Follow the money

Dr Justin Pyvis Dr Justin's picture

We've been writing and tweeting about the collapse in interest-only property loan issuance in Australia for several months, following APRA's decision last year to require banks to keep interest-only loans to less than 30% of their mortgage portfolio.

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Australia's remarkable property boom was fuelled with debt, and the big banks completely transformed their balance sheets to facilitate it. In the past 18 years, the amount of bank credit allocated to property has grown from 43% to 62%.

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The financial services sector, as a share of total economic output, has profited immensely from the housing pivot. Its share of the economy now stands at 8.8%, double what it was in the mid-1980s.

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But APRA's restrictions - it also limited investor credit growth to 10% a year, a decision it is about to reverse given the recent declines in Sydney property prices - led to a small drop in the sector's overall significance last quarter. Most tellingly, broad money growth is now expanding at just 2.5% year-on-year, its lowest level since the global financial crisis (2.8%).

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If money and credit growth slows enough, the financial services sector cannot expand. Barring fresh supply restrictions (e.g., land use regulations), property prices cannot increase. Two major drivers of economic growth in Australia over the past three decades will slow, dragging down the rest of the economy with them.

How did we get to this point? Artificially low interest rates created an unsustainable asset boom, and the recent slowdown in domestic money and credit growth - driven by APRA's regulatory restrictions, the ongoing Royal Commission, and US Fed tightening - is starting to reveal the malinvestments they spawned.

When an economy is so dependent on ever-expanding money and credit, investors should heed caution when those factors begin to reverse, as they are today.