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Lending for Renovations Down

Bank loans for home renovations have dropped over the last few months to their lowest level in 17 years. Having risen consistently since the start of 2016, lending for alternations and additions continue to plummet as Aussies become less confident about investing in their own homes. Despite falling house prices and a drop in lending activity for both investors and renovations, the average home loan size has increased 7.5 percent since last July to $408,600.

Owner occupier lending to fund home renovations reached a low of $303 million in July according to the Australian Bureau of Statistics. This represents a drop of almost 25 percent from the peak of $401.3 million recorded in September last year. While there are many reasons for this growing pessimism, most analysts are pointing towards stagnant wages growth, tighter lending restrictions, and the recent decline in property prices in capital cities. 

According to senior CommSec economist Ryan Felsman, Australian homeowners are adopting a more careful attitude after years of optimism: “Aussies had found it incredibly difficult to find a local tradie in recent years as the housing market was going gangbusters [but now] Homeowners appear to be less enthused about taking out a loan to renovate their abodes... More people are shelving immediate plans to add extra rooms or revamp kitchens and bathrooms as the housing market slows in some cities and regions.”

The number of investors entering the market also saw a decline in ABS figures, falling by 1.2 percent in July as the downward trend that started in 2015 continues. According to Dr Shane Oliver, AMP Capital’s chief economist, “As property prices have gone down, investors are less interested in getting into the market... Maybe they’ve been able to afford more expensive property and that’s increased their average loan size and we have seen an increase in first-home buyer share of the owner-occupier market.”

Investor activity accounted for a little under 41 percent of new mortgage activity in July, which is the lowest level since April 2011. While renovation lending is very low and housing finance to investors is still falling, Australians continue to take out bigger loans despite falling property prices. In a result that surprised many, the average home loan size of owner occupiers managed to increase 7.5 percent to just over $400,000 in the latest ABS figures. Part of this growth is down to new buyers, with the average first-home loan up 7.4 percent to $345,800.

According to Dr Oliver, new buyers are taking advantage of generous first-home buyer concessions such as the stamp duty exemption and various one-off grants. “Maybe they’ve been able to afford more expensive property and that’s increased their average loan size and we have seen an increase in first-home buyer share of the owner-occupier market,” said Oliver. While tighter lending restrictions have helped to make the way for stronger loan applicants, the overall trend for bigger mortgages in a softening market is cause for some concern, especially when people are unwilling to invest in their own property renovations.

 

Image source: sculpies/Shutterstock

 Australian Credit Licence 389811 & ACN 082 510 585