Message from Australia’s largest mortgage lenders: Don’t worry

by NZ Adviser20 Nov 2015
(Bloomberg) -- Australia’s largest mortgage lenders have a message for those fretting about a potential property-market implosion: Don’t worry.

Commonwealth Bank of Australia’s Chief Financial Officer David Craig said Wednesday that his bank’s home borrowers are well placed to weather rising interest rates. And in a separate interview on Tuesday, National Australia Bank Ltd. CFO Craig Drummond downplayed the risk of a sharp downturn in property prices. Both executives highlighted the country’s strong employment levels as a key support for home borrowers and thus the wider property market.

The two banks are well placed to comment on Australian property market trends as together they control some 40 percent of the nation’s A$1.49 trillion ($1.1 trillion) mortgage market. Both lenders raised raised home-loan rates last month to meet higher capital requirements for their mortgage books, adding to the concern among some economists that the country’s home prices are due for a tumble over the next two years due to the higher borrowing costs and increased supply.

Craig of Commonwealth Bank, the country’s largest mortgage lender, said it would take a rise in unemployment rates to over 10 percent to cause real difficulties for Australian mortgage holders.

“It’s inevitable that house prices will start to flatten or even come down a little bit, but we think it’ll take a lot to actually cause any hardship,” Craig said at the Bloomberg Summit in Sydney on Wednesday. “We always think in terms of double- digit unemployment -- 10 percent unemployment and things start to get a little bit difficult.”

Australia’s jobless rate remains well below that threshold, dropping to 5.9 percent in October from 6.2 percent the previous month as the economy added the most jobs in 3 1/2 years, government data showed. While China’s economic slowdown has hurt Australia’s mining industry, record-low interest rates and a 32 percent slump in the nation’s currency since the start of 2013 has helped exporters and firms in tourism, health care and education.

Political certainty
Consumer and business confidence has improved as a result of the weaker Australian dollar and greater political certainty after Prime Minister Malcolm Turnbull deposed his predecessor Tony Abbott in September, National Australia Bank’s Drummond said. The bank has seen an “uptick” in corporate credit demand since the change of power, he added.

Business credit expanded at 6.3 percent in September from a year earlier, the fastest pace in almost seven years, central bank data show.

“We are very relaxed about the medium-term outlook for Australia,” Drummond said. “The Australian economy has solid growth rates underpinned by a competitive currency, access to strong-ish growth of the Asian region and very pristine credit quality.”

While the broader economy is looking relatively stable, cracks have emerged in the property market after all the country’s large banks last month announced the first mortgage- rate increase in five years.

Quieter weeks
The proportion of successful home auctions in Sydney dropped to the lowest since March 2013 last week, as buyers balked at a 47 percent rise in dwelling values in the three years to Oct. 31. Private new home sales fell 4 percent in September from the previous month, according to Housing Industry Association data.

The interest rate increases had only a temporary effect on mortgage demand, according to Drummond of National Australia Bank. “After the rate rise, we saw a few quieter weeks, but now volumes have kicked back up again,” he said. “They are not perceptibly lower than where they were a year ago.”

Even a 1-percentage point increase in mortgage lending rates wouldn’t affect a majority of Commonwealth Bank’s customers as they had set their repayment amounts when rates were as much as 4 percentage points higher than they are now, Craig said. Despite previous reductions in borrowing costs over the past few years, most customers had left their repayment levels unchanged, resulting in higher principal repayments on their mortgages, he said.

“So 80 percent of our customers are paid off to some degree in advance,” Craig said. “There’s an enormous prepayment that’s happened in the economy, which puts home-owning Australia on the whole in pretty good shape.”

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