Rate rises could prolong weak market

by Rebecca Pike10 Sep 2018

A leading analyst has said the weak housing market could be prolonged as mortgage rates rise.

Three of the four major banks have hiked rates in the last two weeks, between 14 and 16 basis points.

CoreLogic analyst Cameron Kusher said while there have been adjustments in previous years the difference now is that the increases will affect owner occupiers.

Most of the previous mortgage rate changes announced by the major banks have only affected investors and those with interest only mortgages.

The banks have cited increased funding costs. According to CoreLogic data the three-month bank bill swap rate has increased to sit above the RBA cash rate at 2.26%.

Kusher said, “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.”

Looking at how the changes effect the housing market, Kusher said the timing of the announcement was an “interesting one”, with the markets in Sydney and Melbourne “embedded in a downturn”.

He added, “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.

“The timing of the hikes to mortgage rates is also interesting in that it has been announced right at the beginning of the Spring Selling Season. 

“Although spring, in my mind and according to the data, is somewhat overhyped as a good time to sell, more stock does typically become available for sale over the period and buying activity typically increases. 

“The other usual occurrence at the beginning of spring is that lenders offer enticing mortgage rates to the market to jostle for market share.  By contrast this year, major lenders are announcing higher mortgage rates.”

CoreLogic has seen rising mortgage rates drive a slowing of demand for investors over the past year. Kusher expects that while the latest hikes are “fairly small”, they will impact further on housing market sentiment.

He added, “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. 

“From the lenders’ perspectives, clearly they realise that the housing downturn is becoming entrenched (particularly in Perth and Darwin, but more recently in Sydney and Melbourne) and they are doing what they can to maintain profitability in the face of lower mortgage volumes.”