We look at the latest stats from RBA and APRA on credit growth. Home lending is STILL growing at 3.9% per annum – yet we are about to stir up the monster some more – “you cannot be serious!”
Once again on the last working day we get the latest credit
data from both the RBA and APRA. And fair enough, this is before the election,
and the recent spate of “unnatural acts designed to kick start credit growth,
but the trends before this are clearly down.
Here we are talking about the net stock of loans – rather than new loan
flows (so we see the net of old loans closed, refinanced, and new loans written).
We will need to wait for the ABS series in a couple of weeks to get the flow stats.
The RBA provides an overview, and a seasonally adjusted
series, including the non-bank sector. APRA provides data for the banking
sector – ADI’s or authorised depository institutions.
Total credit in the system, is still growing, with housing
lending up to $1.83 trillion dollars, with owner occupied lending accounting
for $1.23 trillion and investor loans 0.59 trillion. Business lending was 0.96
Trillion dollars and personal credit was $146 million dollars. So, you can see
how significant housing credit – and yes, it is STILL growing.
Of that $1.83 trillion dollars for housing, $1.68 trillion
comes from the banks, as reported by APRA.
Of that $1.12 trillion dollars is for owner occupied housing, and 0.55
trillion dollars for investors. The rest is non-banks, institutions who can
lend, but do not fund these loans from holding bank deposits. APRA now have
responsibility for these too but is not that actively engaged. So, to the rate of change of credit growth.
We know that housing credit growth has been slowing as
demand has slowed, and lending standards tightened, in response to APRA’s
interventions and the Royal Commission. But the stark reality is that business
lending is also flat according to the RBA.
In fact, last month, total credit grew by only 0.16% and
this is the weakest since early 2013.
Overall housing credit was up by 0.28% in the month, and personal
credit declined by 0.3%
Annual credit growth slowed to 3.7%, the weakest since November
2013 and the trends are clear.
Slowing Housing credit growth is a large element in the
numbers, as we have been tracking. The latest annual figure is just 3.9%, and
this is the lowest ever in the series which started back in the late 1970s.
Looking at the three-month series you might argue that the
rate of decline is easing just a little, there is not much here really to get
excited about. Of course, most of the commentators are now looking ahead
following the Coalitions return to power. The RBA I think cut rates on Tuesday,
which is the first cut since August 2016. And of course, APRA is consulting on
a proposal to loosen the interest rate buffer test.
I won’t repeat here the significant downside forces which
will make a rebound in housing lending difficult, other than to say, the
Coalition has promised a home price recovery, so they have to try and engineer
it any cost – even if the debt balloon inflates further.
Investor housing momentum is still very weak, and there is
little to suggest this will change soon – though some might try to sell into
any more optimistic season. So, its down to first time buyers, and those
seeking to trade-up.
Turning to business credit, this grew by 4.5% over the past
year, up from 3.0% for 2017 but is easing back from gains of 6.4% in 2015 and
5.5% in 2016. In fact, this is an
important issue, as business lending and confidence are easing back – not a
good sign.
APRA’s data showed that owner occupied lending rose 0.38% in
the month, investor lending was flat, and the market growth was 0.3%.
And our analysis of the individual bank data shows that housing market shares did not change that much, although CBA and Westpac were more active in net terms last month, though mainly in owner occupied lending. NAB and ANZ dropped more investor loans.
The 12-month portfolio moves for investor loans reveals the majors below the market. Macquarie and HSBC are leading the charge.
But a comparison of the gap between the Bank lending and RBA data shows the non-banks are still growing their books faster. Overall, they are running at an annualised 7.8%.
And analysis of owner-occupied lending by the non-banks shows it is still at 12.8%, compared with 2.1% for investor loans, but both above system.
So, standing back, the pre-election trends were weakening,
the non-banks were making hay, and investors are still on the sidelines. Now it
will be interesting to see if the so-called sentiment swing, and hype shows up
in the numbers in the next couple of months.
But to state the obvious, a growth rate of 3.9%
for credit for households even now is way stronger than wages growth or
inflation, so the debt burden is building further, and yet the policy settings
are about to be shifted to encourage more of the same. Hardly sensible.
The RBA’s aggregates to April 2019 shows s further slowing, with housing credit over 12 months down to a growth rate of 3.9%.
We will publish more analysis on this later, but no surprise given the unnatural acts now in the pipeline to try and reverse the trend. Plus an analysis of the APRA data, which also looks pretty weak.
The RBA released their minutes today, and things are looking less rosy, even though their rose-tinted glasses.
International Economic Conditions
Members commenced their discussion of the international economy by observing that global growth had
eased in the second half of 2018 and looked to have continued at around this more moderate rate in 2019.
Growth in Australia’s major trading partners was also expected to continue at around this slower
pace over 2019 and 2020. Members also observed that the outlook for China continued to be a significant
uncertainty for the global growth outlook, as were trade tensions, which had escalated again between the
United States and China immediately prior to the meeting. Global financial conditions had become more
accommodative since the turn of the year. Members noted that this could lead to stronger growth than
expected, although there were still risks of events occurring that could lead to both tighter financial
conditions and lower global growth.
March quarter GDP growth had been stronger than expected in the United States and the euro area, but
had been quite weak in a number of trade-intensive economies in east Asia. The latest monthly data had
shown that growth in Chinese industrial production, fixed asset investment and total social financing
had increased, suggesting momentum had picked up in response to targeted policy easing by the Chinese
authorities. Conditions in Chinese property markets had also strengthened. Members noted that economic
sentiment in China had improved since the beginning of the year, partly because small to medium-sized
businesses were obtaining improved access to finance and government infrastructure spending was boosting
demand.
Members noted that the sharp slowing in global trade had been related to slowing growth in China. The
decline in the value of Chinese imports had been broadly based across regions, although the large
decline in the value of trade with the United States suggested that trade diversion as a result of new
tariffs had also been a factor. Growth in China was expected to slow gradually over the forecast period
to the middle of 2021. This was expected to continue to weigh on external demand for trade-intensive
economies in east Asia and the euro area; recent data on export orders in east Asia had been
subdued.
Members discussed various longer-term policy initiatives in China, including policies on investment
abroad and modernisation of China’s manufacturing sector. China’s infrastructure
investment abroad had served to support land and sea trade routes, although there had been some
challenges that Chinese authorities had been addressing. Members also noted the authorities’
efforts to promote innovation, particularly in China’s technology sector, and to upgrade the
Chinese manufacturing sector significantly.
For some economies, the slowing in external demand had been accompanied by lower investment and
investment intentions. In some east Asian economies in particular, including South Korea, the turn in
the cycle in the global electronics industry had dampened exports and investment. Members noted that
firms would also be less likely to commit to long-term investments given the uncertainty around the
evolution of international trade policy.
In many economies, domestically focused sectors, such as services and retail trade, had been more
resilient than externally focused sectors. This was particularly the case in the advanced economies,
where tight labour market conditions had supported growth in spending. Unemployment rates had remained
around multi-decade lows in many advanced economies and wages growth had increased noticeably. In the
United States and Japan, recent wage increases had been larger for low-wage earners than high-wage
earners.
Core inflation had remained subdued in most economies and, following weaker inflation data in the
United States, was below target in the three major advanced economies.
