Another good response from the RBA Deputy Governor yesterday, which affirms what I have said here for some time. Many folks like to stir up angst by claiming that housing credit growth of 5-6% per annum is somehow worrying and a harbinger of adverse economic prospects (noting that this rate of growth is at 35 year lows). I've repeatedly countered that housing credit growth is simply tracking household disposable income, which is what one would expect through-the-cycle. This is precisely why the household debt-to-disposable income ratio has moved sideways since 2006 (a number of years before the GFC). I've also tried to explain that the double digit housing credit growth that transpired during the 1990s and 2000s was an unusual, not-to-be-repeated, experience, which was driven by an equally once-off, 40% decline in average Australian home loan rates. The RBA's Phil Lowe reiterated these points yesterday:
QUESTION: We are certainly seeing sluggishness in the banking sector at the
moment, particularly given the drop in mortgage lending, given that some of the
big infrastructure projects, some of the big resource projects are perhaps not all
been funding out of bank lending here in Australia but being funded out of other
sources, particularly cash sources from those projects themselves. Are we in for
a period of quite sluggish growth in the banking sector?
MR LOWE: Well sluggish is a relative term. I mean perhaps what we have for a
decade and a half is unusually strong credit growth and I suspect that many parts
of the economy, including the finance sector, mistook that for the permanent
state of affairs, and now we’ve returned to something that is more normal, that is
more sustainable and people now interpret that as sluggish because it’s slower
than what came before, but what came before was not really normal or
sustainable and I think where we are now with household credit growing broadly
in line with household incomes, and some pick up in business credit, it’s a more
sustainable position than we have been in. And many parts of our economy and
not just the finance sector are having to adjust to this change in the financial size
of the economy and the growth in the financial sector, it’s effecting the real estate
sector, I think it’s affecting the retail sector as well. But we had really 15 years of very unusual financial and economic activity associated with the decline in
interest rates and financial liberalisation and that adjustment to that is over, and
that’s causing significant ripple effects right through the economy and the slower
credit growth, what you described as sluggish I might describe that as new
normal, is one of those.
