Banks the big winners in housing boom: Citi

With housing price growth typically a precursor of credit growth for banks, analysts are expected to upgrade their earnings forecasts for the lenders.

A nascent housing boom that has followed an unprecedented wave of monetary and fiscal policy stimulus in response to the COVID-19 pandemic in Australia is “unlikely to be stopped” by regulators anytime soon, and the ­nation’s banks are set to reap the benefits, according to Citi.

Macroprudential policies to mitigate any developing risks to the health of the broader financial system from a red-hot property market are the favoured way of overriding the effects of low rates without actually lifting rates, but “this time is different and the toolkit available is looking sparse”.

The recent strength in house prices has seen growing calls for “intervention” in the housing market, but the “narrowness” of the current cycle — driven by first-home buyers and “upgraders”, rather than investors — has rendered many macroprudential tools “less effective”.

Any move to limit high debt-to-income lending risks “marginalising” first-home buyers, who are “likely the most politically sensitive” group, according to Citi analyst, Brendan Sproules.

“Unfortunately, this housing boom was engineered by fiscal and monetary policy to make us feel wealthier and consume more,” he says.

“However, those not rushing off to buy another plasma TV or adding another cabana out the back are being refreshed of the ­affordability and social issues of a hot housing market.

“Regrettably, the nature of this housing boom means that it is unlikely to be stopped soon.”

Sproules says the banks will prove to be among the main beneficiaries, with incrementally more applications — for those who can afford it — and better collateral in the housing book.

With housing price growth typically a precursor of credit growth for banks, it is expected to lead analysts to upgrade their earnings forecasts for the banks and lower their estimates of bad and doubtful debt upgrades as balance sheets normalise.

Share prices of the four major banks rose by an average of 0.5 per cent on Monday, as the S&P/ASX 200 index rose 0.7 per cent to a two-day high of 6752.5 points amid a fall in bond yields.

The banking sector index has risen about 75 per cent since March last year, when it hit a decade low in the COVID-19 crisis.

CoreLogic’s median capital city house price index rose 2 per cent on a monthly basis in February, the fastest month-on-month growth since November 2019.

Citi’s Sproules noted that the only way to undo strength in housing is by lifting interest rates.

However, the Reserve Bank has no mandate to control house prices and, in any case, lifting rates would be an “unattractive” option to the Reserve Bank given weakness elsewhere in the economy.

His comments came amid a warning that fixed home loan rates may be on the rise.

CBA bucked the trend to lower lending rates by lifting its four-year fixed home loan on Monday, even as it bowed to pressure from rivals by cutting its two-year fixed rate loan below 2 per cent.

While CBA’s two-year loan rate fell to 1.94 per cent, from 2.14 per cent, an increase in its four-year fixed rate — to 2.19 per cent, from 1.99 per cent — was the “most significant change”, according to ratecity.com.au research director Sally Tyndall.

After the RBA cut its cash rate to a record low of 0.1 per cent in November last year, all the big-four big banks responded by cutting fixed rates, in particular their four-year fixed home loan rates.

But less than five months later, CBA has taken this deal off the table.

By lifting its four-year fixed rate the same amount as it cut its two-year rate for new customers, CBA was “giving with one hand, and taking away with the other”, according to Tyndall.

“This is the first big four bank to hike its four-year owner-occupier rate since October 2019 — a sign the bank is pricing in a higher cash rate from 2024,” she says.

“It’s not surprising CBA has decided to raise its four-year fixed loan — the bank is pricing in at least one cash rate hike over this time. Governor [Philip] Lowe has repeatedly said the first round of cash rate hikes wouldn’t be until at least 2024, but that’s only three years away.”

In her view, standard variable home loan rates “could very well go up” within four years — provided the economic recovery stays on track — and other banks could start lifting their four and five-year fixed rates in coming months to factor in a potential rate rise in 2024.

The RBA has repeatedly said it won’t increase the cash rate until inflation is sustainably within its 2-3 per cent target band. For that to occur, wages growth would need to be “materially higher”, which would require “significant gains in employment and a return to a tight labour market”, and it “does not expect these conditions … until 2024 at the earliest”.

Minutes of the RBA’s March board meeting revealed last week that the central bank’s board members discussed the effect that low interest rates have on financial and macroeconomic stability.

They acknowledged the risks inherent in investors searching for yield in a low rate environment, including risks linked to higher leverage and asset prices, particularly in the housing ­market.

But while they noted that lending standards remained sound and it was important that they ­remain so in an environment of rising housing prices and low ­interest rates, RBA board members concluded “there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets”.