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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 31 October 2014

Financial Aggregates show Housing Credit continues to rise

Total credit rises by 5.4 percent

The Reserve Bank of Australia has released its Financial Aggregates data for the month of September 2014, which revealed some interesting trends as total credit growth picked up to 5.4 percent over the past year.

Business credit growth, which has largely been lacklustre, showed a nice uptick in the month of September to be 3.8 percent higher over the past year.

However, business credit remains 1.5 percent below its previous peak which was hit way back in November 2008.

Unsurprisingly perhaps, given the currently easy monetary policy settings, housing credit growth continues to lead the way back with a 6.8 percent year-on-year growth.

As we will look at in more detail below, the RBA will particularly interested in the pace of investor housing credit growth, a point which it recently again flagged in its October Board Minutes.

Inflationary pressures easing

This is particularly so since there appears to be very little chance of interest rates being hiked any time soon,

The Australian Bureau of Statistics released its Producer Price Index data today which came in at just +0.2 percent for the quarter and only +1.2 percent for the past year, which is the slowest pace we have seen since the June 2013 quarter.

Inflationary pressures are seemingly receding, and since the central bank has an inflation target and full employment remit, imminent rate hikes look to be unlikely.

Cash rate futures markets remain ambivalent about the next move in interest rates, with the implied yield curve suggesting a long period of "no change" ahead, perhaps for even for the next 18 months.

Housing Credit expanding further

The RBA's Financial Aggregates showed owner occupier credit increasing by a seasonally adjusted $4.2 billion in the month of September 2014, with the equivalent increase in investor credit coming in at a $4 billion (which, of course is equivalently significantly higher credit growth for investment lending when considered on a percentage basis).

This result pushes the growth in investor credit up to 9.5 percent for the past year, far ahead of the 5 percent pace of growth in owner occupier credit aggregates.

While these are much slower rates of credit growth than we have seen in previous housing market cycles, we are of course coming from a higher base (in any case it is what is happening at the margin that really counts in housing markets), and further, these figures do not capture the potentially significant flow of funds from offshore.

The monthly numbers tend to jag around a little, but if we smooth the figures on a rolling annual basis we can see that investor credit growth is comfortably outpacing owner occupier credit growth.

At the current rate of progress investor credit growth will soon have reverted to a double digit pace, especially given that there are no interest rate hikes visible on the immediate horizon to pull things up.

Outperforming housing markets

With both owner occupier credit and investor credit picking up, in order to identify the housing sub-markets which are due to record capital growth, analysts should follow the flow of funds (for owner occupier credit, that means to Brisbane, and for investor credit, this means into inner- and middle-ring Sydney suburbs).

Today's data takes the investor share of outstanding credit a notch higher to 34 percent, which is now the highest percentage share we have ever seen in Australia.

Over the very long term we might expect to see this share of outstanding credit increasing towards 40 percent given the ever more prevalent Australian penchant towards (centric) capital city lifestyles, although this trend will take many years to play out in full.

Macro-prudential measures?

The above charts will give the RBA a little more food for thought as to whether it needs to work with APRA on implementing measures to restrict, ration, direct or control the flow of credit.

Call me an old sceptic, but the Minutes wording from the RBA's October Board Meeting (which note that dwelling investment picking up "as expected", and credit growth remaining "moderate overall") in conjunction with other rhetoric, have suggested to me that there will be few serious measures taken, other than to simply step up the monitoring of the quality of interest only lending.

The RBA wanted all along to see an increase in housing market activity and dwelling investment, and while the share of credit flowing to 'investors' may be higher than the Board might have wanted to see, it would seem contradictory to then step in and slow the market given the previous rhetoric of the Board's own members. 

The central bank does not have a mandate to intervene in the allocation or direction of credit, and whether first-time buyers and others decide to buy housing as an investment or a home is outside the scope of the RBA's own mandate or duties (except to the extent that this impacts future price stability or economic prosperity/welfare).

In any case, there are two crucial releases lying right ahead on November 10 (ABS Housing Finance) and November 12 (ABS Lending Finance - which will show the extent to which investors are still focusing on Sydney) respectively, which between them will shed a great deal more light on how credit is being allocated across the housing market at the state level (new housing, construction lending, owner-occupiers, major renovations and investor credit etc.). 

Thus in turn these monthly releases will ultimately determine the answers as they relate to macro-prudential measures.


As noted previously, commencing from Monday we have an absolutely rip-snorting ten days ahead for domestic economic data. 

You can find an overview or rundown of the key releases from Scutt Partners here.