Council of Financial Regulators closely watching housing market for financial stress

The peak body for the nation’s financial regulators is keeping a watchful eye on emerging risks in the housing market as banks pass on rate hikes and house prices lose steam.

The peak body for the nation’s financial regulators is keeping a watchful eye on emerging risks in the housing market as banks pass on consecutive monthly hikes in the official rates to their customers and house prices lose steam.

The Council of Financial Regulators – comprising the Reserve Bank, Australian Securities & Investments Commission, Australian Prudential Regulation Authority and Treasury – said price growth had slowed but lending was “only just starting to ease”.

The cautious assessment – after the CFR’s regular quarterly meeting on Monday – was in contrast to the pessimistic outlook from a leading bank analyst, who said the mortgage slowdown would be more pronounced than previous cycles because of a “quick and aggressive” program of rate hikes by the RBA.

Morgan Stanley now forecasts average quarterly growth in bank mortgage portfolios will ease from 7.5 per cent at the start of 2022 to 3.5 per cent in the 2023 financial year. While the major banks were already lagging the system, averaging 3 per cent growth, this was likely to fall to 2 per cent.

“However, under a bear case scenario with more rate hikes, a larger decline in house prices and even less housing turnover, we believe system growth would be negative,” said Morgan Stanley equity analyst Richard Wiles.

“Australian mortgage growth has historically slowed meaningfully in response to a series of ‘quick and aggressive’ RBA rate hikes. We believe the slowdown will be greater in this tightening cycle, and we forecast the major banks’ average mortgage growth to be about 1-2 per cent over the next two years,” Mr Wiles added.

Like other central banks, the RBA is trying to flatten inflation, which it expects to peak around 7 per cent by the end of the year.

RBA governor Phil Lowe has forecast the cash rate could increase to 2.5 per cent before inflation starts to settle back into the bank’s target of 2-3 per cent.

The shift to higher global interest rates has prompted local observers, including Westpac chief economist Bill Evans, to revise their expectations. On Thursday, Mr Evans lifted his prediction for the terminal rate in the RBA’s tightening cycle from 2.35 per cent to 2.6 per cent – short of the market’s forecast of 4.5 per cent.

He said the sensitivity of the domestic economy to official rates was “markedly higher” than in the US, with 60 per cent of local mortgages on variable rates and a further 75 per cent of the remaining fixed-rate loans set to mature by the end of 2023.

Effectively, 90 per cent of mortgage borrowers were directly exposed to moves in the RBA cash rate over the next 18 months.

This could occur through multiple channels, including the cash flow of existing borrowers, the capacity of prospective borrowers to obtain and service new loans, the wealth effect from the impact on house prices, and through confidence effects.

Australian Housing Market Fears As Interest Rates Rise

The CFR said members had considered how risks in the housing market might evolve, as rising interest payments affected mortgage repayments and households’ borrowing capacity. “Housing market indicators suggest that activity has weakened in the major cities in recent months and housing price growth nationally has slowed, although housing lending is only just starting to ease,” it said in a statement on Thursday. “The council will be closely monitoring the effects of rising interest rates on the household sector.

“Members emphasised the additional resilience provided by the substantial housing equity and payment buffers built up by households since the onset of the pandemic.”

The meeting also discussed pass-through of RBA cash-rate increases to deposit rates.

It was noted that, given the cash rate was still at a low level, there had been much less pass-through to deposit rates than to lending rates so far.

The CFR said it would continue to monitor pass-through closely. Other issues discussed at the meeting included de-banking and developments related to crypto assets. The council said advice was expected to be provided to the new Labor government in August on how risk-aversion by banks over certain sectors could be addressed, along with ways to improve transparency about banks’ decision-making processes.

The meeting also discussed recent crypto developments, including the crash in flagship crypto assets like bitcoin, which has slumped from some $US60,000 ($87,300) to less than $US20,000.

“Participants agreed on the importance of a robust regulatory framework to protect investors and guard against potential financial stability risks,” the CFR said.

“The meeting also discussed the increased interest by industry participants in the issuance of Australian-dollar stablecoins and the regulatory implications.”

In other developments, the CFR said it discussed the Australian Securities Exchange’s response to a number of operational outages in recent years, and further delays in delivery of the critical CHESS replacement system for clearing and settlement.

Last month, the ASX once again delayed the launch of the long-awaited overhaul, scrapping the deadline for the fourth time and casting doubt over the project’s future.

The project, which uses blockchain technology, was slated to launch in April next year, but the ASX said that this was “no longer viable”.

“ASIC, the ACCC and the RBA are engaging closely with the ASX and will continue to do so, particularly in relation to the delivery of the CHESS replacement system,” the CFR said.