Amid breathless talk from some economists of a “toxic” environment for the housing market and demands the Reserve Bank step in and cut rates in a fortnight, it’s worth reviewing the facts.
The trigger for the latest headlines about a looming housing bust was Westpac’s move to hike mortgage rates by 20 basis points. It runs against the economic cycle and is likely to have taken borrowers by surprise, as it has analysts.
So far, the other banks have not followed suit and they will likely take their time in assessing whether and by how much to move. But they are facing similar regulatory pressures to lift capital standards and market pressures to maintain profits, and can take shelter behind Westpac’s brave decision.
By itself, Westpac’s move affects less than a fifth of the mortgage market. The big four banks between them control 80 per cent of the market, and Westpac’s hike applies only to its own branded loans and not St George or Bank of Melbourne loans, which account for one-third of Westpac’s total book. Rates for business loans are unaffected.
ANZ just last week said it wants to aggressively court the NSW mortgage market and may see lower rates as one way to gain a little market share at its larger rival’s expense. (How the brand fallout affects Brian Hartzer’s goal to add a million notoriously hard-to-budge customers remains to be seen.)
So the tightening in financial conditions across the economy so far is limited. Before it goes anywhere near the rates trigger, the Reserve Bank would want to see whether and by how much other banks follow suit. It is unlikely to act pre-emptively.
But there is an underlying presumption in the demand that the central bank needs to “offset” the Westpac hike at all.
Glenn Stevens and the Australian Prudential Regulatory Authority have been talking about the risks in the housing market for two years. APRA’s prudential measures to curb excesses in investor lending have just begun to have an effect in slowing double-digit rates of growth, helped by higher interest rates for landlords.
“It’s arguable that a little drift higher in mortgage rates is exactly what the RBA wants to see,” says Deutsche Bank chief economist Adam Boyton. “You get to cool the excess froth in some areas of the housing market.”
“At the first sign that housing is cooling a bit, it would seem odd to me to throw 25 basis points of rate cut fuel onto the fire,” Boyton says.
Melbourne's auction clearance rate on Saturday of 73 per cent suggests buyers haven't taken one bank's move as a sign the rates cycle has reversed. Domain reported the Sydney clearance rate fell to 65.1 per cent from 70 per cent, although that was based on only 530 properties reporting out of 874 auctions.
In the financial stability review on Friday, the RBA noted tentative signs that sentiment may be turning in the Sydney and Melbourne property markets, and crucially added this would add to the financial strength of the housing and banking sectors.
While analysts and householders who are carrying record levels of debt have been unprepared for a tightening in mortgage rates, Stevens appears to have been expecting such a move for some time.
As far back as July, following a speech to the Annika Foundation, Stevens was asked a question about the banks’ capital requirements. “So I would imagine it will result in some rise in mortgage rates from the major banks. It’s supposed to, that’s the point… If they made that adjustment, no one should find that surprising or controversial.”
Hartzer this week bit the bullet in meeting higher capital requirements by spreading the cost across both customers and shareholders. The $3.5bn raising and rate rise will help lift the bank into the top quartile of its global peers and, if they cared, make Hartzer the envy of the Wall Street investment banks reporting last week that have struggled to maintain revenues and profits in a near-zero interest rate world.
The last time the majors moved out of step with the RBA was in the first half of 2012 because of funding pressures. The four banks raised rates in February by between six and 10 basis points while the RBA held an easing bias. When the central bank cut rates by 50 basis points in May, it wanted to restore financial conditions to an easier setting.
In that episode, policymakers waited three months to assess the impact of modest rate rises on financial conditions before acting.
With the November meeting and quarterly statement on monetary policy, the RBA will have the chance to examine whether financial conditions have tightened sufficiently to affect its economic forecasts. It will take time for any evidence to accumulate.