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.

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Private sector credit

• Private sector credit (lending) rose by 0.5 per cent in April after a 0.4 per cent lift in March. Annual credit growth rose from 4.4 to 4.5 per cent – the strongest growth in five years.
• Overall housing credit lifted by 6.1 per cent on a year ago, with investor housing finance up 8.2 per cent – marking the strongest annual growth in 3½-years. Business and consumer credit were more mixed.
• More money put to work: Term deposits fell by 1.2 per cent over the year – the biggest decline in 11 years.

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• Private sector credit rose by 0.3 per cent in November to stand 3.6 per cent higher than a year ago.
• Housing lending to owner-occupiers stands 7.3 per cent higher than a year ago – the weakest reading in records going back 20 years (since 1990).
• Business credit fell for the fifth straight month, easing 0.2 per cent. Business credit growth stands 2.2 per cent lower than a year ago and has been consistently falling for 17 months.

What does it all mean?

• In 20 years of records, lending to home owners has never grown at a slower pace. It is a remarkable statistic, highlighting the impact that rate hikes have had over 2010. The Reserve Bank was determined to lift rates to “normal” levels but it has come at a cost. Not only have home prices weakened over 2010 but so has construction activity, pointing to weaker times ahead for builders, tradespeople and real estate agents alike.
• Overall the modest uptick in overall lending is encouraging, particularly the pickup in consumer loans. But the old adage of ‘one swallow does not a summer make’ is clearly appropriate. Lending will need to pick up further in coming months to get retailers and other consumer-focussed businesses more excited about the road ahead.
• Businesses are still cutting debt at a faster rate than new loans are being taken out. Overall this is a good reason to remain cautious on the outlook for the economy.

What do the figures show?

Private sector credit

• Private sector credit (lending) rose by 0.3 per cent in November after edging just 0.1 per cent higher in each of the previous three months. Credit growth is up 3.6 per cent on a year ago.
• Housing credit grew by 0.5 per cent with both lending to owner-occupiers and lending to investors up 0.5 per cent. Housing credit is up 7.5 per cent on a year ago – the weakest annual growth in 15 months. Owner occupier housing credit is up 7.3 per cent on a year ago – slowest pace in records going back 20 years. Investor housing lending was up 8.0 per cent on a year ago, down from 8.1 per cent in October.
• Personal credit rose by 0.5 per cent in November after rising by 0.2 per cent in October. Personal credit was up 2.4 per cent over the year – still below the rate of inflation. Business credit fell for the fifth straight month in November, easing by 0.2 per cent. Business credit is down 2.2 per cent on a year ago and has been consistently contracting for the past 17 months.

What is the importance of the economic data?

• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

• There are glimmers of hope for consumer-focussed businesses in the latest credit data. On balance consumers seem to be taking on a bit more debt, albeit very cautiously. The runs aren’t on the board but it is a trend worth watching.
• The softness in housing lending and home prices gives the Reserve Bank more reason to stay on the interest rate sidelines. We argued that the Bank was slightly too aggressive in lifting rates in 2010 and that is borne out by the weakness in recent economic data.
• Not even in the past recession was lending to home owners this weak – it clearly shows a re-assessment by young Aussies about whether to buy or rent.

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