Banks may tighten lending standards and buyers turn cautious if a surge in Sydney house prices spreads to other capital cities in Australia, according to the country head of the nation’s third-largest mortgage lender.
“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, the chief executive officer for Australia & New Zealand Banking Group’s Australian operation said. “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.”
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 four-and-a-half year low. Home lending grew 5.8 per cent in the 12 months to February, the fastest pace since September 2011. Australian home prices in March had the biggest monthly gain on record while Sydney prices were up 15.6 per cent from a year earlier.
The central bank is expected to start raising rates in the first quarter of 2015, according to the median forecast from a survey of 30 economists by Bloomberg News. Once interest rates start to rise, house prices will stabilise as affordability deteriorates, Mr Chronican said.
HOME LENDING BOOM
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 prudential regulator said in its submission to the government’s financial systems inquiry March 31.
Australian mortgage lending will grow 6 per cent to 7 per cent 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”, Mr Chronican said
The share of households favouring real estate as the best use of their savings has risen to a level approaching that of the early 2000s property market boom, the Reserve Bank of Australia said in its Financial Stability Review March 26. Australian households’ savings rate fell to 9.7 per cent in the final three months of 2013, the first time it has dropped below 10 per cent since 2010.
ANZ, which has grown mortgage market share for 16 consecutive quarters, expects to further increase its share after doubling the number of branch staff qualified to write home loans and automating originations, said Mr Chronican.
INTENSIFYING MORTGAGE COMPETITION
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, has had a measurable impact,” Mr Chronican said. “The emergence of securitisation means lenders who were previously finding it difficult are more confident.”
Macquarie Group more than doubled mortgages in the year to February 28, according to data from APRA. Australian issuers sold $26.1 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, Mr Chronican said without elaborating. ANZ reported a cost-to-income-ratio of 44.8 per cent in the year ended September 31 and wants to bring it down to 43 per cent 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 per cent in the year ended September 31 from 2.31 per cent a year earlier.
“Term deposits are getting to levels we’d consider normal,” Mr 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.” By Jayden Vecchio