Finance Market Update - 14 February 20
Property prices are about to hit fresh highs and people are paying a new kind of bank tax. In this fortnights update we look at the cost of loyalty to borrowers and metrics that point to an all time high in property prices.
The price for loyalty
You are more likely to die than change banks.
That is a rather dark humour joke going around but based on recent RBA data this sounds quite true, or at least, costly, for those who die first.
This is because there is a so called ‘loyalty tax’ that banks charge existing customers, and that ‘tax’ could be costing people thousands of dollars a year.
While technically not a tax but rather an extra cost, this cost is the differential in the interest rate on an ‘old’ mortgage to a ‘new’ mortgage.
Generally speaking, banks split borrowers into two groups. New and existing. In bank speak this is called the front and back books.
All the sharp advertised rates generally go to the new borrowers to attract them to the bank. And we know once they are in the door they will be there for a while.
And the existing clients, while they might get a bit of rate reductions like when the RBA drops the cash rate, don’t get the same sharp low rates used to entice new customers.
Banks are offering better rates to new customers over existing customers.
After the big banks failed to pass along the full rate cuts from the RBA last year Treasurer announced a Home Loan Price Enquiry to be run by the ACCC to address this issue. The ACCC are monitoring the price differences from the start of this year and will hand down their final report in September.
You can bet that report will show similar dubious pricing issues the Reserve Bank of Australia (RBA) is bringing to light.
Earlier this week in its quarterly statement on monetary policy the RBA released research that showed the price differential between new and outstanding variable rate home loans increases with the age of a loan.
That differential is between 30 to 40 basis points depending on the situation and loan type and means it pays to actively manage your mortgage debt by monitoring it and checking regularly or speaking with your finance broker about getting a rate review or refinancing.
However, from the bank’s perspective, as a capitalist organisation obligated to perform for their shareholders, this profiteering through opaque rate offers makes sense.
But from a customer who has had been with the same bank for years it sounds bad, really bad, and costly.
For example, a difference of half a percent 0.50% on a $500k loan is a saving in repayments of around $1,644 per year. That a nice chunk of money back in some ones pocket rather than the banks.
Fortunately, Skyward Financial works across a spectrum of lenders from big banks to smaller banks and actively reviews rates and options available to existing clients and new clients. If you are interested in this let’s talk.
This is the kind of opaque behaviour from banks is under threat from changing consumer sentiment, new ‘open banking’ regulations and new challenger banks.
One of the predictions I made for 2020 in the last finance market update of last year talked about ‘open banking’ and this change in opaque behaviour and said…
“open banking will be a game changer. This will be one of the key moments in a long transformation of the financial services playbook from a “make it confusing for people to understand our products so we can charge more fees” kind of mentality that all the banks have had for decades. To a more “lets help people make smarter decisions with their money, make easier to use mobile apps and be transparent” that many fintechs are offering. Ultimately, what open banking will enable is this shift to a new financial services paradigm of better customer service and outcomes”
If my prediction comes true it might be the loyalty tax to die first.
All signs point to yes
Another prediction of mine from the last update of 2019 was that prices for residential property will reach or exceed 2017 peak values by midyear 2020.
This is looking increasingly likely.
If we look at recent statistics and metrics on clearance rates, new lending and average loan values, all signs are pointing to a yes in higher prices.
Clearance rates in Sydney hit 80% even as with twice as many listings of properties for sale. This is indicative of the pent-up demand and fear people have on missing out on affording a property. I wrote in a December update last year that “When people see prices boost so high so quick it might entice them to sell” and with listings double this is sounding spot on.
According to the Australian Bureau of Statistics (ABS) new home loan lending grew by 4.4% at the end of last year in December which was the fastest growth rate since September 2016. This is another data point indicating that prices are well on an upwards trajectory.
Further, the ABS showed the average mortgage in NSW swelled by a staggering 22.2% to hit a new high of $621k, and that is the average, there are many, many borrowers with much more sizeable mortgages than that.
Even the property listing site Domain has their economists now predicting a 10% price increase this year lifting the median house price of $1.25 million in Sydney, which would exceed the 2017 peak.
If and when we get to that peak the fall down could be perilous.