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Investor home lending eases

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Business Indicators; New home sales; Private sector credit

  • Lending up: private sector credit (lending) rose by 0.6% in July to be up 6.1% over the year. But investor housing credit rose by only 0.6% in July – the slowest growth in almost two years.
  • Sales ease: total sales fell by 0.2% in real terms in the June quarter – the first fall in just over two years.
  • Profits fall: in 2014/15, company operating profits fell by 5.4%. But non-mining profits rose by 2.2% in the year to a record high of $184.7 billion.
  • New home sales ease: new home sales fell by 0.4% in July. Sales of multi-units fell by 4.2% while detached house sales rose by 0.7%.

What does it all mean?

The latest economic data highlights the balancing acts being played out in the Australian economy. Mining is in transition from booming investment activity to the production phase of the cycle. As a result mining profits and sales fell in the latest quarter. But while mining profits are retreating, profits in other parts of the economy are rising, in fact hitting record highs.

There is also the balancing act in the housing sector. Financial authorities want to see less frothy growth in investor housing lending, but at the same time want to maintain lending growth in business and owner-occupier home lending. The good news is that this is also happening.

So from the Reserve Bank’s standpoint there is nothing to do but to monitor the transitions to ensure that the process moves as smoothly as possible.

What do the figures show?

Business indicators

  • Company operating profits fell for the fifth straight quarter, dropping by 1.9% in the June quarter. Profits fell in 10 of the 15 industry groups. Profits fell by 9.9% in Mining, fell by 0.8% in Manufacturing and fell by 4.7% in Construction. But profits rose by 3.3% in Retail Trade.
  • In the year to June (2014/15 year), profits totalled $255.8 billion, down 5.4% over the year and the biggest annual decline in just over two years. Non-mining profits rose by 2.2% to a record $184.7 billion in 2014/15.
  • Unincorporated gross operating profits actually rose by 5.1% in the June quarter after rising by 6.8% in the March quarter. Business gross operating profits fell by 0.9% in the June quarter after rising 0.6% in the March quarter. Company profits before tax fell by 11.3% in the June quarter after rising 13.7% in the March quarter.
  • Inventories rose by less than 0.1% in the June quarter after rising by 0.6% in the March quarter. Inventories rose in Manufacturing (up 0.9%) and in Electricity, gas, water and waste services (up by 2.6%). Inventories fell in Mining (down by 0.3%), Wholesale Trade (down 0.4%) and in both Accommodation & food services and Retail Trade (both down by 0.2%).
  • Sales rose in 8 of the 15 industry sectors in the June quarter. Sales rose the most in Transport, postal and warehousing (up 3.1%) followed by Rental, hiring and real estate services (up 2.6%). Sales fell most in Mining (down 2.5%) and Construction (down 0.8%).
  • The value of all sales by industry fell for only the first time in nine quarters, down by 0.2% in real terms in the June quarter to be 1.4% higher than a year ago. In the March quarter sales were growing at the fastest pace in 3½ years.
  • In current prices, sales rose in five states and territories in the June quarter: NSW & Queensland (both up 1.5%), Tasmania (up 1.1%) and Victoria & South Australia (both up 1.0%).
  • Sales fell in Western Australia (down by 3.7%), ACT (down by 1.1%) and Northern Territory (down 0.4%).
  • Wages & salaries rose by 1.1% in the June quarter to be up 1.6% over the year, weaker than the 2.3% annual growth in the Wage Price Index.

Private sector credit

  • Private sector credit (lending) rose by 0.6% in July after a 0.4% gain in June. Annual credit growth rose from 5.9% to 6.1%.
  • Housing credit grew by 0.6% in July after a similar rise in June. Housing credit is up 7.4% on a year ago – the strongest annual growth since October 2010.
  • Owner occupier housing credit rose by 0.5% in July to stand 5.3% higher than a year ago – the fastest annual growth since April 2012. Investor housing finance lifted 0.6% in July – the slowest growth in almost two years (equal the rate in October 2013). Investor housing credit was up by 10.8% over the year, down from 11.1% annual growth in June.
  • Personal credit was unchanged in July after rising 0.3% in June. Personal credit was up 0.9% over the year.
  • Business credit rose by 0.7% in July – the biggest rise in six months. Business credit is 4.8% higher than a year ago.
  • Term deposits held with banks rose for the first time in six months, up by $4.7 billion in July to $511.3 billion. But term deposits are down 5.0% on a year ago – the sharpest decline in 12 years. Term deposits have been regularly falling in annual terms for 20 months – the longest period in records going back almost 30 years.

What is the importance of the economic data?

The quarterly Business Indicators publication by the Australian Bureau of Statistics (ABS) contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are increasing then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.

Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia's largest 100 home builders. The survey covers around 14% of the home building industry.

New home sales

New home sales fell by 0.4% in July. Sales of multi-units fell by 4.2% while detached house sales rose by 0.7%.

The Housing Industry Association reported: “In the month of July 2015 detached house sales increased by 4.2% in New South Wales. Detached house sales fell by 2.3% in Victoria and by 4.9% in Western Australia. Sales were close to flat for the month in Queensland (-0.6%) and South Australia (-0.2%).”

“The annual peak for detached house sales has passed. Over the three months to July this year detached house sales fell by 2.8% to be 3.4% lower when compared to the three months to July 2014.”

“‘Multi-unit’ sales peaked in May this year and fell by 4.2% in July following a decline of 2.9% in June. Over the three months to July this year multi-unit sales increased by 8.3 %, but it was the strength of the May result that drove the quarterly outcome.”

What are the implications for interest rates and investors?

The Australian economy is evolving as best as can be expected. There is no need for the Reserve Bank to either lift rates or cut rates in the current environment.

Our review of the profit-reporting season showed that corporate Australia remains in good shape. While profits are understandably down in mining and engineering sectors, they are up in consumer and housing-dependent areas. Bottom-line earnings are generally improving despite the fact that a large number of companies have taken the opportunity of favourable financials to write down the value of assets such as intangibles.

Over the last seven years the Australian economy has experienced the biggest structural swings in a century. Mining investment and prices soared; resource prices retreated; mining investment was completed; mining production has ramped up to record highs; interest rates fell to record lows; and home building approvals hit record highs. Major swings and transitions have already occurred and the process is a long way from over.

The Reserve Bank can feel justifiably happy about how the process has gone so far.

Published: Tuesday, September 01, 2015