Credit growth in Australia is unlikely to return to pre-GFC levels anytime soon, according to a newly-released report published by Professor Rodney Maddock of Monash University and Sydney-based consultant, Peter Munckton.
The report, Funding Australia’s Future, written for the Australian Centre for Financial Studies, claims borrowing trends leading up to the GFC were something of an anomaly and that households are unlikely to embrace major credit commitments – like home loans – with as much enthusiasm as before.
“Historically and in most economies the household sector has been a net saver, the corporate sector a net borrower, and the government relatively neutral,” reads the report. “The period of increasing household leverage [prior to the GFC], most notably at the upper end of the income distribution, is only matched in our history by the run up towards the 1890s recession.”
The scholars argue that the increase in debt from about 1990 more than offset the reductions in interest rates resulting in a sharp rise in the debt servicing ratio of households.
“Households appear to have been happy to increase their debt prior to the crisis because of the large increases in the value of their assets (especially houses and shares). The subsequent decline in house prices, and the fall in the equity market, reduced the value of household assets. This has played an important role on the asset side of the balance sheet.”
In an interview with Australian Broker, Adelaide Bank head of lending, Damian Percy, agrees, saying that while many people still look at the GFC as a credit growth ‘hiccup’, a return to ‘aggressive’ credit growth is unlikely.
“This new normal, where instead of credit growth growing at 15%, it’s growing at 5% - that means that there’s a smaller pie [for brokers] in relative terms. So the whole ‘new normal’ is, I think, a systemic shift over the last five or six years and will probably last for another five or six. I certainly don’t see Australians en mass fronting up in six weeks’ time and saying they’re happy to get back to the aggressive approach we saw pre-GFC. People are paying down their debts and seem to be quite enjoying the feeling.”