Daily Commentary BY THE CURVE TEAM –

New Lending Stalls

10th of July, 2020

Housing finance approvals for May were worse than expected, which has broader implications for the economy.

Following a 4.6% drop in April, housing finance approvals fell 11.6% for May. This was worse than the market expectation for a 5.5% fall.

As new loan commitments fell, refinancing spiked. Refinancing of loans was up 27.5% on last month, suggesting borrowers were eager to take advantage of lower interest rates and banks were eager to attract borrowers as new loans fell. Refinancing has jumped more than 45% the past two months.

APRA also released updated data on loan deferrals. 10% of all small business and housing loans had been deferred as of May 31. APRA announced that loan deferrals would be allowed to continue until either March 31 or for 10 months since deferrals began, whichever one is the shorter period.

All these updates do not bode well for banks and the broader economy. For banks, profits will come under pressure as loans continue to be deferred, and if a refinancing war gains pace, net interest margins will also come under pressure, further impacting profits. Falling lending historically has coincided with lower house prices, which will reduce the value add of new home loans for banks.

Credit is self-fulfilling in this sense, in that decreasing bank profitability and lending further decreases credit and economic activity. With the RBA’s cash rate at 0.25%, it will be difficult to break the cycle without external stimulus, namely from the government.

Similarly, as credit falls, the economy will lose one of its key levers to stimulate economic activity. There is also a risk that the fall in lending will translate to lower house prices, which will impact household wealth and by extension consumption. Again, without structural reforms or government stimulus, there is a risk that decreasing activity levels feeds on itself.

Josh Stewart

Client Relationship Manager