- Mortgage costs increased amid stricter banking regulation
- Tighter conditions increase odds of more easing from RBA
Australian home owners look set to pay for regulators’ efforts to make lenders safer in the event of a financial crisis, after Westpac Banking Corp. raised borrowing costs for mortgage holders.
The Sydney-based bank’s first increase in five years for owner occupiers may be followed by other major lenders as they respond to more stringent regulatory burdens. Higher borrowing costs can risk crimping consumer spending and weigh on housing demand, weakening support for an economy already struggling to regain momentum amid tumbling commodity prices and a drop in mining investment.
Traders boosted their bets on the prospects of an additional interest-rate cut from the Reserve Bank of Australia to offset the damage. While concern that the housing market was becoming frothy had already spurred higher rates for landlord mortgages in recent months, the increase for owner occupiers took many analysts by surprise.
“A move by a bank to raise mortgage rates represents a tightening in financial conditions which the Reserve Bank may not have been looking for, so it therefore increases the probability that the RBA will respond,” said Andrew Ticehurst, a Sydney-based interest-rate strategist at Nomura Holdings Inc. “That tightening in financial conditions would obviously be more appreciable if the other banks follow suit.”
The decision to lift home-loan rates in an economy growing at a slower pace than its historical average comes after Australian banking regulators said increased risk weights for mortgages will take effect next year. It also follows a request by the prudential overseer to contain growth in landlord loans to cool a rampant housing market.
Goldman Sachs Group Inc. said Westpac’s move adds to the risks for Australia’s economy, which also faces the prospects of a severe drought.
“The combination of preemptive independent interest rate hikes by the banking system and the emergence of a new and significant threat to Australia’s economic growth comes at a particularly uncomfortable time in Australia’s economic cycle,” Goldman Sachs economists led by Tim Toohey wrote in a note Wednesday. They said it was “highly likely” that Australia’s other major lenders would also increase their mortgage rates and predicted that would probably prompt the RBA to cut its benchmark both in November and again in the first quarter of 2016.
While home prices increased 28 percent in the three years through September, there have been some signs of softening within the market of late. New residential building activity fell 3.4 percent in the three months through June compared with the previous quarter, government data showed Wednesday.
“The credit rationing aimed at curbing investor activity is having a broad impact and risks generating a sharper fall,” said Harley Dale, chief economist at Australia’s Housing Industry Association. “The new home building sector has delivered a strong economic dividend to Australia during a period when many other sectors of the economy have struggled.”
In addition to changing lending behavior, the tighter regulatory environment and the prospect of even greater capital requirements has led all four of Australia’s biggest banks to engage in equity issues. Westpac’s announcement this week that it would seek A$3.5 billion ($2.6 billion) in a rights offering takes to almost A$20 billion the amount of capital the big four have raised this year.
The most recent boost in mortgage rates, if replicated by other lenders and combined with earlier increases focused on landlord lending, could potentially shave as much as half a percentage point from household consumption growth, Royal Bank of Canada strategist Michael Turner estimated in a note to clients on Wednesday.
Australia’s economy grew at just a 2 percent annual pace in the three months through June, the weakest performance since the third quarter of 2013, while consumer price inflation is running at just 1.5 percent. A report on Thursday in Sydney showed an unexpected decline in jobs, while unemployment held at 6.2 percent. Joblessness earlier this year reached 6.3 percent, the most since 2002.
“Right now, both growth and inflation are too low, so the economy doesn’t need higher mortgage and deposit rates,” said Matthew Johnson, executive director for fixed-income sales at UBS Group AG in Sydney. “The RBA may well be very happy that the banks are slowing the housing market -- but it’s hard to make a case for higher rates, so it does add to the pressure on them to ease further.”
While the RBA indicated last month that it was “pretty content” with its current cash rate of 2 percent, the swaps market is showing a 50 percent chance of at least a quarter point reduction by the end of this year, according to data compiled by Bloomberg. That’s up from 35 percent a week earlier. The Aussie dollar bought 73.20 U.S. cents as of 3:56 p.m. in Sydney Thursday, down 10 percent this year.
“We suspect they will eventually deliver a rate cut in February,” said Nomura’s Ticehurst. “Given the recent tone I think November’s probably too soon. Having said that I think we need to watch the other major banks over the next couple of weeks because if they all do what this first bank has done, then the probability of a move pre-Christmas will rise.”