Pete Wargent blogspot

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

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Friday, 29 January 2016

Total credit passes $2.5 trillion

Credit growth up in 2015

The Reserve Bank of Australia (RBA) released its Financial Aggregates for December 2015 today, which revealed credit growth picking up steadily to +6.6 per cent by the end of 2015, from +5.8 per cent in 2014. 

The key points of note included that business credit growth improved to +6.3 per cent in calendar year 2015 (from +4.3 per cent in 2014), while total housing credit growth of +7.5 per cent was another solid increase (from +7.0 per cent in the prior year). 

Notably annual growth in credit for property investors has continued to soften from a peak of +11 per cent to just +8.5 per cent, which will please the market's prudential regulator APRA. 

Naturally banks and lenders have aimed to fill the void by ramping up lending to owner-occupiers, a sector which increased strongly again to a 63 month high of +6.8 per cent year-on-year.

Total year-on-year credit growth of +6.6 per cent slowed just a little into the end of 2015, largely as a consequence of the slowdown in property investor lending as lending criteria have been tightened.

Interestingly, although bank term deposits have understandably slowed in the prevailing low interest rate environment (declining by $19 billion in 2015), current and other bank deposits expanded very substantially through the year (+$123 billion), in aggregate leaving the banks few headaches in this regard.

Business confidence (mix-a-lot)

Business credit expanded by +0.5 per cent in December following a flat month in November, to be up by a "so-so" +6.3 per cent in 2015. 

This is a middling result for business credit reflecting the mixed economic outlook.

Arguably double digit hurdle rates for business cases and investment projects remain optimistically high in the prevailing low growth and low inflation environment.

Yet the CFO community might counter that perhaps hurdle rates need to remain this high in order to reflect elevated market risk. Swings and roundabouts. 

The credit growth figures suggest that business lending growth is in considerably better shape than was the case trhough the recession-like conditions of 2009, but nowhere near the levels of confidence seen in the heady pre-financial crisis days. 

Housing: "We are all owner-occupiers now"

Housing credit continues to grow at around +7.5 per cent, with the slowdown in investor lending by and large offset by a pick-up in lending to owner-occupiers, which should in turn lead to a more sustainable market going forward. 

The great surge in lending to investors had led to a surfeit of rental properties in some locations, and resultantly a softening rental market. 

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in the middle of last year, some borrowers rather conveniently opted to change the purpose of their existing loan (as one does!).

The net value of loan purpose switching from investor to owner-occupier was approximately $34 billion in the second half of the 2015 calendar year, of which $1.5 billion occurred in December.

The wrap

Overall, there have been some interesting sub-trends, but at the headline level total credit continues to grow at a wholesome clip, and indeed December 2015 was a landmark month with total credit surpassing $2.5 trillion for the first time.

I expect to see housing credit ease back a bit in 2016 as lenders struggle to fill the hole left by investors with bona fide owner-occupier home loans. There may also be some further tightening of mortgage rates. 

Accordingly the property types to mark down to underperform include the higher-density stock which is so specifically targeted at investors.

Prospective buyers in 2016 need to look at properties with actual scarcity value and genuinely strong owner-occupier appeal.