Fixed rate increases to bite into housing market surge

The Commonwealth Bank has followed Westpac with hikes to home lending rates and more lenders are likely to follow suit.

Housing markets could be hit by rising fixed interest rates.

The housing market has been rattled by a second major bank raising fixed interest rates, with the Commonwealth Bank on Friday lifting rates for prospective borrowers for the second time in just over three weeks.

The upward shift has prompted suggestions that the banks are racing each other to raise fixed rates, with Commonwealth’s move following a shift by Westpac, which on Thursday lifted its fixed rates for the second time in just over two weeks.

The Commonwealth Bank raised its one-year to five-year fixed rates by up to 0.5 per cent for both owner-occupier and the more rate sensitive investor market, with the shifts coming amid a more cautious regulatory environment.

This means the nation’s largest bank has no advertised home loan rates under 2 per cent for the first time in a year. The change saw the bank’s last remaining sub 2 per cent fixed rate – its one-year option – lifted 35 basis points to 2.34 per cent.

On Tuesday, RBA governor Philip Lowe indicated he was not opposed to lifting rates ahead of an initial planned time frame of 2024 in the face of rising inflation and runaway house prices.

SQM Research managing director Louis Christopher said it looked increasingly likely action would be taken sooner rather than later.

He said he believed that the Australian Prudential Regulation Authority would move to modestly tighten lending next year, through its own measures, with the expectation the RBA will do the heavy lifting.

New listings rose almost 30 per cent last month and the trend of more homes coming on to the market will continue.

“However, with increasing chatter about future interest rate rises and macroprudential intervention by APRA, an increasing number of vendors may also be thinking now is a good time to sell,” Mr Christopher said.

Analysis by RateCity.com.au showed a total of 33 lenders had lifted at least one fixed rate in the last month.

Four lenders have increased their fixed rates twice in the last month – the Commonwealth Bank, Westpac, AMP and BDCU Alliance Bank – and the analysts said this list would probably grow.

AMP Capital chief economist Shane Oliver this week warned about the storm clouds gathering over the home boom after average home prices had already risen by 19 per cent year to date. “Storm clouds are starting to gather for the property boom and we expect a further slowing in price gains ahead of falls from later next year,” he said.

Dr Oliver said rising interest rates were expected to be a big dampener. “The collapse in fixed rates to 2 per cent or less played a big role in the recent boom in ­prices and fixed mortgages have accounted for 40 per cent or so of new loans recently, so are far more significant than they used to be,” Dr Oliver said.

“But fixed rates have already started to increase and if the RBA drops its 0.1 per cent yield target for the April 2024 government bond further increases in two and three year fixed mortgage rates are likely.”

The AMP economist warned that higher inflation and the faster than expected recovery probably meant that the first rate rise would come late next year, pushing up variable rates.

“As a result we have revised our 2022 capital city average dwelling price forecast down to 5 per cent, from 7 per cent, and with prices likely to start falling from later next year we expect a 5-10 per cent decline in average prices in 2023,” he said.

The Reserve Bank on Friday noted that rising longer-term funding costs had been pushing up fixed rate loans.

“After a period of strong growth in fixed rate loans, competition in housing loans may be shifting back towards variable-rate loans,” the RBA said.