Today, we’re diving headfirst into the turbulent waters of the financial world. Specifically, we’re focusing on the dramatic transformations that have been shaking up the Australian mortgage market. If you’ve been keeping an eye on the financial news, you’ll know that the big banks have been reeling from some fierce competition. This competition has culminated in the end of an aggressive mortgage pricing war that has been raging for some time.
But what does this mean for homeowners? Well, as the dust settles on the battlefield, we’re starting to see the implications of rising interest rates. This is a topic that affects us all, whether we’re first-time buyers, seasoned property investors, or simply interested in the state of our economy. So, let’s roll up our sleeves and delve into the nitty-gritty of these recent developments.
Stay tuned as we navigate through this complex landscape, shedding light on the winners, the losers, and what these changes could mean for you. Whether you’re a banking aficionado or a finance novice, we’re here to make sense of it all.
To learn more, read on, or check out the video below.
Table of Contents
Watch Now: Mortgage War Ends! Plus Raising Mortgage Stress
The Mortgage War
Just a month ago, the Australian mortgage market was a battlefield. Major banking players like ANZ, NAB, and Westpac were locked in a fierce war, each vying for the attention and business of customers. The competition was so intense that the chief executives of these banks branded it as the toughest they’ve ever encountered.
Shayne Elliott of ANZ, Ross McEwan of NAB, and Peter King of Westpac were at the helm of their respective banks, trying to navigate these turbulent waters. McEwan even speculated that only time would bring an end to this situation.
However, the dynamics of this war have already started to shift. Brendan Sproules from Citi, a keen observer of the financial world, noted a sudden downturn in the competition. Most of these big banks have started discarding their cashback schemes, which they previously employed to lure new borrowers.
But the disappearance of these incentives isn’t the only transformation the mortgage market is experiencing. There’s more to this story, and we’re just getting started.
Stay tuned as we delve deeper into these changes and what they mean for the future of the Australian mortgage market.
The Transformation of the Mortgage Market
The Changing Landscape of Loans
Historically, there’s been a clear distinction in the mortgage market. On one hand, we have new loans, known as the “front book”. On the other hand, we have existing loans, or the “back book”. Over the last 18 months, this gap has been narrowing. Banks have been offering enticing discounts to attract new customers and retain their existing clientele. This was particularly noticeable during the surge of low-cost, fixed-rate mortgage refinancing that occurred during the pandemic. However, Brendan Sproules suggests that this disparity is reverting to its standard 0.3 per cent difference.
The Real Change: The Cost of Funding
But what sparked these changes? For most of the past year, the banks have been issuing mortgages below the cost of capital, even while complaining about doing precisely that. Sproules believes this was more of a distraction. The real change lies in the cost of funding.
Throughout the previous year, banks managed not to pass on the full impact of interest rates to depositors. This was primarily because they benefited from low-cost loans made available to them by the Reserve Bank during the pandemic, under the Term Funding Facility (TFF). This allowed the banks to aggressively pursue mortgages while boosting their net interest margins due to the substantial profits from deposits.
However, as the TFF draws to a close, banks face the pressure of seeking more deposits. Moreover, with the instability of the global banking liquidity, as exemplified by the downfall of Silicon Valley Bank and Credit Suisse, banks are leaning towards more conservative funding.
This situation required a change, leading to an end of the aggressive mortgage pricing that was a prominent feature of the post-COVID period. As Sproules suggests, “the tightening in deposit markets, and the recent role of deposits in subsidising mortgage pricing thus far, signals the end of the broad and intense mortgage competition we have seen post-COVID.”
The Impact on Non-Bank Lenders
The New Competitive Landscape
While the big banks can now safeguard their margins, they lose the upper hand they once had over non-bank lenders. Brendan Sproules foresees better competition possibilities for both Liberty Financial Group and Pepper Money. These non-bank lenders, which were underperforming in the past year, can now match the banks more effectively.
