Westpac Rate Rise Could Lower House Prices
"Those record low interest rates could be a thing of the past"
Westpac is being slammed for raising interest rates while the official Reserve Bank cash rate remains at a record low, but market experts said the move could help housing affordability in Australia.
Westpac raised its variable mortgage rate by 14 basis points on Wednesday, which the bank said was due to "a sustained increase in wholesale funding costs".
This represents a $35-per-month increase in mortgage repayments on a $300,000 loan.
The RBA's official cash rate has remained steady at 1.5 percent since October 2016, while Westpac in May reported a six percent increase in its half-year profit to $4.25 billion, leading to accusations the bank is simply gouging customers.
"They have to justify in this environment, when people are really feeling it, why they believe they need to clip that ticket a little harder when people in Australia and their customers are doing it tough," Prime Minister Scott Morrison said.
READ MORE: Westpac To Hike Mortgage Rates
Economist Saul Eslake said when a bank's costs of funding went up -- for instance, if a bank borrows money from an overseas country, and that country's interest rates go up, as has been seen in the United States -- there were tough decisions to be made.
"The choice is lowering profits, lower stockholder returns, or raising rates. Westpac wouldn't have done this lightly, knowing they would get an absolute pasting," he told ten daily.
"They make a lot of money and people ask 'why don't you just wear it?'. But they felt they had to do it, and of course the other banks are going to follow because Westpac has made it easier for them."
Eslake said it has not been uncommon since the global financial crisis for banks to raise interest rates out of cycle with RBA cash rate changes, but suggested if other major banks followed suit, then the RBA could delay any future official rate rise or even decrease rates further.
"The Reserve Bank ultimately cares about the rates borrowers are paying. It takes any movement in the difference between the cash rate and the rate borrowers are paying into account when they make their decisions," he said.
"They've said the next change will be up, but they're in no hurry to raise it. The timeframe for the next raise has been pushed out. If all the banks do what Westpac has done, the RBA could put its rate down."
To the all-important question of impact on house prices, Eslake said Westpac raising rates on its own would have a negligible impact, but wider effects would be felt if other major lenders did the same.
"It will make servicing a mortgage more difficult. But if making that more difficult results in a drop in housing prices, so that prices already dropping do drop some more, it could be a wash," he said.
"Most people think rates at record lows means housing affordability improves, but what has the record low meant for house prices? Most of the benefits of lower rates have gone to people who already own houses."
Australian homebuyers, particularly in major cities Sydney and Melbourne, have been faced with skyrocketing house prices in recent years. In January, the annual Demographia International Housing Affordability Survey found Australia had the third most unaffordable major housing market in the world, with median house prices in Sydney found to be nearly 13 times the median income, and in Melbourne nine times the median income.
Tim Lawless, executive research director with property market analyst CoreLogic, said the Westpac move could be the first step in wider changes to the housing market.
"It will probably have a positive effect on housing affordability, a dampening effect on prices. But serviceability is different, as mortgages will rise," he told ten daily.
"Affordability is already challenging in markets like Sydney and Melbourne, and first homebuyers would welcome some downward pressure. That's the silver lining. But rates edging higher outside official cash rate changes suggests those record low rates could be a thing of the past. Most people have expected a rate rise and this is potentially a sign of things to come."
Both Lawless and Eslake predicted wider housing price reductions in coming months.
"Higher mortgage rates will place downward pressure on housing prices, and further pressure on prices which are already falling in most cities," Lawless said.
"People might say rate rises could make housing affordability worse, but it could moderate the demand and have the opposite effect, or the two could even out," Eslake said.
"People typically say low rates are good for homeowners but ownership rates have gone down as interest rates have gone down."
But while rate rises might cool the housing market generally, there's still not much good news for aspiring first homebuyers.
"From a first homebuyer standpoint, whatever benefit lower interest rates have are more than offset by increases in house prices. Lower interest rates don't help you with a deposit, actually it makes it even harder because you get less interest on your savings," Eslake said.
Lawless said the news was "mixed" for aspiring home owners.
"The biggest barrier for first homebuyers isn't paying a mortgage, it’s getting foot in the door with a deposit and funding the stamp duty payment," he said.
"With rates where they are, mortgages are still low, it shouldn't affect first homebuyers that much. Their biggest barrier is the deposit."