Finance Market Update - 14 09 18
Rate rises and property prices. One of these will continue to rise and the other to fall. We discuss how and why in this update.
As correctly predicted in our last update more major banks have raised their rates, and it is very likely that these rises will sustain the downward pressure on property prices.
Since Westpac raised their rate by 0.14 both ANZ and CBA have raised theirs by 0.16 and 0.15 respectively. All of them cited funding costs as the reason, as we also correctly predicted they would.
To recap, banks watch their “NIM” (Net Interest Margin) as it impacts their profit. NIM is essentially the rate/cost for a bank to borrow money to how much profit it can generate to lend out at.
So when banks increase their rates citing funding costs they are effectively saying they need to protect the profit margins.
This causes unrest among borrowers, given the billions of profit banks make each year, and has recently been compounded by all the of negative press from the Royal Commission. It also highlights conflicts the banks have as they place shareholders over customers by protecting profit.
Skyward Financial has been covering these changes and can help people refinance their mortgage if they are facing a rate increase. We have strong connections with many lenders to suit any financial situation.
However, the reality is mortgagors face higher rates and repayments going forward. Big banks, second tier banks, non-bank and specialist lenders, all of them will increase rates to combat costs. This is reality. The best thing borrowers can do is to actively manage their debt by calling their bank and negotiating down the rate or using a broker like Skyward Financial to understand your situation, goals and options and to help refinance your loan.
When we are talking about rising rates, the natural progression is to talk about how much people are still borrowing.
Worryingly, but not unsurprisingly, investor credit growth remains weak, and according to CBA went negative in June since the first time since 2009, right after the Global Financial Crisis.
This means that the amount investors are borrowing, or more precisely are able to borrow, has dramatically reduced. The Australian Bureau of Statistics recently published that the dollar value of mortgage loans to investors was $136.2 Billion in the year up to July 2018, which is down $16 Billion compared to the previous year.
A $16 Billion-dollar difference in loans to investors can be felt in the property market with noticeable slow down of sales as there are less willing and able buyers.
As we have discussed before less available credit leads to lower property prices and the supply of credit directly influences property prices. The less supply – like when the credit market is “tightening” like it is now – means downward pressure on property prices, because people can’t borrow as much and therefore pay as much.
We saw investors retreating months ago, and expect their activity to remain weak given we have past the peak of this housing boom.
Sydney in particular has seen a lot of investor activity. Both from domestic investors like mums and dads buying an investment property, and from foreign investors, from China and Japan.
All of this investor activity has influenced property prices to increase, and now that credit growth and activity has slowed, it makes sense that property prices are also slowing down.
The banks have partly done the RBA’s job
It has been over 2 years since the Reserve Bank of Australia changed the countries cash rate, currently sitting at 1.5% so when Big Banks raise their rates not only does it make borrowers angry, but it dampens the property market, which is one of the key reasons why the RBA would move the rate.
The cash rate is used as a lever by the RBA to speed up or slow down the economy. When they lower or raise the cash rate this is monetary policy. The idea is to get people to spend more or less, on property and everyday items, based on the cash rate.
Low rates make people borrow and spend more because credit is cheap, so the economy booms, high rates mean people borrow and spend less because credit is expensive, so the economy slows down.
When the banks raise their rates that cost borrowers hundreds of dollars more per year, borrowers have less to spend, which can slow down the economy.
So even though the RBA hasn’t moved the cash rate in years, by the big banks raising rates they are in a way doing the RBA’s job by influencing spending of consumers.
This is partly why the RBA is in no rush to move the rate. A common view among economists in the banks is that a move is not likely until mid-2019. Depending on the strength of the economy, the move could even downwards. But don’t expect the big banks to hold their rates for that long, they will increase them again as funding costs will remain elevated for the foreseeable future.
The RBA recently flagged risks associated with household debt as the debt-to-income ratio in Australia sits at 190% which is high compared to the 130% global median average. They highlighted this was “largely driven” by mortgage debt, and that 60% of bank loan books are mortgage debt with 40% business debt. In other counties this ratio is reversed.
This debt-to-income ratio is worth noting because it ties in with the sharp focus of living expenses the banks have at the moment on any new applications.
The Royal Commission has also alleviated the RBA’s responsibilities in flexing monetary policy and influenced the banks’ lending patterns and activity.
Since the Royal Commission started in early 2018 bank lending has noticeably slowed and become more challenging. This is true for business loans and for mortgages.
The Royal Commission has highlighted the low standards and high loan amounts that banks were lending, so as a reaction they are taking a closer look at borrower expenses and lowering the amounts they offer.
At Skyward Financial we understand the lending market and work with many different kinds of lenders, from big banks, to second tier banks, non-bank lenders and specialist lenders. We offer a free consultation to discuss the market and your potential finance options.