Update on Lending Stats

1st November 2021

Good morning and welcome to another week.

As noted previously, my topics of discussion right now are dominated by two things (1), can the property market fall? and (2), will we have a correction in the stock market?

The value of new loan commitments for housing fell 1.4% in September 2021 (seasonally adjusted), driven by a 2.7% fall in new owner-occupier loan commitments, according to statistics released today by the Australian Bureau of Statistics (ABS).

ABS head of Finance and Wealth, Katherine Keenan, said: “The value of new loan commitments for owner-occupier housing fell for the fourth month in a row, to $20.7b in September. However, this was 21% higher compared to a year ago and 49% higher than pre-COVID levels in February 2020.”

Keenan went on to say “Similar to overall owner-occupier lending, the largest fall in the number of first home buyer loan commitments was in Victoria which fell 17%.”

These statistics and statements from the ABS support my view that the property market has reached the point where those wanting to enter the market are now either in it or have given up trying, at least for the moment.

The stock market is in a similarly overheated state where values are well above earnings. What I mean by this is that generally, people are paying more for a company share than it is actually worth or, that the company is capable of generating in income. The driver here is that not unlike property, some people are buying a company share purely on the basis that they believe they can sell it for more, later. This logic assumes that company earnings and profitability will go up in the immediate future.

I’ve mentioned before that inflation is a major potential problem that Lowey and his mates at the RBA seem content to write off as “transitory” as we emerge from the pandemic. But what if it’s not?

Another issue is wages. If inflation (which is already kicking into gear by the way) is NOT transitory and does stick around for a bit, workers will ask for higher wages to support an increase in the cost of living due to rising household expenses (inflation). This will lead to an early rise in interest rates, well ahead of the RBA’s predicted 2024 date.

A company that has borrowed to fund it’s business as most do, will now be paying more for their loans from the bank. Add into this, higher wages, and company earnings and profit begin to thin out very quickly. Their answer to getting profits back on track? put prices up which in turn fuels…..you guessed it – inflation. So, armed with this information the logic of buying an over valued share in a company on the basis that it’ll be earning heaps more in the future suddenly doesn’t seem very logical after all.

So going back to the first two questions, all things considered, my answer to both questions is still yes and yes.

Have a great week everyone.

Kind Regards