Westpac [ASX:WBC] made a major splash today by raising home lending rates by 0.20%. Yet unlike recent measures targeting investors, Westpac is hiking rates for owner occupier loans. Variable home loan rates will increase from 5.48% to 5.68%.
Its decision raises serious doubts about the future of house prices. With owner occupiers under the gun, it’s easy to see home loan demand plunging. Enough to drag house prices appreciably in the coming months.
So why did Westpac do this now?
It did so to help pay for the costs of its new capital raising scheme. In addition to rate hikes, Westpac also announced it expects to raise $3.5 billion through a share entitlement program. It’s the second time the bank has done this this year, following a similar $2 billion scheme in May.
The capital raising itself is a response to regulatory guidelines. APRA wants banks to cover the risks of their mortgage lending. Since it introduced new guidelines, banking capital requirements have shot up by 50%.
Westpac’s capital raising is now in line with most the other banks, barring ANZ [ASX:ANZ]. The Commonwealth Bank [ASX:CBA] and National Australia Bank [ASX:NAB] have already raised $5.5 billion this year. Westpac’s latest move puts its capital raising at $5.5 billion for the year.
Westpac customers lose out big
Westpac customers won’t be happy about the changes. For one, interest paid out on term deposits heading down. Four, seven and 12 months term deposits will see interest payments reduced by 0.25%.
But Westpac customers with mortgages will mostly care about rising loan rates.
These changes are effective from November 20. Yet they won’t affect Westpac’s other divisions, St George and Bank of Melbourne.
Here’s what Westpac had to say on today’s decisions:
‘This was a difficult decision, and one that was not taken lightly. We understand it has an impact on customers, even in an environment where interest rates are near historical lows. We accept the regulators have ruled on challenges, but these changes impact on the cost of providing mortgages.
‘[The rate hike] sensibly shelters the return on equity impact of the capital raising’.
Westpac isn’t lying about what it means for its customers. For those with variable home loans, the rate hike could add more than $20,000 to a 30 year loan.
On a $500,000 loan, interest payments would rise from $2,832, to $2,895. That’s up $63 a month. However this assumes the variable rate remains at the new baseline of 5.68%.
Westpac customers unhappy with the decision will have much to ponder. The bank will likely lose customers over its decision. Credit unions or non-bank lenders are possible, cheaper alternatives.
Other major banks are another option. But how long will it be before the other Big Banks follow suit? According to mortgage brokers at 1300 Home Loans, all major banks may raise rates by mid-2016.
Westpac moves ahead of the Reserve Bank
Banks have a tendency to take cues from the Reserve Bank before adjusting rates. Now that Westpac has jumped the gun, the focus falls squarely back on the RBA. Pressure is now mounting on the RBA to reduce rates soon.
Markets are pricing the likelihood of a 0.25% rate cut in November at 57%. That’s up from 39% prior to Westpac’s announcement. Citibank is also pricing in a 0.25% rate cut in December at 60%.
Westpac’s move comes at something of an inopportune moment for the RBA. Especially in the wake of poor economic data coming out of China.
Chinese trade slumped in September, with imports down by 17.7% year on year. That’s adding to concerns about the extent of China’s slowdown. And how this affects growth prospects for commodity exporters like Australia.
At the same time, the US Federal Reserve’s delay in lifting interest rates adds even more pressure on the RBA. Without US rate hikes, the RBA needs other ways of weakening the dollar. Cutting interest rates is one of the few options open to it.
But the RBA now has a good opportunity to do just that. The pace of housing growth in Sydney and Melbourne, a worry for much of this year, is easing.
Recent data shows that house prices in these cities are beginning to cool. Median house prices in Sydney didn’t grow in September, following a 1.1% rise in August. Suggestions of a slowing housing market leaves the door ajar for further rate cuts.
Westpac is only making the RBA’s decision easier. Particularly if other big banks follow suit in raising owner occupier loan rates soon.
Housing market at a crossroad
While Westpac’s move increases the likelihood of interest rate cuts, it doesn’t bode well for the housing market.
Normally, interest rate cuts are a boon for real estate. As borrowing becomes cheaper, demand for home loans surges. But this depends on banks following the RBA’s lead. Unless banks pass on the rate cuts to borrowers, it doesn’t lead to increasing demand.
Yet with Westpac hiking loan rates, and other banks likely to as well, demand will only go down. That doesn’t bode well for house prices, considering supply is expected to outstrip demand by 30,000 properties next year.
Banks raising owner occupier rates will place a lot of pressure on the market. Just like the investor market, we’ll see a likely slowdown in owner occupier lending too.
Recent data shows investor lending growth slowed to 10.8% in the year to August. That’s still above APRA’s 10% limit. But at least it’s moving in the right direction.
Yet lending to owner occupiers is on the rise. Loans to this segment grew at 0.6% in August, up 5.6% for the year. That makes Westpac’s move a first step of sorts in slowing owner occupier lending.
That leaves the market with housing supply which is on the up, and demand edging lower. The outcome will almost certainly result in falling house prices. How much?
Well, this week Macquarie predicted house prices plunging by 7.5% from next year. But that was before Westpac made its unusual move. Its decision might just end up as the flint that ignites a bigger collapse in property prices.
Contributor, The Daily Reckoning
PS: The Reserve Bank held interest rates at record lows of 2% when it met last week. But as long as the US Fed maintains near zero rates, the pressure will be on the RBA to cut again soon.
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