Banks may tighten lending standards and buyers turn cautious if a surge in Sydney house prices spreads to other capital cities in Australia, the country head of the nation’s third-largest lender by market value said.
“These price rises are there because of the very low level of interest rates and we need to be mindful of what’s going to happen as rates rise,” Philip Chronican, chief executive officer for Australia & New Zealand Banking Group Ltd.’s Australian operation, said in an interview April 3. “We’ve already put in a buffer over and above current interest rates to allow for the fact that the borrower might have to be repaying in a higher interest-rate environment. So one of the tools is to increase the buffer.”
Australian home prices in March had the biggest monthly gain on record while Sydney prices climbed 15.6 percent from a year earlier, according to the RP Data-Rismark Home Value Index. Banks are focusing on borrowers’ capacity to repay after 2.25 percentage points of interest-rate cuts by the Reserve Bank of Australia over almost two years pushed down home-loan costs to a 4-1/2 year low. Home lending grew 5.8 percent in the 12 months to February, the fastest pace since September 2011.
The central bank is expected to start raising rates in the first quarter of 2015, according to the median forecast of 30 economists surveyed by Bloomberg News. Once interest rates start to increase, house prices will stabilize as affordability deteriorates, Chronican said.
The Australian Prudential Regulation Authority and the central bank have been “vigilant about any potential loosening of credit standards” amid low mortgage rates and competition in the home loan market, the regulator said in its submission to the government’s financial systems inquiry March 31.
Mortgage lending will grow 6 percent to 7 percent annually, sustaining a recovery that began in early 2013, with demand coming from households that had in the past few years focused on “savings rather than spending,” Chronican said.
The share of households favoring real estate as the best use of their savings has risen to a level approaching that of the early 2000s property market boom, the RBA said in its Financial Stability Review March 26. Australian households’ savings rate fell to 9.7 percent in the final three months of 2013, the first time it has dropped below 10 percent since 2010.
ANZ, which has grown mortgage market share for 16 consecutive quarters, expects to further increase its portion after doubling the number of branch staff qualified to write home loans and automating originations, said Chronican, 57, who has been in his current role since November 2009 and before that headed the institutional bank of Westpac Banking Corp.
Shares of ANZ rose 0.2 percent at A$33.44 at 11:33 a.m. in Sydney and gained 3.7 percent this year.
“As the smallest of the big four in most of the markets we’d rather grow than not,” he said. “That’s manifested itself in the last few years where we’ve been growing in excess of the market and we don’t see that easing up.”
Competition is intensifying with bigger discounts and larger loans doled out by lenders to gain share, he said. “Macquarie Bank, through its venture with Yellow Brick Road Holdings Ltd., has had a measurable impact,” Chronican said. “The emergence of securitization means lenders who were previously finding it difficult are more confident.”
Macquarie Group Ltd. more than doubled mortgages in the year to Feb. 28, according to data from APRA. Australian issuers sold A$26.1 billion ($24.2 billion) of residential mortgage-backed securities last year, the most since 2007, according to data compiled by Bloomberg.
Australian banks have further avenues to cut costs, Chronican said, without elaborating. ANZ reported a cost-to-income-ratio of 44.8 percent in the year ended September and wants to bring it down to 43 percent by the end of 2016.
Pressure on net interest margin, a key measure of lending profitability, will continue though easing term deposit spreads will limit the decline, he said. ANZ’s net interest margin fell to 2.22 percent in the year ended September from 2.31 percent a year earlier.
“Term deposits are getting to levels we’d consider normal,” Chronican said. “Two to three years ago you could have got a full 300 basis points over and above the RBA cash rate on the term deposit. That’s highly unlikely now.”