Wednesday, August 15, 2007

People of the same trade seldom meet, but they do communicate via the radio

Australia’s biggest home lenders have begun softening people up for bigger increases in mortgage rates than those brought on by the Reserve Bank.

Both the Commonwealth Bank and Aussie Home loans yesterday warned of rate increases over and above last week’s 0.25 per cent official rate increase on a day when the measure of consumer confidence dived and the Australian share market plunged.

The head of Aussie Home Loans John Symond told the ABC that concern over home loan defaults in the US had already increased his cost of funds and that “eventually if that digs in, it will need to be passed onto consumers”.

“There's a thunderstorm brewing here, it could turn out to be quite aggressive and if it really hits, there is a chance that interest rates could trickle up a little bit, and that's beyond what the Reserve Bank does,” he said.

The head of the Commonwealth Bank, Ralph Norris, said that his bank, with 1.1 million customers would be among those that would have to charge more...

“The fact of the matter is that the price of credit in markets internationally has moved, so there will at some stage be some increase in rates. I think non-bank lenders are going to be in a situation where they will have to pass on significantly greater increases than a bank like us,” he said.

In recent years cheap funds from overseas and competition from non-bank lenders such as Aussie and Rams have forced banks such as the Commonwealth to cut their margins.

While they quoted standard variable mortgage rates of around 8.05 per cent before last week’s hike, they actually offered near-universal discounts which resulted in an average rate for new borrowers of 7.45 per cent according to Reserve Bank calculations.

Non-bank lenders source a greater proportion of their funds from overseas and will face greater cost pressures. Traditional lenders will be under less pressure to discount their rates to match them.

The highest rate increases are likely to be faced by low-documentation borrowers, who at the moment are charged an interest rate premium of only 0.15 percentage points according to the Reserve Bank.

That premium is likely to climb sharply, with standard loans themselves being discounted by less.

The Australian share market lost $48 billion in value yesterday as the index slipped a further 3 per cent to a new five-month low following big losses in Europe and on Wall Street.

Australia’s banking sector was particularly hard-hit with the Commonwealth losing $1.00 to $53.00 despite announcing another record profit of $4.47 billion, up 14 per cent.

The retailers Woolworths, Coles and David Jones also lost value after news that consumer confidence was hit hard by last week’s rate hike.

The Westpac-Melbourne Institute index of consumer sentiment slid 8 per cent after last week’s rate hike, with some sub-indexes sliding more steeply. Asked whether now was a good time to buy a house, 20 per cent fewer Australians said yes than in the month before. 15 per cent fewer Australians thought now was a good time to buy a major household appliance.

The slide in confidence was widespread with even those Australians who owned their homes outright appearing spooked by the higher rates.

Westpac’s Chief Economist Bill Evans said he had expected such a plunge but noted that there have been sharp rebounds in confidence following the last four hike-related plunges.

The Reserve Bank Governor Glenn Stevens will explain his views about the future of rates at a parliamentary hearing on the Gold Coast on Friday.