Increases in interest rates for housing investors by ANZ and CBA will boost margins, slow loan growth and allow the RBA to cut rates again. Glenn Hunt
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In a remarkable decoupling, the standard variable home loan rate for property investors is moving higher while expectations are for the cash rate to continue to fall.
And in a brazen display of bank pricing power, the cost of mortgages for landlords, and possibly for owner-occupiers too, is going up, as banks claw back from customers the drag to return on equity from lower leverage being imposed by regulators .
Even though the banks have for most of this calendar year been removing discounts on investor loans and tightening eligibility criteria, the pricing action last week surprised the market with its timing and magnitude. This is largely because banks have historically been constrained from adjusting variable mortgage rates outside the official cash rate moves made by the Reserve Bank of Australia. The reason has largely been political: for many years, banks have pointed out that the cash rate is only one ingredient in the funding cost mix, but some politicians (think former treasurer Wayne Swan) have been quick to
lash greedy banks for out-of-rate-cycle profit grabbing.
But much to the relief of bank shareholders – and the central bank – this straitjacket was untied last week. "Banks are showing their willingness and ability to reprice the largest part of their book with limited downside risk," says Commonwealth Bank of Australia analyst Victor German.
Borrowers for houses should expect the hits to continue. CLSA analyst Brian Johnson says major banks could re-price up all housing loans – including owner occupied – by between 0.55 and 0.65 percentage points, an amount that would maintain group return on equity that otherwise would be lost from the Australian Prudential Regulation Authority's decision last Monday to increase housing risk weights to a minimum 25 per cent from July next year.
For bank shareholders, the outcome of last week's repricing is positive, as net interest margins (NIMs) – key drivers of bank profit – are fattened up after being squeezed in recent years by the forces of competition.
The action by ANZ and CBA would also have been applauded at the top end of Martin Place, where the RBA has been under pressure to protect the economy in a low-interest-rate world, which has resulted in the Australian dollar remaining higher than desired levels.