There had been some large movements in commodity prices over recent months. Iron ore prices had
remained high as a result of supply disruptions in Brazil and Australia. Oil prices had also risen,
which had led to higher headline consumer price inflation in most economies and was expected to flow
through to higher prices for Australian liquefied natural gas exports over the following couple of
quarters. As a result, the forecast for Australia’s terms of trade had been revised higher, but
they were still expected to decline over the forecast period to the middle of 2021.
Domestic Economic Conditions
Members commenced their discussion of the domestic economy by noting that growth had been subdued in
the second half of 2018. Indicators of household consumption suggested that growth had remained subdued
in the March quarter. In addition, demand for new dwelling construction was expected to have remained
weak. These factors had been the main drivers of a downward revision to the domestic growth outlook in
the near term. Beyond 2019, these effects were broadly offset by upward revisions to export growth and
some newly announced mining investment projects. Members noted that, overall, the Bank expected
year-ended GDP growth to be 2¾ per cent over 2019 and 2020.
Growth in consumption had been weaker than expected in the second half of 2018 and retail sales data
for the March quarter suggested that this weakness had continued into 2019. Members noted that, as had
been the case for some time, the outlook for growth in consumption was a key uncertainty for the overall
growth outlook. The risks to consumption were tilted to the downside, given the extended period of low
income growth and the adjustment occurring in housing markets. The forecast for an improvement in growth
in consumption depended on an increase in growth in household disposable income over the forecast
period. The forecast increase in household disposable income growth was supported by employment growth,
a pick-up in wages growth and lower growth in tax payments, partly because of the introduction of the
low- and middle-income tax offsets announced in the Australian Government 2019-20 Budget. Members noted
that there was uncertainty about the outlook for fiscal policy and how this might affect the outlook for
growth in household disposable income.
Housing markets had remained weak in the preceding month. The rental vacancy rate in Sydney had
increased to the highest level in around 15 years and housing prices in established markets had
continued to decline. More positively, the pace of price declines had moderated and the modest recovery
in auction clearance rates since the start of the year had been sustained.
Information obtained through the Bank’s liaison program continued to indicate that sales
conditions for off-the-plan apartments and new detached housing had been difficult. The spike in
residential building approvals in February had largely been unwound in March, confirming that underlying
conditions for new dwelling activity remained weak. Data released since the previous meeting had shown
that the pipeline of residential work to be done had decreased in the December quarter, but remained
high. Members noted
that the forecasts for dwelling investment suggested that population growth could exceed growth in the
stock of housing towards the end of the forecast period, and that this possibility had been suggested by
a number of the Bank’s liaison contacts.
Survey measures of business conditions had moved a little higher in March and April and had remained
slightly above average, though well below the high levels that had prevailed throughout most of 2018.
Forward-looking indicators of non-mining business investment had been mixed; non-residential building
approvals had declined, but the pipeline of infrastructure work remained high. Non-mining business
investment was expected to support growth in output over the forecast period.
Mining investment had declined in the December quarter, but was expected to increase over the forecast
period, reflecting investment required to sustain current production levels and an expectation that a
number of new projects would commence towards the end of the forecast period. Recent trade data
suggested resource exports would contribute to output growth in the March quarter, and exports were
expected to contribute to output growth throughout the forecast period. Members noted that the forecast
pick-up in rural exports from 2020 depended on a return to normal weather conditions.
Public demand was expected to continue to support aggregate growth over the forecast period; a
significant share of this expenditure was associated with delivering goods and services to households,
such as the National Disability Insurance Scheme. Members noted that the Victorian Government had
announced measures to contain growth in labour costs in an environment of expected lower stamp duty
revenues.
Growth in employment in the March quarter had been strong, following similar outcomes over much of
2018. Most of the growth in employment since mid 2018 had been in full-time employment. The
unemployment rate had remained around 5 per cent in March. Members observed that conditions in
the labour market had signalled a significantly stronger pace of economic activity since mid 2018
than indicated by the GDP data. Leading indicators of labour demand had eased over recent months and
provided a mixed picture of the near-term outlook. As a result, employment growth was expected to be
similar to the growth rate of the working-age population in the near term. The unemployment rate was
expected to remain around 5 per cent through most of the forecast period, before declining to
around 4¾ per cent in 2021.
Members noted that the forecasts for the labour market suggested that there would be some spare
capacity in the labour market throughout the forecast period, although there was uncertainty about how
quickly the spare capacity would decline and how progress would feed into wage pressures. The central
forecast was for wages growth to pick up gradually. In combination, the forecasts for wages growth and
consumer price inflation implied that real consumer wage growth would be low but positive over the
forecast period.
The inflation data in the March quarter CPI release were noticeably lower than expected. The CPI
increased by 0.1 per cent (seasonally adjusted) in the quarter, while the underlying rate of
inflation was ¼ per cent. In year-ended terms, headline inflation was
1.3 per cent, with the underlying rate at 1½ per cent. The earlier exchange
rate depreciation and the drought-related increase in some food prices had led to relatively strong
retail price inflation in the March quarter. However, these inflationary pressures had been more than
offset by broad-based weakness in other CPI components, which was likely to be more persistent.
Rental inflation had remained low, driven by a marked slowing in rental inflation in Sydney; data on
newly advertised rents suggested that rents had started to pick up in Perth. Developer discounts and
incentives had weighed on the prices of newly built homes, particularly in Melbourne and Brisbane. A
range of government policy decisions had contributed to lower inflation in administered prices in recent
quarters. Market and survey-based measures of inflation expectations had declined in recent months, as
had been the case in other advanced economies.
Members noted that the recent CPI data had led the Bank to reassess the disinflationary effects of the
weak housing market. Combined with the lower GDP growth outlook, this had led to a downward revision to
the inflation outlook, although there was also some uncertainty about the persistence of downward
pressure from utilities and administered price changes and the effect of housing market weakness. The
central forecast scenario was for underlying inflation of around 1¾ per cent over 2019,
2 per cent over 2020 and a little higher after that.
Financial Markets
Members commenced their discussion of financial market developments by noting that global financial
conditions were accommodative and had eased significantly since the start of the year. Market
expectations for the future path of monetary policy in a number of economies had declined earlier in the
year, in line with guidance from major central banks that policy was likely to be more accommodative
than previously expected. The expectation that policy rates would remain little changed for some time
had contributed to very low levels of volatility in most financial markets.
In the United States, with inflation close to but a bit below target and the federal funds rate close
to neutral, the Federal Reserve (Fed) had reiterated that it would take a patient and flexible approach
to its policy decisions. While the Fed’s recent forecast update implied that one more policy rate
increase was likely by the end of 2020, market pricing implied that the Fed was expected to lower its
policy rate around twice over that period. At its April meeting, the European Central Bank had
reiterated that it expected policy rates to remain at current levels at least through to the end of
2019. The Bank of Japan had indicated that its very stimulatory policy settings will remain in place
until at least mid 2020. Market participants expected the next moves in policy rates in Canada, New
Zealand and Australia to be down.
Government bond yields remained at very low levels in the advanced economies, having declined since
late 2018 in line with downward revisions to growth and inflation projections, and the lowering of
policy rate expectations by market participants. In Germany and Japan, long-term bond yields were around
zero, close to the record lows of 2016. Members noted that Australian government bond yields had
declined by more than those in other major markets over the preceding six months, following
weaker-than-expected inflation data and a lower expected path for monetary policy. By contrast, Chinese
government bond yields had increased over the preceding month, as signs emerged that policy stimulus
there was providing support to economic activity.
