Statement on Monetary Policy – November 2024Box A: The Pick-up in Housing and Business Credit Growth

Despite borrowing rates remaining at a high level, housing credit growth has picked up since mid-2023, and business credit growth is above its post-GFC average. This Box compares these trends with previous periods of monetary policy tightening and discusses factors that have supported credit growth recently. While some recent trends in credit growth have been unusual for an interest rate tightening phase, we continue to view overall financial conditions as restrictive.

Overall household financial conditions remain restrictive.

There is evidence that tighter monetary policy is weighing on housing credit growth. Serviceability and affordability constraints have weighed on growth in the stock of outstanding mortgages, particularly for lower income borrowers. Loan discharges – whereby a loan is fully repaid, usually on the sale of a property – remain high relative to new lending. This is consistent with incentives to reduce debt in a higher interest rate environment. Other indicators such as the level of mortgage rates and scheduled household debt repayments, as well as developments in the real economy, also point to household financial conditions being restrictive (see Chapter 1: Financial Conditions; Chapter 2: Economic Conditions).

Unusually for a rate tightening period, housing credit growth has picked up over the past year …

Nominal housing credit growth has been gradually increasing since August 2023, over which time the RBA has assessed financial conditions as being restrictive. In previous tightening phases, housing credit growth generally decreased after a period of tighter monetary policy (and then continued to decline even as policy was eased). Although housing credit growth did initially decline materially during the current tightening phase, the recent pick-up is unusual compared with previous periods of restrictive monetary policy (Graph A.1).

Graph A.1
A line graph showing housing credit growth in six-month-ended-annualised terms. The background of the graph is shaded blue and yellow, with blue representing a cash rate tightening phase and yellow representing cash rate easing. There is a vertical bar at November 2023 to indicate the latest cash rate change. Housing credit growth was declining from the start of the most recent tightening phase but has been increasing recently.

… but the rate of growth remains subdued, particularly in light of growth in nominal incomes, population and housing prices.

While housing credit growth has increased, the current rate of growth is not that strong – particularly after accounting for growth in nominal incomes. Housing credit growth has increased from a relatively low rate and is around its post-GFC average. The ability of households in aggregate to service new debt has also been supported by strong growth in nominal incomes. Reflecting this, household credit has declined steadily as a share of household disposable income since late 2022 (Graph A.2).

Graph A.2
A line graph showing household credit as a per cent of annual household disposable income. The graph shows that household credit has been relatively stable as a share of disposable income since around 2017 but has been declining as a share since the middle of 2022. A dashed line illustrates the same measure excluding offset accounts. The dashed line is lower and has been relatively flat since around 2008. It has also been declining in recent periods.

Housing prices and housing credit growth have been supported by strong population growth and constrained housing supply. Population growth over the tightening phase has contributed to increased demand for housing, which (combined with a lack of new supply) has led to strong growth in housing prices (see Chapter 2: Economic Conditions). Housing price growth and a modest pick-up in housing turnover have supported demand for housing credit, despite higher interest rates.

Business credit growth has been strong, though its historical relationship with monetary policy is weaker than for housing credit growth.

Business credit growth has declined over the most recent tightening phase but remains well above its post-GFC average.[1] Businesses’ ability to continue to borrow has been supported by relatively low levels of leverage and above-average cash balances. This has meant that the increase in interest rates has had a weaker effect on business credit growth than in some previous tightening phases, which has contributed to financial conditions being less restrictive for businesses than for households. Profit margins for most large and small businesses remain around pre-pandemic levels, supporting their ability to service debt despite higher interest rates.[2] Lenders have also noted that competition for business loans has increased, suggesting that the availability of business credit has not tightened alongside the slowing economy.

The link between business credit growth and official interest rates is weaker than for housing credit. Business credit growth has both increased and declined in previous easing and tightening phases (Graph A.3). While businesses’ demand for credit is influenced by the level of interest rates (including because of their effect on current and expected future economic conditions), other factors are also at play. For example, borrowing to fund mergers and acquisitions contributed to strong growth in business credit in the 2006–2008 tightening phase. More recently, favourable farming conditions and higher land values have contributed to strong growth in lending to the agriculture industry. Business credit growth is also affected by the supply of credit: lenders may be less willing to provide loans during easing phases as they coincide with economic slowdowns (and vice versa).

Graph A.3
A line graph showing business credit growth in six-month-ended-annualised terms. The background of the graph is shaded blue and yellow, with blue representing a cash rate tightening phase and yellow representing cash rate easing. There is a vertical bar at November 2023 to indicate the latest cash rate change. Business credit growth fell during the most recent tightening phase but has settled at an elevated rate and is generally increasing.

While firms’ business investment decisions are affected by monetary policy, business credit growth has a relatively weak relationship with aggregate business investment. This is partly because internal funding (i.e. retained profits) makes up the bulk of businesses’ total funding, including for investment spending (Graph A.4). Additionally, businesses can substitute between different funding sources such as bond issuance and trade credit. Businesses also use their funding for a broader range of purposes than investment. Notwithstanding this weak aggregate relationship, the availability and cost of finance are important factors influencing individual firms’ decision-making, growth and profitability. Research using firm-level data has found that the investment decisions of firms that are more financially constrained or reliant on external funding are more sensitive to monetary policy.[3] This is consistent with the fact that while internal funds are the largest source of business funding, the level of interest rates affects businesses’ marginal cost of obtaining additional funding for investment.

Graph A.4
A stacked bar chart showing sources and uses of funding across financial years starting in 2002 and ending in 2024. Sources of funding, which include internal and external funding, have fallen in dollar terms over the past year driven by internal funding. Uses of funding include investment, dividends paid, net interest and other. A black line plots the total sources as a per cent of GDP, which has remained stable over recent years.

Endnotes

Business credit refers to the stock of outstanding loans made by financial intermediaries to businesses. [1]

See RBA (2024), ‘Chapter 2: Resilience of Australian Households and Businesses’, Financial Stability Review, September. [2]

See Nolan G, J Hambur and P Vermeulen (2023), ‘Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE’, RBA Research Discussion Paper No 2023-09. [3]