Credit aggregates stumble on

The RBA’s credit aggregates for February continue their recent trends of a slow disleveraging. Month on month, owner occupier credit advanced a seasonally adjusted 6.9% annualised. Over the year it was the same.

Investor credit slowed to its lowest growth rate since September 2009. Month on month and seasonally adjusted it grew 4.6% annualised. Over the year it was up 7.6%, so we’ve seen a marked slowing in the past few months.

Revolving credit was up a negligible 1.9% seasonally adjusted and annualised on the month, which is a above year on year growth of 1.9%.

The star performer was business lending, up 7.8% seasonally adjusted and annualised. The first decent month in as long as anyone can remember.

So, what do we make of it all. It’s a volatile series so the monthly growth figures have limited value. What is clear in trend terms is that owner-occupier finance is stalled at 7%. Investor housing credit is fading. Credit cards are still on the nose. And maybe, at last, there’s some business lending going on but it’s getting off the floor too early to say.

Given Rismark is also out today declaring virtually zero house price growth year on year for February, there’s nothing here to disprove my notion that we’re going to need above 7% growth in mortgage aggregates to generate any capital growth.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. I was amazed that given Rismark has always said “dwelling prices go up with change in disposable income” why have they remained flat for over a year whilst real disposable income has increased?

    Why do they suggest that house prices have only gone up 5.2% per annum since 2003 yet real disposable income has gone up over 6% p.a?

    Perhaps I’m being too simple in my reading of this, but wouldnt that suggest that house prices don’t go up in line with disposable income?

    And that would mean this won’t continue into the future?

    Oh they don’t mention lending/credit growth either.

    • I think its too simplistic to simply look at credit growth or disposable income growth (as Chris Joye does) on their own as drivers of house prices.

      Both have some degree of influence.

      So does questions like: What types of houses are people buying? How keen are they to buy? What do investors consider the outlook to be? How many houses are there for sale? I’ve seen the good ole argument many a time thrown out there that because there are so many houses for sale, it means house prices are going to go down. This is lazy analysis, as if someone is selling a house, they may not be a forced seller – they may simply want to upgrade or buy a different house, but if they don’t sell they simply take it off the market. All of a sudden supply changes.

      Housing starts are another factor in the supply equation. The drop in building approvals certainly improves the outlook for house prices in my opinion – not so good for construction but less supply = supportive for house prices in general. The list would go on and I’m sure some smarter people out there could add to the list.

      To simply say that “there’s nothing here to disprove my notion that we’re going to need above 7% growth in mortgage aggregates to generate any capital growth” is not a factual statement and it is wrong to say this. There are too many other factors to consider to make such a conclusion.

      Not disagreeing for the sake of it, but as a financial analyst I find it slighly unnerving to read those types of conclusions as they have no basis in fact.

      Rather than looking at the 7% mortgage growth, what you should be looking instead possibly today is that retail sales are starting to trend higher again (very early to predict this but they have found a base it seems) and this could lead to earlier interest rate hikes, which would be a clear negative for the outlook. I will be looking at this first before the credit aggregates.

      Just my 2c

  2. Dave From Pakenham

    If current trend continues, March 2011 will mark the slowest rate of housing loan growth in the 35 years the RBA has maintained the index, at 6.5%, 30bps below previous low in April and May 2009.

  3. “we’re going to need above 7% growth in mortgage aggregates to generate any capital growth.”

    So you’re saying 7% housing credit growth equates to zero capital growth and other factors can be ignored.
    How then, do you explain the 18.8% capital growth (ABS 8 cap figure) from March 2009 to March 2010? Housing credit grew only 8.6% over that precise period.

    Credit growth, transaction numbers and LVRs are linked. It’s perfectly possible for steady credit growth and fewer transactions (which we seem to have) to lead to greater credit per transaction and thus higher prices. It is also possible that lower LVRs with steady or rising average loans (which is what AFG say we have)to lead to higher prices.

    I’m not saying prices will rise. But I am saying prices can rise with 7% credit growth.

    • Dave From Pakenham

      Perhaps the discussion should differentiate between, total value of housing and estimates based on extremely low numbers to population of observed sales.

      Its irrefutable that credit growth is the single most important factor, (which is a second order impact of all other macro factors) if you consider it is the marginal buyer, who is more levagred than the system that determines price. Clearly stimulus at the bottom end or economic mishap at the top end will bias estimates of price intertemporally, but total system value cannot continue to remain positive if credit growth is well below trend. Here I cite USA, Japan, UK, Western Europe, The Baltics, The Balkans, Middle East, Gulf States etc etc.

    • I was dumbfounded too at how it was occuring, but then it clicked. I did believe it was partially from FI, but then we see RP Data report last month that # of transaction volumes were 20% down in 2010 compared to 2009.

      Falling volumes on rising prices assisted this temporary anomoly.

  4. Ummm, hello. I said “there’s nothing here to disprove my notion”. Not, “this is a fact”.

    Of course it’s a simplistic comparison. A simple macro observation, not the be all and end all.

    Nonetheless, the first thing I would note Sarah is that in your example of capital growth, the aggregates were above 7%, roughly 23% above actually.

    I had this discussion last month. I wonder if the remainder of the growth came through Asian cash purchases as the FDI rules were relaxed in that period, but that is only speculation.

  5. Would have to be careful with business lending – days of invoices outstanding are on the rise, and i wouldn’t be surprised if some (many?) businesses are increasing their borrowings to cover shortfalls in cashflows….

    …or, is there more data to shed light on that??

    • Business lending has been very weak for a while now. Not sure there’s much you can draw from that

  6. I am a lender with a one of the big four and based in Qld. I can tell you that lending is very quiet here in Brissy. This time last year was one of the busiest periods we had in the last eight. We acheived 125% of our half year target (which ends on the 31st of March). This year we reached 67%. That is almost 50% less than 12mths ago. Lending is down in NSW, Vic and SA. However it is WA and Qld that impacted the most. They have already let go of over 20 corporate staff and if business lending is doing well it is not here in Qld, speak to the commerical bankers everyday and they have never seen it so quiet. We are also loosening lending policy almost back to 2007 levels and some of our biggest interest rate discounts and still no real uplift. Valuations are coming considerably lower than 12 mths ago and this seriously effecting our ability to get loans approved. I don’t know what Sarah is smoking but I want some. The valutions are down for the whole market from million dollar homes to small homes in the outer burbs. We have three real estate agents who are in serious financial difficulty and the bank is doing everything it can to keep arrears levels low. The slow down became most evident just before Christmas and has gotten worse in last three weeks with a small uptick this week.
    I have been in banking and this company since 1989 and this is much worse than the slow down in 2008.

  7. It’s difficult to tell precisely from looking at the graphs, but comparing the past 10 years of capital gains (RP data) to the past 10 years of credit growth (RBA), there certainly does look to be a fairly close correlation between upswings and downswings in the rate of housing credit growth and the rate of price growth.

    The very large acceleration in the rate of credit growth from 2001 – 2004 approx, is matched by the largest rate of price gain over the same period. Credit growth then falls in a large trough, mirrored by correspondingly large falls in the rate of price growth, to just above zero. Credit growth then accelerates again and price growth surges up in tandem with it. The pattern continues through to the present day.

    The volume of sales complicates the picture further but to say that there is no relationship there at all does not look correct to me. It’s the RATE of house price growth and credit growth that appear to have fairly closely tracked one another in at least the decade to now. Actual price is something else.