Members noted that, following the brief inversion of segments of the US yield curve in March, the slope
of the US yield curve had increased a little in April. While market commentators had noted that past
episodes of yield curve inversion had tended to precede recessions, the decline in credit spreads and
rise in equity valuations in 2019 suggested market participants did not perceive this to be a particular
risk.
Members observed that financing conditions for corporations remained favourable. In the advanced
economies, corporate bond yields had declined, partly because of a decline in spreads. In addition,
equity prices had increased substantially since the start of 2019 to be at their highest levels in over
a decade, including in Australia.
In China, growth in total social financing had been steady in recent months and a little higher than in
2018, supported by bank lending and bond issuance. Off-balance sheet financing had continued to decline,
reflecting the authorities’ efforts to discourage riskier forms of financing. Members noted that
the Chinese authorities had introduced additional measures to encourage banks to lend to small private
sector firms, which had previously made use of off-balance sheet financing that was now less readily
available. Members also noted the substantial local government bond issuance to finance infrastructure
projects, which was a key part of the authorities’ stimulus measures.
In foreign exchange markets, volatility had remained low over the preceding month, including in most
emerging markets. Members noted, however, that risks remained pronounced for a small number of economies
with specific vulnerabilities, most notably Turkey and Argentina, where financial conditions had
tightened again.
The Australian dollar had depreciated a little following the weaker-than-expected March quarter CPI
release, but overall had been little changed over recent months and remained around the lower end of its
narrow range of the past few years. Members noted that this reflected the offsetting influences of the
rise in commodity prices and decline in Australian government bond yields relative to those in the major
markets over 2019. The difference between long-term government bond yields in the United States and
Australia had increased to a historically large 75 basis points.
Housing credit growth had slowed over the preceding year, but the monthly pace of growth had stabilised
over recent months. In three-month-ended annualised terms, growth in housing lending was around
4½ per cent for owner-occupiers and ½ per cent for investors. Loan
approvals also appeared to have stabilised in recent months. Members noted that, although lending
practices were tighter than they had been for some time, the decline in housing credit growth over the
preceding year had been driven largely by weaker demand for finance, associated with the decline in
housing prices.
The average interest rate charged on outstanding variable-rate housing loans had remained broadly
steady. While banks had increased their standard variable reference rates since mid 2018, rates on
new loans had remained materially below the average of those on outstanding loans. Members noted that
banks had recently reduced the rates charged on new fixed-rate loans.
Funding costs for the major banks had declined to record lows in preceding months, as the increase in
short-term money market rates in 2018 had been fully unwound and retail deposit rates had continued to
edge lower. Despite the low cost of funding, bank bond issuance in 2019 so far had been a little below
the average of recent years. Issuance of bonds by other corporations and of residential mortgage-backed
securities had been broadly in line with the average of recent years.
The pace of growth in business lending had been maintained in recent months at rates that were above
those of the preceding few years, driven by lending to large businesses. Lending to small businesses had
declined over the preceding year. Interest rates on variable-rate loans to large businesses, which are
linked to bank bill swap rates, had declined in the March quarter. Members observed that the rates
charged on small business loans remained markedly higher than those on large business loans, with the
gap between small and large business loan rates having doubled following the global financial
crisis.
Financial market participants’ expectations of cash rate cuts were brought further forward
following the release of the March quarter CPI. Financial market pricing implied that the cash rate was
expected to be lowered by 25 basis points within the next three months and again by the end of
2019.
Considerations for Monetary Policy
In considering the stance of monetary policy, members observed that growth in Australia’s major
trading partners had slowed, driven by a sharp slowing in global trade associated with slower growth in
China. Members also noted, however, that targeted stimulus measures in China appeared to be having an
effect and global financial conditions remained very accommodative. In a number of advanced economies,
labour markets had continued to tighten and wages growth had increased, but inflationary pressures had
remained subdued.
Domestically, members noted that the sustained low level of interest rates over recent years had been
supporting economic activity and had contributed to a decline in the unemployment rate. However,
household income growth had remained low and the March quarter inflation data indicated that the
inflationary pressures in the Australian economy were lower than previously thought.
After updating the forecasts for the new information, the central forecast scenario remained for
progress to be made on the Bank’s goals of reducing unemployment and returning inflation towards
the midpoint of the target, but at a more gradual pace than previously expected. Under the central
scenario, GDP growth had been revised lower in the near term, but was expected to pick up to be around
2¾ per cent over 2019 and 2020. The unemployment rate was expected to remain around
5 per cent over 2019 and 2020
before declining a little to 4¾ per cent in 2021. This implied that spare capacity would
remain in the economy for some time. Given this, and the subdued inflationary pressures across the
economy, underlying inflation was expected to be 1¾ per cent over 2019,
2 per cent over 2020 and a little higher after that.
Members noted that the central forecast scenario was based on the usual technical assumption that the
cash rate followed the path implied by market pricing, which suggested interest rates were expected to
be lower over the next six months. This implied that, without an easing in monetary policy over the next
six months, growth and inflation outcomes would be expected to be less favourable than the central
scenario.
At the same time, members also recognised that there were risks to the forecasts in both directions.
The risks to the global economy remained tilted to the downside, with uncertainty remaining around the
evolution of international trade policy. Domestically, the outlook for household consumption remained a
key uncertainty, with the risks tilted to the downside given ongoing low income growth and the
adjustment occurring in housing markets. On the upside, it was possible that the combined effects of
continued accommodative financial conditions, the increase in Australia’s terms of trade, a
renewed expansion in the resources sector and the expected lift in household disposable income growth
would result in stronger growth in output than in the central forecast scenario.
Members discussed the outlook for the domestic labour market in some detail. As in the previous
meeting, members discussed the scenario where inflation did not move any higher and unemployment trended
up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate. As
noted at the previous meeting, members recognised that the effect on the economy of lower interest rates
could be expected to be smaller than in the past, given the high level of household debt and the
adjustment that was occurring in housing markets. Nevertheless, a lower level of interest rates could
still be expected to support the economy through a depreciation of the exchange rate and by reducing
required interest payments on borrowing, freeing up cash for other expenditure.
In light of the recent run of inflation data, the Board then discussed the likelihood that the economy
could sustain a stronger labour market with lower rates of unemployment than previously estimated, while
achieving inflation consistent with the target. In this context, members observed that the recent
international experience was that inflation had remained low despite historically low rates of
unemployment. Given the international evidence and the recent Australian inflation data, members agreed
that a further decline in the unemployment rate would be consistent with achieving Australia’s
medium-term inflation target. Given this, members considered the scenario where there was no further
improvement in the labour market in the period ahead, recognising that in those circumstances a decrease
in the cash rate would likely be appropriate.
Taking into account all the available information, including the various uncertainties about the
outlook, members judged that it was appropriate to hold the stance of monetary policy unchanged at this
meeting, noting that holding monetary policy steady had enabled the Bank to be a source of stability and
confidence over recent years. In view of the spare capacity that remained in the economy, however,
members agreed that it was important to continue to pay close attention to developments in the labour
market and set monetary policy to support sustainable growth in the economy and achieve the inflation
target over time.
The Decision
The Board decided to leave the cash rate unchanged at 1.5 per cent.
The RBA released their quarterly Statement On Monetary Policy today. Expect rate cuts, and QE later as the AUD is allowed to slide, as a decade of wrong policy is now coming home to roost. Plus they are tracking the labour market as a key determinate of policy using the wobbly ABS series data, looking past weaker inflation, and hoping for wages growth.
