Record lift in home loans. RBA notes litany of risks.
Lending; Financial Stability Review

Home loans: The value of new loan commitments for housing rose sharply in August, up by a record 12.6 per cent.

Reserve Bank Financial Stability Review: The Reserve Bank notes: “The financial system remains well placed to withstand the economic effects of the pandemic, while supporting households and businesses. However, there will be increased challenges over the year ahead as government support tapers and loan repayment deferrals end.”

The lending figures have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending, The Financial Stability Review has implications for finance providers, the broader sharemarket and interest rate settings.

What does it all mean?

• Recession? What recession? Aussies are embracing housing like never before. Not only have home loans posted record gains in July and August but the value of loans has never been higher.

• To take on a new home loan, Aussies must have a degree of job security and a generally confident outlook. More homes being built and purchased has positive implications for electrical and homewares businesses.

• The Reserve Bank has acknowledged a litany of potential risks. But overall, households, businesses and banks are considered well placed to absorb the shocks that may lie ahead.

• One thing is clear – the Reserve Bank is by no means complacent. And there is a raft of risks to monitor over coming months.

What do the figures show?

Lending – August

• The value of new loan commitments for housing rose sharply in August, up by a record 12.6 per cent. Owner-occupier loans were up a record 13.6 per cent to a record $16.3 billion. And investor loans were up by 9.3 per cent. The accompanying table has the details of lending per category.

• The value of owner-occupier first home buyer loan commitments rose by 18.4 per cent to be up 38.1 per cent on the year.

• The value of first home buyer loan commitments accounted for 30.8 per cent of all owner occupier commitments (excluding refinancing) – a 10½-year high.

• The number of owner occupier first home buyer loan commitments increased 17.7 per cent in seasonally adjusted terms to a 10½-year high of 12,302 (41.1 per cent of all loans).

• Personal finance fixed term loan commitments fell by 12.5 per cent in August to be down 17.5 per cent on a year ago.

• Personal lending from revolving sources (including credit cards) rose by 13.4 per cent in August after falling by 11.1 per cent in July. Loans were down by 29 per cent over the year.

• New finance leases rose by 0.8 per cent in August after falling 14.1 per cent in July. Finance leases were down 2.9 per cent on the year.

• The value of new loan commitments to businesses for construction fell by 42.9 per cent in August to be down 57.3 per cent on the year.

• Loans for the purchase of property by business rose by 15.3 per cent in August but were still down by 31.3 per cent over the year.

Reserve Bank Financial Stability Review

• Global: “The global economic recovery is going to take time and will be uneven. Its path is also highly uncertain, and dependent on the further course of the virus. Risks to financial systems will therefore remain elevated for some time to come.”

• Australia: “Australian businesses and households are generally in a strong financial position but some will struggle in the near term.”

• Business: “Business failures will rise substantially as loan repayment deferrals and income support come to an end. Business failures have flow-on effects to their creditors, both financial institutions and other businesses, and their employees.”

• Households: “Some households are struggling, but the finances of most households are faring well to date and demand for housing has held up.”

• Australian banks: “While the Australian financial system is in a strong position, risks are elevated. These risks to the financial system would be exacerbated by a weaker-than-expected economic recovery, for example, stemming from further setbacks on the health front or international political tensions. However, stress tests of the Australian banking system indicate under a baseline scenario based on the economic forecasts in the Bank’s August 2020 Statement on Monetary Policy (SMP) banks will remain very well capitalised, not even entering their capital conservation buffers. Even if the economic contraction is substantially more severe under a downside scenario, banks would remain above their minimum capital requirements.”

• Banks: “Given their strong balance sheets, banks will be well placed to continue lending, supporting the economic recovery and so in turn the Australian financial system.”

• Commercial: “Some commercial real estate also poses significant risks for lenders and leveraged investors.”

• Superannuation: “Around 3 million requests for access have been approved under the superannuation early release scheme announced in March, with withdrawals to date totalling $34 billion, or 1.8 per cent of total assets under management. Funds have been able to meet these withdrawals, despite initial concerns for some, because withdrawals have been spread over time and resilient market conditions have enabled funds to easily sell fixed income securities and equities.”

What is the importance of the economic data?

• “Lending Indicators” is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.

• The Financial Stability Review is published by the Reserve Bank every six months. The report is basically a health check on the financial sector but it also assesses the state of household and business balance sheets.

What are the implications for investors?

• This is not your typical recession. The Reserve Bank may have identified a litany of risks, but none are being converted into events. In fact economic data continues to surprise on the upside.

• Take home loans. Loans posted a record monthly gain in August. And the actual value of all owner-occupier new home loans hit all-time highs in the month. That means more homes will be built and more newly-erected and established homes will be purchased.

• Home loans are a key leading indicator for the housing sector and stronger activity in the sector will have positive knock on effects across the economy.

• Interest rates will remain super-low for the next three years. The main uncertainties for the housing market are what happens to migration and what happens to the jobless rate.

• There is no need for the Reserve Bank to lower rates further at this time.

Published by Craig James, Chief Economist, CommSec