Banks set to protect margins amid mortgage pressures

Banks set to protect margins amid mortgage pressures

Roger Pettingell Sarasota Real Estate

The third increase in the cash rate in same number of months came as house prices fell. Corelogic said last week national house prices were down 0.8 per cent in June, an annualised rate of 10 per cent, with bigger falls of 17 per cent in Sydney and 13 per cent in Melbourne. The latest rate rise is likely to see negative momentum continue.

“We expect the additional pressure on serviceability and credit availability that these hikes bring will keep the housing market under pressure,” said Morgan Stanley economist Chris Read.

Mortgage rate rises passed on in full

All the major banks passed on both the previous increases to variable rate mortgage customers in full. Mr Gunson said banks will pass on as much of the rate increases as they can, but some could hold back part in an attempt to win market share.

Banks are more gradually lifting savings rates, while fixed rate loans are being jacked up aggressively.

Additional rate raises would further depress mortgage market activity, with mortgage brokers expecting buyer demand to moderate on the back of lower auction clearance rates and property sales.

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“Prospective buyers not only face higher borrowing costs, but have a lot more uncertainty around future borrowing costs than those over the past two years,” said Eleanor Creagh, a senior economist at PropTrack, the data division of REA Group.

The latest 50 basis point lift in the cash rate will lift repayments on a $750,000 loan by $205 a month. The total monthly increase is $499 a month when Tuesday’s lift is combined with the two earlier moves.

On a $1 million mortgage, the increase after the three rises is $665 a month; on a $500,000 loan, the lift is $333 a month. The pain is not over: homeowners potentially face another double rate rise in August.

Deepest downturn in modern history

House prices could fall by 15 per cent from their peak in April, marking the deepest downturn in Australia’s modern history, Capital Economics said. “Lower house prices will result in a plunge in dwellings investment that will bring the economy close to recession next year,” said its economist Marcel Thieliant after the RBA move.

Mr Read said the pace of house price declines in the past two months is “comparable to what has been seen at the trough of prior price cycles, rather than the start” and is “faster than the start of all other price cycles we have seen over the past 30 years, in line with the speed of correction seen in 1989″.

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After banks’ net interest margins (NIMs) have been squeezed by the ultra-low rate environment, lenders could respond to Tuesday’s lift by increasing mortgage rates by more than the RBA’s move in order to bolster profits. But industry sources said this is unlikely, with lenders not willing to risk heat from new Treasurer Jim Chalmers, given growing cost of living pressures.

Banks could also decide to move by less than the 50 basis points in an attempt to win mortgage market share. However, aggressive pricing competition is not expected until more borrowers come off fixed rates and seek to refinance – the peak of this wave is not expected until the second half of next calendar year.

Tightrope act

Mr Gunson said as they lift rates, banks will need to walk a tightrope and balance high levels of household debt, their own readiness to see customers going through hardship, the reality that the demand for mortgages will shift, and pricing to recover their increased cost of funds.

Next year, the expiry of fixed rate deals is expected to drive a wave of bank switching, to which banks could respond with discounts for quality customers. Last week, CBA cut standard variable rates by 15 basis points for new borrowers with a deposit of at least 20 per cent.

As they determine variable pricing levels, banks continue to push customers away from fixed rate loans, which swelled to 45 per cent of all loans, way above a historical average closer to 10 per cent, after the pandemic’s special deals.

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National Australia Bank on Friday followed CBA by lifting fixed rates for owner-occupiers and investors by up to 1.10 percentage points, after CBA moved earlier in the week by 1.4 per centage points.

ANZ, Macquarie and HSBC increased fixed rates in the last fortnight and Westpac is expected to follow as sharp rises in bond yields increase borrowing costs in global markets.

Westpac economist forecast the cash rate could increase to 2.35 per cent by the end of this year, and hit 2.60 per cent by early next year. RateCity said by the time it gets to those levels, a borrower with a $500,000 loan before the rises started would face an increase in monthly repayments of $685 in less than 12 months. On a $750,000 loan, the monthly increase would be $1028 at the end of the expected cycle, or $1370 a month on a $1 million mortgage.

Bank shares fall

The depressed housing market is expected to keep bank stocks under pressure. Since the start of the tightening cycle, major bank share prices have fallen by an average of 17 per cent. Westpac is the worst performer with shares down 18 per cent since May. CBA is down 13 per cent, similar to Bendigo. NAB and ANZ are down 12 per cent, while Bank of Queensland shares are down 11 per cent. Bank shares ended slightly weaker on Tuesday.

Meanwhile, bank price-earnings multiples have de-rated by an average of 2.8 times. The average P/E multiple for the major banks is 12.8 times forward earnings, which Morgan Stanley noted is back in line with the decade average for the first time since April 2020, when bank stocks accelerated on the bank of generous COVID-19 government stimulus.

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The latest RBA move will also see a focus on bank deposit rates over the coming days. Banks have been slower to lift these than they have mortgage rates, given they are a cost and banks have excessive savings.

Last week, CBA increased the introductory rate on its NetBank Saver account by 0.30 per cent for new customers for the first five months, while ANZ increased rates on Progress Saver by 0.25 percentage points to 0.65 per cent. CBA’s GoalSaver is paying 0.75 per cent, Westpac Life is at 0.85 per cent, NAB Reward Saver is 0.50 per cent.

Disregarding bonus deals, other popular savings account rates pay even less: CBA’s NetBank Saver was paying 0.30 per cent, NAB iSaver 0.30 per cent, ANZ Online Saver 0.30 per cent and Westpac eSaver just 0.05 per cent before any changes responding to the latest RBA rise.

More coverage of the RBA’s July rate rise


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