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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 1 November 2015

Investor credit "hangs a u-ey"

Credit growth to 7 year high

The Reserve Bank recorded an upbeat result for private sector credit in September, with annual credit growth picking up to 6.7 per cent, the strongest result since 2008.

The main eye-opener was the 1.2 per cent monthly jump in business credit, with housing credit continuing to grow at a solid clip of just above 7.5 per cent over the year to September.

Growth in personal credit remained subdued, but with Westpac having reported that 70 per cent of its home loan customers are ahead of repayment schedules, and aggrergate mortgage buffers now at unprecedented levels, this can hardly be a surprise.

Business credit

Business credit growth tripled some market forecasts to come in at 1.2 per cent for September, taking annual growth to a 79 month high of 6.3 per cent. This was pleasing to see, as it has been a long, slow recovery from the recession-like business conditions seen in Australia from 2008.

The strength of the business credit result is somewhat at odds with the ABS Lending Finance data series - I analysed it here - which has implied a softening in commercial finance over the months since April.

Elsewhere there have been some tentative indicators that businesses are increasingly accessing capital. The ASX market statistics to September recorded $88.1 billion of initial and secondary capital raised over the past year, the greatest rolling annual total since April 2010.

The data is forever lumpy, and businesses can tap secondary markets for capital raisings for any number of reasons, of course - not all of them positive by any means - but there are at least some signals evident that Australian business is borrowing again.

Housing credit to a 60 month high

Housing credit recorded another 0.6 per cent growth for the month, thereby nudging annual credit growth a shade higher to a tick over 7.5 per cent, for a fresh 60 month high.

As the chart below shows the composition of housing credit has "chucked a u-ey" since June, with owner-occupiers now accounting for growth in the housing sector and investor lending slowing.

Housing credit relating to owner occupiers jumped by 0.7 per cent in September, the strongest monthly reading since all the way back in Q1 2010.

Of course, total annual housing credit growth of 7.5 per cent is materially lower than the levels seen in cycles past, but then the total stock of outstanding credit is significantly higher today, now closing in on $1.5 trillion. This debt sits against a total value of dwelling stock which is rapidly approaching $6 trillion.

More than meets the eye...

Despite the strong result for housing credit, there has been some jiggery-pokery in the housing finance data lately, and we may not know for certain how the market is shaping up until the new year. 

Firstly, as you can see represented by Point A the chart below, around $30 billion of outstanding credit was reclassified out of the owner-occupier category, as lenders undertook a more rigorous review of their classification processes. 

Secondly, Reserve Bank Governor Glenn Stevens predicted that following on from APRA's tightening macroprudential measures more borrowers in the market would opt to class themselves as owner-occupiers instead of investors, thereby attaining access to more favourable lending conditions.

On the evidence of the figures to date, this has proven to be spot on. The annual rate of investor credit growth has slowed from a post-revision peak of 11 per cent back in May to 10.4 per cent, and it is only a matter of time before the growth rate sinks below APRA's arbitrary 10 per cent preferred threshold. 

Indeed, APRA's own monthly banking statistics for the month revealed that within the mortgage books of many lenders this has already taken place. 

Meanwhile annual owner-occupier credit accelerated in September to a four year high annual growth rate of 5.9 per cent (refer to the recent acceleration in Point B in the above chart).

Although this broadly seems to mirror the ABS Housing Finance series - which showed an unprecedented seasonally adjusted total of $34.3 billion written in August - there's a suggestion that a portion of the enormous 6.1 per cent leap in owner-occupier financing written in that month was bogus (due to some refinancing by existing borrowers being classified as "new" lending).

For this reason and others, we likely won't know until at least January how the housing market is truly shaping up for the calendar year ahead.

The wrap

This was a pleasing result for business credit growth, while investor credit growth slowed for a third consecutive month. Indeed, on a seasonally adjusted basis the total stock of outstanding investor credit has declined.

Following the revisions to historical data the share of credit pertaining to investors soared to a more believable 38.6 per cent in July, but this trend has has now been reversed by tighter macroprudential measures, and the investor share of outstanding credit has quickly eased back towards 37.6 per cent.

All of this may leave the Reserve Bank of Australia (RBA) wondering what to do with interest rates on Tuesday.

It seems that the Reserve may now cut interest rates in order to soothe the slowing economy without fear of unduly firing up the property investor cohort, with lending criteria having been tightened considerably.

On the flip side another cut might still represent a net boost for property markets - despite recent increases in mortgage rates by the big four banks - partly because not every existing or potential borrower in Australia has been impacted by the tightening of mortgage rates, and largely because yet another interest rate cut could wrench more hapless savers away from the safety of cash. 

As we have seen in recent weeks, growth in the economy remains weak at around 2 per cent, trend unemployment has been sitting in the 6.1 to 6.2 per cent range for 16 months, and inflation is also generally soft, declining towards the lower end of the target range.

Thus there are plenty of arguments in favour a rate cut on Melbourne Cup day, even if the RBA is a reluctant cutter. However, the most coherent explanation of the probabilities that I've seen was written by Bill Evans of Westpac, who explained that although the Q3 inflation result was soft, forecast growth has probably not been revised below trend.

Hence, expecting to see the cash rate on hold at 2 per cent with an easing bias. It will be a fascinating week ahead!