Clancy Yeates| 1 November 2022| Sydney Morning Herald
Mortgages: Rising rates put brakes on home loan growth (smh.com.au)
As the Reserve Bank prepares to raise interest rates again to tame the highest inflation in decades, loan growth in the $2 trillion mortgage market is showing signs of softening and analysts say the slowdown in lending has further to run.
New RBA figures, released on Monday, showed housing credit growth – a key long-term influence on bank profits – slowed to a 10-month low of 7.3 per cent in the year to September, from 7.6 per cent a month earlier.
With the RBA expected to raise the cash rate by at least 0.25 percentage points on Tuesday, analysts say it is still early days in the mortgage lending slowdown, which has occurred as house prices have fallen and banks have cut how much they will lend.
Westpac senior economist Andrew Hanlan said the RBA figures provided further confirmation of slowing credit due to higher interest rates, saying overall credit growth of 0.7 per cent in September was the weakest monthly reading since March. Hanlan said while borrowing had grown strongly in 2021 and early 2022, this trend was now reversing as interest rates rose.
“The RBA is quickly removing ultra-easy monetary policy, on the way to a contractionary stance, to fight a significant inflation challenge. The tightening of policy will reduce demand for credit – across households and, in turn, businesses,” he said in a note.
“The housing market is showing the adverse impacts of sharply higher interest rates.”
Some investment houses such as Jarden expect annual housing credit growth will fall to about a third of its current pace by late year, while the Commonwealth Bank said it expects housing credit growth to slow to 4 per cent next year.
Despite the expected slowdown, investors remain upbeat towards the major banks, as lenders are benefiting from a dramatic widening in net interest margins, which compare funding costs with the price of loans. Lenders are also reporting low levels of borrower stress.
Managing director of White Funds Management, Angus Gluskie, said over the next year banks would get the full benefit of rising interest rates across their loan portfolios, and the majority of bank customers could handle higher interest rates.
“These rates are not that expensive. They are a long way below where interest rates have been over the last 20 or 30 years,” Gluskie said.
Chief investment officer at Atlas Funds Management, Hugh Dive, said slowing loan growth was a secondary issue for the market, compared with the risk of bad debts and changes in net interest margins. Dive said that although banks’ bad debts would rise, the increase would be from historically low levels.
“Going into this tightening cycle, unemployment is so much lower than it was in previous cycles,” Dive said.
Jarden analyst Carlos Cacho said growth in outstanding credit was lagging the sharper drop in new lending, partly because banks typically took months to change customers’ mortgage payments. Carlos said he expected housing credit growth to drop to about 2.5 per cent in the second half of 2023.
In business lending, meanwhile, the RBA said credit growth accelerated to 14.7 per cent in the year to September, which was the fastest annual growth since before the global financial crisis in 2008.
Cacho said this was an “incredibly robust” result, noting that other data on business conditions was also still positive. “It just seems like the business environment remains really strong,” Cacho said.