Are high interest rates ‘outstripping growth’ in home lending?

The RBA collated figures across its own database – the Australian Bureau of Statistics (ABS) and the Australian Prudential Regulation Authority (APRA) – highlighting strong business loan growth over the year to June, climbing 7.7 per cent.

Trailing was housing lending, which saw an increase of 4.7 per cent, and personal lending, which rose 2.8 per cent year on year.

According to Vado Private founder and director Simon Arraj, high interest rates are pushing housing and personal lending rates down. In turn, this is pushing inflation up, he said.

“With housing being the biggest contributor to annual inflation, we are still seeing sticky inflation. Rental price inflation rose 7.3 per cent and remains higher due to very low vacancies in capital cities and constrained supply. New dwelling price inflation of 5.1 per cent is also keeping property prices elevated,” Arraj said.

As recently reported by Broker Daily, the latest ABS data revealed that the consumer price index (CPI) rose 1 per cent over the June quarter, climbing 3.8 per cent over the year.

Rents and new dwellings purchased by owner-occupiers drove the quarterly growth in housing inflation by 2 per cent and 1.1 per cent, respectively. Further, higher material and labour costs were the contributors behind a 1.1 per cent rise in the construction of new dwellings, following a 1.1 per cent rise in the March quarter.

The strain felt across housing and personal lending is contrasted by strong growth for business credit.

“Despite higher interest rates, the demand for business credit remains strong. For investors, the returns on private lending remain attractive. With interest rates on private debt typically floating rate, investor returns have increased with official RBA rate rises,” Arraj said.

Arraj believes there is an opportunity for investors in private lending: “Private credit investments can deliver investors yields of around 10 per cent per annum, which is more than double the typical yields on one or three-year term deposits, and a 3 per cent to 4 per cent premium to the returns on Australian investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned 6.8 per cent over the year to 31 July 2024.

“Broadly speaking, an allocation to private credit can potentially enhance risk-adjusted returns, as well as boost diversification and provide a consistent income stream. That is why it’s so important for retirees and other retail investors to better understand the resilient returns offered by private credit, especially if official interest rates rise again.”

Related: Will the 2Q24 CPI figures be enough to trigger a rate hike?]

Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career working on Broker Daily’s sister brand, HR Leader. In August 2023 he was made the news editor and worked alongside some talented journalists writing articles and recording podcasts.

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