Mortgages crowd out business lending

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By Leith van Onselen

Veda has released its Consumer Credit Demand Index results for the December quarter of 2013, which registered flat consumer credit demand over the year, but big growth in the number of mortgage applications, although first home buyer demand continues to fall.

According to regular commenter and mortgage broker Peter Fraser, Veda are the largest credit recording agency in Australia, and every application for any formal loan through any retail lender is recorded with them. As such, results published by Veda should be taken seriously.

According to Veda:

Overall consumer credit demand for the December quarter compared to the same period in 2012 was flat (+0.4%) year on year, representing an easing in the pace of growth from the increase of 7.4% recorded in the September quarter.

The index measures the volume of unsecured and secured credit enquiries that go through the Veda Consumer Credit Bureau by financial services credit providers in Australia.

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Mortgage enquiries continued to rise, increasing by 15.3% year on year, an increase from 9.7% in the September quarter and 7.9% in the June quarter.

All states except SA saw year on year growth in the volume of mortgage enquiries in the December quarter. For the second consecutive quarter mortgage enquiries were strongest in NSW (+22.2%) with significant increases also recorded in VIC (+15.2%), QLD (+11.9%) and WA (+11.9%).  Other states to experience mortgage enquiry growth were TAS (+9.8%), SA (+8.4%), ACT (+4.8%) and the NT (+2.6%).

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“An extended period of low interest rates is supporting the lift in mortgage enquiries, which have stepped up a level and are now showing the strongest growth since late 2009.  It is likely that we will see a continuing increase in the near term, along with sustained house price growth. We saw a further shift to mortgage applications from older demographics, with more first home buyers leaving the market,” said Angus Luffman, General Manager of Consumer Risk at Veda.

In contrast, credit card enquiries eased sharply in the December quarter.  Nationally, annual growth in credit card enquiries eased to 2.4% in the December quarter, from 13.4% in the September quarter.  Reduced demand for credit cards was apparent in all states with VIC (+6.9%) recording the strongest growth, followed by ACT (+6.2%), NT (+3.9%), WA (+2.6%), and NSW (+1.1%).  Enquiries were flat in SA (+0.2%) and contracted in QLD (-0.2%) and (-1.0%).

“The December quarter was the second consecutive quarter of growth for credit card enquiries after an extended period of decline. Whilst it was a softer result than the previous quarter, the weeks leading up to Christmas had solid growth and 2013 ended with overall growth in credit card enquiries of 4.3%.”

Nationally, personal loan enquiries recorded a decrease of -1.4% over the year to the December quarter.   The NT (+11.0%) was the only state to record year on year growth, with reduced demand apparent in NSW (-0.8%), VIC (-2.0%), QLD (-1.9%), SA (-1.6%), WA (-0.4%), TAS (-7.6%), and the ACT (-2.7%).

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“Personal loans enquiries have stabilised at a much higher level after a period of strong growth. This suggests ongoing challenging conditions for retailers of big ticket items and reflects a slowdown of car sales, which have shown no growth year on year, and a reduced demand for larger purchases among consumers in the mining states.

“The December quarter is typically a strong period for credit demand, reflecting the seasonal peak in spending associated with the Christmas period.  The relatively weak outcome in loans and credit cards suggests low interest rates are not leading to a significant lift in consumer borrowing as households remain cautious about rising unemployment.”

It’s worth also pointing out that the latest credit aggregates data from the Reserve Bank of Australia revealed that the share of credit flowing to mortgages hit the highest level on record (60.2%), with the share of loans flowing to business (33.4%) hitting a record low (see next chart).

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This suggests that mortgage lending is crowding-out other forms of lending.

unconventionaleconomist@hotmail.com

www.twitter.com/leithvo

10 Responses to “ “Mortgages crowd out business lending”

  1. Pfh007 says:

    It may not be ‘crowding out’ in the sense of displacing.

    The demand from business for loans may simply be weak and there are plenty of reasons why business may be cautious about borrowing.

    The main one being that Blind Freddy would have doubts about the strength of an economy:

    1. Where the RBA is resorting to record low interest rates to prevent asset prices from sliding.

    2. Where a historic mining boom can barely generate a trade surplus.

    3. Where the Federal Govt is relying on foreign sales of govt securities to keep its cost of borrowing down.

    4. Where the price of land has excluded large numbers of new entrants to the market and undermined the competitiveness of much commercial activity.

    5. Where the currency has been inflated by a rush to sell public and private (residential mortgage) IOUs and hard assets to foreign buyers.

    It is a surprise that there is any business demand at all for loans outside those areas of commercial activity directly related to the asset price ponzi economy being driven by RBA monetary policy and reinforced by government policy.

    • The Claw says:

      It may not be ‘crowding out’ in the sense of displacing …

      “Comment of the day award” to Pfh007

  2. Explorer says:

    Isn’t there also the issue with whether the amount of HECS/HELP debt is also relevant to total credit measures. This debt has grown rapidly over the last say decade but is not lent by banks. A similar issue arises in the US.

    http://www.consumerfinance.gov/newsroom/student-debt-swells-federal-loans-now-top-a-trillion/

    The existence of student loans has an imact on appetite for debt and creditworthiness of many recent graduates.

    This in turn has an impact on consumption/investment spending by that segment of graduates whose families were not able to pay up front so that the student does not have debts.

    More debt funded consumption of education means less debt funded consumption of some other good/service.

    • Ronin8317 says:

      HECS is repaid a bit differently from US student debt. In Australia, it acts like an increase in income tax rate past a threshold, where as in the US it’s more like a personal loan.

