It’s the housing sector that continues to support debt growth, though lending to business has stabilised and the government is doing its bit for Queen and country:

Zooming in on growth in housing sector debt, we can see that it is at historically low growth rates.

Which brings us to the Chart of the Day – it takes a look at lending by sector as a proportion of the total.  From 1990, the housing sector has risen from 20% of total lending to more like 55% currently.

Now it could well be argued that the business sector went through a property fuelled credit binge of its own that imploded in 1990, and hence the initial decline in its percentage was something akin to ‘normalising’. But still with the likes of Centro, Allco and Babcock et al doing some seriously heavily lifting more recently, don’t think we can argue that the housing sector was alone in enjoying the credit boom.

So what does it mean? While the housing sector has been shown to be the engine room of a developed economy – given it’s multiplier effect on consumption that makes up ~70% of GDP – making more houses doesn’t really add to the productive capacity of an economy. If the villagers spend all their time carving huge stone heads to put in their living rooms, then who is left to tend the crops? This trend goes a long way to explaining why GDP growth has failed to keep up with house price growth – or more simply why our incomes haven’t kept pace with mortgages.

• Housing credit increased by 0.5 per cent over July. Over the year to July, housing credit rose by 8.1 per cent.
• Other personal credit was flat over July. Over the year to July, other personal credit increased by 3.2 per cent.
• Business credit fell by 0.4 per cent over July. Over the year to July, business credit declined by 5.0 per cent.

To throw a little shawl around these statistics, the following chart provides a longer term context:

Business continues to paydown debt – even in the face of the rising tide of capital investment in the resources sector.  At the same time, leverage in relation to housing remains surprisingly strong.  To get a sense of how the Australian household wallet is evolving consider the following chart:

I may be suffering from selection bias here – after all, housing credit is still growing at an annualised rate of ~8% – but it looks to me like the trend for growth in housing debt is down.

So how is this credit demand flowing into the money creation machine?  Looking to M3 – the squeeze on money supply growth is continuing:

It’s a less than glowing endorsement for the demand side of the domestic economy.  Its interesting then to consider what the increasing preference for term deposits means for the velocity of money and risk preferences in the Australian economy.

So while term deposits reached a minimum of 23% of M3 in late 2007, they have now risen to ~33%.  Wonder whether they could revisit the 40% levels last seen in the mid-90′s?

While the US has been struggling with a contracting money supply, Australia remains in positive territory.  Still with the credit creation machine at its apex from a housing perspective and our funding needs likely to require more homegrown capital going forward, the liklihood of growth in money supply becoming free and easy again is pretty slim.

As to the credit markets, debt funding in the corporate markets continues to contract:

While the housing sector is struggling with higher interest rates and the debt burden that accumulated over the last decade in particular:

An interesting perspective on the rise and rise of household debt can be seen in the following chart that shows the change in debt on a quarterly (and in light blue behind – monthly) basis:

Here we have taken the quarterly change in debt and annualised it to get a sense of the growth rate over time.  It’s astounding that debt was able to grow at over 10% compound rates for nigh on 15 years.  No wonder our household debt to GDP ratio has pushed so high – sounds suspiciously like we have been living beyond our collective means:

Given the deteriorating global environment and the recent interest rate rises, it’d be a fair bet that growth in household debt has peaked for this cycle and that the recent months plunge is an sign of things to come.

Housing finance still rising the escalator – up 8.5% for the year to March and 0.7% for month:

While business credit remains stubbornly in contraction mode – down 6.9% for the year to March.

And M3 attempting to get off the canvas after a torrid 18 months – broad money was up 3.8% for the year:

(Note to Greg at MerrilloverMatter- the year-on-year change makes for a much cleaner read of trends in M3.  Thanks.)

From my view in the pews, I reckon it’s unlikely that we’ll have the money supply growth that we enjoyed in the noughties. More likely, with debt levels elevated at the consumer level (not corporates – they are looking pretty darn healthy), we are more likely to see something like pattern that prevailed post 87 and through the 90′s.

As noted earlier (see Household debt to GDP ratio), it’s the retail market that has been merrily running up the credit aggregates. On the other hand, business continue to deleverage – at a slowing rate – with total debt now 10% lower than it’s peak in Nov 2008. It’s all the government can do to step into the breach – another global trend.

First up the housing finance numbers (all seasonally adjusted):

Compare and contrast to the personal finance and business finance charts:

The contraction in lending volumes in everything but the housing sector is hardly a vote of confidence in an expanding economy.  The net effect is an acceleration in the tightening of the money supply with M3 falling for the seventh consecutive month (and well below the long-term average of +0.85%).

Conclusion – the numbers suggest that the continuing strength in house prices is being driven by debt.  The government should have a good long hard look at its ‘first home buyers grant’…not sure that it’s been good for anyone but the sellers.  Still maybe that was the intent?