The RBA Financial Stability Review, released today, says
Risks to financial stability from lending to households have lessened a little over the past six months, as serviceability metrics and other lending standards have continued to strengthen and the pace of credit growth has slowed. Housing price growth is also slower than it was a year or so ago, although it has picked up a little in Sydney and Melbourne in recent months. The risk profile of new borrowing has improved further. The share of new high loan-to-valuation (LVR) lending and interest-only loans has fallen; high-LVR lending is now at its lowest share in almost a decade.
Nonetheless, the household debt-to-income ratio is still drifting higher, even after adjusting for the rapid growth of balances in offset accounts. Non-performing mortgage loans have also picked up nationally but remain low. This pick-up has been most pronounced in mining areas where housing market conditions have deteriorated sharply, though only a small share of banks’ mortgage lending is to these areas.
But, the latest release from the ABS seems to tell a rather different, and more disturbing story. I will focus in the trend series, which irons out month on month distortions.
In trend terms owner occupation loans fell 0.9% compared with the previous month, to $19.8 bn, personal finance fell 0.8% to $6.9bn and commercial finance fell 0.7% to $38.3bn. But this does not tell the full story.
Here are the month on month movements by a more granular set of categories. The only segment which rose was lending for housing investment purposes (which is reported within the commercial sector numbers). This rose 1%, t0 $11.9 bn. Other lending for commercial purposes, excluding for housing investment fell, commercial fixed loans fell 0.5% to $18.6 bn and revolving commercial credit fell 3.6% to $7.7 bn.
Therefore the total fixed commercial credit (sum of housing investment loans and other commercial fixed loans) netted off with a rise of 0.04%.
All other lending categories saw a fall in month on month movements, owner occupied housing indeed fell 0.9% $19.8 bn.
Turning to the trend analysis, the chart below shows a fall in overall lending, but the mix of lending is the main concern. The only thing holding up bank lending is growth in the investment property sector, whilst the rest of the commercial sector continues to borrow less. The ratio of fixed commercial lending for investment housing has moved up from 31% in 2012 to 39% now, whilst the proportion of lending for productive commercial investment has fallen from 69% in 2012 to 61% now. Another way to look at it is commercial lending, excluding for housing has fallen to 40% of all lending, from 46% in 2012.
So, it is momentum in investment lending which is supporting overall lending, which would have otherwise fallen significantly, but this is not a productive activity. The lack of business investment growth is hobling overall economic outcomes, whilst our housing stock value, and bank balance sheets are artificially being inflated.
This mix of lending and the implications, is what the RBA should be discussing. Ultra-low interest rates are not helping to restore productive growth.
Also, it is worth bearing in mind, interest only loans tend to be used by property investors to maximise their tax refunds, one reason why more are being written than earlier in the year.