Uncertainty clouds the lending picture

Household and commercial lending are likely to hit a peak in coming months, but a decline in fixed credit facilities for businesses suggests a murky outlook for non-mining investment.

Low interest rates continue to support household and business lending but momentum has slowed considerably during 2014. Lending to owner-occupiers and investors has been largely unchanged over the past few months and is set to ease over the remainder of the year. For businesses, fixed credit facilities have declined for the past three months, raising concerns about the outlook for non-mining investment.


Household lending appears set to peak in the next couple of months, following modest growth during 2014 so far. On a trend basis, loan approvals to owner-occupiers rose by just 0.2 per cent in June (down from 1.7 per cent in October), while for investors growth slowed to 0.1 per cent (down from 3.9 per cent in October).

Graph for Uncertainty clouds the lending picture

Low interest rates have encouraged owner-occupiers and investors to bring forward their purchases but that process has its limits. In the past, periods of strong activity have been followed by lengthy lulls. House prices -- which are demand driven in the short-run -- typically ease considerably when lending activity slows.

The most recent housing boom has been driven by investor activity, which increases the risk to house prices when lending eases. Speculators are particularly sensitive to falling prices, since rental yields on Australian properties are so low. Without capital gains growth there is very little reason to invest in Australian property.

At the state level, investor demand is starting to ease somewhat in New South Wales and Victoria. Nevertheless, these two states continue to be dominated by speculation and are the most at risk if investors become more cautious. Investor activity in the other states has been more moderate, which may isolate them somewhat from the eventual investor fallout. 

Graph for Uncertainty clouds the lending picture


Commercial lending rose sharply in June, offsetting some recent moderation in the pace of growth, but lending activity should ease somewhat over the next few months based on current growth dynamics.

Graph for Uncertainty clouds the lending picture

Commercial revolving credit facilities (such as lines of credit or overdrafts) rose by 38 per cent in June, accounting for around 95 per cent of total lending growth in the month. Revolving credit facilities can be particularly volatile -- to the extent that even trend measures are often unreliable --so we should take the result with a grain of salt.

More importantly, absurdly large spikes in revolving facilities are temporary and could be unwound as soon as next month. For example, revolving credit facilities rose by around 50 per cent in June 2013 but fell almost 30 per cent the following month. There were similar occurrences in both October 2011 and January 2009.

Although we should discount this month’s outcome, we shouldn’t ignore the broader strength in revolving credit facilities and its implications. While fixed facilities are often used to fund new investment, revolving credit facilities are typically used to balance the books. They can be a useful tool if customers are slow with repayments or if a business is struggling to pay its debts.

Fixed facilities will be the more important indicator of non-mining investment -- particularly among smaller businesses -- and on a trend basis this measure has fallen for the past three months. Overall activity remains quite high, although not as high as it was pre-crisis.

Overall, lending activity for both households and businesses remains high but the trend suggests it's almost at its peak. The response to low interest rates has been swift but has mainly benefited house prices rather than productive business investment.

Businesses have taken advantage of low rates by refinancing or paying down existing loan balances. That is smart business practice and will benefit Australian businesses down the track but it will weigh on activity in the near-term.

The trends to keep track of are lending to fixed credit facilities and to housing investors. The first has implications for non-mining investment while the second has underpinned the most recent housing boom and will largely determine whether prices rise or fall over the next year. 

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