Are consumers shifting back to cash?

17:00, Jun 15 2013
BACKLASH: Consumers could be returning to cash.

The country's leading credit bureau is reporting a sharp drop in demand for credit.

Veda said inquiries for credit cards fell by 13 per cent in May 2013 compared with May 2012 while credit-card balances are also declining. Demand for hire purchase fell 6 per cent over the same period.

"Our data shows consumer credit demand fell by 8 per cent last month compared with May 2012," said Veda managing director John Roberts. As the largest credit-checking bureau in the country it gets to see credit trends first.

The figures seem in sharp contrast to consumer spending figures for May which showed a 0.6 per cent rise during the month. Roberts said it appears on aggregate people have become less likely to use a credit card or hire purchase and more likely to use a debit card.

That indicated "a bleak picture" of a flat economy, he said.

"While demand for mortgages continues, the real story is in demand for other forms of credit which reflect levels of consumer comfort in spending."


Mortgage inquiries were up by 13 per cent for May 2013 compared with the same month last year with demand led by borrowers in their 30s and 40s. However, some portion of that is related to people shifting lender to fix their mortgage interest rates after floating while interest rates stayed low.

Roberts said part of the trend for lower consumer credit - Reserve Bank figures show household consumer debt to have fallen to $9.19 billion at the end of March from $9.34b at the end of December - is a big national shift to favour using debit cards over credit.

That's a trend Caroline Ada of Visa confirms, saying though that credit card debt balances are growing modestly, there is good growth in both credit-card spending (with balances being paid off at the end of the month) and in the use of what are known as "scheme debit cards" such as its Visa debit cards, which are used to buy online.

Roberts believes the trend away from consumer credit poses a concern for the economy.

"My assessment of this data is not great news for the economy," he said. "While there continues to be some buoyancy in the housing market, the consumer sector is having a tough time - people remain cautious with their spending and small businesses keep finding it harder and harder to stay afloat."

There is a strong relationship between consumer-spending growth and house-price growth (see chart), though some economists believe the relationship between the two is misunderstood.

Traditional wisdom was that people tapped into their equity as they felt it growing, but Westpac economist Dominick Stephens believes that effect is only a small part of the picture with spending driven by people cashing out, often because they are dead, releasing money to be spent by their descendants.

But if Westpac is right about the cashing-out effect, then more rises can be expected, according to its latest weekly economic review.

"Looking ahead, our forecasts suggest that equity withdrawal will continue to rise over the next couple of years - at least until higher interest rates start to bite and the housing market starts to cool. That means that we should expect to see consumption growing faster than incomes.

"We do expect house prices to rise another 18 per cent over this year and next," it said, which will be music to the ears of the banks, as it suggests the pace of household borrowing should rise to about 6 per cent annual growth from just under 5 per cent now.

Roberts said it appeared borrowers were getting smarter in that there were indications they were getting their consumer debt for less.

The data shows consumers opting for personal loans from banks, which have been going hard in the market and winning business of lower-tier finance companies which people have traditionally turned to for consumer credit.

Roberts said: "Traditional banks offer better interest rates and Generations X and Y have shown a particular enthusiasm to consolidate debt at the best rate they can find."

Inquiries for personal loans increased by 34 per cent in May 2013 compared to the previous May - with demand from Gen X and Y up 38 per cent.

Caution is manifested in other borrowing. Forecasts that interest rates will rise have been leading a charge to fixed-rate mortgages. The Reserve Bank has noted the percentage of mortgages that are on fixed rates has increased to around 50 per cent compared with 37 per cent a year ago.

"Most of the increase in fixed-rate mortgages is at six-month to two-year terms, the cheapest part of the curve, so for many mortgage holders repricing risk remains over the short term," it said.

BNZ economist Stephen Topliss said the decline in credit-card balances may also be a "value" effect on household spending with discounts on offer on items such as whiteware and brownware, requiring less borrowing.

Reserve Bank figures also show credit-card balances were up a modest 0.1 per cent on April last year, meaning they are down in real terms against inflation.

Sunday Star Times