Morgan Stanley explains why risks to Australian house prices and GDP growth are to the downside this year

Dmitry Serebryakov/AFP/Getty ImagesRussian competitors take part at the Red Bull ‘Flugtag’ event in Moscow on July 26, 2015. A Flugtag — which means ‘flying day’ in German — is a competition in which teams in fancy dress attempt to pilot human-powered, home-made flying machines off a platform into water.
  • The amount of outstanding loans issued to Australia’s private sector is slowing.
  • Morgan Stanley expects that to continue, possibly weighing on economic growth and house prices.
  • It says an upside risk to this view is income tax cuts in the upcoming Federal Budget.

Credit growth in Australia is slowing, and will likely slow even further.

And that suggests Australian economic growth may undershoot expectations this year and contribute to even further falls in house prices.

That’s the view of Morgan Stanley’s Australian Equity Strategy team who think recent trends in credit growth — the amount of outstanding loans issued to Australia’s private sector — will continue in the period ahead, led by weaker growth in housing.

“Credit growth has been slowing since its recent peak of 6.6% year-on-year in the December quarter of 2015 to 4.9% in February, and in the past few months this looks to have sharpened, with the 3-month annualised rate tracking at 4.1%,” it says.

“Our Banks team expects credit growth to slow further from here, with housing loan growth forecast to slow from approximately 6% currently to around 4% in 2018, given the combination of more onerous capital rules, tighter lending standards, higher mortgage rates and credit rationing.”

And it thinks the risks to this view are to the downside, not upside.

“[Our bank’s team] think risk is skewed to the downside given an increasing focus on responsible lending,” it says.

“Without a recovery in business credit, this would see total credit growth slow to around 3%, and the credit impulse potentially return to zero.”

This chart from Morgan Stanley shows Australia’s credit pulse — defined as the 12-month change in the ratio of private credit to GDP — overlaid against annual real GDP growth in Australia going back 30 years.

Source: Morgan Stanley

Given the expectation that credit growth will slow further this year, Morgan Stanley says this will potentially weigh further on house prices and household spending levels.

“Tightened credit supply is likely to continue weighing on clearing prices for housing, contributing to the ‘consumer crunch’ through fading/negative wealth effects,” it says.

“This features as a key drag on our [Australian housing market] lead indicator, driving our view that housing prices continue to decline throughout 2018.”

Morgan Stanley says its view on household consumption underpins why it expects GDP will undershoot expectations this year, including forecasts offered by the RBA.

However, while slower credit growth carries the potential to drag on GDP, it thinks help may be on the way courtesy of the Federal budget.

“An upside risk to our outlook is the Budget position, which has improved by approximately $8 billion, or 0.4% of GDP, more than was expected at the December MYEFO [mid-year economic and fiscal outlook],” it says.

“We think it is likely the Government uses this windfall to fund personal tax cuts for low to middle income earners at the upcoming Budget on 8 May. This could help support households’ cash-flow, although this heavily depends on the size and structure of any tax relief.”

NOW READ: ‘We cannot push this to breaking point’: Scott Morrison on why tax relief is coming for Australian households

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