New loans to housing investors have fallen to their lowest level in over two years, as lenders under scrutiny from the banking royal commission tighten their purse strings.

“Overall the figures show, in trend terms, the number of owner-occupied finance commitments decreased by 0.7 per cent – the eighth consecutive month of decreases.

"If refinancing is excluded, in trend terms, the number of owner-occupied finance commitments decreased by 0.6 per cent –the ninth consecutive month since an increase,” REIA President Malcolm Gunning told WILLIAMS MEDIA.

"Decreases were recorded in all states and territories except Tasmania, where lending increased by 0.3 per cent. The largest decrease of 1.9 per cent was in the Australian Capital Territory.

“The value of investment housing commitments decreased by 1.9 per cent in May in trend terms. The dollar amount approved for the purchase of dwellings by individuals for rent or resale is at the lowest level since February 2016.

Related reading: Market rationalisation underway, says REIA

“In trend terms, the number of established dwellings purchase commitments decreased by 0.6 per cent while the purchase of new dwellings decreased by 0.9 per cent and new dwelling construction fell by 1.5 per cent.

'Cautious' lenders

“The continued decline in housing finance confirms the feedback from the market that the APRA restrictions and the fallout from the Royal Commission into Banking have resulted in an extremely cautious approach by lenders," Gunning said.

“Loan applications are now being scrutinised for real costs of living including outgoings such as school fees and use of credit cards. At the same time an ultra conservative approach is being taken by banks with their valuations which means that funds available are below purchaser’s expectations.

Related reading: Banks scrutinised for mortgage lending practices

“We need to ensure that lending approaches reflect the market rather than set the market which appears to be case at the moment,” Gunning told WILLIAMS MEDIA.

Housing Industry Association principal economist, Tim Reardon, said the drop off in investor lending is why new home builds have been stagnant.

“The fall off in investor participation has been caused by a number of factors including tighter financial regulations and the targeting of certain loan products favoured by investors,” Reardon said.

Related reading: Australia could face 'credit crunch' if banks significantly tighten lending standards: UBS

“Less investor involvement in the market is one of the reasons why we have seen a slowing in new home building and why we are expecting this slowdown to continue over in the next couple of years," Reardon said.

Balance tilts from investors to first-home buyers

First-home buyers are continuing to partially offset the impact of weakened investor lending, as the proportion of first home buyers, as part of the total owner-occupied housing finance commitments, remained unchanged in May at 17.6 per cent.

According to CoreLogic residential research analyst Cameron Kusher, New South Wales recorded the highest number of first-home buyer loans since 2011.

Kusher said lower prices ahead could provide an opportunity to get into the market.

Related reading: 

What will the banking Royal Commission mean for real estate?

First-home buyers at highest share of market in five years

Most millennials are saving for their first property, new research shows