Australia Fixed Home Rates Fall Below Floating: Mortgages
Australia’s biggest banks, taking advantage of cheaper funding, are trying to lure home buyers with fixed-rate mortgages after the central bank’s reduction of its benchmark failed to boost the housing market.
Floating-rate loans account for about 90 percent of Australian mortgages, so the Reserve Bank’s reduction of its benchmark by 1.25 percentage points to 3.5 percent between November and June provided homeowners with almost immediate benefits. The cuts did little to stimulate home sales because of concerns that slowing economic growth would drag down property prices. Loan approvals unexpectedly fell in July by the most in five months.
Australia’s long-term borrowing costs are the cheapest in the developed world relative to short-term, a situation known as an inverted yield curve, as bond investors bet the central bank will cut its benchmark rate by another 73 basis points in the next year to stimulate the flagging economy. That allows lenders such as Commonwealth Bank of Australia to lower fixed rates to near decade-lows in an effort to revive the nation’s slowest lending growth since records begin in 1977.
“We have a Nike swoosh, so to speak, of a yield curve,” said Jarrod Kerr, director of Australian rates strategy at Credit Suisse Group AG in Singapore. For the banks, the cheaper fixed-term mortgages are “another way of competing and trying to get business; it’s passing on these lower prices to customers.”
Commonwealth Bank (CBA), the biggest lender, is offering four-and five-year loans at 6.14 percent, the lowest in more than nine years. That compares with 6.8 percent on its standard variable- rate loans.
Westpac Banking Corp. (WBC), the second-biggest, cut its one-year rate to 5.69 percent, the lowest since September 2009. Members Equity Bank Pty. is offering the cheapest one-year and three- year loans since it became a bank in 2001. In the U.S., 30-year mortgages cost about 3.55 percent.
Westpac has seen an increase in customers shifting to fixed-rate mortgages since it started offering the cheaper rates, said spokesman Danny John.
“It’s a very competitive market and therefore we are pricing competitively,” he said.
Banks are fighting for a smaller pool of new borrowers, with the annual growth of outstanding home loans falling to the slowest pace since at least 1977 as Australians repay debt and boost savings. The annual rate was 4.9 percent as of July, compared with 14 percent in 2006, central bank data show.
Australia’s economy slowed last quarter on weaker housing and rising imports, a government report showed Sept. 5. Gross domestic product advanced 0.6 percent from the previous three months, when it rose a revised 1.4 percent.
House prices in Australia’s eight state and territory capital cities were little changed last month and fell 2.4 percent in the year to Aug. 31, according to a report from RP Data Ltd. and Rismark International.
Australian fixed-rate mortgages revert to a floating rate after the initial period, making them different from loans in countries such as the U.S. where the rate is locked for the entire term, said Vera Chaplin, a Melbourne-based managing director of structured finance at Standard & Poor’s.
“Fixed-rate loans can offer payment stability to borrowers and on the other hand at the end of the fixed-rate period, borrowers may also experience payment-shock if interest rates increase significantly,” she said. “From a credit perspective, we don’t differentiate them too much.”
Top-ranking Australian RMBS would mostly maintain their AAA credit scores even if home prices were to fall 35 percent, unemployment to reach 11 percent and variable interest rates to increase to 12 percent, according to a Fitch Ratings report last month. Some 97.2 percent of the rankings would remain unchanged under that scenario, the report said.
Australian offerings of residential mortgage-backed securities climbed to A$3.2 billion ($3.4 billion) in August, the most since October, according to data compiled by Bloomberg.
ME Bank priced A$800 million of mortgage-backed bonds on Sept. 13, paying 135 basis points more than the bank bill swap rate on the main class of notes. That’s the smallest margin paid by any Australian lender this year on comparable securities, the data compiled by Bloomberg show.
“RMBS is largely a defensive asset class and is becoming relatively more attractive with the general grind in on corporate yields,” said Justin Davey, a Sydney-based asset manager at BT Investment Management Ltd. (BTT), which oversees the equivalent of $13 billion. “From an asset quality perspective RMBS has continued to perform.”
Top-rated Australian RMBS have never defaulted. Arrears fell to a seven-month low of 1.5 percent in June, compared with 7.6 percent in the U.S., S&P and Bloomberg data show.
Australia’s central bank lowered borrowing costs by a total of 50 basis points late last year and a further 75 basis points in May and June to help shield the economy from Europe’s debt crisis and slower growth in China. It held the rate at 3.5 percent, the highest among major developed economies, at the past three meetings.
Lenders didn’t pass on all of those cuts to borrowers with variable-rate loans, blaming higher funding costs to attract deposits.
“Households remain cautious when it comes to acquiring new debt, which likely stems from the less-than-complete interest rate pass through by the major banks in May and June,” said JPMorgan Chase & Co. economist Tom Kennedy this month after housing finance data missed analysts’ forecasts.
The number of loans granted to build or buy houses and apartments in July declined 1 percent from June, when they rose a revised 1 percent, the statistics bureau said Sept. 10. The median estimate in a Bloomberg News survey of 16 economists was for approvals to be unchanged. The report showed the total value of loans fell 1.8 percent to A$20.1 billion.
The rate on Australian two-year interest-rate swaps, a gauge of interest rate expectations, is the least relative to three-month bills among 15 developed markets with comparable securities, according to data compiled by Bloomberg.
The Australian two-year swaps yield 3.2 percent, compared to 3.53 percent on the shorter-term debt.
Pacific Investment Management Co., manager of the world’s biggest bond fund, says expectations for more rate cuts in Australia may come to fruition as China slows and the currency’s resilience to a decline in commodity prices hurts growth.
“We believe China’s economic rebalancing will be much less supportive for the Australian economy,” said Robert Mead, Sydney-based head of portfolio management at Pimco. “Either the Aussie has to weaken or the RBA will be required to ease policy further.”
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