The monthly Financial Aggregates were published by the RBA on Friday (31st August). The figures show a continuing decline in growth of Investor home lending to 1.55% annual growth, whilst lending to Owner Occupied kept moving at a brisk pace of 7.64% annual growth.
The reasons for these moves are clear with the regulators placing a 10% limit on investor lending growth, placing a 30% cap on new interest only lending, and the banks lifting lending standards because of the shortcomings exposed by the Royal Commission. A growing political risk has further emerged, with a greater possibility of the Labor Party election victory as a result of the Liberal Party’s bloodletting. The Labor Party’s platform on negative gearing and capital gains subsidies is that these tax subsidies are unsustainable and unaffordable. The Labor Party will only allow investors to deduct net rental losses from newly constructed housing. Also, they propose reducing the capital gains tax discount from 50% to 25%, although superannuation funds will not be affected.
The Financial Aggregates also show that Personal Credit growth continues the negative growth with annual growth falling to minus .10%.
Looking at the figures over a 10-year period paints a clear picture of the Australian economy, and probably the risks we face in an economy overly reliant of rising house prices.
Over 10 years, total credit in the economy increased by $992 Billion. Of that total, $809 Billion (81.5%) was allocated to the (unproductive?) home loan market. Reflecting the death in real wage increases, Personal Credit went backwards by $2 Billion over the 10 years.
Business Lending only managed an increase of $185 billion (18.6%) over the period. The Government is a much bigger borrower than business in Australia, with the Australian Office of Financial Management publishing a $516 Billion increase in the market value of their debt in the 10 years to June 30th 2018.
Interestingly, the increase in Government debt nearly matches the $520 billion increase in Owner Occupier lending.
So, Government spending and homes were the main game over 10 years. Both political parties are promising to reduce the increase in Government debt to zero in the future and one party wants to cut the tax breaks going to property. Makes you wonder what the growth drivers will be if 88% of the drivers in credit growth gets cut back.