In the past week, the industry has seen a flurry of mortgage rate increases from big banks and non-major lenders alike. So, what does this mean for investor lending and for the nation’s interest rates moving forward?
A series of lenders have moved on rates in the past few days, with increases from AMP, CBA, ANZ, NAB, Homeloans, Bendigo Bank, St.George and Westpac ranging from seven to 117 basis points.
Commenting on the banks’ moves, AMP Capital chief economist Shane Oliver told Mortgage Business: “What they've done is entirely rational, they've covered their funding cost increases over the last six months, they're responding to the regulators, and also responding to the strong demand from investors for loans by putting rates up.”
Investor lending in APRA’s crosshairs
Many of the banks cited APRA’s macroprudential measures as one of the reasons for hiking their rates.
AMP’s Mr Oliver explained that currently APRA seem to be providing guidance to banks behind the scenes, however they are likely to make a public announcement in the near future.
“I think ultimately just to reinforce the point they probably will be more public at some point, and I suspect that an element of that will be a reduction in the speed limit for lending to property investors. I suspect that it will be lowered to 5 or 7 per cent or something like that, with probably some other measures as well.
“I think the current approach of being behind the scenes is quite good and it does seem to be having an impact, at least in terms of banks raising mortgage rates for investors particularly.
“But if APRA and the regulators want to get maximum impact then an upfront announcement would make sense as well, and I suspect given the interest in this issue from the RBA but also federal treasury in Canberra, that they will go down the formal prudential path as well as continuing to work behind the scenes.”
Mr Oliver remarked that the issue of investor lending seems to have “hotted up” recently, with the RBA treasurer also expressing concern, and expects that an announcement could come as soon as in the next few weeks.
His comments come after Morningstar outlined the likely action APRA will take to curb investor lending as the impact of its initial efforts to cool the market appear to be fading.
“Increasing concerns of an overheating housing market are likely to prompt APRA to act to slow the rate of growth of residential investor home loans,” Morningstar analyst David Ellis warned.
Like Mr Oliver, he also suggested that APRA would likely reduce the current 10 per cent annual growth limit on residential lending to around 5 to 7 per cent.
The impact of the US Fed Reserve’s rate rise
After the US Fed decided to lift interest rates by 25 basis points, Gateway Credit Union’s chief executive Paul Thomas said that Australian borrowers should brace themselves for interest rate increases too.
However, AMP’s Mr Oliver says that unless the RBA follows through with higher interest rates, which looks unlikely this year, then borrowing costs for owner-occupiers aren't going to rise much.
He elaborated: “The Fed does its thing, we do ours. We were raising interest rates in 2010, they did absolutely nothing. They were hiking in 2016, we were cutting. Australia doesn't follow along behind the Fed, it does its own thing.”
He went on to say that ultimately the Reserve Bank will do whatever it thinks is appropriate for Australia’s economy.
“At the moment, our economy is still growing at a relatively constrained rate. Unemployment in Australia is much higher than it is in the US, we've got a big problem with underemployment, which is recording in record low wages growth whereas in America wages growth is picking up. I think there's big differences between the Australia and the US, which probably to suggest that the RBA won't be following the Fed, not in the short term anyway.
“If the improvement evident in the US economy flows through to the rest of the world, including Europe, Japan and China and that eventually benefits the Australian economy and Australian growth and inflation picks up, then we would follow, but at the moment it's too early to say that,” he concluded.
What will the RBA do next week?
It’s likely the Reserve Bank will choose to leave rates on hold at their monthly meeting next week, Mr Oliver predicted.
“The macroeconomic arguments in Australia haven't really changed much. We have inflation running below target, the Australian dollar is too high, unemployment is higher than we'd like it to be… but against that there's more powerful arguments and they are that growth is OK with December quarter GDP growth, Sydney and Melbourne property markets are perhaps too hot for comfort, so all of those things predominate.
“The arguments against a rate cut dominate at the moment, and by the same token, it's hard to argue in favour of a rate hike, because although the Sydney and Melbourne property markets are too hot, other property markets around Australia are actually quite weak, such as in the case of Perth, so best outcome is to leave rates on hold which is I think what they'll do.”