Growth in the Australian economy has slowed and inflation remains low. Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction. Despite this, the labour market is performing reasonably well, with the unemployment rate steady at around 5 per cent. Underlying inflation has been lower than expected, at 1½ per cent over the year to the March quarter, with pricing pressures subdued across much of the economy.
GDP growth is expected to be around 2¾ per cent over both 2019 and 2020. This is lower than previously forecast, reflecting the revised outlook for household consumption spending and dwelling activity. Stronger growth in exports and, further out, work on new mining investment projects are expected to support growth. Forecasts for inflation have also been revised lower. Trimmed mean inflation is expected to be around 1¾ per cent over 2019 and then increase gradually to 2 per cent in 2020 and a touch above 2 per cent by early
In the near term, CPI inflation is expected to run a little above the rate for trimmed mean inflation, driven by the recent increase in petrol prices.
The Australian dollar is currently around the low end of the narrow range it has been in for some years. Sovereign bond rates in Australia have continued to decline relative to those in the major economies. This has tended to counteract the upward pressure on the exchange rate that would otherwise have come from rising prices for Australia’s key commodity exports.
Conditions in the established housing market remain soft. Housing prices have continued to decline in the largest cities, although the pace of decline has eased a bit recently. Some other indicators, including auction clearance rates, have improved a little since the end of last year, but generally point to continued soft conditions. Prices have also been declining in many other cities and regional areas.
Despite strong employment growth and some recovery in growth of average hourly earnings, growth in household income was very low over Non-labour sources of income have been subdued and are likely to remain so for a while, given the effects of the drought on farm incomes and of soft housing market conditions on the earnings of many other unincorporated businesses. Strong growth in tax payments has also subtracted from disposable income growth over recent years.
Weak growth in household income poses a key risk to the outlook for household consumption, especially in the context of falling housing prices and the need for many households to service high levels of debt. Some recovery in income growth is likely, because employment growth is expected to remain solid, wages are expected to increase and the tax offset for low and middle-income taxpayers is set to come into effect in the second half of this year.
At its recent meeting, the Board focused on the implications of the low inflation outcomes for the economic outlook. It concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. They reinforced the labour market as the key to future rate moves, looking past lower inflation. That is a pretty strong signal about what would lead to a cut. They are still reciting stronger growth than many believe is feasible.
Franking, cutting now would be using using up the limited ammo they have, for no good reason. Savers will be relieved!
The outlook for the global economy remains reasonable, although the risks are tilted to
the downside. Growth in international trade has declined and investment intentions have
softened in a number of countries. In China, the authorities have taken steps to support
the economy, while addressing risks in the financial system. In most advanced economies,
inflation remains subdued, unemployment rates are low and wages growth has picked up.
Global financial conditions remain accommodative. Long-term bond yields are low,
consistent with the subdued outlook for inflation, and equity markets have strengthened.
Risk premiums also remain low. In Australia, long-term bond yields are at historically
low levels and short-term bank funding costs have declined further. Some lending rates
have declined recently, although the average mortgage rate paid is unchanged. The
Australian dollar is at the low end of its narrow range of recent times.
The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019
and 2020. This outlook is supported by increased investment in infrastructure and a
pick-up in activity in the resources sector, partly in response to an increase in the
prices of Australia’s exports. The main domestic uncertainty continues to be the outlook
for household consumption, which is being affected by a protracted period of low income
growth and declining housing prices. Some pick-up in growth in household disposable
income is expected and this should support consumption.
The Australian labour market remains strong. There has been a significant increase in
employment, the vacancy rate remains high and there are reports of skills shortages in
some areas. Despite these positive developments, there has been little further progress
in reducing unemployment over the past six months. The unemployment rate has been
broadly steady at around 5 per cent over this time and is expected to remain around this
level over the next year or so, before declining a little to 4¾ per cent in 2021. The
strong employment growth over the past year or so has led to some pick-up in wages
growth, which is a welcome development. Some further lift in wages growth is expected,
although this is likely to be a gradual process.
The adjustment in established housing markets is continuing, after the earlier large
run-up in prices in some cities. Conditions remain soft and rent inflation remains low.
Credit conditions for some borrowers have tightened over the past year or so. At the
same time, the demand for credit by investors in the housing market has slowed
noticeably as the dynamics of the housing market have changed. Growth in credit extended
to owner-occupiers has eased over the past year. Mortgage rates remain low and there is
strong competition for borrowers of high credit quality.
The inflation data for the March quarter were noticeably lower than expected and suggest
subdued inflationary pressures across much of the economy. Over the year, inflation was
1.3 per cent and, in underlying terms, was 1.6 per cent. Lower housing-related costs and
a range of policy decisions affecting administered prices both contributed to this
outcome. Looking forward, inflation is expected to pick up, but to do so only gradually.
The central scenario is for underlying inflation to be 1¾ per cent this year, 2 per cent
in 2020 and a little higher after that. In headline terms, inflation is expected to be
around 2 per cent this year, boosted by the recent increase in petrol prices.
The Board judged that it was appropriate to hold the stance of policy unchanged at this
meeting. In doing so, it recognised that there was still spare capacity in the economy
and that a further improvement in the labour market was likely to be needed for
inflation to be consistent with the target. Given this assessment, the Board will be
paying close attention to developments in the labour market at its upcoming meetings.
The headline news is the overall housing credit is up, to a new record of $1.82 trillion dollars up 0.31% from last month, or 0.31%. Within that owner occupied lending rose 0.32% to $1.22 trillion dollars and investment lending was flat. 32.7% of lending stock is for investment lending purposes, a slight fall from last month, whilst business lending as a proportion of all lending rose from 32.9% from 32.8% to reach $963.7 billion dollars. Personal credit fell 0.27% or $0.4 billion, to $147.1 billion, and continues to fall.
The annualised movements by category shows further weakness, with lending for owner occupied housing now at 5.7%, investment housing lending at 0.7%, giving housing overall growth of just 4% (though still higher than wages growth I would add). Personal credit fell 2.8% over the past year, while business lending rose 4.9% annualised. All these figures are on a seasonally adjusted basis
Turning to the APRA data on the banks, owner occupied lending rose 0.35% in March, while investment lending fell by 0.02%, giving total credit growth of just 0.2%. Over the past year owner occupied loans grew by 4.8% (compared with 5.7% at the aggregate level) and investor loans grew 0.4% (compared with 0.7% at the aggregate level). So the banks loan portfolios are growing more slowly than the market.
This can be illustrated by comparing the RBA and APRA data (warts and all) to show the non-bank sector is growing faster than the banks. Overall, they have over 7.5% of the market, which is up from the low in December 2016.
In addition, the rate of growth is significantly higher than the banks. Non-bank owner occupied loans are growing at an annual rate of 14%, while investment loans are 2.2%; both significantly higher than the ADI’s. Non-banks have weaker regulation, and more ability to lend. APRA has yet to truly engage with the sector.
Turning back to the individual lenders, the changes in their portfolios over the month show that Westpac and CBA offered the most new owner occupied loans, while ANZ dropped back, on both owner occupied and investment loans, while NAB dropped investment lending. HSBC, Macquarie and Member Equity Bank (ME) lend more than the regionals.
Overall market shares hardly moved, with CBA still the largest owner occupied lending, and Westpac the biggest investor lender.
