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Housing credit lifted by 0.5% and is running at 6.2% over the year. Investor housing credit rose by 0.8% (8.3%pa) and owner‑occupied credit increased by 0.4% (5.2%pa).
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Business credit increased by 0.2% and is 2.7% higher over the year.
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Other personal credit growth fell by 0.3% in May and is 0.3% higher over the year.
Housing and business credit rose in May
Annual credit growth is running at the highest level since March 2009. Annual growth has stepped up from 3.0% to 4.7% over the past year. The lift in credit growth is a natural response to lower levels of interest rates and some recovery is risk appetite. While overall credit growth levels remain well below long‑run average levels, the RBA would prefer not to see another debt‑fuelled cyclical upswing. If credit growth continues expanding at the current trend pace of 0.4%, annual growth rates will top out at around 5%pa.
Housing credit growth continues to lift and annual growth (at 6.2%) is now at the highest level for nearly two years. The dominant driver of higher housing credit growth is investor lending. Unlike in other housing upswings, investor activity has accounted for a larger than usual proportion of housing activity. For example, in the year to April, total owner‑occupied housing loans financed accounted for 56% of activity and investor loans were 38%. This compares to the housing upswing in 2009 when owner‑occupier accounted for 62% and investors 31%. Rental yields have fallen recently which is natural as dwelling prices increase. Lower rental returns should dampen investor activity.
Housing credit growth (6.2%pa) is now running well above income growth (4.4%pa) which means that the household debt‑to‑income ratio is rising again. The RBA will be watching changes in the debt‑to‑income ratio closely to ensure that household balance sheets remain sound. The recently released financial accounts indicated that that the household debt‑to‑disposable income ratio increased to 183.5 in QI (167.4 in QIV).
Broad money growth is often taken as a proxy for the savings rate because it is the widest measure of deposits held. Annual growth in broad money is roughly unchanged on QI which suggests that the savings ratio has remained stable.
Business credit growth remains low but is showing signs of faster growth (annual growth is 2.7%pa compared to 1.0%pa this time a year ago). Business sentiment has held up despite the post budget drop in consumer confidence. Other data indicates that business lending has risen significantly over the past few months. We also suspect that a large proportion of businesses are using this period of low interest rates to pay down debt. The credit data is a measure of the stock of credit which means that it may not capture the surge in lending if businesses are paying down debt.
Other personal credit growth remains weak and fell by 0.3% in May (0.3%pa).
There do not seem to be any signs of an immediate post‑Budget impact on credit growth. Housing credit growth remains strong, business credit is picking up and the weak trend in other personal credit has continued.
