Challenger banks laud more rational markets

by 20 Dec 2016
A number of non-major banks have said the national home loan market is behaving more rationally thanks to a decision by the big four to halt extreme price discounting on mortgages.
In a survey conducted by The Australian, the banks said the end of heavy discounting had led to the end of historically low interest rates and better profitability industry-wide.
Mike Hirst, managing director Bendigo and Adelaide Bank, said that “larger” discounts were now less common than in the first half of 2016. At this time, Commonwealth Bank had taken off around 150 basis points from offered loans.
“At the sort of discounts being offered, it is hard to see how reasonable returns would be achieved. As such, we are not surprised to see some pullback from the extreme discounts being offered,” Hirst told the publication.
This sort of “uninformed and irrational competition” was a major risk to the health of both the overall housing market as well as unemployment, said James Boyle, CEO of Liberty.
As the market has been incredibly competitive, it would be nice to see some rationality return, Cory Bannister, chief lending officer at La Trobe Financial, told Australian Broker.
“It was always a case of when, not if, some of the heavy discounts offered would cease as lenders’ cost of funds increased in the background and margins compressed further.”
“Demand for good quality housing remains strong with auction clearance rates holding at high levels so we expect plenty of home loan activity to take place in 2017, but perhaps without some of the fizz witnessed in 2016.”
The banks have also raised suspicions about predictions the Reserve Bank will increase rates next year.
“While there are some expectations that the cash rate will increase, I think we will actually see the cash rate remaining neutral in 2017,” Rob Goudswaard, CEO of Credit Union Australia (CUA), told The Australian.
“However, I think we will see some increases in home loan pricing across the market, as there has been some very intense competition on pricing over the past six months and that is starting to ease.”
Hirst echoed this, saying that the RBA would keep the cash rate on hold at 1.5% throughout 2017.
“The risk to this view is that the economy is much slower than expected and a more accommodative policy stance may be required,” he said.
Bannister told Australian Broker that he expected the cash rate to remain on hold, at least for the first half of next year, as the RBA sought to stabilise the economy.
“Go down, and certain parts of the nation’s economy have the ability to boil over again; go up, and some are likely to struggle further,” he said.
The fate of Australia’s AAA credit rating would also dictate the future of the RBA’s decision, he added.
“If the rating is downgraded, it is likely to result in increased funding costs which will ultimately be passed down to borrowers. This potentially replaces the need for the RBA to react (and raise rates) as both an RBA and out-of-cycle bank increase could potentially be too much for many to bear. If the RBA moves down, it could be neutralised quickly by an out-of-cycle bank move.”
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