During the recent tightening phase in Australia from May 2022 to September 2023, lending rates increased by approximately 315 basis points, trailing the cash rate by 85 basis points.
Housing loans, the majority of credit, played a significant role, with lending rates rising slightly more than deposit rates. The average outstanding mortgage rate increased by around 290 basis points, influenced by fixed-rate loans and competition for variable-rate housing loans. Variable interest rates on new housing loans rose slightly faster than the cash rate, but the average new variable rate increased by 40 basis points less than the cash rate hike. Major housing lenders intend to pass the November cash rate increase in full to their housing reference rates.
The fixed-rate share of outstanding housing credit declined to 22% in September, primarily due to the transition from fixed-rate to variable-rate loans. As fixed-rate loans expire, the average outstanding mortgage rate is expected to rise further. Despite ongoing contributions to mortgage offset and redraw accounts, extra payments have fallen below the pre-pandemic average of approximately 2% of household disposable income, attributed to increased interest rates impacting disposable incomes and living costs. Overall savings are still growing, but some borrowers are drawing down on these accounts.
Total credit growth in the specified period has stabilized around 5%, marking a 4-percentage-point decrease from its late 2022 peak. Housing credit growth remains consistent, driven by modest increases in housing loan commitments and rising housing prices. Business credit growth has also steadied. Personal credit has recently increased, particularly in lending by automotive finance companies, aligning with improved supply chains and increased new car sales. However, personal credit is still below pre-pandemic levels, and there’s limited evidence of households using it for sustained spending. Credit card spending has slightly risen, but outstanding balances for interest-free accounts remain 20% below pre-pandemic levels.
New housing loan commitments have moderately increased since February, driven by a rebound in national housing prices, especially from investors. However, they are still 25% below their January 2022 peak. External refinancing commitments have decreased with eased mortgage market competition. Business debt growth has stabilized, but non-financial corporations continue robust offshore corporate bond issuance.
The ASX 200 index has seen a slight recent decline but remains largely unchanged over the year. Consumer staples share prices are consistently decreasing due to cost concerns, while consumer discretionary shares are volatile, outperforming other sectors. Health care stock prices have fallen, reflecting worries about weight-loss drugs impacting demand. IT stocks, after strong gains earlier, have declined recently due to valuation sensitivity to interest rate changes.
Equity raisings have stayed at their lowest levels in a decade, with minimal activity since 2022, including only $900 million raised through initial public offerings in the industrials sector. ASX 200 companies experienced a decline in underlying profits in the first half of 2023, with less than half reporting growth after adjusting for inflation. Ongoing cost pressures were a common challenge. The Australian dollar’s Trade-Weighted Index remained relatively stable, showing a 2% decrease against the US dollar since August. Australia’s financial account deficit widened in the June quarter of 2023 due to increased net capital outflows. However, the net income deficit narrowed to 3.7% of GDP, driven by a decline in primary income debits, while the current account balance remained in surplus.
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