Investment lending growth over the past 12 months has been anemic, but some lenders such as Macquarie are making hay. Of course the old 10% speed limit from APRA has gone now, but the relative growth highlights the fact that the four majors are well below market growth levels – and ANZ the weakest (which is why they said they wanted to lend more).
So finally, the total ADI lending book is at $1.68 trillion dollars, with owner occupied loans comprising $1.12 trillion dollars and investment loans $557 billion dollars, and comprising 33.2% of the portfolio – as the ratio continues to fall.
In conclusion, the credit impulse – the rate of change of credit being written is the most significant forward indicator of house price trajectory. The weak state of the market suggests more and significant price falls ahead. Yet despite all this, household debt will continue to rise. There is absolutely no reason to loosen lending requirements, or drop the hurdle rate on these numbers. More households will get into trouble ahead.
The RBA released their minutes today, and they highlight the current tensions between the domestic GDP and labour market data evolve. But more negative news was recited in the minutes, and this suggests rate cuts, not rate rises.
International Economic Conditions
Members commenced their discussion by noting that the slower pace of global economic activity had
continued in recent months. This had been particularly evident in the manufacturing sector. Survey
measures of conditions in the manufacturing sector had declined across a range of economies, although
they had ticked up in China in March. Slower external demand, especially from China, had continued to
weigh on export growth and the manufacturing sectors in the trade-exposed economies of east Asia, Japan
and the euro area. In east Asia, the electronics cycle had turned, which had affected the
region’s exports as well as investment in those economies with sizeable semi-conductor
sectors.
Recent trade talks between the United States and China had taken on a somewhat more positive tone.
However, the United States had also said it would consider imposing restrictions on automotive imports,
which would affect large car exporters, including Germany and Japan.
In the major advanced economies, however, domestic demand conditions had remained positive, supported
by an easing in financial conditions since the beginning of 2019, and were consistent with growth being
around, or even above, potential. Underlying inflation had remained close to target in a number of
advanced economies, but global headline inflation had declined since late 2018 because of the fall in
oil prices.
Growth in consumption in the advanced economies had been supported by ongoing tightness in labour
markets, which had led to an upward trend in wages growth over a number of years. In the United States,
the unemployment rate had remained below levels consistent with full employment and employers had been
finding it increasingly difficult to find suitable labour. Members observed that most sectors of the US
labour market had experienced strong conditions and the pick-up in wages growth had been most pronounced
for lower-income workers.
In Japan, consumption was expected to be supported by a bring-forward of spending ahead of an increase
in the consumption tax in October 2019, as well as ongoing tightness in the labour market. In the euro
area, the unemployment rate had been declining gradually and wage pressures had increased. However,
employment intentions had eased in the euro area and, more sharply, in the United Kingdom in the context
of ongoing uncertainty around Britain’s exit from the European Union.
The outlook for investment across the major advanced economies had been more mixed. In the United
States, investment indicators had eased a little but remained above average, while investment in the
euro area had weakened further. Members noted that political uncertainty in the United Kingdom and the
euro area was weighing on investment in those economies. In Japan, survey measures suggested that
business conditions would remain strong despite a prospective moderation in investment growth.
In China, growth in domestic demand had slowed. At its March meeting, the National People’s
Congress had set a target of 6–6.5 per cent for growth in output in 2019, which was
below the target of around 6.5 per cent in 2018. Members noted signs that stimulus measures
implemented by the authorities over recent months were having an impact: growth in total social
financing had increased a little, after slowing over the preceding year, and growth in infrastructure
investment and retail spending had recovered. Residential construction activity had also increased.
However, some recent indicators of production and investment in the manufacturing sector, which is more
exposed to external demand, had been subdued. Exports from China to the United States had continued to
decline, but China’s imports from the United States had increased a little over the first few
months of 2019, after an earlier sharp decline. Australian coal shipments had continued to be affected
by customs delays at Chinese ports.
Australia’s terms of trade had increased in the December quarter to be around
6 per cent higher over 2018. The terms of trade were expected to have increased further in the
March quarter, although commodity price developments had been mixed since the previous meeting. Bulk
commodity prices had been little changed because falls in coal prices had been largely offset by an
increase in iron ore prices. Oil prices had risen, but were still 20 per cent below their
recent peak in October 2018. Reflecting oil price movements in late 2018, liquefied natural gas (LNG)
prices were expected to have declined over the first quarter of 2019. Other commodity prices had been
little changed over the previous month.
Domestic Economic Conditions
Members commenced their discussion of the domestic economy by observing that growth had slowed markedly
in the second half of 2018 compared with the first half. GDP had increased by 0.2 per cent in
the December quarter and by 2.3 per cent over the year, which was below the forecasts
presented in the February Statement on Monetary Policy. The soft December quarter outcome
partly reflected another weak quarter of consumption growth and a larger-than-expected fall in dwelling
investment. It also reflected some temporary factors, such as the weather-related disruption to resource
exports and the effect of the drought. Public demand and non-mining investment had supported output
growth. Members noted that the income-based measure of GDP growth had been particularly weak over the
preceding year, while the expenditure-based measure had been stronger.
Growth in consumption had clearly slowed in the second half of 2018. The weakness had been concentrated
in discretionary items, especially those that have historically been most correlated with housing prices
and housing turnover, such as motor vehicles and home furnishings. Retail sales data and contacts in the
Bank’s liaison program suggested that growth in housing-related consumption had remained soft in
recent months.
Members noted that growth in household disposable income, which is an important driver of consumption
growth, had been subdued for a number of years. In 2018, labour income growth had been above the very
low rates seen in recent years, supported by a pick-up in growth in average hourly earnings and
continued employment growth, but non-labour income growth had remained weak. Members observed that tax
payments by households had been growing noticeably faster than income growth in recent years, partly
because of efforts to increase tax compliance.
Dwelling investment appeared to have passed its peak, although there continued to be uncertainty about
how quickly dwelling investment might decline over the forecast period. Construction of new dwellings
had contracted in the second half of 2018; the largest falls in the December quarter had been for
apartments in New South Wales and detached housing in Queensland. Slower housing activity had also
weighed on the incomes of some building contractors and property professionals in the December quarter.
There continued to be a large amount of work in the pipeline, which should support a relatively high
level of building activity in the near term. Members noted that there had been a substantial rise in
building approvals for high-density residential projects in February, although this series was volatile
and in trend terms remained well below earlier peaks. Members also noted that population growth was
expected to continue to support demand for housing over the medium term.
Conditions in the established housing market had remained weak in recent months. Housing prices had
continued to fall in Sydney, Melbourne and Perth, and had declined a little in most other capital cities
and regional areas. In March, Sydney prices were 13 per cent below their 2017 peak and
Melbourne prices were 10 per cent below their peak. Although auction clearance rates in Sydney
and Melbourne had increased over the first quarter of 2019, they remained at relatively low levels.
Members noted that in Perth, housing prices had declined over the previous year, while the rental
vacancy rate had declined sharply and there were signs that newly advertised rents were starting to
increase. By contrast, rental vacancies in Sydney had risen, particularly in suburbs where the supply of
new apartments had increased significantly.
Non-mining business investment had grown solidly in the December quarter, with non-residential
construction having made the largest contribution to growth in the quarter, driven partly by strong
growth in private sector infrastructure projects, such as roads and renewable energy. Forward-looking
indicators, such as the substantial amount of work still to be done on private infrastructure projects,
the relatively high level of non-residential building approvals and positive business investment
intentions, pointed to further growth in non-mining business investment. Survey measures of business
conditions had declined in late 2018, but had stabilised at above-average levels.
