Banks signalling end of ultra-cheap housing finance

Some of Australia’s biggest banks are continuing to hike fixed interest rates, suggesting the era of historically-cheap housing finance could be coming to an end.

Westpac was the latest to lift the interest rates on its fixed rate loans, increasing its two, three, four and five-year fixed rate loans by 0.1 per cent this week.

Those hikes followed the Commonwealth Bank of Australia raising its two, three and four-year fixed rates by 0.1 per cent last week, as well as ING’s fixed rate increases ranging from 0.05 per cent to 0.2 per cent.

Research by Canstar showed five lenders had increased rates on 38 fixed-rate loans this week, by an average of 0.12 per cent. 

Finance expert at Canstar, Steve Mickenbecker, said he believed lenders were scrambling to lift rates ahead of a margin squeeze.

“The recent trend in fixed rate hikes reinforces that markets are pricing in interest rate increases for some time in 2023,” Mr Mickenbecker said. 

“The emergence of inflation around the world for the first time in years is clearly signalling a shortening horizon to higher rates across the board.

“Lenders are still running hard with sharp variable interest rates, which they can price up when they need to, and 12 month fixed terms can also be favourably funded. 

“But the writing is on the wall that rates are on the up.”

RateCity.com.au research director Sally Tindall agreed that Australian banks were anticipating an increase to the costs of funding once borders reopen and the economy rebounds.

“While today’s fixed rate hikes from Westpac are relatively small, people in the queue for a home loan, who didn’t lock in their rate, will understandably be annoyed,” Ms Tindall said. 

“Westpac has kept its 1- and 2-year fixed rates under 2 per cent for owner-occupiers paying principal and interest in order to stay competitive in a market where refinancing is at record highs. 

“While the writing might be on the wall for fixed rates, the party isn’t over yet – there are still 154 fixed rates under 2 per cent.”

Meanwhile, the Reserve Bank of Australia’s monthly board meeting minutes suggest the central bank is not about to alter its monetary policy any time soon. 

While the RBA said it was monitoring rising property prices and strong credit growth at a time of historically-low interest rates, the board agreed that increased interest rates would likely result in lower house prices but also bring with it fewer jobs and lower wages growth.

Those conditions would create further distance from the RBA’s monetary policy goals of full employment and inflation sustainably within its target range of 2 to 3 per cent.

“The central scenario for the economy is that these conditions will not be met before 2024,” the RBA said.

“Meeting this condition will require the labour market to be tight enough to generate materially higher wages growth than at the time of the meeting.”

The RBA said it supported the Australian Prudential Regulation Authority’s recent move to increase serviceability buffers for home loans, in the context of the increased risk associated with high and rising household debts.

But in a warning shot for prospective borrowers, the RBA’s minutes suggested that serviceability rate increases may not be the only move by APRA to cool Australia’s overheating property markets.

“Analysis suggested that these risks would be best addressed with a serviceability-based macroprudential measure, which would ensure that borrowers would have more income left after home loan repayments and other expenses,” the RBA’s monthly minutes said.

“Other options that could be used to improve borrowers’ buffers would be portfolio restrictions on individual lenders’ shares of lending at high debt-to-income ratios and/or high loan-to-valuation ratios.”

The RBA said APRA was scheduled to publish a macroprudential policy framework paper later this year, which would outline its objectives and the range of tools available to address different risks in financial markets.

Looking globally, the RBA’s members also discussed the risks to the Australian economy associated with Chinese property developer Evergrande, which is undergoing a comprehensive restructure to avoid defaulting on more than $US300 billion in debts. 

Evergrande has missed its last three rounds of interest payments on its dollar bonds, while it was reported this week that chief executive Xia Haijun was in Hong Kong holding talks with investment banks and creditors regarding the restructure and possible asset sales.

The RBA said Evergrande’s financial position had led to a decline in risk sentiment across financial markets in September.

“While Evergrande is small relative to the financial system in China, members noted a financial stability risk from spillovers to other developers and financiers if the resolution of Evergrande’s problems were to be disorderly,” the RBA said.

“Some other property developers had also experienced restrictions on their ability to borrow under China’s ‘three red lines’ policy because they had some combination of high-leverage, high gearing or low liquidity ratios.

“Members noted that a deterioration in confidence in developers could see a sharp withdrawal of credit provided to the sector and a decline in pre-sales, placing them under further duress.

“However, sharp price movements had so far been limited to Evergrande’s own bond and equity prices, along with those of some other Chinese property developers and the equity prices of a small number of banks with large exposures to Evergrande.

“Broader financial conditions in China had been stable, aided by liquidity injections from the central bank.”