MARKET VIEW
for total credit in the year ending May was 1.9 %, less than half the 4.3 % for the year ended December 2018 . Demand for housing credit has recovered reflected in surging house prices and record household debt . Business demand has slumped from 4.8 % in the year to December 2018 to negative 2 % in May . Perhaps this reflects the major precautionary equity raisings in 2020 and the sharply reduced dividends in FY20 which improved the financial health of many listed companies .
The combination of bond purchases and the Term Funding Facility has seen the RBA ’ s balance sheet expand from near $ 280 billion to around $ 510 billion over the past year . With future bond purchases likely to push total assets to over $ 550 billion . The unwinding road will not be smooth and while the speed of the taper will require an unemployment rate “ with a 4 in front ”, the reopening of Australia ’ s international border and the influx of foreign workers will prove a challenge .
Household debt serviceability remains an issue . Most forecasters see the official cash rate around 1.25 % at the peak of the tightening cycle . If proved correct , the peak would be just half the 2.50 % rate through 2013- 2014 and a quarter of the average over the past 30 years . With inflation in the 2-3 % range , the real interest rate would remain comfortably negative .
But , despite historically low interest rates , a regulator enforced focus on responsible lending , a housing price boom , and a job market now fully recovered to prepandemic levels , Australian households still face debt serviceability issues , brought about due the level of the debt , which is concentrated among owner-occupiers . Given debt serviceability is an issue and major bank mortgage loans represent between 60 and 70 % of total loans , investors should be cautious after such a strong run-up in bank shares .
Housing prices are likely to ease from current levels . Both the RBA and APRA are likely to move to take the heat out of the market by either reducing liquidity or introducing macro-prudential measures to limit bank lending to the sector . Government debt is also an issue . Deficits over at least the next decade will push debt well beyond the trillion-dollar mark . Government revenues will need to increase and that means higher taxes down the track .
Finally turning to the upcoming reporting season . The upcoming financial year 2021 reporting season is likely to be solid except for companies severely affected by restrictions , lockdowns , and border closures , namely those in :
� aviation , � travel ,
� leisure , and � hospitality .
Generally , the second half , the six months ended June , is likely reveal robust , but not sustainable earnings growth . The momentum in economic activity is forecast to slow as the economy has recovered to prepandemic levels . The significant recovery in employment growth and the consequent decline in unemployment is also expected to slow as the participation rate remains elevated . Unemployment is currently flattered by the absence of over 300,000 foreign workers , with their return dependent on the reopening of our international border .
Bruce McLeary
Associate Senior Analyst ( 07 ) 3006 7219 bmcleary @ burrell . com . au
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