Tighter bank lending standards showing impact: Savanth Sebastian

Tighter bank lending standards showing impact: Savanth Sebastian
Tighter bank lending standards showing impact: Savanth Sebastian
GUEST OBSERVER
 
The latest lending statistics show a mild consolidation in July, although the result is not a cause for concern – especially given that lending is holding just 4% shy of the seven-year highs reached in April.
 
The real driver of lending over the past year has been the housing sector and in that context it is investor housing that has driven the strength. However the tighter bank lending standards are starting to have an impact in terms of the housing finance data - loans for construction of new dwellings has now fallen for three consecutive months.

It is important to realise while housing activity will continue to be the backbone of the economy over the coming year, it is starting to show signs of starting to cool – especially when it comes to irrational exuberance. If there is an anticipated pullback in home lending policymakers would be hoping that activity amongst the business sector lifts from here.

There would be mild disappointment in the fall in business loans in July. Commercial loans are now down 5% on a year ago. Business conditions are healthy, however businesses are still rather tentative about borrowing. The key driver of future lending will be an ongoing improvement in labour market conditions, rise in business hiring intentions and lift in consumer confidence. 
 
Tighter bank lending standards showing impact: Savanth Sebastian
 
 
 
Tighter bank lending standards showing impact: Savanth Sebastian
 
The Reserve Bank will dominate headlines next week with a number of releases and speeches. However the focus will be squarely on the Reserve Bank Governor, when he testifies in front of the House of Representatives Economics Committee on Friday. It will be interesting to see the Governors views when it comes to the non- mining business investment and how the housing sector is likely to evolve with the tighter lending standards. CommSec expects no change in interest rates over the next year.

What do the figures show?

Lending finance

Total new lending commitments (housing, personal, commercial and lease finance) fell by 0.1% in August to $74.1 billion after a 1.3% rise in June. New loans are down 1.1% over the year.

Housing finance: The seasonally adjusted measure of construction and new purchases rose by 2.2% in July while alterations & additions rose by 0.9%. Home loans are up 13.4% on a year.

Commercial finance: The seasonally adjusted series for the value of total commercial finance commitments fell by 2.7% in July. Revolving credit commitments fell by 13% while fixed lending commitments fell by 0.9%. Business loans are down 5% over the year.

Personal finance: The seasonally adjusted series for the value of total personal finance commitments fell by 2.6% in July after rising by 0.9% in June. Revolving credit commitments rose by 2.6% and fixed lending commitments fell by 5.8%. Personal loans are down 12.7% over the year. Within personal fixed finance commitments, finance for used cars was down 2.3% on a year earlier while loans for new cars were up by 8.8%.

Lease finance: Lending rose by 60.2% in July. Lease finance rose by 68.9% over the year. What is the importance of the economic data?

Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.

What are the implications for interest rates and investors?

The Reserve Bank would be comfortable about the mix of borrowings: Aussie businesses are tentatively borrowing - in a measured way. Still, the Reserve Bank would be watching the recent drop in consumer confidence a lot more closely.

The weaker Aussie dollar is providing solid stimulus to the economy at present and the Reserve Bank will continue to assess the impact on the economy over the next few months. CommSec expects no change to interest rates over the coming year. 

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Tighter bank lending standards showing impact: Savanth Sebastian

 

Savanth Sebastian is an economist for CommSec. You can follow him on Twitter here.

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