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Credit growth sinks into rate cut territory

This article originally appeared on MacroBusiness via UBS on 1/3/18.

Jan-18 credit below expected at 0.3% m/m; holding a ~4-year low of 4.9% y/y
Private credit growth was below consensus again, with another rise of only 0.3% m/m (UBS & mkt: +0.4%), the equal lowest since Jan-17. This held the y/y at only 4.9%, the equal slowest since May-2014.

Investor housing credit slumps to ~2% annualised – post material restatement
More notably, investor housing credit growth slumped to 0.2% m/m and 3.0% y/y, the weakest since 2016. The 3-month annualised rate was ~2%, far below ~7% in early17 when APRA announced ‘phase 2’ of macroprudential tightening capping interest only loans at a 30% share; and even further below APRA’s 10% y/y ‘cap’ for investor housing credit growth. Indeed, due to (another) material restatement of the RBA data this month – the trend of investor housing credit growth – the primary concern of regulators – has been much weaker in recent years than previously realised.

Feb-18 dwelling prices fell ~0.3% m/m, dropping to a 5-year low of ~2.0% y/y
Meanwhile, CoreLogic will tomorrow release dwelling price data for Feb-18. Based on the available daily data, this will likely show prices fell another ~0.3% m/m, and see the y/y drop further to ~2.0% (after 3.2% in Jan-18), the weakest pace since 2013.

Implications: RBA likely not hiking this year given a weakening housing market
Overall, we highlight that the drop in credit growth, especially for investor housing, suggests that macroprudential policy is starting to have a more material negative impact on housing (with ‘wealth effects’ to constrain consumption). Indeed, house price growth has arguably dropped into historical RBA rate cut territory – albeit we doubt this time the RBA will actually ease, given the global economic backdrop is booming, and the overall growth outlook is modestly recovering. That said, the weakening housing market gives us confidence in our view that the RBA is unlikely to hike rates in 2018, especially as they clearly signalled they are patiently waiting for faster wages to support inflation (which they see stuck below target until mid-2019).