The Winners of the Mortgage War
The end of the mortgage war and the shift in the dynamics of the mortgage market have created a more level playing field. Non-bank lenders, who were previously at a disadvantage, now have the opportunity to compete more effectively. This could lead to more choices and better deals for consumers, making this a significant development in the Australian mortgage market.
Stay tuned as we delve into the potential implications of these changes in the next section.
The Potential Spike in Mortgage Defaults
A Warning from Westpac's CEO
In an unprecedented prediction, Westpac CEO, Peter King, has raised concerns about the potential spike in mortgage defaults among Australians in the coming year. This alert is a result of the consecutive tenfold increase in interest rates within the past eleven months. King attributes this grim outlook primarily to the rising interest rates, which, in his words, are a ‘blunt tool’. He further reveals that the bank is keenly monitoring borrowers who have borrowed to their maximum capacities, thus putting themselves at high financial risk.
The Rise in Distressed Property Listings
SQM’s latest research shows a concerning increase in properties sold under ‘distressed conditions’. March 2023 alone saw a rise in distressed selling activity, particularly in New South Wales, Victoria, and Queensland, with distressed listings in NSW escalating by 68% within a year, from March 2022 to 2023.
The Struggling Australian Real Estate Market
In light of these developments, SQM states that the Australian real estate market continues to struggle amidst economic uncertainty, leading to more residential properties being sold under distressed circumstances. This is a significant development that could have far-reaching implications for homeowners, investors, and the broader economy.
Stay tuned as we delve into the role of the Reserve Bank in the next section.
The Role of the Reserve Bank
The Cash Rate Remains Steady
At its last meeting, the Reserve Bank made a significant decision: it kept the cash rate steady at 3.6% for the first time in a year. However, this hiatus might not last, as homeowners could face additional financial pain later in the year.
The Potential for Further Tightening of Monetary Policies
Reserve Bank Governor, Philip Lowe, stated that further tightening of monetary policies might be necessary to bring inflation back to target. He also stated that this pause in the interest rate increment would allow the board to evaluate the economy and outlook amidst prevailing uncertainty.
The Reserve Bank's Commitment to Meeting its Inflation Target
Despite the challenges, Lowe affirmed the bank’s commitment to meeting its inflation target. He declared that the bank would monitor household spending trends, inflation, and labour market data before its next meeting in May.
The Drastic Rate Increases in the Past Year
In the past year, the Reserve Bank has drastically raised rates from a historical low of 0.1% to control high inflation. Although inflation rates have dropped from their peak of 8.4% in December to 6.8% in February, they are still far above the bank’s target of 2 to 3%.
Stay tuned as we delve into the troubles for Australian homeowners in the next section.
The Troubles for Australian Homeowners
A Warning from ANZ's CEO
ANZ CEO, Shayne Elliott, warns that the troubles for Australian homeowners are far from over. Drawing on an apt quote from economist JP Morgan, Elliott underlines that as interest rates rise, financial hardships increase for many. He urges vigilance rather than panic, as he does not foresee a major crisis, but acknowledges the potential for turmoil and impact on people.
The Recent Raise of the Cash Rate
March saw the central bank’s board raise the cash rate to its highest since June 2012. However, Lowe suggests inflation could return to the 2 to 3% target range by mid-2025. This forecast is a notable shift from his earlier analysis of upcoming rate hikes, indicating potential rate increases might not be as frequent as previously thought.
As we wrap up our deep dive into the recent shake-ups in the Australian mortgage market, it’s clear that these are significant developments that could have far-reaching implications for homeowners, investors, and the broader economy. From the end of the mortgage war to the potential spike in mortgage defaults, these changes are set to reshape the landscape of the Australian mortgage market.
Need Help With Navigating the Mortgage Market?
Our team here at Hunter Galloway is here to help you navigate the complex landscape of the Australian mortgage market.
Unlike other brokers, we’re not a one-person operation. We have an entire team of experts ready to make your journey through these financial changes as simple as possible.