  3. China-Bob says:

    Is there a simpler explanation?
    Is it possible that businesses have lending choices that extend beyond the reach / manipulation of our big 4 banks?Maybe businesses are simply exercising these choices and thereby altering the balance of bank lending towards the captive mortgage market.

    The last time I looked at bank lending in Australia they wanted me to secure the business loan with personal house or similar collateral, I said no way and that ended the discussions. I moved onto a sourcing funds from a private equity lender and got a much warmer reception, on much better terms. I wont be in a hurry to knock on that banks door again. I mention this because I suspect I’m not alone, our TBTF banks have just become inefficient sources of capital so they cater only to their captive markets.

    • J Bauer says:

      China Bob,

      A mate in business banking said he focuses on doing home loans for business customers as its a lot less work than funding a business and more profitable for him as he can meet his revenue and lending targets more easily.

    • m8 says:

      Hi China Bob,

      that’s very interesting you say “on much better terms”

      I thought private equity was basically the same thing as venture capital?

      Are you saying that it’s possible to get PE for business that more resembles a bank loan (and without needing property as security)?

      • m8 says:

        Found this document that answers my own question

        http://tinyurl.com/avcal-private-equity

        And the answer is PE is very similar to VC, albiet usually at higher levels / later stages of a companies growth.

        quotes from the document:

        5.3. INVESTORS INVEST IN PRIVATE EQUITY
        FOR HIGHER RETURNS
        Sophisticated investors invest in private equity
        because they understand it and consider that the
        higher returns it offers, compared to less risky
        investments such as government bonds, more
        than justify the increased risk of the investment.
        As well, the long-term approach of such investors
        is consistent with the long-term approach of
        private equity managers.
        According to AVCAL research, the target for
        private equity investment is to return 5% above
        the return on public equity markets. Australian
        private equity investment returns have been largely
        consistent with this target (see table above and
        quote on page 19).

        5.4. HOW PRIVATE EQUITY FUNDS OPERATE
        After a fund has closed (i.e. raised the funds that
        will be managed), the managers invest the fund’s
        capital across a set of investments that fi t the
        fund’s investment mandate or focus. Once this
        process is complete, typically after 3 to 5 years,
        the fund is said to be ‘fully invested’.
        Over the life of a fund, the managers will assess
        hundreds of potential investments, conduct
        detailed due diligence on perhaps 10% of these
        but only actually invest in a small number, usually
        around 10 to 15. Competition for investments is
        fi erce and a fund manager’s bid will not always
        succeed, in which case the time and money
        expended on assessing an investment and
        preparing an offer is lost. Additionally, owners and
        managers of companies may reject approaches
        from private equity, as is their right.
        Private equity investments, unlike venture capital
        investments, are fi nanced partly with debt from
        third party lenders, rather than exclusively using
        investment capital from the fund. The use
        of debt has two important consequences:
        – a fund can make more investments with a
        given amount of investment capital; and
        – investors can receive a higher rate of return
        on the capital they have invested in the fund.

    • Neville Gearless says:

      This is my understanding too, small business’s acquire finance from banks by mortgaging the proprietors’ personal homes.

      Interesting in light of Aussie banks so well capitalised that Gina Rinehart obtained finance from the US government and in return, which I bet was a precondition by the yanks, she’s buying US locomotives. While that Aussie loco builder has zero orders. Is this a multiplier (not sure of the correct economic term) effect that Australia misses out on?

      Well this is oz, flipping houses is better…

  4. m8 says:

    Found this document that answered my question

    And the answer is PE is basically VC but for later stages in a company growth.

    http://www.avcal.com.au/documents/item/283&ei=gwneUsK7No3ikAXov4DIAw&usg=AFQjCNF6RcHha3PU2K7yFE7XX2Elw6eauQ&sig2=mW-AP4xVRSnNtd1NZK4QmQ

    quotes from the PDF:

    5.3. INVESTORS INVEST IN PRIVATE EQUITY
    FOR HIGHER RETURNS
    Sophisticated investors invest in private equity
    because they understand it and consider that the
    higher returns it offers, compared to less risky
    investments such as government bonds, more
    than justify the increased risk of the investment.
    As well, the long-term approach of such investors
    is consistent with the long-term approach of
    private equity managers.
    According to AVCAL research, the target for
    private equity investment is to return 5% above
    the return on public equity markets. Australian
    private equity investment returns have been largely
    consistent with this target (see table above and
    quote on page 19).

    5.4. HOW PRIVATE EQUITY FUNDS OPERATE
    After a fund has closed (i.e. raised the funds that
    will be managed), the managers invest the fund’s
    capital across a set of investments that fi t the
    fund’s investment mandate or focus. Once this
    process is complete, typically after 3 to 5 years,
    the fund is said to be ‘fully invested’.
    Over the life of a fund, the managers will assess
    hundreds of potential investments, conduct
    detailed due diligence on perhaps 10% of these
    but only actually invest in a small number, usually
    around 10 to 15. Competition for investments is
    fi erce and a fund manager’s bid will not always
    succeed, in which case the time and money
    expended on assessing an investment and
    preparing an offer is lost. Additionally, owners and
    managers of companies may reject approaches
    from private equity, as is their right.
    Private equity investments, unlike venture capital
    investments, are fi nanced partly with debt from
    third party lenders, rather than exclusively using
    investment capital from the fund. The use
    of debt has two important consequences:
    – a fund can make more investments with a
    given amount of investment capital; and
    – investors can receive a higher rate of return
    on the capital they have invested in the fund.
    To ensure ready access to potential investments,
    a manager develops and maintains a strong
    network of relationships in appropriate commercial
    or technical areas