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Calls for rate hike to check pace of debt accumulation
The Australian 12:00am January 18, 2017
Michael Bennet
Australians are accumulating debt at a faster rate than in the wake of the global financial crisis, despite much smaller reductions in official interest rates, sparking fresh calls for the Reserve Bank to lift the cash rate from near emergency levels.
As data revealed growing demand for housing finance, TD Securities warned that “tiny” RBA rate cuts had encouraged debt accumulation to surpass levels during the GFC when the official cash rate was slashed from 7.25 per cent to 3 per cent within seven months.
“The pace of debt accumulation is equivalent to massive rate cuts when in fact we haven’t seen massive rate cuts, we’ve seen 25 basis points every six months,” Annette Beacher, TD’s chief macro strategist for the Asia-Pacific, told The Australian.
“When the rest of the world is wringing its hands saying ‘interest rates aren’t effective’ — they certainly are in Australia, and you just need to look at debt accumulation to show that low interest rates are still working.”
Ms Beacher said the fact debt was still growing from record highs with only small rate cuts was more worrying than just the absolute level of household debt, which this week prompted Fitch to downgrade the banking sector.
The banking regulator this week argued systemic risk in the financial system had not risen, but Ms Beacher said her analysis of quarterly debt data, released last month, showed stability had reduced. She said the RBA should increase the cash rate from 1.5 per cent this year, arguing that debt accumulation would only stop when households saw the central bank lift rates or believed an increase was imminent.
“Fitch got people talking when they downgraded the banking sector,” she said. “(But) we’ve been talking about household debt for 15 years. It’s not about that, it’s about the rate of accumulation of household debt. I think that’s the story. I’m still greatly concerned about this debt accumulation and that’s why, last I checked, I’m the only person looking for a rate hike by year end.
“It’s got nothing to do with runaway growth or inflation, although inflation is picking up ... but the financial stability risks, particularly for a (Reserve) bank that’s highly reluctant to bring in macro tools, I think we’re going to have to start talking about getting interest rates off the floor.”
The Australian Bureau of Statistics yesterday said the value of housing finance approvals in November jumped 3.2 per cent, taking the annual pace to 7.4 per cent excluding refinancing.
The surge was powered by investor loans, which jumped 4.9 per cent in the month and 21.4 over the year, the fastest growth rate since May 2015 as banks step up lending to landlords after previously cooling growth to comply with the regulator’s cap.
“This pick-up in investor activity reflects ongoing strength in price growth and auction results ... (suggesting) sentiment in the housing market remains strong and is likely to persist into 2017,” ANZ economists said.
Despite the resurgence in investor lending, banking regulator the Australian Prudential Regulation Authority this week opted against raising banks’ capital requirements, saying the “level of systemic risk” in the financial system had not increased in the past year.
APRA argued the banks’ so-called countercyclical capital buffers did not need to be raised as there had been a decline in higher-risk mortgage lending, such as to investors, and overall housing credit growth was slowing.
But Digital Finance Analytics analyst Martin North labelled the investor lending market “overheated”. Fitch this week downgraded its outlook on the banks from stable to negative, following similar cuts by Moody’s and Standard & Poor’s, citing the property market as the key risk amid the rise in household debt to 187 per cent of disposable income.