From the CEO’s Desk: Australian Banks Hike Mortgage Rates
Be it certain members of the big four banks, or various other lower-tier lenders, the decision to increase variable mortgage interest rates has been prevalent among Australia’s banking industry in mid-2018. As commentators continue to declare the end of Australia’s property boom, how much will these out-of-cycle rate hikes contribute to a downturn in the housing market?
Home loan rate hikes – as they happened
Despite several non-major financial institutions having already raised their home loan rates, the mainstream media only begun shedding light on the rate hikes once the first of the major banks opted to do so on 29 August.
Such news emerged out of Westpac Group after it imposed a 14-basis-point increase to all variable mortgage rates for both new and existing customers – effective 19 September.
Two days later, Adelaide Bank – a subsidiary of Australia’s fifth-largest retail bank, Bendigo and Adelaide Bank – announced that, as of 7 September, interest rates on owner-occupier and investor loans will grow by between 0.12 and 0.4 percentage points. Brisbane-headquartered Suncorp followed suit on the same day, also, spiking its interest rate on variable home loans by 0.17 per cent, and on small business loans by 0.1 per cent – effective 14 September.
For those who were anticipating a ‘domino effect’ to ensue, vindication came just days later when both ANZ Banking Group and the Commonwealth Bank of Australia (CBA) announced their own out-of-cycle mortgage rate increases on 6 September.
In the case of ANZ, variable interest rates for Australian home and residential investment were upped by 16 basis points (bps) from 27 September onward. Notably, no such change to effective rates were enforced upon ANZ’s estimated 70,000 home loan customers residing in drought-declared regional Australia.
Just minutes after the announcement from ANZ, Commonwealth notified its customers that they too would begin incurring costlier mortgage repayments; the result of a decision to increase all variable home loan rates by 15 bps – effective 4 October.
Following a sustained increase in funding costs @CommBank will increase variable home loan rates for owner occupied & property investment loans by 15 basis points or 0.15% per annum effective 4 October. https://t.co/WQCrtrFUKz pic.twitter.com/Ntfc1M7G2e
— CBA Newsroom (@CBAnewsroom) September 6, 2018
NAB changes tack as rates stay put
National Australia Bank (NAB) stands alone as the only major Australian bank to have opted against raising its standard variable home loan rate, meaning it is now lower than each of Commonwealth, ANZ, and Westpac, as depicted in the table below – data obtained from RateCity.
|Standard variable rate (%)||5.36||5.37||5.24||5.38|
In a press release issued by NAB on September 9, Andrew Thorburn (Group CEO & Managing Director) identified the “need to rebuild the trust of [NAB’s] customers” as being of the utmost importance moving forward.
Such ‘customer first’ rhetoric by a major Australian bank is rather unconventional, many would argue. Indeed, overwhelmed by the sheer volume of profit-maximising announcements by their chosen bank(s), neglected retail customers throughout Australia have become desensitised to news that (yet again) their demands failed to dislodge those of shareholders.
Primarily due to the damning revelations that emerged from a series of public hearings held earlier in 2018 as part of the ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Australia’s banking sector is now adjusting to an era of heightened scrutiny from regulators, shareholders, and the general public.
For senior leaders of the major Australian banks, decisions such as mortgage rate adjustments – especially those that occur out-of-cycle – are far more nuanced than in the past. As seen already with NAB, it appears the risk of widespread public backlash (and with it, a fall in business) has begun to deter against the making of decisions whereby bolstering short-term shareholder value is the primary concern.
Why all the rate hikes, anyway?
It is a valid question, especially with the likes of Commonwealth reporting an after-tax net profit of $9.4 billion for the financial year ended June 30, 2018. The factor all Australian banks are citing as the reason for their rate hikes are significantly elevated wholesale funding costs.
Australian banks had shown a willingness to absorb the financial burden associated with such heightened funding costs. But, after more the six months of hoping this burden would dissipate, certain macroeconomic factors made it evident that this would not be the case for the foreseeable future. Matt Comyn (CEO, Commonwealth Bank) explains more in the short video below:
Matt Comyn CBA CEO explains how elevated funding costs over the past 6 months have led to today’s decision to increase variable home loan rates. pic.twitter.com/JRqMtMTKnG
— CBA Newsroom (@CBAnewsroom) September 6, 2018
Real estate downturn to continue?
It remains to be seen just how much of an impact these out-of-cycle home loan interest rate increases will have on Australia’s real estate market – a market that has been the source of some of the most significant property value appreciation in the world over the past 55 years.
Real estate in Australia’s most populous capital cities have already begun incurring sizable year-on-year depreciation throughout 2018. Whilst this may be nothing more than a healthy market correction, one cannot help but ponder the implications that could stem from this most recent bout of mortgage rate hikes enforced by the majority of Australian banks.
Factor in the strong possibility that tighter lending standards and regulatory oversight will be imposed upon a red-faced Australia banking sector – as a consequence of the banking royal commission – and, well, the direction of real estate prices is not hard to envisage.