Mining activity had subtracted from growth in the second half of 2018, mainly reflecting ongoing
declines in mining investment as remaining LNG projects approached completion. Members noted that
investment required to sustain capacity and recently announced expansion projects were expected to
support stronger mining investment over the medium term. Declines in resource exports, partly related to
supply disruptions, had also subtracted from growth in the second half of 2018. Coal exports to China
had declined by 20 per cent, partly as a result of weather-related disruptions. The longer
time taken for imports of coal to clear Chinese customs in recent months was also likely to have played
a role. Liaison contacts had reported that they expected to continue to be able to redirect coal
shipments intended for China to other destinations. Members noted that there had been some disruptions
to iron ore shipments as a result of Tropical Cyclone Veronica, which were likely to have affected iron
ore export volumes in March.
The ongoing effects of the drought had weighed on farm output and income in the December quarter, and
rural exports had declined; farm GDP had fallen by more than 6 per cent over the second half
of 2018. Based on the latest estimates from the Australian Bureau of Agricultural and Resource Economics
and Sciences, farm production was expected to improve gradually in 2019/20
assuming rainfall returned to average levels. This was a more favourable outlook than had been assumed
in the forecasts presented in the February Statement on Monetary Policy. However, members
noted that shortages of water in the Murray-Darling Basin had been severe and that it would take
significant rainfall to increase soil moisture content from current low levels in this region.
Public demand had contributed strongly to GDP growth over 2018, supported by spending on the National
Disability Insurance Scheme and aged care and health services, and investment in infrastructure. Members
noted that, despite this, the overall fiscal impact on the economy had been negative because of slow
growth in some other forms of government expenditure and strong growth in tax revenues.
The labour market had continued to improve in early 2019, despite the slowing in growth recorded in the
national accounts through 2018. Employment had increased a little in February, following strong growth
in January, and the unemployment rate had declined to 4.9 per cent, continuing the run of
months with an unemployment rate at or around 5 per cent. Other measures of spare capacity,
including the underemployment rate and the long-term unemployment rate, had also trended downwards. The
participation rate had been relatively stable at a high level over the preceding year or so.
Employment growth over the previous year had been particularly strong in the health care & social
assistance, professional services and construction industries. Over the same period,
employment-to-population ratios had increased further in New South Wales and Victoria, where
unemployment rates had been around historically low levels. Employment-to-population ratios had declined
a little in other states more recently. Forward-looking indicators of labour demand had been mixed in
recent months. Job advertisements had eased, but job vacancies reported by employers through the ABS
survey had increased further as a share of the labour force in February.
Financial Markets
Members commenced their discussion of financial market developments by noting that global financial
conditions remained accommodative and had eased over the preceding couple of months.
Market expectations for the future path of monetary policy in a number of economies had been lowered
since the beginning of the year. This was consistent with guidance from major central banks that
monetary policy would remain more accommodative than earlier expected, given downward revisions to
growth forecasts and little upside risk to inflation despite increasingly tight labour markets.
At its March meeting, the US Federal Open Market Committee (FOMC) had kept the federal funds rate
unchanged and announced that the decline in the Federal Reserve’s asset holdings would slow from
May and cease after September, which was sooner than had been expected. The FOMC also published the
quarterly update of its members’ projections for where they believed the federal funds rate was
likely to be in coming years. These projections implied that the federal funds rate was likely to remain
unchanged throughout the rest of 2019, followed by one increase (of 25 basis points) in 2020. By
contrast, at the time of the December 2018 meeting, the median FOMC projection had been for two rate
increases in 2019 and one in 2020. Policy expectations implied by financial market pricing had also been
revised down since December. These implied that the next move in the federal funds rate was expected to
be down.
In the euro area and Japan, financial market pricing indicated that policy rates were expected to be
maintained at very low levels for an extended period, in line with recent statements by the respective
central banks. In March, the European Central Bank had announced that it would roll over a long-term
lending program to euro area banks. In Canada, New Zealand and Australia, financial market pricing
implied that declines in policy rates were expected in the coming year or so.
Members noted that 10-year government bond yields had declined noticeably across all major markets over
the preceding month. In some cases, including in Australia, yields had declined to historic lows. These
declines had reflected lower expected paths for monetary policy, lower term premiums and, to varying
extents, lower inflation expectations. In Germany and Japan, long-term bond yields had again turned
negative, approaching the lows that had been reached in 2016. In the United States, long-term rates had
moved below some short-term rates for a brief period, with market commentators noting that past episodes
of yield curve inversion had tended to precede recessions. At the same time, the recent decline in risk
premiums in credit and equity markets suggested financial market participants did not consider a
recession to be likely.
Members observed that financing conditions for corporations had improved. Corporate bond yields had
moved lower, reflecting the decline in government bond yields as well as a decline in spreads following
increases in late 2018. Non-financial firms had increased their bond issuance in 2019, particularly in
the US dollar high-yield sector. By contrast, issuance of leveraged loans had been more subdued, which
partly reflected an easing in investors’ appetites for floating rate securities in response to
the lowering of policy rate expectations. Equity markets in the advanced economies had been little
changed in March, having previously rebounded from their sharp fall in late 2018.
In China, equity markets had risen particularly sharply since the end of 2018, which was likely to have
reflected some easing in US–China trade tensions, as well as the authorities’ stimulus
measures. Growth in total social financing had increased a little in recent months, as the authorities
had taken measures to encourage bond issuance. They had also encouraged banks to provide finance to
smaller private firms. To support this, the authorities had signalled additional targeted monetary
easing for the period ahead. These changes had followed a slowing in the growth of total social
financing over the preceding year or more as the authorities had taken measures to reduce non-bank
lending, which had been an important source of funding for private firms, in order to reduce overall
risks in the financial system.
In other emerging markets, conditions had been relatively stable in 2019, although Argentina and Turkey
had experienced renewed depreciation of their exchange rates in response to continued macro-financial
and political risks in those economies.
Members noted that there had been little change in major economies’ foreign exchange markets
over the preceding month. The Australian dollar had also been little changed, remaining at the lower end
of its range of recent years. The strength in commodity prices and the terms of trade had been
supporting the exchange rate, while the continued decline in Australian government bond yields relative
to those in other major markets had been working in the opposite direction.
Growth in housing lending to owner-occupiers had slowed to 4¾ per cent in
six-month-ended annualised terms, although the monthly growth rate had increased slightly in February.
Growth in housing lending to investors remained at a very low level. Housing loan approvals were
materially below the levels of a year earlier, but had also increased slightly in February, with the
small uptick in approvals broadly based across types of borrowers. Members observed that the slowing in
housing lending over the preceding year had been driven largely by weakness in demand, particularly from
investors. There had also been some tightening in lending practices. Lenders continued to compete for
borrowers of high credit quality by offering lower interest rates on new loans than typically paid on
existing loans.
Members noted that the major banks’ funding costs had declined over the preceding couple of
months. The cost of debt funding had declined as pressures had eased in short-term money markets and
bank bond spreads had narrowed. Deposit rates had also continued to edge downwards.
