The move by two of the big six home lenders, as well as a second-tier outfit, to raise rates was simultaneously expected and unusual.
The banks and economic commentators had been warning borrowers for months about rising rates overseas inevitably driving up rates in Australia.
Westpac and Suncorp delivered 0.14 and 0.17 percentage point increases respectively within days of each other.
Scrutiny now turns to the other big players — CBA, NAB, ANZ and Bank West — about their intentions.
All the banks are under pressure on narrowing margins. Westpac was under the most pressure and it blinked first.
More rises are likely. The fact they are coming as house prices are falling is uncommon and a worry.
The last time this unhappy coincidence played out was in 2008.
There are similarities and differences between then and now.
Like today, the rate rises a decade ago were not being driven by the Reserve Bank, but by funding costs escalating. Back then, the banks’ access to funds was strangled as the GFC unravelled and credit markets shut down.
However, mortgage rates were coming off a much higher base, above 9 per cent for a standard variable loan rather than a bit above 5 per cent now.
The unemployment rate was much lower at 4.5 percent and wage growth had been stronger leading into 2008.
The hikes so far should be no more than an aggravation. A bit more aggravation for Suncorp customers given they have been hit with the second rise in the past six months.
If the hike is unaffordable, the borrower should never have been sold the loan in the first place — but that is another story and the subject of some scrutiny at the banking royal commission.
As the RBA has repeatedly pointed out, it won’t be particularly anxious about modest out-of-cycle hikes. The RBA’s view is they are basically reversing an overall decline over the past year or so as lenders slugged it out for market share.
Australia is a long way from recession, but the risks are rising according to Capital Economics’s Paul Dales.
Mr Dales laid out three conditions for an Australian recession, or financial crisis within the next five years:
- A big fall in house prices
- A big tightening in credit conditions
- A big rise in mortgage rates, or some combination of all three
“The news that Westpac will raise its standard variable mortgage rates by 14 basis points is significant as it means all three conditions are now present,” Mr Dales said.
He said these developments were not large enough yet to cause many problems and if all the banks were to follow Westpac’s lead it would be the equivalent of the RBA raising rates by 0.1 percentage points.
If anything things are getting worse in the property market with auction clearance rates falling and the time to sell a house blowing out.
That in turn is leading to a glut of unsold properties, both new and old, and that is keeping downward pressure on prices.
Rising mortgage rates are likely to only amplify that pressure. Judging by another weak weekend of property sales, it is already starting to bite.
On Saturday, only around half the properties in Sydney and Melbourne sold at auction. In Brisbane the clearance rate was more like a third.
Last year, on the same weekend, more than 60 per cent were sold under the hammer. Two years ago it was 75 per cent.
Consumers will cut spending
ANZ’s head of Australian economics, David Plank, said normally increases in the range of 0.1 to 0.15 percentage points would not be all that material to households.
While nobody would welcome an extra $35 a month on a $300,000 loan, it shouldn’t be a make-or-break sort of thing.
So how did consumers respond to the combination of rising mortgage rates and a weakening housing market a decade ago?
“They reduced spending. Household consumption fell in the June 2008 quarter and again in the September quarter,” Mr Plank said.
“This weakness in spending came before the global financial crisis gathered steam.
“Perhaps the key difference between now and then is the level of interest rates. This meant that household interest payments were much higher relative to disposable income than they are now.”
The worry is consumers are responsible for around 60 per cent of domestic demand and delaying or abandoning spending can have nasty consequences on the broader economy.
Mr Plank said the consequences this time around are likely to be less severe than a decade ago. However, add political uncertainty into the mix and it might just be too much weight for the struggling consumers’ psyche to bear.
“But, again, the combination of falling house prices, political uncertainty and a rise in mortgage rates — if only very modest — may be more negative for households than a small increase in interest rates would be in isolation.”