Mortgage Market in Australia Booms Despite Rising Interest Rates

As Australia navigates the complexities of a high-interest-rate environment, the sustained growth in residential and commercial property lending bodes well for the economy. The resilience of borrowers and the stability of lending standards suggest that the housing market will remain a key driver of economic activity in the coming months.

This chart demonstrates the median monthly mortgage payment in Australia now exceeds rent by $1,172 as of June 2024, highlighting a growing affordability gap. The increase is driven by rising interest rates and higher dwelling values, according to CoreLogic data.

Residential mortgage credit rose from $2.185 trillion in September 2023 to $2.288 trillion in September 2024, reflecting robust demand for housing finance. This growth occurred even as borrowers faced elevated costs of borrowing, underscoring the market’s adaptability and strength.

Owner-Occupier and Investor Loan Performance

The expansion in mortgage credit was driven by both owner-occupiers and property investors:

• Owner-occupier loans recorded a 5.2% increase, growing from $1.457 trillion to $1.532 trillion.
• Investor loans rose by 4.7%, climbing from $655.9 billion to $686.4 billion.

This balanced growth indicates sustained confidence in the Australian property market, with both segments contributing significantly to the rise in credit.

Stable Lending Quality

APRA emphasized that the overall quality of lending remains sound despite the challenging economic environment. High-risk lending, including loans with high loan-to-value ratios (LVR) and high debt-to-income ratios, remained low and stable:

• The proportion of loans with LVR below 80% decreased slightly for outstanding mortgages, dropping from 18.1% to 17.4% year-on-year.
• New residential mortgages with LVRs above 80% rose from 28.7% to 31.1%, suggesting a cautious shift toward higher-risk lending.

Meanwhile, the average debt-to-income ratio of borrowers improved marginally, declining from 5.7 to 5.6. These trends indicate that while borrowing conditions have tightened, lenders are maintaining responsible lending practices to manage risks effectively.

Non-Performing Loans Edge Higher

The report noted a slight increase in non-performing loans and loans past due, though these remain at manageable levels:

• Loans overdue by 30–89 days increased from 0.5% to 0.6% year-on-year.
• Non-performing loans rose from 0.8% to 1.1%.

Despite these increases, the overall stability of the lending market suggests that borrowers are largely coping with the pressures of higher interest rates.

New Loan Funding on the Rise

New residential loans funded during the September quarter also saw strong growth, rising by 9.3% year-on-year. The value of new loans increased from $150.9 billion to $165 billion, reflecting continued demand for housing finance:

• The share of new loans for owner-occupiers declined slightly, dropping from 66.1% to 62.8%.
• Conversely, investment loans increased from 31.9% to 35.1%, demonstrating growing interest from property investors.

This trend indicates a shift in market dynamics, with investors taking advantage of opportunities despite the higher cost of borrowing.

Commercial Property Lending Also Grows

The commercial property sector mirrored the positive trends in residential lending, achieving significant growth:

• Total commercial property credit limits rose by 5.2%, from $443.1 billion to $466.1 billion.
• Actual exposures in commercial property increased by the same percentage, climbing from $411.6 billion to $433.2 billion.

APRA attributed this growth to strong demand in the industrial property sector and a resurgence in the retail property sector, both of which contributed to the rise in commercial lending activity.

Resilience Amid Challenges

The continued growth in mortgage credit highlights the resilience of Australia’s housing market and lending institutions. Despite higher borrowing costs, demand for property remains strong, driven by both owner-occupiers and investors. The increase in new loan funding, alongside steady loan quality, underscores the adaptability of the Australian mortgage market.

APRA’s findings also suggest that lenders are striking a balance between expanding credit and maintaining sound lending practices. The slight rise in overdue and non-performing loans signals challenges but does not overshadow the broader growth trajectory.

With mortgage credit on the rise, now is the perfect time to secure a competitive loan. At OM Financial Services, our expert brokers work with over 50 banks to find the best mortgage options that suit your needs.

Reach out today to get the right advice and the best mortgage deal available. Let us help you navigate the market and make the right financial choice for your future.