Pete Wargent blogspot

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

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Thursday, 31 December 2015

No fireworks, but housing credit rises again (62 month high)

Credit grows by 6.6 per cent

Well, you win some, you lose some: the Reserve Bank did indeed release its November Financial Aggregates figures today. Happy New Year, by the way!

The final release of the calendar year showed annual credit growth rising at a healthy 6.6 per cent pace over the year, after a softer monthly result of 0.4 per cent.

Deposit growth was up very strongly by around 15 per cent over the year to November, so there are few concerns in that regard for the housing market. 

Business credit flat in November

Business credit was only flat in November, and so growth slowed to 6.2 per cent for the year ended November 2015.

Housing credit growth highest since 2010

Looking at the headline credit growth figures we can see that total housing credit inched up to 7.52 per cent, the strongest annual result in some 62 months since September 2010.

The annual rate of growth in investor loans slowed further from a peak of 11.0 per cent in June to just 9.1 per cent, thereby continuing to decline well below the arbitrary 10 per cent threshold stipulated by the regulator.

Over the past three months investor credit has grown at an annualised pace of just 5.3 per cent.

Narrative changes

Due to the introduction of an interest rate differential between owner-occupier and investor lending, a number of borrowers have changed the classification of their loans, which has resulted in reclassifications totalling $32.5 billion.

Although a further $1.9 billion was reclassified to owner-occupier lending in November, most of the impact of these changes has now washed through, and normal service should be resumed forthwith.

With the impact of loan classification changes stripped out, investor credit grew by 0.4 per cent in November, while owner-occupier lending strengthened once again to a hot monthly growth of 0.8 per cent - the strongest result since mid-2009 - with annual lending to this sector now surging to 6.5 per cent, which is the strongest annual result since February 2011. 

The investor share of outstanding credit has thus fallen sharply from a record 38.6 per cent in July to 36.1 per cent.

Total housing credit outstanding has increased very strongly by 7.5 per cent over the last year to $1.52 trillion, a rate of growth which suggests that solid dwelling price growth is set to continue in 2016. 

As a point of comparison, this time last year housing credit growth was only 7 per cent, from a lower base. 

Housing credit growth

November 2012 - 4.6 per cent
November 2013 - 5.2 per cent
November 2014 - 7.0 per cent
November 2015 - 7.5 per cent

Residential property was the best performing asset class of 2015, with gross returns of around 12 per cent easily beating shares and other investments, and particularly so for Sydney and Melbourne housing.

Caveat emptor

Given that most property investors use leverage, residential property as an asset class has seen many market participants achieve spectacular results in recent years, particularly in Sydney and Melbourne. 

There has been some fierce debate in property circles over the last few years about whether capital city property would fare better or worse than mining towns and regional property.

Some of the mining towns which were recommended by advisors essentially as a "get rich quick" scheme (with no exit strategy worthy of the name) have seen prices crash by 80 to 90 per cent, leaving some investors in negative equity to the tune of millions of dollars.

There will likely be worse to come for resources regions in 2016.

Since property prices are ultimately a derivative of land prices, mining town speculators were effectively betting on something with no inherent scarcity value, and as the construction phase of the mining boom continues to wane the fallout for property prices in mining towns will often be catastrophic. 

It is important to note that the mining towns crash was not caused by the government, the since-repealed mining tax (MRRT), or by mining companies, as is sometimes inferred - export volumes have ramped up just fine.

No, mining town property speculation was simply a flakey idea for long term investors, as was warned all along. No apologies here for sticking with a recommended strategy of long term buy and hold hold in capital cities throughout. Slow and steady wins the race.