Credit slowdown sparks fresh business concerns
Credit to the private sector has slowed to its weakest annual growth rate in almost a decade, stoking concerns about the pace of any near-term turnaround in the economy.
The credit growth fall comes amid persist criticism that banks are taking too tough a line on lending standards, which is choking off credit through the economy — a claim disputed by banks.
Lending to businesses and property buyers grew by just 0.1% month-on-month and 2.3% year-on-year in November — the lowest since April 2010, according to the Reserve Bank.
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Credit slowed from 2.5% in October and was below the consensus estimate of 2.4%.
After hitting a post-financial crisis high of 6.7% in early 2016 amid booming residential property prices, the annual pace of credit growth has fallen for 13 consecutive months.
Notwithstanding a rebound in property prices in recent months, tighter lending standards, rising unemployment and weak wage growth led households to focus on reducing their debt, which in the June quarter hit a record 188 per cent of disposable income.
But analysts said that sustained weakness in credit growth should offset concerns that interest rate cuts this year are reigniting an unsustainable boom in the residential property market, which might dissuade the central bank from further interest rate cuts if needed.
With the RBA having lowered its official cash rate three times to a record low of 0.75% since June, the federal election outcome removing the threat of capital gains tax changes, and the government delivering tax relief, Australian capital city house prices have rebounded rapidly in recent months and were growing at a double-digit annualised pace in November.
House prices have risen almost 7% on average since the federal election, with the rebound led by Sydney and Melbourne where prices have soared by 10%, according to CoreLogic.
But the central bank is understood to be comfortable with this, unless credit growth rises rapidly.
Home loans rose 0.2% from October and increased 2.9% for the year on year.
“At this stage, the Reserve Bank appears relaxed about the resurgence in Sydney and Melbourne property prices,” says CommSec senior economist Ryan Felsman.
“Rising prices have not yet been accompanied by a significant lift in housing credit growth.
“Still-low housing turnover, less desire to borrow on an interest-only basis and an increasing focus on deleveraging or paying down debt continue to produce modest housing credit growth.”
Felsman says the slowdown in business credit had implications for the broader economy. “Credit conditions for small- and medium-sized businesses still remains tight, hampering potential investment in capital, equipment and labour,” he said.
Non-housing credit fell 0.5% versus the previous month and 4.9% year-on-year. Loans to companies rose 0.2% for the month and 2.5% for the year, the slowest in 5.5 years.
RBA governor Philip Lowe recently noted that: “Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight.”
The Council of Financial Regulators, which counts as members the Reserve Bank, the Australian Securities & Investments Commission, the Australian Prudential Regulation Authority and Treasury, recent warned banks were being overly cautious in lending in the wake of the royal commission.
“The flow of credit is fundamentally important to the functioning of the Australian economy and (we) discussed the concern that lenders’ risk appetite for some types of lending may have swung too far towards caution,” the CFR’s December quarterly statement says.
While Treasury Josh Frydenberg has continually urged the banking sector to open their books to borrowers, RBA deputy governor Guy Debelle recently said a lack of demand from home buyers — not a regulatory crackdown on loose lending standards — was “primarily” behind the slump in credit growth and the weak housing market.
ASIC deputy chair Karen Chester has pointed to blockages in loan approvals stemming from a lack of customer demand, according to data collected by the banking sector and given to the regulator during its investigation into responsible lending reforms.
According to ASIC, two of the major banks had encountered issues while “rolling out massive system upgrades to be able to meet responsible lending obligations” after years of underinvestment in regulatory compliance systems, which caused some delays in loan approvals.
The banking sector has complained the decision by the ASIC to appeal responsible lending lawsuit against Westpac is adding to uncertainty.
– with Michael Roddan
This article originally appeared on www.theaustralian.com.au/property.
