While it played second-fiddle to the December quarter consumer price inflation (CPI) report, Australia received another piece of economic news that was quite significant today.
Credit extended to the private sector is slowing noticeably, including for housing investment.
According to the Reserve Bank of Australia’s (RBA) December private sector credit report, annual growth slowed to just 4.8% from a year earlier, down from 5.2% in November and the weakest result since May 2014.
This report measures the change in the outstanding balance of loans issued to Australia’s private sector.
As John Peters, Senior Economist at the Commonwealth Bank explains, it was not just business and consumer credit growth that was soft in December, but for housing as well.
“Housing credit expanded by 0.4% in December which saw the annual rate ticking lower to 6.3% from 6.4% in November,” he said following the release of the report.
“The modest easing in housing credit over the past year has been driven by the dynamic of slowing investor housing credit growth juxtaposed with stable owner-occupier credit growth.”
Investor credit rose by 0.3% over the month, leaving up 6.1% higher over the year.
“[This is] well below the recent peak of 10.8% per annum seen around mid-2015,” Peters said. “The slowing in investor credit reflects the more onerous APRA lending requirements.”
APRA introduced an annual 10% cap in investor credit growth in late 2014. Australia’s banking regulator followed up that move with a 30% limit on interest-only lending as a proportion of total new mortgage lending in March last year.
It’s clearly having an impact — not only on credit growth, but also on prices in housing markets that were previously favoured by investors such as Sydney and Melbourne.
For owner-occupier housing, credit rose by a larger 0.5% in December, leaving it up 6.4% on a year earlier.
As seen in the chart below, it’s gradually accelerating as investor housing credit slows.
Along with APRA’s attempts to slow investor credit growth, Peters said the overall slowdown in housing credit growth reflects affordability constraints in Australia’s largest cities.
“The recent slowing in total credit generally also encompasses affordability issues particularly in Melbourne and Sydney, the nation’s two major housing markets, where housing prices have kept rising solidly in the past few years,” he said.
While he believes recent trends will be welcomed by APRA and the RBA, Peters says that with housing credit continuing to grow far quicker than household incomes, further measures to curb housing credit growth could still be introduced.
“There is some scope for more macro-prudential action if the regulatory authorities feel that investor credit growth is not slowing sufficiently,” he says.
Outside of housing, and contributing to the headline slowdown, both business and personal credit growth remained weak in December.
Business credit rose by 0.2%, seeing the increase on a year earlier slow to 3.2% from 4.2% in November.
“Whilst it is heartening that business credit growth remains in positive territory, it is clearly lagging behind the much more upbeat business outlook surveys of the past six months or so,” says Peters, adding “any pick-up in business credit would be welcome since it would support that view that non-mining business investment will continue lift over 2018”.
In what is now a well entrenched theme, credit extended for personal purposes came in flat, leaving the decline over a year earlier at 1.1%.
“Households are also cautious about adding to already high debt levels,” Peters says. “Leverage is not the previously enticing word for consumers in the post GFC world.”
The soft credit report, released alongside an equally soft Q4 CPI result, provides little near-term reason for the RBA to consider lifting interest rates.
Credit demand from business and consumers is already weak, and now housing, previously the only real area of strong demand, is now also showing signs of cooling.