Housing credit plumbs record lows

By Leith van Onselen

The Reserve Bank of Australia (RBA) has just released the private sector credit aggregates, which registered a small increase in total credit in the month of June, but the second lowest monthly housing credit growth in the series’ 35-year history and the lowest annual mortgage growth ever recorded:

Total credit provided to the private sector by financial intermediaries rose by 0.3 per cent over June 2012, after rising by 0.5 per cent over May. Over the year to June, total credit rose by 4.4 per cent.

Housing credit increased by 0.3 per cent over June, following an increase of 0.3 per cent over May. Over the year to June, housing credit rose by 5.1 per cent.

Other personal credit decreased by 0.2 per cent over June, after increasing by 0.1 per cent over May. Over the year to June, other personal credit decreased by 1.5 per cent.

Business credit increased by 0.5 per cent over June, after growing by 0.8 per cent over May. Over the year to June, business credit increased by 4.4 per cent.

A chart showing the long-run breakdown in the components is provided below:

Personal credit growth (-0.2% MoM; -0.4% QoQ; -1.5% YoY) fell over the month and remains lower over the year. By contrast, business credit continued its modest recovery (0.5% MoM; 2.0% QoQ; 4.4% YoY), which is good news, but housing credit (0.3% MoM; 1.0% QoQ; 5.1% YoY) grew over the year, but at subdued levels relative to their long-run average growth rates.

Focusing on the housing market, annual credit growth hit a fresh all time (35-year) low of 5.06%. Monthly housing credit growth (0.30%) was also the second lowest recorded result in the series’ history (see below chart).

After registering a decent bounce in January, monthly housing credit growth recorded five consecutive monthly falls and appears to be in a downtrend.

Finally, a breakdown of owner-occupied credit and investor credit is provided below:

What is most worrying about this result is that it follows the RBA’s -0.5% cut in official interest rates in early-May and the follow-up -0.25% cut in June. While it is only a few month’s data, these figures imply that these rate cuts had absolutely no impact on mortgage demand which, in fact, has taken another leg down over the past few months.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

Comments

  1. I see business credit’s still growing steadily, as businesses borrow to get through the bad times…

  2. Wow, Owner Occupier credit growth has fallen off a cliff! Interesting to compare that with PI credit growth increasing (although still very low).

    Loan sizes are starting to shrink a bit, right? Not just less sales I believe.

    This upcoming Spring selling season could be an absolute disaster for would be vendors, especially if rate cuts keep getting their price expectations up above the market…

  3. Interesting. Confirms what everyone feels – that debt is out of favour.

    Deleveraging is all the rage.

    Lets face it, people were just speculating on prices (whether they understood it or not) – an expensive pad doesn’t feel too good when it might not make you money and you actually need to pay it off.

    • For the household sector, I think you are absolutely right. They see house prices essentially falling since the start of 2010, and they have a regular diet of global FUD on their nightly TV screens.

      • When mortgage credit growth is a negative number we can be sure the bust is well and truly under way.

    • You could be right PF but i’m wondering if there isn’t a bit of a cultural change in social attitude to debt and speculating that has started to take hold.

      This is within the broader global context of asset price deflation making debt speculation much more risky.

    • Rate cuts are less important than the ability to save for a deposit. For a lot of people, costs including rents, are making it hard to save even a 5% deposit.

      Aligned to this, banks see more credit demand when LVRs drop than a few falls of 50 basis points. That is the main thing driving the bubble since the late 90s – relaxed banking standards, which the market is now slowly correcting.

    • >Rate cuts take time.

      Yes, but the big question is what they will mean. More lending, or paying down debt faster ?

      I would suggest that the evidence I have seen from VIC and QLD govt data suggests the later.

      • Hopefully households will pay down debt and consolidate.

        What happened to minimalism?

    • I think that regardless, our bubble is made of tougher skin than most due to various factors which include politicians on both sides dedicated to keeping houses unaffordable.

      However, the situation in Europe is falling apart fast and the US and Chinese economies are slowing as well. Once the perfect storm is created, I’m pretty sure that despite our leader’s best efforts to hold up prices with handouts and bailout our banks with our tax money, house prices will collapse.

  4. @ Peter Fraser… You’re funny

    22 years seems long enough to me!

