Australia: Contraction ahead

Concern about rising household debt and house prices prompted Australian regulators to crack down on bank lending, with APRA introducing limits on interest-only loans.

Australia: Household Debt and Housing Prices

China is also making it more difficult for Chinese nationals to purchase real estate offshore. The combined result is a slow-down in Australian bank credit, with credit and broad money growth falling below 5% for the first time since the global financial crisis.

Australia: Credit and Broad Money Growth

Currency in circulation may be more volatile but a sharp fall in currency growth over the last two years confirms tighter monetary conditions.

Australia: Currency and M3 Growth

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recently kicked off with intense media coverage. Airing of banks’ dirty laundry in public is again likely to lead banks to further tighten lending standards. Falling housing prices as a result of fewer offshore purchases and restrictive lending practices will in turn fuel a more negative lending outlook, creating a negative feedback loop.

While a credit contraction can still be avoided, it may be difficult for the RBA and APRA to reverse course. Given that their objective is to avoid a full-blown banking crisis, caused by a collapse of the housing bubble, the current slow-down may appeal as the lesser of two evils.

One thought on “Australia: Contraction ahead

  1. A good summation Colin; for what is worth I agree. It will be interesting to see how this plays out.

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