Costello warns of falling property prices in rate rise pain

Homeowners should brace for “painful” consequences, as interest rates rise from historically low levels, Peter Costello warns.

Experts fear a series of rate hikes on mortgages — out of cycle with the Reserve Bank — has begun, after Suncorp Bank said yesterday it would lift its owner-occupier mortgage rate by 0.05 percentage points. Picture: AAP.

Homeowners should brace for “painful” consequences, including falling property prices, as interest rates rise from historically low levels, Peter Costello warned yesterday, as Queensland home lender Suncorp kicked off what could be a sharp rise in borrowing costs.

Speaking two days before the US central bank is expected to lift its official interest rate above the Reserve Bank’s for the first time in 17 years, the former treasurer highlighted how vulnerable Australia’s heavily indebted economy had become to rising global ­interest rates.

“It’s going to be slow and it could be painful, and the question is will it be a hard landing or a soft landing, but it’s going to be a landing,” Mr Costello said in a speech in Melbourne. “If money is more expensive, asset prices must fall.”

Now chairman of the Future Fund, Mr Costello also ramped up his attack on Labor’s plan to dump cash refunds for self-funded retirees, defending their introduction in 2000 for shareholders with a zero tax rate as a pure way of avoiding double taxation.

Mr Costello told the Urban Development ­Institute of Australia conference that he was “amazed” that anyone would be surprised by high household debt levels, which in Australia had risen to the equivalent of 120 per cent — higher than in any other country except Switzerland.

“Of course they are (indebted),” Mr Costello said. “Because we made money so cheap. And we made money cheap because we wanted them to borrow, that was the whole idea … We wanted them to borrow so they’d get the economy moving.”

In the minutes of the Reserve Bank’s most recent board meeting, released yesterday, it said household debt “warranted careful monitoring” and “contributed to the uncertainty surrounding the outlook for consumption growth”.

Experts fear a series of rate hikes on mortgages — out of cycle with the Reserve Bank — has begun, after Suncorp Bank said yesterday it would lift its owner-occupier mortgage rate by 0.05 percentage points to a standard rate of 5.6 per cent.

Suncorp Bank boss David Carter said: “Funding costs have been steadily rising since the end of October.”

He added that business loans would rise by 0.15 percentage points.

“This has been driven by the outlook for US interest rates, as well as domestic factors,” he said.

Suncorp said it would lift borrowing rates for interest-only loans by 0.12 percentage points and for property investors by 0.08 percentage points.

Westpac this month lifted rates on several fixed-rate owner-occupier and investor loans, with rates to rise as much as 0.1 percentage points for borrowers paying principal and interest. For interest-only borrowers, rates rose up to 0.25 percentage points.

The US Federal Reserve will almost certainly raise its funds rate 25 basis points to 1.75 early ­tomorrow as it tries to ward off rising inflation in the world’s largest economy.

That would leave its official monetary lever above the Reserve Bank’s record-low 1.5 per cent cash rate for the first time since late 2000.

The Australian dollar has shed about US2c in a week, hovering around US77c as the relative ­attractiveness of safe-currency ­investments wanes.

Suncorp’s decision came in a week when Moody’s Analytics warned that housing momentum was fading and price growth would slow this year, with Sydney house prices likely to fall 4.2 per cent in 2018. Separate ­official figures also showed a slowing market: Sydney dwelling prices rose 3.8 per cent over the year to the December quarter, down from 9.4 per cent in the year to September.

Australians have become ­accustomed to record-low interest rates in ­recent years, after the Reserve Bank cut official rates to “emergency” levels amid a sluggish economy. Low variable rates offered by mortgage lenders have helped fuel surging house prices in east coast cities, allowing borrowers to pay manageable monthly repayments.

Mr Costello’s ominous remarks offered a stark contrast to the Turnbull government’s budget outlook of a return to a small surplus by 2021 built on a forecast wage boom, falling unemployment, and only modest rises in mortgage rates.

AMP chief economist Shane Oliver said: “Historically vir­tually every time you’ve seen a rise in interest rates the housing market has turned down to some degree — it’s just that it’s not necessarily instantaneous.”

Australia’s banks are heavily dependent on offshore sources of funding, which are influenced by US interest rate movements.

Independent economist Saul Eslake said Mr Costello’s warning on rising rates was “right in theory” but he added that the rate of increase would likely be gradual, which would limit the effect on the housing market. “The Reserve Bank is saying that interest rates are not going to rise any time soon,” Mr Eslake said.

He said he expected rates to rise in November.

Amid the debate over interest rates, the financial services royal commission yesterday heard of further misconduct by banks. Westpac revealed it had told mortgage brokers it would ask the three global credit agencies to audit borrower credit information as regulators ramped up scrutiny over the lending behaviour of the banking sector. In a note sent to brokers, obtained by The Australian, Westpac said it would be “enhancing credit ­assessments”.

The royal commission earlier revealed that about 15 per cent of National Australia Bank home loans had not complied with all the standards set out in its ­lending policy.

The Commonwealth Bank-owned Aussie Home Loans came under fire after executives revealed it lacked a system to detect loan fraud and outsourced the responsibility to other lenders such as Westpac, Suncorp and Bankwest. ANZ has been ­accused of breaking responsible lending laws by failing to verify the living expenses declared by mortgage applicants.

Additional Reporting: Elizabeth Redman