Credit growth stagnates (updated)

The Reserve Bank of Australia (RBA) has released the Financial Aggregates data for August 2011.

Here’s the summary (emphasis added):

  • Total credit provided to the private sector by financial intermediaries rose by 0.2 per cent over August 2011, after rising by 0.3 per cent over July. Over the year to August, total credit rose by 3.0 per cent.
  • Housing credit increased by 0.4 per cent over August, following an increase of 0.5 per cent over July. Over the year to August, housing credit rose by 5.8 per cent.
  • Other personal credit declined by 0.9 per cent over August, after decreasing by 0.4 per cent over July. Over the year to August, other personal credit decreased by 0.9 per cent.
  • Business credit was flat over August, following a similar result in July. Over the year to August, business credit declined by 0.9 per cent.
  • Over the month of August, M3 grew by 1.3 per cent and broad money grew by 1.3 per cent. Over the year to August, broad money grew by 7.8 per cent.

Looking at the data visually, first by housing credit yearly growth:

Then business:

And total growth:

Some readers have asked for a closer look at the change in monthly housing credit growth – here is a chart going back 10 years:

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  1. Whammo – crunch time and if China’s growth halves in the next year as we have been reading that would be a masive implosion here in Australia … in fact it would be the Beijing Blues all round.


    • Plenty of people in China now are talking about when the real estate market is going to crash. Chinese government now is trying to beat the property price down and “push” this market to crash.Then government will buy most of land back at very cheap price. And will build up plenty of cheap public apartments in couple of years late.

      So next year Chinese GDP will heavily shrink. Of course the demand to Australia resources will sharply drop.

  2. Well if credit is the fuel for booming house prices, the tank is looking almost empty. The lift from the FHOG boost in 09 was surprisingly modest.

    Absent any fiscal stimulus from the federal govt, I’d say we are heading into recession if Steve Keen is correct about the relationship between credit growth and growth in the economy.

      • We HAVE an inflation problem. We just don’t see it yet because we are driving looking back through the rear window and shouting ‘All clear ahead’

        In the past instead of an inflation problem caused by excess credit we had a CAD problem we still refuse to recognise and some learned gentlemen even preach is a wonderful thing for the nation.

        Shortly we are about to have an inflation and a CAD problem combined.

    • I don’t think it’s the case of housing credit just being positive or negative, it looks like it is a case of how positive it has to be to make prices grow. Just looking at the chart suggests there has to be a certain + level just to stand still in a society with a growing population, let alone get them rising.

      I trust I’ve got the right interpretation?

    • The trend is more important then any individual figure. If the line is sloping down then credit growth is decellarating and casing GDP to fall. An upward sloping line mean accellarating credit and growing GDP. A flat line is stagnating credit growth and can mean a relative fall or growth in GDP depending on what credit was doing beforehand.

  3. Ι’m not too sure I like the idea of economy “growth” which is based mostly on credit growth.

    I think people are sandbagging, they’re scared because of all this talk of upcoming recession. Pay some debts, save some cash, postpone purchases. Is that necessarily a bad thing?

      • Οff topic dumb question: aggregate demand + change in credit: isnt that double counting consumption?
        Eg wouldnt credit card spending appear on both sides?

      • Credit card debt levels are only counted if it hasn’t been paid off.

        Remember, credit cards are pure, unbacked credit creation (whereas when you borrow to buy your house, the credit is created (on a keyboard), but the house is the “collateral”).

        Rob, I agree about distinguishing the quality of the debt, but the mathematical balance remains. Debt is debt and it all adds to consumption, which is GDP.

          • actually hang on it’s still doing my head in 😛
            Say I buy a TV for $2k from Hardly Normal on my CC, and I leave the balance unpaid for a while. HN reports sales $2k which goes to GDP. Then my bank reports credit growth $2k (unpaid credit card balances), which also goes to GDP…? Isnt that double counting the same consumption?

          • Isn’t that scenario the same as buying a house with a high LVR mortgage?

            The higher you pay, the more money goes into the economy, thus boosting GDP. The person you sold it too can then borrow more and thus increase spend more and boost GDP again.

            Now see what happens when you stop borrowing money to buy stuff?

            If you use savings, there’s no recycling factor, just like paying off your credit card at the end of each month.

            Tis why GDP is not the best metric for following an economy.

            Credit, savings levels and the acceleration/deceleration matter.

      • While Prince is right, what this does is highlight the limitations of GDP as a measure of a country’s wellbeing.

      • I agree Alex, I’m just describing what is, not what should be.

        I much prefer GDH – gross domestic happiness.

        Used to be called prosperity – hard to quantify, but metrics like
        – sub 2% unemployment, (5% for NAIRU is laughable)
        – less than 40 hours average work per week, (30 is a good benchmark)
        – zero to negligible use of childcare
        – increased leisure time,
        – low cost for essentials (fresh food, water, wine, electricity, housing, transport),
        – flexi retirement/working hours

        These should be more important than GDP per capita or increase in wages, or other unconnected irrelevances.

        But we don’t structure our economy that way, yet.

        • We can only dream for that which you described.

          Instead we have a world dominated completely by small minded glorified accountants (economists of the Neo-Liberal bent) who do nothing for the common man. They work knowingly or unknowingly for the world’s owners.

          Oh for a GDH index and a political system that values it.

        • Prosperity/happiness and your metrics are hard to quantify. How about a measure for developed countries of depression drugs per head of population?

        • dumb_non_economist

          The Prince,

          I must be your offspring, that’s just how I see it. Couldn’t be a work-a-holic if you paid me!

        • OMG +100 yet again.

          The Prince is clearly on a roll with this train of though.

          Even sounds populist!


