Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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Thursday, 1 January 2015

Housing Investor Credit Accelerates into 2015

Credit growth to new 5 year high

The Reserve Bank released its Financial Aggregates data for the month of November 2014, which showed total credit growth at its fastest level since January 2009 when lending was in the process of drying up through the financial crisis. 

Housing credit once again increased by 0.6 percent to be a very solid 7.1 percent higher over the past year. Business credit came in at a softer 0.2 percent in November following a stronger 0.7 percent in the prior month, again suggesting that this sector of credit growth is softening.


Down to business...

The latest round of data sees year-on-year business credit growth moving up to 4.6 percent, a considerable improvement on the limp 1.8 percent growth we saw in the corresponding month of the prior year.


It has certainly been heartening to see business credit continuing to rebound from "recession-like" levels. However, the most up-to-date commercial lending data from the Australian Bureau of Statistics (ABS) has also implied that this trend is weakening, hinting at the possible need for further interest rate cuts in 2015.

Crowded out?

The common refrain is that productive business lending has been "crowded out" by troublesome property investors and banks preferring the security of real estate. It certainly makes for a grand headline and a neat story - banks refuse to lend to productive businesses because they only have eyes for unproductive housing - but is this narrative really true? Does it reflect what is actually happening?

Certainly housing investment has increased strongly to take up a larger share of the credit pie, some of the reasons for which I looked at here.

Yet when I put this contention to to the pleasant business lending manager folk in Sydney at Australia's largest bank, they remained adamant that funding is absolutely available to be deployed for small business lending provided that a coherent business case is submitted. So what gives?

Business - credit where it's due?

In one sense hardly a surprise that the pace of business credit has slowed - the chart was more or less turning parabolic prior to the financial crisis with total business credit more than doubling between 2003 and 2008.

There is a fine distinction to be drawn between welcoming business credit growth and adopting a "all lending to business = good" mantra regardless of risk - risky leverage on the balance sheet being the very same charge which is endlessly leveled against real estate credit.

I would argue that trends in business credit are largely a function of business confidence and decision-making - not a lack of availability of credit.

The data shows that total business credit increased to a new all-time high of a seasonally adjusted $773.5 billion in November 2014, but the pace of business credit growth remaining demonstrably slower than that seen prior to the financial crisis.


But there is more to it than simply this.

More than meets the eye for small business

Looking only at the share of total credit outstanding as categorised by the Reserve Bank is too simplistic in any case.

As a small business owner I know from personal experience it is much cheaper and more efficient for small business owners to secure a line of credit which is secured against property - regardless of its ultimate purpose or use - which in turn inevitably skews the data as it relates to small business towards the "housing credit" category.

For example, we have a pre-existing line of credit in UK which attracts interest at 1.50 percent - hell would freeze over before anyone chose a small business loan over credit attracting that rate of interest! The securing of business lending via home equity lines of credit is one trend that has to some extent distorted the picture at the small end of town.

If anything rising home prices over the past decade have been as much a boon as they have a burden, dependent of course upon home ownership status.

My business is a services operation and thus has no real need for debt capital - but if I did need leverage the banks would far more readily extend me a line of credit for $100k than a business loan - for even if my business failed and I decided to "do one" and leg it to the Bahamas, my house is going nowhere. With skin in the game there is a huge disincentive to default.

Certainly there has been no significant decline in the number of small businesses or in entrepreneurs taking that route.

The top end of town...and other funding matters

Importantly debt is only one part of business capitalisation and Australia's most material businesses are increasingly more inclined to tap equity markets than they are to seek purely the business credit that is captured within the RBA's Financial Aggregates data.

An expanding listed business today more commonly seeks investment capital via a Secondary Equity Capital Raising - particularly via a Share Placement, but alternatively through a Share Purchase Plan (SPP), a Dividend Reinvestment Plan (DRP) or a Rights Issue.

Business credit as a share of total outstanding credit has declined from around 50 percent two decades ago to only 33 percent today. Rewinding the charts back two decades, the Australian Securities Exchange (ASX) data reveals that capital raisings have taken on an increasingly eminent role of business funding since that time.


Below we have also plotted a monthly chart of initial and secondary capital raised on the ASX in the past decade - excluding the figures relating to scrip-for-scrip capital raised which are not appropriate to include here and therefore have been stripped out. 

Notably there was an obvious dearth of listing activity from 2008 until H2 2009 - and a great flood of secondary equity raisings as Australian businesses were hurriedly recapitalised - but since that time listing activity and new admissions have resumed with secondary capital still on tap as required.


