Since that time the savings ratio has trended higher, with the trend towards more savings increasing dramatically since 2008. The household savings ratio has been at levels above 8% since the December quarter of 2008 and savings levels haven’t been this high since 1987.
This is indicative of a clear transition in the consumer mindset away from leveraging debt to one of paying down debt and saving. Subsequently, as the savings ratio has increased, growth in private sector housing credit has slowed.
The largest contributing factor to the slowdown in private sector housing credit growth has been the lower level of capital gains in the housing market and the subsequent decline in sales volumes. If home values are not increasing at a consistent pace then demand for housing credit is simply not going to grow at the same pace, even if sales volumes remained stable. The reason being that housing credit will grow based on the demand for that credit (sales volumes) but also based on how quickly the cost of purchasing increases (growth in home values).
When the rate of capital gains in the housing market slowed (it has been trending lower since May 2002), so too did the volume of sales (it has been trending lower since a peak in May 2001) and subsequently so has demand for housing credit by the private sector.
In light of these factors, until such time as sales volumes and home values record sustainable improvements, growth in housing credit is likely to languish at quite low levels.
Over the past two months there has been an improvement in capital gains across the housing market. However, the number of home sales remains below average despite some recent improvement. Given these conditions, until such time as one or both record a sustained recovery we would expect demand for credit to remain low.
Clearly much of the reason for the recent falls in home values and the subsequent lower growth in home values over recent years is due to the higher rate of savings by households.
These factors, as well as tighter housing finance restrictions, are also contributing to lower volumes of house and unit sales with home owners moving less regularly. While the high level of household savings persist, it is difficult to see how the housing market will return to the growth rates of the recent past.
This article first appeared on RP Data.
