Biggest lift in housing credit growth in 11 years

Private sector credit

What happened? Private sector credit rose by 0.9 per cent in June – the most in 15 months – to be up 3.1 per cent on the year. Housing credit lifted 0.7 per cent – the most in 11 years – to be up 5.3 per cent on a year ago – the strongest annual pace in 2½ years. Owner-occupier housing credit jumped 0.9 per cent – the biggest gain in 5½ years – to be up 7.2 per cent on a year ago – the strongest annual growth rate in 2½ years. Investor housing credit rose by 0.3 per cent to be 2.0 per cent higher on a year ago – the strongest annual rate in 3 years.

Implications: Market interest rates have declined in recent months, despite building inflationary pressures. Lower government bond yields have weighed on the performance of ASX-listed banks, despite supportive fundamentals, such as stronger mortgage credit growth, solid capital management and low personal insolvencies. But investors should be alert to the potential for rising bad debts and buybacks during prolonged Covid-19 delta lockdowns.

Other data: The APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards fell by 0.6 per cent in June to be down 7.1 per cent on a year ago.

Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending.

What does it mean?

• Prolonged lockdowns in Sydney and Melbourne and virus flare-ups elsewhere are likely to slow the rapid pace of home price growth in the second half of 2021. That said, the CoreLogic daily home value index suggests that national home prices were still likely to have grown by 1.5 per cent in July, with prices up 1.8 per cent in Sydney. Sydney’s traditional spring selling season is likely to be pushed back into the summer months with fewer listings, auctions and sales volumes in the near-term. That said, the eventual re-opening of the NSW economy, supported by pent-up buyer demand and record low mortgage rates could trigger a sharp rebound in housing market activity.

• So what does this mean for home loan demand? Owner-occupier home buyers propelled a surge in housing credit in June. In fact, housing credit lifted 0.7 per cent – the most in 11 years – to be up 5.3 per cent when compared to a year ago – the strongest annual pace in 2½ years. Owner-occupier housing credit jumped 0.9 per cent – the biggest gain in 5½ years – to be up 7.2 per cent on a year ago – the strongest annual growth rate in 2½ years. And investor housing credit rose by 0.3 per cent to be 2.0 per cent higher on a year ago – the strongest annual rate in 3 years.

• The figures are consistent with elevated housing finance approvals by banks. Commonwealth Bank (CBA) lending data shows that the pace of new lending for housing remained buoyant in June. Lending to investors continues to lift as affordability constraints weigh on demand from first home buyers. CBA Group economists expect the value of home loans to increase by 1.0 per cent for June when the Bureau of Statistics (ABS) issues the data on Tuesday.

• While lockdowns are expected to temporarily weigh on the property market, the pick-up in housing credit growth and home lending bears close watching. Reserve Bank policy makers have made it clear they won’t hike interest rates to cool soaring home prices. While the Board continues to monitor lending standards, macro-prudential policy is likely to be the tool of choice again for regulators, should they need to cool the market. But CBA Group economists don’t expect APRA to reintroduce macro‑prudential measures in 2021 largely because we do not think the stock of housing credit will rise fast enough for the regulator to act.

• Market interest rates have declined in recent months, despite building inflationary pressures. Lower government bond yields have weighed on the performance of ASX-listed banks, despite supportive fundamentals, such as stronger mortgage credit growth, solid capital management and low personal insolvencies. Bank earnings are recovering from last year’s pandemic hit, but investors should be alert to the potential for rising bad debts and buybacks during prolonged Covid-19 delta lockdowns. Already Aussie banks have begun returning money to investors with the NAB today announcing plans to buy back up to $2.5 billion shares. ANZ also repurchased $1.5 billion worth of stock in July.

• Large Aussie businesses are cashed-up. And financial discipline during the pandemic has bolstered balance sheets. Spending on equipment has been supported by government policies, such as the instant asset write-off scheme, but investment has often been funded internally. That said, business credit growth jumped in June ahead of the expiry of the Reserve Bank Term Funding Facility (TFF) on June 30. Also, firms may have drawn down credit lines as the economic outlook deteriorated in NSW and Victoria. Lockdown uncertainty will likely restrain business investment in the near-term.

What do you need to know?

Private sector credit – June

• Private sector credit (effectively outstanding loans) rose by 0.9 per cent – the most in 15 months – in June to be up 3.1 per cent on a year ago.

• In June, housing credit lifted 0.7 per cent – the most in 11 years – to be up 5.3 per cent when compared to a year ago – the strongest annual pace in 2½ years.

• Owner-occupier housing credit jumped 0.9 per cent – the biggest gain in 5½ years – to be up 7.2 per cent on a year ago – the strongest annual growth rate in 2½ years. Investor housing credit rose by 0.3 per cent to be 2.0 per cent higher on a year ago – the strongest annual rate in 3 years.

• Personal credit fell by 0.5 per cent in June to be down 6.3 cent over the year.

• Business credit lifted 1.6 per cent in June – the most in 15 months – to be up 0.6 per cent over the year.

• The M3 money aggregate lifted by 1.6 per cent in the month to be up 7.7 per cent from a year ago.

• Broad Money also rose by 1.6 per cent to be up 7.7 per cent from a year ago.

• In June, loans and advances by banks grew by 3.4 per cent on the year. Loans by all financial institutions were up by 3.7 per cent on the year.

• Total commercial lending by banks fell by 1.9 per cent on the year.

• The APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards fell by 0.6 per cent in June. While credit card lending is down 7.1 per cent on the year, the data is affected by series breaks. Credit card lending is down 9.2 per cent since April 2020 when the series break took effect.

Published by Ryan Felsman, Senior Economist, CommSec