For decades, the housing market in Australia – which has not seen a recession in 27 years – appeared immune to any external or internal shocks, as prices kept rising gingerly year after year. That all changed in the past year, when according to Core Logic, home prices across Australia’s 5 top cities peaked in October of 2017 and have since declined by 3.5% on average.
That decline is now set to accelerate because overnight, two of Australia’s biggest banks, Commonwealth Bank of Australia and Australia and New Zealand Banking Group, announced within minutes of each other that they are raising mortgage rates citing higher funding costs, cutting chances of an official rate hike and risking a political backlash.
The rate increases followed one week after Australia’s second largest bank, Westpac, became the first of the so-called “Big Four” to raise rates. That prompted fierce criticism from Prime Minister Scott Morrison. The former Treasurer demanded the bank explain itself and suggested unhappy borrowers should shop around.
“They have to justify, in this environment when people are really feeling it, why they believe they need to clip that ticket a little harder when people in Australia and their customers I think are doing it tough,” he told reporters.
Fourth-ranked National Australia Bank Ltd is the only one of the majors not to deliver an out-of-cycle rate rise.
CommBank will increase all variable home loan rates by 15 basis points from October 4, while ANZ will hit all borrowers with a 16 basis point increase from September 27. The change means a customer with a $400,000 loan from CommBank will pay an extra $37 a month, or $447 a year. An ANZ customer with the same loan will pay an extra $40 a month, or $476 a year.
“We have made this decision after careful consideration,” CommBank group executive retail banking services Angus Sullivan said in a statement.
“We are very conscious of the impact that increasing interest rates will have on our customers, however it is important that we price our home loan products in a way that reflects underlying costs.”
The move comes two days after the Reserve Bank again left the official cash rate on hold at its record low of 1.5%, extending the country’s longest ever period without an official rate move to more than two years. Despite the low-rate environment locally, banks have faced rising costs in overseas wholesale markets, forcing many of the smaller lenders to gradually raise rates over the past 12 months.
The hikes also reverse moves from just a month ago when some banks cut rates as a downturn in the country’s red-hot housing market heightened competition to write new loans. More notably, the rate increases come even as the Reserve Bank of Australia has held its official cash rate at a record low of 1.50% since 2016 while signaling a steady path for some time.
News of the rate increases pressured the Australian dollar, which dropped near a two year low on concern that higher mortgage rates at three of the big-four banks will sap consumer spending. Short-end bonds gained on similar concern, while the local ASX/S&P index added to morning losses, down 1.1% by the close, as investors digested the prospect that rising rates would hurt home prices further, stifling spending.
According to Michael McCarthy, Chief strategist at CMC Markets and Stockbroking, the news was both goods in that “It’s a small negative for housing prices but part of a much larger trend towards the normalisation of interest rates”… and bad “that of course is likely to continue to keep pressure on housing prices.”
The four banks combined control about 80% of the country’s deposit and home loan market, Reuters reported. The banks have come under intense scrutiny, wiping tens of billions of dollars from their market capitalisations, from a public inquiry which has aired continuous allegations of misconduct within the sector.
As a result, with the central bank seemingly unable to make up its mind and raise rates, the banks decided to take matters into their own hands, and according to a UBS note, “today’s announcements demonstrate the oligopolistic nature of the Australian banks and their ability to pass on additional funding costs and more to their customers.”
“Given the additional focus from both sides of politics (on the banking sector) there is a risk the government or opposition may look to raise the bank levy,” UBS added.
A spokeswoman for NAB, the only lender not to lift rates on Thursday, said in an email the bank continually assessed interest rates and tried to “achieve the right balance for our customers and our shareholders, and to ensure we remain competitive”.
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