Funding conditions for Australian businesses more broadly were accommodative. Three-year bond yields
for corporations across all major sectors had declined to record lows, reflecting the decline in both
government bond yields and spreads. Bond issuance by non-financial corporations in the first quarter of
2019 had been in line with that of recent years. Growth in bank lending to businesses had remained
robust, in part reflecting increased lending by the major banks, although other institutions had
accounted for most of the growth. Members observed that the growth in business lending had been entirely
to large businesses. Meanwhile, credit conditions for some small businesses were reported to have
tightened further recently.
Financial market participants’ expectations of a rate cut had been brought forward following
weaker than expected data, most notably the December quarter national accounts. Financial market pricing
implied that the cash rate was expected to be lowered in the second half of 2019 and then again in
2020.
Financial Stability
Members were briefed on the Bank’s regular half-yearly assessment of the financial system.
Overall, members noted that financial stability risks were slightly higher than six months earlier but
were not especially elevated.
Globally, investors were receiving little compensation for taking on risk. Notably, risk-free rates
were very low and the term premium in the United States had briefly turned negative. Furthermore,
corporate bond spreads remained low. These conditions had contributed to the significant increase in
borrowing by businesses since the global financial crisis. However, members noted that debt servicing
costs had not increased to the same extent, given the decline in interest rates over this period. The
high prices of a range of assets in this environment meant that there was heightened risk of an abrupt
repricing in response to news.
Members observed that the profitability of banks globally had generally increased. In part, this
reflected above-trend economic growth in the first half of 2018. However, some European banks remained
fragile, given large stocks of non-performing loans, high cost structures and overcapacity. The large
stock of sovereign debt held by some European banks, along with concerns about sovereign debt
sustainability, raised potential issues about the resilience of some banking systems.
In China, the authorities had taken measures to contain risks in the financial system. As a result, the
pace of growth in debt had slowed to below the pace of growth in the economy. However, given the earlier
rapid growth in debt, China’s ratio of non-financial debt to GDP remained higher than in other
economies with comparable income and even higher than in many high-income economies. Members noted that
the earlier rapid growth in debt had also raised concerns about the lending standards under which those
loans had been made.
In Australia, conditions in the housing market had remained weak. Housing prices had fallen further in
the capital cities and regional areas. Over the preceding six months, the falls had been largest in
Sydney and Melbourne, but prices in these cities had remained more than 40 per cent higher
than in 2012. Falls in housing prices had resulted in some borrowers having negative equity, where the
value of their loans exceeded that of their properties. Nationally, just over 2 per cent of
borrowers, accounting for less than 3 per cent of housing debt, were estimated to have
negative equity. Around 90 per cent of these borrowers were in Queensland, Western Australia
and the Northern Territory. Members observed that negative equity by itself was not a concern for
financial stability. However, if unemployment were to rise and borrowers were not able to continue to
make repayments, then financial institutions would incur increased losses. Members noted that the
decline in high loan-to-valuation ratio (LVR) lending in recent years was expected to lessen any losses
for lenders. In recent quarters, almost all loans to investors had LVRs less than 90 per cent.
By contrast, a decade earlier only 85 per cent of loans to investors had LVRs less than
90 per cent. The share of owner-occupiers with high LVR loans had also declined.
Members noted that total household payments on housing debt as a share of income had been broadly
stable in recent years. Within the total, however, an increase in scheduled principal repayments had
roughly offset a fall in unscheduled principal repayments. Members noted that households’ excess
payments amounted to about two-and-a-half years’ worth of scheduled repayments on average.
Housing loan interest payments had increased slightly as housing debt had increased.
Banks’ assets had continued to perform well overall. Although banks’ non-performing
housing loans had increased, they remained low at less than 1 per cent of their total housing
lending. Members noted that the increase in housing loan arrears had been driven by loans remaining in
arrears for longer, on average. Banks’ business loans had been performing well, with
non-performing loan rates around their lowest levels in a decade. Banks had continued to accumulate
capital, with the capital ratios of the four major banks all exceeding or close to the
‘unquestionably strong’ benchmarks set out by the Australian Prudential Regulation
Authority (APRA).
The tightening in banks’ housing lending practices over recent years had been accompanied by an
increase in lending by non-banks, although this was still estimated to account for less than
5 per cent of total housing credit. Members noted that, while not subject to prudential
regulation by APRA, non-banks’ housing lending is subject to responsible lending obligations. The
available evidence suggested that the riskiness of non-bank housing lending had not increased.
Members noted that the International Monetary Fund’s Financial Sector Assessment Program report
on the Australian financial system was generally positive about the resilience of domestic financial
institutions and the quality of regulatory and supervisory oversight, but made several high-level
recommendations for improving current arrangements.
Considerations for Monetary Policy
In considering the stance of monetary policy, members observed that growth in the global economy had
slowed over the second half of 2018 and into 2019. Trade tensions and political developments in Europe
remained sources of uncertainty. At the same time, though, global financial conditions had eased in
preceding months and, in China, the authorities had provided targeted stimulus to support domestic
growth. In a number of economies, continued strength in labour market data and moderating GDP growth
were sending different signals about the momentum in economic activity. Members noted that this was also
the case in Australia. While the labour market had continued to improve in early 2019, GDP growth had
slowed over 2018. Continued low growth in household disposable income and the adjustment in housing
markets had weighed on household spending.
Members noted that the sustained low level of interest rates over recent years had been supporting
economic activity and had contributed to progress in reducing the unemployment rate and returning
inflation towards the midpoint of the target, albeit only gradually. The central scenario was for
further gradual progress to be made on both unemployment and inflation. Members observed that a pick-up
in growth in household disposable income was an important element of these forecasts. Given this outlook
for further progress towards the Bank’s goals, members agreed that there was not a strong case
for a near-term adjustment in monetary policy. Members recognised that it was not possible to fine-tune
outcomes and that holding monetary policy steady would enable the Bank to be a source of stability and
confidence.
Members agreed that inflation was likely to remain low for some time. Wages growth had remained low,
there continued to be strong competition in the retail sector and governments had been working to ease
cost of living pressures, including through their influence on administered prices. In these
circumstances, members agreed that the likelihood of a scenario where the cash rate would need to be
increased in the near term was low.
Members also discussed the scenario where inflation did not move any higher and unemployment trended
up, noting that a decrease in the cash rate would likely be appropriate in these circumstances. They
recognised that the effect on the economy of lower interest rates could be expected to be smaller than
in the past, given the high level of household debt and the adjustment that was occurring in housing
markets. Nevertheless, a lower level of interest rates could still be expected to support the economy
through a depreciation of the exchange rate and by reducing required interest payments on borrowing,
freeing up cash for other expenditure.
Taking account of the further progress expected towards the Bank’s goals, members assessed that
it was appropriate to hold the cash rate steady. Looking forward, the Board will continue to monitor
developments, including how the current tensions between the domestic GDP and labour market data evolve,
and set monetary policy to support sustainable growth in the economy and achieve the inflation target
over time.
The Decision
The Board decided to leave the cash rate unchanged at 1.5 per cent.
The RBA released their Financial Stability report today, and even with the rose tinted RBA glasses there are a number of worrying issues touched on. Though none new. But their analysis of negative equity is over optimistic. So we will look at what they say, and highlight some additional considerations.
The RBA said:
Domestic economic conditions remain broadly supportive of financial stability. The unemployment rate has remained around 5 per cent since the previous Review and corporate profit growth has also been strong.
However, GDP growth in Australia also slowed in the second half of 2018. In particular, consumption growth eased and the outlook for consumption is uncertain.
