How higher mortgage rates disrupt the market

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Over the recent weeks, Australia saw Commonwealth Bank of Australia (CBA), Australia and New Zealand Banking Group (ANZ), and Westpac Banking Corp. (Westpac) increasing their variable mortgage rates. 

While a mortgage rate shift is not entirely a new occurrence, CoreLogic research analyst Cameron Kusher pointed out that this latest announcement from three of the four biggest banks in the country is distinct and quite impactful compared to other rate hikes before.

Unlike in previous cases, the affected sector in this rate change is not only investors and those with interest-only mortgages but also owner-occupiers.

Kusher noted in his commentary that many of the smaller regional banks have raised mortgage rates for owner-occupiers over recent months citing higher short-term funding costs.  Major banks, on the other hand, refused to follow suit albeit the fact that they are also affected by higher funding costs.

Data showed that the cost of short-term funding has increased.  It currently sits at 2.26% compared to the official cash rate which remains unchanged at 1.5% since August 2016.

But then again, it pays to look closer at the composition of funding to Australia’s banks.

“Short-term funding is not an insignificant part of the funding profile (slightly more than 20%), although the share of funding from short-term debt has fallen over recent years as domestic deposits have increased. “

 “There are other ways to handle higher short-term funding costs rather than lifting mortgage rates but that would likely mean cutting dividends which lenders seem reluctant to want to do or reducing deposit interest rates which would likely see a further reduction in the primary funding source: domestic deposits,” Kusher quipped.

Another remarkable point to discuss is the impact of these rates on the current condition of the housing market. The increased interest rate is coming at a time when tighter credit conditions, higher mortgage rates for investors and interest-only borrowers, and reduced affordability have already led to the falls of -5.6% from the peak in Sydney and -3.5% from their peak in Melbourne.

 If the downturn happened without higher interest rates for owner occupiers paying off principal and interest in the picture, what more can transpire when these rate hikes from big banks settle in? 

More importantly, the timing of the hikes to mortgage rates disturbs the trend during the beginning of the Spring Selling Season.  Usually, lenders offer enticing mortgage rates to the market to push for market share.  By contrast this year, major lenders are announcing higher mortgage rates.

In the end, it was presumed that increased mortgage rates could weaken demand for investors and affect housing market sentiment.

 “Furthermore, it may end up further exacerbating the declines which are already occurring in Sydney, Melbourne, Perth and Darwin and the slowing of value growth being experienced elsewhere.  Overall this move seems likely to lead to a continuation of the currently weak housing market conditions over the coming months and may weaken the market further,” Kusher concluded.


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