Australian housing credit growth hits record lows, pointing to further price falls ahead

iStockA huge thunderstorm brews in the sky above suburban houses.
  • Australian housing credit grew by 4.19% in the year to February, the weakest level on record.
  • Credit growth for owner-occupiers slipped to 5.91%, the lowest level since August 2015. Investor credit grew by only 0.85% over the same period. That was the slowest pace on record.
  • Changes in housing credit growth tend to lead home prices by around six months, according to the Commonwealth Bank.
  • Credit to businesses is growing at the fastest annual pace since December 2016. Personal credit continued to decline over the year, although the rate of decline slowed marginally in February.

Annual growth in Australian housing credit fell to the lowest level on record in February, driven by a sharp deceleration to both investors and owner-occupiers.

According to the Reserve Bank of Australia (RBA), housing credit grew by just 4.19% from a year earlier in seasonally adjusted terms, the slowest increase since records began in 1977.

Over the year, credit to owner-occupiers grew by 5.91%, the slowest annual expansion since August 2015. Credit extended to housing investors was even slower at just 0.85%, the lowest pace on record.

In February, owner-occupier credit grew by 0.37%, a small acceleration from the 0.33% pace recorded in January. Investor credit growth stood at just 0.04% over the same period, marking the fifth consecutive month that it expanded by 0.1% or less.

The small increase in owner-occupier growth saw total housing credit lift by 0.28%, accelerating marginally from the 0.24% level of January that was the slowest increase since July 1984.

Credit growth measures the change in outstanding aggregate loan balances, in this case for housing.

The final report from Australia’s royal commission into the banking and finance industry was released in early February, something that may have caused extra caution among lenders in prior months given uncertainty over the recommendations it would contain.

While that may have been a contributing factor behind recent weakness in growth in housing credit, the impact of tighter lending standards gradually rolled out since late 2014, initially targeting investor and interest-only lending, was likely the broader catalyst behind the deceleration.

This saw many borrowers move from interest-only to amortising home loan repayments, seeing outstanding loan balances reduced as consequence.

Although these restrictions have been removed by Australia’s banking regulator, APRA, there’s now greater scrutiny being placed on household expenses and existing debts held by those seeking finance, something that looks set to restrain credit growth for some time yet despite signs of a renewed willingness from banks to lend.

The deceleration in housing credit has played a large role in the downturn in Australia’s housing market, both in terms of prices as well has dwelling construction.

Recently, falling prices may have also contributed to the slowdown in housing credit, seeing some prospective home buyers put off purchasing in hope of even lower valuations ahead.

“Lending for housing tends to lead house prices growth by around six months,” said Kristina Clifton, Senior Economist at the Commonwealth Bank. “Soft housing credit growth suggests house prices will keep falling in coming months.”

Aside from housing, credit for personal uses also remained weak in February, falling by 0.1% after dropping by an even steeper 0.66% in January. Over the year, personal credit declined by 2.65% having fallen by a faster 2.8% in the 12 months to January.

The last time personal credit was declining at an annual rate this fast was during the GFC. Tighter lending standards, continued consumer caution and the growing influence of buy now, pay later services likely explain the bulk of the recent weakness.

“A slow down in the deceleration in personal credit growth would be a signal that household spending growth is picking up,” Clifton said.

Growth in business credit remained the one bright spot, lifting by 5.29% from a year earlier, the fastest increase since December 2016, although the monthly increase of 0.28% was the weakest since June last year.

Monthly growth in business credit has now been decelerating for six months.

Combined, total credit extended to Australia’s private sector expanded by 0.26%, up modestly from 0.22% in January. Despite the small monthly acceleration, growth over the year slowed to 4.18%, the weakest increase over a comparable period since early 2014.

“As the downtrend continues, we think that households are close to deleveraging, albeit from a record high level of gearing, where total household financial liabilities were 201% of annual household income in Q4 2018,” said Kaixin Owyong, Economist at the National Australia Bank.

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