- Credit to buy Australian housing grew at the slowest annual pace on record in March.
- Credit to owner-occupiers expanded at the slowest annual rate since August 2015. At 0.7%, the annual increase for investors was the weakest on record.
- Movements in housing credit growth are expected to be a lead indicator for home prices, pointing to further weakness ahead.
- The RBA will announce its May monetary policy decision next Tuesday. In the past rate cuts have often led to a pickup in credit growth.
Credit to buy Australian housing grew at the slowest annual pace on record in March, pointing to the likelihood of further prices declines in the months ahead.
Data released by the Reserve Bank of Australia (RBA) on Tuesday revealed housing credit grew by just 0.25% in March after adjusting for seasonal patterns, leaving growth over the year at 3.99%, the lowest level since records began in August 1977.
Credit growth measures the change in the outstanding value of loans issued to Australia’s private sectors.
Credit extended to owner-occupiers grew by 0.35% during the month, leaving the increase in 12 months earlier at 5.65%, the slowest expansion since August 2015.
The deceleration in credit to buy investment housing was even more pronounced, lifting by 0.7% over the year, the smallest increase on record. In March alone, investor credit expanded by just 0.04%, extending the run of sub-0.1% increases into a sixth consecutive month.
“We expect monthly investor credit growth to continue to oscillate between zero and 0.1% in the coming year, meaning the annual rate should start to show signs of stabilisation around current levels,” said Tom Kennedy, Economist at J.P. Morgan.
The pronounced slowdown in credit growth for housing reflects a number of factors, including an ongoing switch away from interest-only to amortising loans as a result of a prior restriction introduced by APRA, Australia’s banking regulator, to cap interest-only home loans to 30% of total new housing loans.
While that restriction has now been lifted, it means that many borrowers who previously only made interest payments are now paying down the principal on their home loan.
Falling home prices across many capital city markets — led by Sydney and Melbourne — along with uncertainty over the outcome of Australia’s federal election which may dictate the future tax treatment of housing, are factors that have also contributed to the reduction in housing credit demand seen in recent years.
A sharp reduction in housing turnover — seeing less properties change hands — has also been a factor.
Tighter lending standards, particularly towards household expenses and existing debt levels of prospective borrowers, has also acted to reduce the supply of credit being extended.
Changes in housing credit growth tend to lead movements in home prices and dwelling approvals, meaning the downturn that began in late 2017 likely has further to run in the second half of the year.
“Going forward, indicators point to some further cooling of conditions, across prices and dwelling approvals,” said Andrew Hanlan, Senior Economist at Westpac Bank.
“The positive is that the pace of decline for the housing sector appears to have eased early in 2019.”
Outside of housing, personal credit continued to decline, falling by 0.3% from February after seasonal adjustments, leaving the decline over the past 12 months at 2.8%, just shy of the lowest level since the GFC set two months earlier.
Annual credit growth for personal use has fallen in annualised terms in each of the past 39 months.
“Greater use of mortgage offset accounts and a negative wealth effect from falling dwelling prices on vehicle sales and durable goods is having an impact, as is less use of margin loans,” said Gareth Aird, Senior Economist at the Commonwealth Bank.
Helping to offset the weakness in housing and outright contraction for personal use, credit extended to businesses lifted by close to 0.5%, the largest monthly increase since October 2018.
Even with the monthly acceleration, up from 0.3% in February, the annual growth pace still eased to 4.9%, down from 5.1% reported a month earlier.
Combined, total credit extended to Australia’s private sectors grew by 0.3%, the largest gain in five months. Over the year, total credit growth slowed to 3.9%, the weakest expansion since December 2013.
Despite continued weakness in housing and personal credit, Aird believes the RBA is unlikely to cut official interest rates to spur on lending — and with it economic activity — given Australia’s already high debt levels.
“Another rate cut or two from here may not make a lot of difference in the scheme of things,” he said.
“We are drifting towards the end of the long-term debt cycle where the policy rate has been moving towards zero while the stock of debt to income has marched to record highs.
“A rate cut or two now would simply kick the can down the road a little further.”
While the Commonwealth Bank doesn’t see the RBA cutting official interest rates at this point, that view is now in the minority with most economists now expecting the bank to cut Australia’s cash rate at least once by the end of this year.
Financial markets also have 50 basis points of rate cuts priced in, taking the cash rate to 1%, by February next year.
The RBA will announce its next monetary policy decision on Tuesday, May 7.
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