    The 1990 cash rate has been cut from 17% to 3.5% in 2012. The mortgage interest rate has been cut from 16% in 1990 to 6.5% in 2012. Annual housing credit growth has declined from 15 – 20% p.a. in 1990 to 3.5 – 5% p.a. in 2012 and now the lowest growth rate in 35 years. The BOJ have had 0% interest rates for 20 years… they are still waiting. The USA has had 0% interest rates fror several years… They are still waiting.

    • I have no idea why you would confuse us with Japan – get real. We do not have a contracting population, we don’t live in 65 Sqm apartments, and our housing is way cheaper.

      Look up “One Room Mansions”

      I can understand the comparison to the USA – house prices are rising in the USA, and as they do so will interest rates, although not just yet.

      If we are building too few houses, that is a bad sign for bears. Do I need to explain that?

  5. I think the credit aggregates could go a lot lower – negative.

    We are in a deleveraging phase – where net savings exceed net new debt by a wide margin. Paul Vallejo argues with some justification that the deleveraging is not because of an epiphany among the indebted to change their ways, but a lack of fresh borrowers to keep the boom going – which is how all Ponzi schemes end.

    http://www.debtdeflation.com/blogs/2012/07/27/the-investors-corner/

    Don’t Buy Now!

  6. A large part of the decline in mortgage demand is a function of demographics.

    Since the beggining of of this year, approximately 100,000 baby boomers have retired. Another 100,000 will retire by the end of this year.

    Most people extinguish their loans before retirement and are very reluctant to establish a new loan during retirement.

    Despite what some may say, there aren’t sufficient Gen X/Ys to replace this disappearing demand – the banks already know this and a changing their strategies accordingly.

    This demographic trend is going to continue for at least the next 5 years unless we have an immediate increase in skilled migration.

    P.S. the next phase of this cycle is the disposal of negatively geared / low yielding investment properties by retired baby boomers. I suspect we’re already seeing the begginings of this trend, as can be seen by the elevated stock on market.

  7. @ Peter Fraser

    The USA is an interesting comparison.

    The aggregate price of US housing is 1 X GDP = $16 trillion. In Australia the aggregate price of housing is 3 X GDP = $4.5 trillion. US net mortgage credit growth is ~negative. (check the FED flow Z1 around page 104)

    Australian housing for many previous decades (over the past 120 years) has been priced at 1 X GDP

    As an historical observation, prices do seem to stabilise and maybe even rise from about 1 x GDP

    Australian household debt is 0.85 – 0.95 X GDP

    Australian Housing ‘equity’… That is entirely dependent on what quantity of credit 4% of the population decide to create each year.

    You know this because, you know the only way you can spend ‘housing equity’ is to create credit. For retirees that is a reverse mortgage… (I call them Sub prime NINJ loans ‘No Income No Job loans’)

  8. Despite very subdued mortgage growth one thing is certain the rate cuts are having an effect on the direction of the real estate market. If the major data providers are to be believed the rate cuts have at the very least bought some time for housing to have a temporary bounce. However if the RBA abandons reason and lets the housing bubble start to reinflate in a meaningful way then the sky is truly the limit for property prices. That is before we experience the worst property bubble burst in all of modern history.

    The long term trend is down but the property never goes down meme is still very strong in the mindsets of the average Australian, especially Gen Y who is constantly barraged by family and friends to “get in now or miss out forever”. I just wish the average person was intelligent enough to understand the idiocy of that statement, without any demand at that level of prices they have to drop its commerce at its most simple.

  9. @ David Collyer

    Just Zero credit growth would mean aggregate purchase power = deposit base = 1 X GDP

    The RBA will soon panic and lower rates far more. That will allow the most spectacular credit destruction vs credit creation in Australias history.

    @ Peter Fraser

    Richard Feynman… From Wikiquote…

    The first principle is that you must not fool yourself, and you are the easiest person to fool.

  10. @ willy

    The RBS analyst does not understand money despite the report published by a bank. (Nothing new here that’s been perfectly consistent world wide!)

    1% mortgage credit growth for an extended period in Australia would not cause the outcomethe the RBS has predicted.

  11. Leith, how do you define long term…because over the long term ie the next 35 years I can’t see household credit growth growing at 11%+ year on year. I can’t even see it growing at half that over the next decade. I just can’t imagine the total stock of credit even doubling in 15 years (growth rate of only 4.8%).

  12. @ Bakunin

    A valid point when housing debt/gdp is at a record high. A regression back to long term average would imply credit growth < nom gdp growth. Is that 1% 3% 4% who knows. Presently s.a. we have had two months of 0.3% = 3.66% p.a.