    • “I think people are sandbagging, they’re scared because of all this talk of upcoming recession. Pay some debts, save some cash, postpone purchases. Is that necessarily a bad thing?”

      Well that’s the ironic part – if masses of people started holding back spending and saving due to fear of a recession (which I’d argue may already be happening)….it’ll likely itself cause a recession….

      • Paradox of thrift I think you are reffering to. What might be good on an individual level ends up as a problem at mass level.

        I think it’s the same sort of phenomenon that led to the flood of easy credit. One firm can see an advantage to itself in lowering it’s lending standards, other firms see it’s success and follow suit in order to protect their market share, and eventually you end up with subprime lending. Individually each firm was acting in it’s own best interest, but the collective result was the GFC. Sometimes I think we need rules, like lending standards, to protect the common good, and that is the role for government. interest.

        • It depends on whether you think ever-increasing debt and the sale of all its assets to foreign interests is a good thing for the nation.
          The paradox of thrift is baloney.

    • That chart is not at all what I was expecting. There’s been a downward trend over the last ten years? Isn’t housing credit growth supposed to be a leading indicator of house prices? So why then have prices skyrocketed over the past ten years while credit growth has fallen?

      • Just, remember that a steady rate of growth leads to exponential growth in the underlying

        So if you grow at 5% every year the rate of growth looks steady but the amount of credit is growing exponentially.

        Thats why you see total credit looking exponential till around 2005, where it start to flatten out, then the step change since the crisis which is roughly linear with a much flatter slope.

    • You can only grow a system at 10-20% compounded annually for so long Just.

      This is coming off an extremely low base.

      e.g 4 years ago in August 2007, total credit for owner occupier housing was $605 billion. As of August 2011, its $844 billion.

      That $239 billion increase represents the TOTAL change from January 1990 to September 2002 – almost 13 years.

      Yet average annual credit growth during these periods was 9% and 12%, respectively.

      Now we are down to 5.8% annualised.

  4. @ Hamish

    As simple as I can make this…

    The issue is not the ‘growth’ of credit, it’s the ‘quantity’ of NEW credit (aggregate NEW credit) vs the ‘quantity’ of housing (aggregate house prices)

    The aggregate ‘equity’ in housing is a direct function of the aggregate quantity of NEW credit TO BUY (not to refinance)

    When New Credit creates NEW deposits in an actual sales transaction (TO BUY) the hypothetical “equity” becomes reality in that ONE transaction…

    Of course, every one else in the neigbourhood thinks to themselves… Well that’s what MY house is worth so I have XYZ “equity” in my house… That’s NOT true, it’s ONLY ‘hypothetical equity’. It ONLY becomes ‘real equity’ if the same quantity of NEW credit is created and a sales transaction occurs of the deposit is in the accounts for ALL houses in the neighborhood. If that does NOT occur, then the observation of someone elses transaction DOES NOT imply some broad community hypothecation of ‘real house equity = a bankable deposit’ to the wider community observers.

    • Well that makes sense to a degree. The money as a seller your tapping into is provided by new current buyers only. The only money in a market is the money the current buyers are willing to put onto the table.

      However previous sales do set a precedent to others of how much money they need to put into the market to get an asset. It encourages new market participants somewhat. On an individual seller level it also gives you an indication as to what buyers are willing to fork out.

  5. @ Mark

    I agree.

    There is a 100% correlation between these three things for entirely logical reasons to do with housing being purchased with ‘money’ (NOT bananas).

    The quantity of deposits.

    The quantity of New mortgage credit.

    The purchase price of housing.

    Money can ONLY come into existance from NEW Credit which creates a NEW deposit (or government money printing)

  6. Somewhere people lost an idea of what the numbers really mean when talking dollars and euros and debt. Just google Debt Clock and Billion Picture to see what I mean.
    You will soon see what is happening when you realise the sheer quantity of money which is being given to banks to keep them from going bankrupt.
    When you take on hundreds of thousands in DEBT you can start to visualise what you are really doing. I can’t see how it gets paid back.

    • I ROFL when people say “It’s only $xx,000” and I lose it when they say “It’s only $xxx,000” as if it’s not a lot of money.

      Like the average person has that in actual savings.

      • +1

        When credit freezes you will be able to open your windows in the burbs in the new estates (eg bullshit waters/mews/views etc), hopefully snugged in between some SUVS and listen to ‘true love’. 😉

      • I do … and I am debt free and mortgage free and renting.

        Hmm renting must be the ‘neo negro’ in Melbourne!

        Woo Woo!


  7. Prince – lenders are insisting on very high standards at the moment, especially over 90% LVR.

    That will slow credit growth. On the flipside there seems to be a reasonable level of enquiry from new buyers.


  8. Prince – I’m intrigued by the charts “Yearly growth in Business credit” and yearly growth in total credit”

    I note that the credit growth to the lead up to the 91 recession was much greater than the lead up growth to the present. Perhaps this is due to less reliance on bank lending by publicly listed corporations – do you have any data on that?

    • I think the acceleration of the change in debt growth is more important than the nominal level of change – that is, leading up to the recession, credit growth decelerated extremely fast.

      Note too that it was the positive acceleration in change in debt that got Australia out of the 1991 recession (due to lower interest rates mainly).

      The nominal level comparison (between now and 1991) is not effective also because of the tremendous amount of outstanding debt in the system, even after adjusting for GDP and population growth.

      • I’m not in disagreement, but it could also be argued that the recessions in 81, 91, and 2008 were all preceeded by a sudden contraction in credit growth after periods of sharp credit growth upswings.

        refer chart RBA D1

        In each case, we came out of recession when credit grew again, as we will again in this current recession.

        I was surprised by the high rate of credit growth before the 91 recession. I had forgotten about the rapid rise and fall of the Alan Bonds of this world. We really haven’t seen as much of that this time around.