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

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Saturday, 1 August 2015

Investor credit growth accelerates

Credit aggregates

In a week when it was reported that Sydney house price growth has accelerated to an annualised pace of 23 per cent, all eyes are now on the lending market for any signs of a slowdown.

The Reserve Bank of Australia (RBA) released its Financial Aggregates for the month of June 2015 on Friday which showed investor credit to be rising at a faster pace than had been previously thought. 

Indeed annual investor credit growth increased to its fastest pace since January 2008.

While business credit growth (+0.0 per cent) and personal credit growth (+0.1 per cent) were broadly flat for the month, housing credit once again recorded +0.6 per cent growth to be up +7.3 per cent for the year.

Business credit growth moderating

Business credit growth was flat in the month of June and appears to have lost its momentum.

In annual terms business credit growth has slowed to be back at +4.3 per cent.

While capital expenditure surveys have also generally pointed to weak investment spending intentions, certain other surveys have pointed to moderately improving business conditions of late.

While not a part of the RBA release, it is worth noting that some $78 billion of initial and secondary capital has now been raised on the Australian Securities Exchange (ASX) over the past year, the highest dollar value of capital raised since May 2010 in rolling annual terms.

Housing credit

There have evidently been a number of revisions - or at least, re-classifications - to previously reported RBA data on housing credit (there are some grey areas between the classifications of housing lending and deposits reported by financial institutions).

In any case, the net effect has been that investor credit as at June 2015 recorded the biggest monthly gain since the onset of the financial crisis at more than 1 per cent, to be nearly 11 per cent higher over the past year.

Notably this is somewhat faster than the arbitrary 10 per cent speed limit called for the by the regulator APRA.

Even when smoothing the data on a rolling annual basis below, we can see that investor credit growth was continuing to breach the 10 per cent limit as at the end of the 2015 financial year.

That said, a number of cooling measures have been announced by lenders through the month of July, which might be expected to take effect in due course. 

The main unanswered question is to what extent other banks and lenders outside the major players will be willing or able to take on additional volumes of investment lending.

The demand for investor credit with the cash rate sitting at just 2 per cent remains seemingly insatiable, and for that reason regulators and lenders are having to find ways to slow the pace of lending growth.

Measures taken by lenders to date have variously included higher deposit requirements for investors, moderate increases in mortgage rates and more stringent serviceability criteria.

It is also as yet unclear whether the rate of credit growth to owner-occupiers - presently expanding at a 5.5 per cent annualised pace - will continue to increase, particularly if these loan products are now made more attractive by lenders. 

Unsurprisingly the share of outstanding credit held by investors continued to increase to its highest ever level at more than 36 per cent.

As noted on this blog previously, I have long expected this trend to continue for a whole range of reasons, including the prevailing tax legislation, housing affordability constraints in the inner suburban areas of our capital cities, and structural shifts in lifestyle choices, demographics and the composition of the workforce. 

While some other countries maintain tax legislation which allows for deductions on home loan mortgage interest, Australia does not.

Accordingly homeowners look to pay down their mortgage debt via principal and interest loans.

Investors, on the other hand, often tend towards the accumulation of debt via interest only loans which attract deductions, and frequently aim to hold on to properties for as long as is practicable. 

This is one reason that real estate transaction volumes have been lower than might have been otherwise expected through this phase of the property cycle.