Australian housing credit growth hits another multi-year low

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  • Australian housing credit growth continues to slow, reflecting the impact of tighter lending standards and reduced demand at a time when prices are falling.
  • Perhaps as a result of the housing downturn, personal credit contracted at the fastest annual pace since 2009 in October.
  • With household savings already low, this points to the potential for slower household spending ahead despite firm labour market conditions.

Australian housing credit growth continues to slow, both to owner-occupiers and investors.

According to the Reserve Bank of Australia (RBA), housing credit grew by 0.3% in October in seasonally adjusted terms, unchanged from the level reported in September.

The report essentially measures the change in outstanding loans issued to Australia’s private sector. The monthly increase in housing credit was the smallest in percentage terms since July 1984.

Over the year, total housing credit grew by 5.1%, the weakest increase in five years.

Credit extended to owner-occupiers grew by 0.4% from September — the smallest amount since May 2015 — leaving the increase over the year at 7%, the slowest expansion since November 2015.

Credit extended to investors was unchanged from a month earlier, below the 0.1% increase seen in September. That left growth over the year at 1.3%, the smallest increase on record.

In mid-2015, annual credit growth to investors was as high as 10.8%.

CBA

The pronounced slowdown in investor credit growth reflects a number of factors, including an ongoing switch away from interest-only to amortising loans as a result of APRA’s move to cap interest-only home loans to 30% of total new housing loans.

“There is a significant quantity of loans that are rolling over from interest only to principal and interest,” said Gareth Aird, Senior Economist at the Commonwealth Bank.

“As the rollover occurs, borrowers who were previously paying only interest on their loan switch to paying off the principal which ultimately weighs on the stock of debt.”

Recent weakness in Sydney and Melbourne home prices — markets that were previously hotbeds for investor activity — has also helped to reduce demand for credit, contributing to the downturn in the housing market.

The slowdown in owner-occupier credit growth has also been affected by these factors, albeit to a lesser degree.

“This is a natural response to buyer expectations that dwelling prices will continue to adjust downwards in the near term,” Aird says.

Perhaps reflecting the impact of recent weakness in the housing market, personal credit contracted for a ninth consecutive month in October, dropping by 0.2% after seasonal adjustments.

That left the decline in personal credit over the year at 1.6%, the steepest since November 2009.

At a time when household savings levels are extremely low, the decline in personal credit growth points to downside risks for household spending in the months ahead, including in next week’s Australian Q3 GDP report.

Helping to offset the impact of weaker housing credit growth and outright decline in personal credit, that extended to Australian businesses remained firm last month, adding to optimism surrounding the outlook for business investment following a strong upgrade to estimates for the current financial year in Q3 CAPEX data released earlier this week.

Business credit expanded by 0.6% — the same level reported in September — leaving growth over the year at 4.7%, the strongest increase since December 2016.

CBA

“The annual rate has accelerated to 4.7% and sits at 8.3% on a six-month annualised basis,” says Aird.

“The lift in business credit marries up with the upgrade to investment intentions in 2018/19 by non mining firms contained in yesterday’s CAPEX report.”

Combined, total credit extended to the private sector grew by 0.4% last month, leaving the increase over the past year at 4.6%, identical to the level seen in September.

Given what was seen last month, Aird says policymakers at the RBA will pleased with the detail of the report.

“The composition of growth has shifted in a way that will please policymakers,” he says.

“Growth in housing credit to both owner-occupiers and investors continues to slow. On the other hand, business credit has picked up over the past four months which is consistent with a lift in investment.”

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