Conditions in the housing market remain weak. Nationally, housing prices are 7 per cent below their late 2017 peak, although they are still almost 30 per cent higher since the start of 2013.
Growth in housing credit was slightly lower over the six months to February than the preceding half year, with investor credit hardly growing at all.
Nationally, falling housing prices have been driven by weaker demand and increased housing supply. The tightening in the supply of housing credit from improved lending standards has played a smaller part. Importantly, these more rigorous lending standards have seen the quality of new loans improve in recent years.
Measures of financial stress among households are generally low and households remain well placed to service their debt given low unemployment, low interest rates and improvements to lending standards. However, there has been an increase in housing loan arrears rates. The increase in arrears has been largest in Western Australia, where the decline in mining related activity has seen housing prices fall for nearly five years and unemployment increase.
They did in “deep dive” on negative equity using their securitised loan data.
Large housing price falls in parts of Australia mean some borrowers are facing negative equity – where the outstanding balance on the loan exceeds the value of the property it is secured against. Negative equity creates vulnerabilities both for borrowers and lenders. A borrower having difficulty making loan repayments who has negative equity cannot fully repay their debt by selling the property. Negative equity also implies that banks are likely to bear losses in the event that a borrower defaults. Evidence from Australia and abroad suggests that borrowers who experience an unexpected fall in income are more likely to default if their loan is in negative equity.
At present, the incidence of negative equity remains low. Given the large increases in housing prices that preceded recent falls and the decline in the share of mortgages issued with high loan to- valuation ratios (LVRs), housing prices would need to fall significantly further for negative equity to become widespread. However, even if this did occur, increased defaults would be unlikely if the unemployment rate remains low, particularly given the improvements in loan serviceability standards over recent years.
Estimating the share of borrowers with negative equity requires data on current loan balances and property values. The RBA’s Securitisation Dataset contains the most extensive and timely data on loan balances and purchase prices.
The Securitisation Dataset includes about one-quarter of the value of
all residential mortgages, or around 1.7 million mortgages.
This data can be combined with regional data on housing price movements to estimate the share of loans that are currently in negative equity. This suggests that nationally, around 2¾ per cent of securitised loans by value are in negative equity (just over 2 per cent of borrowers). The highest rates of negative equity are in Western Australia, the Northern Territory and Queensland, where there have been large price falls in areas with high exposure to mining activity. Almost 60 per cent of loans in with negative equity are in Western Australia or the Northern Territory. Rates of negative equity in other states remain very low.
Estimates of negative equity from the Securitisation Dataset may, however, be under or overstated. They could be understated because securitised loans are skewed towards those with lower LVRs at origination. In contrast, the higher prevalence of newer loans in the dataset compared to the broader population of loans, and not being able to take into account capital improvements on values, will work in the other direction. Some private surveys estimate closer to 10 per cent of mortgage holders are in negative equity. However, these surveys are likely to be an overestimate for a number of reasons; for instance, by not accounting for offset account balances.
DFA Says: Of course DFA estimates 10% of households in negative equity, after taking offset balances into account, and also adding in the current forced sale value of the property and transaction costs.
Information from bank liaison and estimates based on 2017 data from the Household Incomes and Labour Dynamics of Australia (HILDA) survey suggest rates of negative equity are broadly in line with those from the Securitisation Dataset.
DFA Says: The HILDA data is at least 2 years old, so before the recent price falls – so this set will understate the current position.
The continuing low rates of negative equity outside the mining exposed regions reflect three main factors: the previous substantial increases in housing prices; the low share of housing loans written at high LVRs; and the fact that many households are ahead on their loans, having accumulated extra principal payments.
Housing prices in some areas of Sydney and Melbourne have fallen by upwards of 20 per cent from their peak in mid to late 2017. But only a small share of owners purchased at peak prices, and many others experienced price rises before property prices began to fall. Properties purchased in Sydney and Melbourne since prices peaked account for around 2 per cent of the national dwelling stock. Looking further back, properties purchased in these two cities since prices were last at current levels still only account for around 4½ per cent of the dwelling stock.
Few recent borrowers had high starting LVRs. Over the past five years, the share of loans issued by ADIs with LVRs above 90 has roughly halved. Since 2017, it has averaged less than 7 per cent (Graph B2). Around 80 per cent of ADI loans are issued with an LVR of 80 or less. Around 15 per cent of owner-occupier borrowers and 20 per cent of investors take out a loan with a starting LVR of exactly 80.
Given most borrowers do not have high starting LVRs, housing price falls need to be large for widespread negative equity. Only 15 per cent of regions have experienced price declines of 20 per cent or more from their peaks. Around 90 per cent of these regions are in Western Australia, Queensland and the Northern Territory.
If a borrower has paid off some of their debt, then price declines will need to be larger still for them to be in negative equity. Most borrowers have principal and interest loans that require them to pay down their debt and many borrowers are ahead of their repayment schedule. Around 70 per cent of loans are estimated to be at least one month ahead of their repayment schedule, with around 30 per cent ahead by two years or more.
When a borrower is behind on repayments and their loan is in negative equity, banks classify the loan as ‘impaired’. Banks are required to raise provisions against potential losses from impaired loans through ‘bad and doubtful debt’ charges. Currently the proportion of impaired housing loans is very low, at 0.2 per cent of all residential mortgages, despite having increased of late (Graph B3).
Queensland, Western Australia and the Northern Territory together account for around 90 per cent of all mortgage debt in negative equity. These states have regions that experienced large and persistent housing price falls over several years.
This has often been coupled with low income growth and increases in unemployment, which have reduced the ability of borrowers to pay down their loans. Loans currently in negative equity were, on average, taken out around five years ago and had higher average LVRs at origination, of around 85 per cent. This made them particularly susceptible to subsequent falls in property values. Investment loans are also disproportionately represented, despite typically having lower starting LVRs than owner-occupier loans. Investors are more likely to take out interest-only loans in order to keep their loan balance high for tax purposes. Around 10 per cent of loans in negative equity have interest only terms expiring in 2019, which is double the share for loans in positive equity. For these borrowers, the increase in repayments from moving to principal and interest may be difficult to manage, especially as loans in negative equity are already more likely to be in arrears. Having more borrowers in this scenario is distressing for the borrowers themselves and for the communities they live in. However, it is unlikely to represent a risk to broader financial stability given it remains largely restricted to mining-exposed regions, which represent a very small share of total mortgage debt.
Continued housing price falls would be expected to increase the incidence of negative equity, particularly if they affect borrowers with already high LVRs. Around 11/4 per cent of loans by number (and 13/4 per cent of loans by value) have a current LVR between 95 and 100, making them likely to move into negative equity if there are further housing price falls (Graph B4).
However, compared to the international experience with negative equity during large property downturns, the incidence of negative equity in Australia is likely to remain low. Negative equity peaked in the United States at over 25 per cent of mortgaged properties in 2012 and in Ireland it exceeded 35 per cent, as peak to trough price falls exceeded 30 and 50 per cent respectively.
However, high origination LVRs were far more common in these countries than they have been in Australia.
DFA Says: Except we know there were high levels of mortgage fraud and incorrect data supporting loan applications. Higher than in Ireland.
Even if negative equity was to become more common in the larger housing markets of Sydney and Melbourne, impairment rates for banks are unlikely to increase significantly while unemployment and interest rates remain low.
DFA Says: you need to get post code granular to see what is going on. As our earlier heat map showed.