On a rolling annual basis initial listings and secondary capital raisings have raised a combined $73.3 billion over the past 12 months (exclusive of "other capital raised" such as scrip-for-scrip). This compares to an increase in business credit as recorded by the RBA's Financial Aggregates of only a seasonally adjusted $36.5 billion over the past 12 months.

Initial capital raised on a rolling annual basis is at the highest level seen in over a decade. The $8.5 billion monthly spike in November 2014 is largely accounted for by the Medibank foat - the calendar year's largest listing which netted the Federal Government $5.7 billion.


Australia part of a global equity trend

Exchanges in London (LSE), New York (NYSE), Canada (TMEX) and Hong Kong (HKEx) have each revealed a trend towards the raising of equity capital since the 1990s.


And so too particularly has Australia's own securities exchange, the ASX.



It's also worth noting that the component companies of the ASX are not solely behemoths - the respective component indices comprise a great many small-, mini- and micro-caps.


The historic data recording the number of IPOs reveals the rising trend until the impact of the financial crisis through 2008-9.


OK so we haven't exactly seen a return to the heady days of "cash box floats" (thankfully!), but the number of new entities listed on the ASX has now rebounded solidly with new admissions increasing from 83 in 2012 to 110 in 2013 - and with the number of new listed entities admitted in the current financial YTD tracking significantly higher once again up to the most recent monthly data reported at November 2014.

The favoured method of secondary capital raising - the share placement

It is abundantly clear that listed companies more readily look to secondary raisings from equity markets today than was ever the case previously.


In particular, listed companies are now favouring Share Placements - and to a lesser extent Rights Issues, SPPs and DRPs - both as a share of total secondary raisings and in absolute terms.



A function of business confidence

This is only a flavour of why looking purely at business credit growth is too simplistic a measure for analysis of the health (or otherwise) of Australian business. Sources of funding remain available for businesses with the confidence (or lack thereof) to take on the challenge of investment and expansion - but it has been sourced increasingly from the equity markets.

I previously looked at why housing inevitably now takes up a greater share of bank credit in a little more detail here.

Housing - investor credit still leads

Finally a look at what is happening in the property lending space, with owner-occupier credit increased by a seasonally adjusted $4.7 billion in November 2014 and investor credit by $4.0 billion. Of course since the absolute level of investor credit is lower than that for owner-occupiers this reflects a significantly higher percentage increase in investor credit for the month.

The long term chart shows that there was little in the way of deleveraging in Australia through the financial crisis, although the pace of housing credit growth did ease back.


"Macro-pru"?

The above figures will attract interest from market commentators in the new year since they take the growth in investor credit up to approximately 10 percent (rounded) for the past year.

Smoothing the seasonally adjusted data on a rolling annual basis gives a slightly lower result but either way investor credit growth will soon breach the 10 percent threshold. Owner-occupier credit growth has rebounded too, but naturally at a lower pace in percentage terms.


Credit growth is by no mean high in historic terms, but it is strengthening and coming from a high base. The 10 percent investor credit growth benchmark is noteworthy since the market's regulatory body APRA have now indicated that lenders growing their lending to investors at a pace "materially above" 10 percent could be a risk indicator which may lead to further scrutiny.

Happy to be proven wrong on this but my sense over 2014 has been that the spectre of a dramatic APRA 'intervention' has been overplayed. 

Housing market observers love the term "macro-prudential" because it sounds new and exciting, but in reality macro-prudential measures are already in operation. With mortgage arrears recently reported as being at their lowest level in 7 years by Fitch, it seems likely that APRA will remain cautious and observant in the early part of 2015.

If interest rates are cut further and investor lending accelerates significantly thereby pushing investor credit growth "materially above" the 10 percent threshold then we might expect to see some further regulatory measures to cool the market, but at this stage little of note appears to be happening.

Investor credit takes a record share

As Australia's capital cities mature, immigration continues apace and Australians change jobs and careers more frequently than ever before, the share of housing credit attributable to investors ultimately seems set to head towards 40 percent.

However this is likely to take many years to play out. The share of housing credit to investor nudged up to a new record high 34.2 percent in November 2014.


The wrap

Business credit looks as though it may be softening, but more than $20 billion of capital was raised on the ASX in the last 3 months alone, so the news is hardly bleak. Largely thanks to the housing sector credit growth is now at its highest level since nearly 6 years ago in January 2009.

Total housing credit continues to rise at a fair clip implying that dwelling prices should record solid gains in certain capital cities in 2015 - particularly Sydney and Brisbane in our view.

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