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Townhouse approvals at 20-year highsPrivate sector credit; Building approvals; China manufacturing & services
Lending: Private sector credit (lending) rose by 0.4 per cent in October after a 0.3 per cent rise in September. Annual credit growth fell to 5.3 per cent in October from 5.4 per cent in September.
Dwelling approvals: Approvals by local councils to build new homes rose by 0.9 per cent in October after rising 0.6 per cent in September. In trend terms, approvals rose for the ninth straight month, up by 0.7 per cent.
China data: The National Bureau of Statistics manufacturing purchasing managers’ index edged up to 51.8 in November from 51.6 in October while the services sector result increased to 54.8 from 54.3. Any reading above 50 signifies expansion or growth of activity. Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The approvals data has implications for banks, retailers, developers, building and building material companies.
What does it all mean?
Lending in the economy is growing at a sustainable pace. Nominal annual growth of the economy is around 6 per cent whereas credit (or loans outstanding) is growing by 5.3 per cent.
The only real lending growth is occurring in housing though this is now decelerating. Owner occupier and investor credit expansion is slowing. And October was the slowest monthly increase in investor housing credit since May 2016. Investor and interest-only lending restrictions from the bank regulator Australian Prudential Regulation Authority (APRA) continue to bite. APRA and Reserve Bank data shows that interest only lending continues to decline to around 23 per cent of all new lending in the September quarter, down from around 40 per cent just six months ago.
Business credit could be stronger than the current 4.0 per cent pace given record profitability and conditions. But businesses remain cautious about taking on debt. It is hoped that an expected pick-up in 2017/18 business investment plans eventually flow through to stronger business credit conditions in the medium term.
Personal credit remains anaemic as consumers remain constrained by low income growth and elevated household debt. Cautious Aussies have access to mortgage offset accounts should they seek additional funds.
There is certainly plenty of liquidity with annual money growth just below 7 per cent.
New council building approvals rose for a third consecutive month. Growth was particularly strong in Victoria which rose by 24.3 per cent in October. Strong population growth, low interest rates and strong employment growth continues to drive demand for new homes in Australia’s second most populous state.
Another standout was alterations and addition approvals which surged by 21.4 per cent during October. With an ageing stock of housing – especially homes built in the 1980s which require renovating – and recent house price depreciation in Sydney, it seems Aussies are keen to upgrade the interiors of their homes rather than move. Also, an abundance of newer and shinier apartment stock maybe encouraging unit owners to upgrade their bathrooms and kitchens in order to improve their resale value potential.
Townhouse approvals are at 20-year highs. Aussies are continuing to downsize, reflecting an ageing population, preference for smaller living spaces and inner city convenience, rather contending with the maintenance associated with large backyards.
What do the figures show?
Private sector credit
Private sector credit (lending) rose by 0.4 per cent in October after a 0.3 per cent rise in September. Annual credit growth fell to 5.3 per cent in October from 5.4 per cent in September.
Housing credit grew by 0.5 per cent in October – a fifth consecutive month at this level. Annual growth fell to 6.5 per cent in October from 6.6 per cent in September.
Owner occupier housing credit rose by 0.5 per cent in October to stand 6.3 per cent higher over the year.
Investor housing finance lifted 0.4 per cent in October to stand 6.9 per cent higher over the year – the slowest annual growth in eight months.
Personal credit was flat for a second consecutive month in October. Personal credit was down 0.9 per cent over the year and has fallen in annual terms for 22 months.
Business credit rose by 0.3 per cent in October after a 0.1 per cent rise in September. Business credit is 4.0 per cent higher than a year ago – the weakest annual growth in four months.
Both M3 and Broad Money rose by 0.6 per cent in October and were up 6.7 per cent and 6.8 per cent respectively on the year.
Term deposits with banks rose by $4.7 billion to $570.9 billion in October. Annual growth rose to 3.4 per cent in October from 3.3 per cent in September. 
Building Approvals:
Dwelling approvals rose by 0.9 per cent in October after rising 0.6 per cent in September. In trend terms, approvals rose for the ninth straight month, up by 0.7 per cent.
Over the past year 218,188 new homes were approved, down 7.3 per cent on a year ago.
House approvals rose 1.9 per cent in October – the fifth gain in six months. Meanwhile ‘lumpy’ apartment approvals fell by 0.2 per cent in October after declining by 0.4 per cent in September. Apartment approvals remain volatile on a month-to-month basis.
Dwelling approvals across states/territories in October: NSW (-6.8 per cent); Victoria (+24.3 per cent); Queensland (+6.1 per cent); South Australia (-8.4 per cent); Western Australia (-17.8 per cent); Tasmania (-13.0 per cent). Trend terms: Northern Territory (+0.3 per cent); ACT (-5.3 per cent).
The value of all commercial and residential building approvals fell by 1.1 per cent in October. Residential approvals rose by 5.4 per cent with new building up by 3.6 per cent while alterations & additions rose 21.4 per cent. Commercial building fell by 10.1 per cent, the biggest fall in nine months.
What is the importance of the economic data?
Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
China’s National Bureau of Statistics releases its ‘official’ monthly purchasing manager’s surveys for manufacturing and services at month-end. A reading above 50 indicates expansion. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.
What are the implications for interest rates and investors?
Dwelling investment has reached a peak, but home building remains healthy. The stock of new projects continues to be topped up, meaning positive conditions for developers, building material companies, home builders and suppliers to the new housing sector. Companies as diverse as Mirvac, CSR and GWA retain good prospects.
We expect new home building activity to ease in 2018 from recent historical highs, though a ‘soft landing’ appears likely given strong population and jobs growth, interstate migration and interest rate stability. Renovations and alterations could provide further support to housing activity amid an ageing stock of Aussie houses and units.
Housing lending and credit growth remains a focus of the Reserve Bank and APRA. Recent investor lending restrictions has cooled the Sydney housing market in particular. This will no doubt please policy makers. Modest business credit growth continues to be a puzzle considering robust business surveys, though companies may be reluctant to gear-up their balance sheets, preferring to conserve cash.
Chinese manufacturing and services sectors are still expanding. There are no implications for currency or interest rate markets. Aussie businesses can remain optimistic about Chinese demand.
Commsec expects interest rate stability through to at least the end of 2018.
Originally published by Ryan Felsman, Senior Economist, CommSec