Higher household savings rates slow property value growth

Private sector credit figures are released every month by the RBA. Looking specifically at the housing component of the data, the results for June 2012 showed that growth in outstanding housing credit was at a record low over the past 12 months, increasing by just 5.1%.

The first graph highlights the monthly and annual growth in private sector credit over the past 30 years. As mentioned, housing credit increased by 5.1% over the 12 months to June 2012, which was the lowest level of annual growth across the history of the series.

It is clear from the chart that annual growth in housing credit has been trending lower ever since it peaked at 22% over the year to March 2004 (a period that coincides with the end of the 2001 to 2003 ‘housing boom’).

On a monthly basis, private sector housing credit increased by just 0.3% in June 2012. Although it indicates that credit continues to grow, it was the lowest monthly growth rate recorded since July 1984 when housing credit declined by -0.4% and the second lowest growth rate across the history of the series.

The data more recently is split out into housing credit for owner occupation and investment purposes. Over the past 12 months, owner-occupier housing credit has increased by 4.9% while investment credit has recorded stronger growth of 5.3%.

The 4.9% increase in owner-occupier credit over the year was an historic low whereas investment credit is above its historic low of 3.2% (recorded in June 2009) and slightly higher than the recent low of 5%. Overall, the data is indicative of low levels of demand for housing credit.

A key factor in the low levels of growth in demand for housing credit is that since the beginning of the financial crisis households are saving at a much higher rate, resulting in lower levels of demand for housing credit. The household savings ratio reached its low point in the June 2002 quarter, with a ratio of -2% indicating households were spending 2% more than what they were earning.