A credit growth challenge for the Coalition

While investor credit growth continues to push closer toward pre-crisis levels, the overall response to record-low interest rates remains relatively subdued. This will have profound implications for the government.

Investor activity continues to drive credit growth across the country. But the overall response to low interest rates has been relatively subdued, reflecting the fact that many households and businesses remain fairly cautious.

Housing credit rose by 0.6 per cent in April, its strongest monthly gain in three-and-a-half years, to be 6.1 per cent higher over the year. Growth continues to be led by investors, with investor housing credit rising by 0.8 per cent in April, to be 8.2 per cent higher over the year.

New investor lending activity continues to be elevated and -- despite losing some momentum in recent months -- I anticipate that this will push investor credit growth towards its pre-crisis level of around 10 per cent over the next year.

Credit to owner-occupiers is currently up by 5 per cent over the year, reflecting the much stronger investor activity throughout the current housing upswing. Nevertheless, it is likely that housing credit growth will rise to a level that Reserve Bank of Australia governor Glenn Stevens might find uncomfortable.


Graph for A credit growth challenge for the Coalition

In March the RBA noted that “the pick-up in investor activity in the housing market does not appear to pose near-term risks to financial stability”, but it acknowledges that it will continue to monitor the market closely for signs of excessive speculation and riskier lending practices (Investors test the RBA’s homing instinct, March 26). Stevens said that it would be undesirable for annual housing credit growth to climb much higher. But higher it will surely go.

Some of these concerns have eased in recent months, particularly with house prices declining sharply during May. Some of the recent decline is likely to be seasonal but there also good reason to be a little more pessimistic about the outlook than we were a few months back (Has the property market run out of steam?, May 28).

Business credit continues to rise at a modest pace, up by 0.3 per cent in April to be 2.7 per cent higher over the year. As a share of total credit, business credit is now at its lowest level on record.


Graph for A credit growth challenge for the Coalition

Australian businesses remained fairly cautious leading into the federal budget, with many firms continuing to refinance or pay down existing loan balances rather than expand operations.

According to the Australian Bureau of Statistics, business investment is set to improve significantly across the non-mining sector over the next couple of years (Some good news amid Australia’s capex decline, May 29). Unlike the mining sector, Australia’s non-mining sector borrows predominantly from domestic lenders; as a result, rising investment in this sector should see business credit rise to its highest level in at least six years.

Personal credit was unchanged during April and has clearly been incredibly weak over the past six years. Based on the sharp fall in consumer confidence following the budget it appears unlikely that this will change anytime soon. Interest rates may be low but households are clearly taking a cautious approach to anything that isn’t a mortgage.

Lending activity continues to respond to low interest rates but the pick-up in credit has been relatively slow. This relatively subdued response has some profound implications for the federal government.

Steve Keen pointed out on budget night that the federal government’s forecasts rely on the assumption that private debt will need to grow at an annual pace of around 10 per cent in order to generate a healthy surplus of 1 per cent of nominal GDP by 2024-25 (Another budget bounty for the Lucky Party?, May 13).

With credit growth unlikely to hit that number in the near term, even with historically low lending rates and high levels of speculation in the housing market, we cannot rely on credit to drive growth as it has done in the past. Nevertheless, credit growth will continue to trend upwards at a slow but steady pace -- just don’t expect lending to reach the dizzying heights of the past.

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