Speaking to Mortgage Business for a special episode of the Mortgage Business Uncut podcast, the founder, co-CIO and portfolio manager of Coolabah Capital elaborated on an opinion article he wrote for the Australian Financial Review this week regarding an alternative to a cash rate cut.
According to Mr Joye, the cash rate is still “very relevant” when it comes to the direction of mortgage rates, and “if the RBA is going to cut the cash rate, one way or another, it will force lending rates down”.
The financial economist and former government adviser outlined that while he thought it was “a 50-50 proposition” as to whether the RBA would cut rates this coming Tuesday – given that a federal election will take place on 18 May – he added that he did believe the cash rate would drop to a new record low of 1.25 per cent in the next three months and that the majority of lenders would pass this cut on to borrowers.
Mr Joye said: “I do believe the RBA will cut the cash rate over the next few months. Whether it happens in May – in the middle of an election campaign – is a 50-50 proposition.”
He continued: “I think, no matter what, the RBA will look to cut at some point over the next three months. I think, to be honest with you, it’s very 50-50... the only reason they wouldn’t cut in May is the election. Every other economic argument that they adhere to suggests they should cut now.”
A rate cut would be good news for borrowers, according to Mr Joye, who told Mortgage Business Uncut that he believed that he expected a “75-100 per cent pass through” by lenders to borrowers should the RBA reduce the cash rate.
“I think some banks will fully pass through the cut, [while] other banks might keep a little bit back. If it is a 25 basis point (which is what you would think would be the case in the event they cut, as that is the standard move), I’d expect 20-25 basis points to pass through. So close to full pass through.
“The fact is that bank funding costs have fallen dramatically, and I think the case for the banks not passing through the majority of the RBA cash rate change is going to be very, very tenuous. There is probably a case for them to hold back about 5 basis points, but they should be doing, at the minimum, circa 20.”
An alternative to a rate cut
However, Mr Joye added that he had been told that the banks and the RBA and APRA have been looking at an alternative to a cash rate cut that would be “very targeted” and “focused on the housing market”.
Currently, APRA suggests that prudent lenders should use an interest rate buffer “comfortably above 2 per cent” over the loan product rate as well as an interest rate floor “comfortably above 7 per cent” to ensure that interest rate changes do not adversely impact on a borrower’s capacity to repay a loan.
This also enables the lender’s portfolio to absorb any potential stress should there be an economic downturn or rising interest rate environment, without producing unexpectedly high loan default losses.
However, Mr Joye said that the lenders, RBA and APRA could be looking at reducing the floor rate of 7.25 per cent by 50 basis points to 6.75 per cent.
He said: “If you run some rough numbers, for a typical borrower, that would allow them to improve their borrowing and housing purchase capacity by about 5 per cent, which is quite significant.
“I think the logic is that – given you can get a home loan for about 3.5 per cent right now – the chance of seeing a 7 per cent plus rate in the next five or 10 years is pretty slim. Particularly given the 10-year government bond yield share in Australia is 1.8 per cent… So, basically, bond markets are saying they don’t think the cash rate will increase for a decade, and yet we’re forcing borrowers to determine their borrowing capacity based on a minimum rate of 7 and a quarter, which seems outdated.”
This change could come as early as next week, Mr Joye told Mortgage Business Uncut, and potentially in place of a rate cut.
The founder and co-CIO of Coolabah Capital said that he personally believed that the RBA should not cut rates next week but instead “let the housing market clear”.
He added that given housing prices had undergone a “very healthy correction” by falling nationally by 10 per cent (after growing by 50 per cent between 2012 and 2017) and that while this was “not great for lenders, not great for home loan growth, and it’s not great for mortgage brokers”, he said that, in the long term, it was “very positive for everybody because housing valuations have become much more realistic”.
Find out more about Christopher Joye’s thoughts on the RBA cash rate and his projections for economic growth in the bonus episode of Mortgage Business Uncut, out now.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.