Innovations in the Provision of Finance for Investor Housing

Over the past year, there has been a very sharp rise in loan approvals for investors in housing, with the result that investors now account for over 40 per cent of all housing loans approved. This represents the continuation of a decade-long trend which has seen the share of investor loans in total housing loans more than double since the early 1990s (Graph 1). This strong growth in borrowing by investors reflects both demand and supply factors. On the demand side, there has always been a large number of investors who were keen to borrow to purchase rental properties. Traditionally, the rental income was a relatively small part of the attraction: prospective capital gains and the ability to negatively gear for tax effectiveness have always been the major incentives for this type of investment. While the public’s desire to acquire investor housing was always strong, the extent to which it could actually be realised was limited by the availablility of finance. Many lending institutions were not very interested in providing finance for investor housing, and the lending products available were often expensive, inconvenient or hard to acquire. Over the course of the 1990’s, however, this progressively changed and the supply of finance increased markedly, making geared investment in rental properties available to a much wider cross-section of the public than formerly. In the 1980s, when the financial sector was initially deregulated, it was the corporate sector that availed itself of the products of financial innovation. As companies’ access to debt increased greatly, their gearing rose sharply. In comparison, there was much less innovation in the provision of housing finance. In the 1990s, however, the picture was quite different. Early in the decade, financial institutions were keen to expand their portfolios of relatively high-return low-risk