. The ABS stats are backward-looking.

Investor Activity Surges

Now expectations around RBA rate cuts are getting walked back. That makes financing a property less appealing with each step. Watch this space.

Then we have the financing firms that APRA doesn’t regulate in the mix too. These are called “non-banks”, and several are listed on the ASX, including Liberty Financial (ASX: LFG), Pepper Money (ASX: PPM), and Resimac (ASX: RMC).

You might have heard the name Pepper in the news recently. It was part of the consortium that just bought the $21 billion RAMS portfolio off Westpac (ASX: WBC). This is not the kind of move they would pull if they thought markets were going to tank anytime soon. And they are at the coal face of the Australian consumer.

Non-Banks Step Up

Another non-bank that’s privately held is the QLD-based Firstmac. They just claimed the title for selling the biggest issue of residential mortgage-backed securities (RMBS) in one hit by any Aussie non-bank. It was $2.5 billion worth.

Of note is that Firstmac prefers investors, because they’re usually wealthier borrowers. That goes against the general perception that investors are the speculative element in housing.

Perhaps the most interesting aspect for you and me is that the RMBS buyers dealing with Firstmac were predominantly Japanese, with Singapore and Europe represented as well.

Record RMBS Demand

Why do you and I care?

Clearly, foreign capital doesn’t mind the risk of Australia and Australian property.

We can go further on this line of thinking. If the non-banks can raise plenty more money, they can make plenty more loans. That will help keep juicing the property market while it lasts.

A Credit Market Signal

We can also use the non-bank sector as something of a risk barometer for the markets in general. If liquidity and risk sentiment are abundant, they’ll keep selling their bonds and probably at tighter spreads. What we have to watch for is signs of the reverse happening. That would be a signal that something is wrong, and credit markets are worried.

For now, we can take the Firstmac and Pepper deals as a vote of confidence in the Aussie economy, and a big one. That’s a handy thought with all this talk of bubbles about.

Hopefully you sleep a bit better tonight after reading this. Odds on your house will be worth a little more at the end of the year too.