Australia: Too much focus on the housing tail risk - AmpGFX

The RBA and many market commentators have expressed a subdued outlook for the Australian economy due to high levels of household debt and a view that the housing market is peaking, suggests Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“Such concerns are valid, but they also appear to be blinding the market to pretty clear signs of a broad-based pickup in the economy.”

“The facts are that housing credit growth remains stable and continues at above income growth.  So households are not, it seems, trying to consolidate their debt.  While investor loan growth has slowed, owner-occupier loan growth has picked up.”

“Consumer spending was quite weak in Q1, helping support the notion that household debt and housing market softness were spilling over the weaker consumer activity.  However, retail spending recovered solidly in Q2, so it’s not clear that households are dragging on growth.”

“The housing market has not slowed all that much.  It may have lost some momentum with softer foreign and investor demand, but the price growth and auction clearance rates are still quite robust.”

“The tightening in credit conditions since last year is relatively modest, taking interest rate somewhat higher for investors, more so for interest only loans, while in fact, they are somewhat lower for owner-occupiers willing to pay off some principal with interest.”

“The RBA SoMP said, “Since May, most lenders have increased their standard variable reference rates for interest-only loans by around 30 basis points and reduced standard variable rates for principal-and-interest loans to owner-occupiers by around 5 basis points.”

“The net effect of these changes is estimated to have increased the average outstanding variable interest rate by around 5 basis points. In combination with the increases previously announced since last November, this implies a rise in the average outstanding variable interest rate of 15–20 basis points.”

“However, the RBA admits that “the increase in the average rate …. is expected to be less than this estimate” due to: switching from interest-only to principle-and-interest loans; discount rates offered by banks have not risen as much; and fixed-rate borrowers rolling into lower fixed-rates.”

“As such, rates faced by households on average have risen by significantly less that one standard RBA policy rate increase from record lows last year. Looking ahead, households might feel quite comfortable about their financial situation since the RBA has dampened expectations that they will hike rates for the foreseeable future.”

“As such, we should not expect frugal households and lower credit growth to drag down the economy in the near term.  In the meantime, stronger employment prospects may underpin consumer spending.  It may also continue to underpin the housing market, despite some headwinds.”