The Finance Flat-Line

Business groups have welcomed today's ABS lending finance figures, claiming an 8 percent jump in commercial finance indicates confidence and a commitment to growth. Consumers are less optimistic. Their finance commitments have been flat for some time now. So, can both groups be right?
The ABS lending finance figures out today do show that businesses are borrowing again, which is great news, but the $29.7 billion committed in July 2010, although 8 percent up on June (seasonally adjusted), is still a long way behind the $52.8 billion peak from June 2007.

Clearly, there's still an element of caution in the business community. And personal finance commitments have stayed flat over the last year, and grown little over the last four. If you agree with Prof. Steve Keen's views on aggregate demand this is bad news. He says that demand is driven by GDP and changes in debt (listen to this month's BNET First Friday webinar for more on this). Basically, we spend more than we earn, which means we need to borrow. More borrowings leads to increased demand until, obviously, it becomes unsustainable. If you follow his argument then a flat line in new finance commitments (with a steady GDP figure) means aggregate demand will ultimately fall --- bad news for the economy.

Interestingly, NSW is a standout state when it comes to new finance commitments. A $9.2 billion commitment to fixed loans in July is 18 percent up on the same month in 2009. Everywhere else (except ACT, which is 15 percent up) figures are either marginally up or down. Commercial finance is also up in NSW --- a whopping 19 percent. This is a surprising figure --- consumers and business seem more buoyed here than anywhere else in the country, despite the mining boom.

Elsewhere a flat line in personal finance commitments could see demand slow. Conversely, anything that sees Aussies incurring less household debt has to be a good thing, if it can be done without hurting the economy.

The worst news today though is housing. In July 2010 we committed $14.2 billion in housing finance, 18 percent down on a year before. In fact, the fall started late last year when the first-home buyer's grant was reduced from its peak of $14,000 (for a new buyer purchasing a new home). With that crutch taken away loans to owner occupiers for the construction of a dwelling are down 23 per cent over the year --- as are loans for the purchase of established dwellings. The only growth is in investment properties, where finance for new dwellings is up by 50 percent .

Perhaps the main conclusion from today's figures is that, maybe at long last, sense is starting to take hold. Commercial commitments are down from a crazy peak in 2007 and the upward trend for housing finance commitments seems to be flattening out. If that doesn't translate into reduced or slowing house prices then we'll know an increasing chunk of the money behind investment properties is coming from overseas.

Follow this link to see the latest Lending Finance Figures from the ABS.