What’s really causing banks to hike up their investor loans?
So I’ve seen a lot of people make a bit of a deal of the recent out-of-cycle rate hikes – especially people in the media. (Haven’t you got anything better to do with your time?)
No, I get it. It’s important. In the last week all the big four have jacked rates at least a little.
But it is interesting how much of a hoo-ha it has caused this time around.
So let me make a couple of points.
#1 – This isn’t really new
We’ve been seeing a series of out-of-cycle hikes since Trump took office back in November. Little by little. And nothing’s changed. The story is still the same. Bond yields in America are rising. Funding costs are rising. Banks need to pass it on to their customers.
Lol. Soz.
#2 – It’s still chicken feed
We’re generally talking pretty small amounts still. A few basis points here or there. Even putting them all together we’re still well short of the 25 basis points that the RBA usually moves in.
That’s not to say that it’s not putting a dent in people’s pockets, but it’s hardly time for panic stations just yet.
#3 – Credit is still loose
Even if we see this go on for a few more months, we’re still living through some of the loosest credit conditions in modern history.
UBS put it together in their Financial Conditions Index, which mashes interest rates, bond curves, exchange rates and asset prices. On their reckoning, we’ve seen financial conditions tighten in recent months, but not all that much.
The financial conditions index is the blue line, and you can see that it’s edged down towards the tighter end of the spectrum.
But track it across from it’s current levels and what does it tell you? It says that these are some of the easiest credit conditions since 2006 – so it’s hardly a disaster.
What’s more, the way they track it against GDP growth, they still reckon that financial conditions are still very expansionary – that is we should see further solid growth on the back of current settings.
Again, that’s hardly disaster.
#4 – The funding costs story is B.S
That’s what I reckon. Everyone’s talking about how much funding costs are rising, but it’s hard to see in the data. This chart here looks at CDS spreads – a proxy for funding costs – for CBA and some internationally similar banks. CBA is the grey line.
What it shows is that funding costs have been falling since the end of 2015, and are still falling!
Maybe there’s some stuff that’s being driving costs that’s not being picked up here, but even if there is, it’s hard to imagine that funding costs are surging all that much.
Which raises the question, what is it really about?
#5 – This is mostly politics
If you look at where banks are raising rates, so far it’s mostly been focused on investors and interest-only loans.
Now if it really was all about funding costs, why focus on investors? Do investor loans cost the banks any more than owner-occupiers? Do their funds costs more depending on where they end up channelling their funds?
Do the forms for interest only loans cost more to process?
Of course not.
So there’s another game going on here. And that’s about the banks trying to get ahead of the curve of any regulatory intervention.
There’s a growing clamour for regulators to get a lid on the Sydney and Melbourne “bubbles”.
(Yeah, I know.)
The banks are also on the back foot right now. They only just fended off calls for a Royal Commission and they know there’s no political mileage in sticking up for them.
So they’re on notice.
They also want to avoid any regulatory limits because they like money. They’re making hay and they don’t want it to end. And any regulatory limits just limit their flexibility to run their business as they want to.
So they’d rather avoid it if they can.
So what I think they’re doing is throwing the regulators something.
“You don’t need to regulate us. Look, we’re already making it tougher for investors.”
I don’t think it’s going to be enough. I still think we’ll see APRA action in some form or another in the near future. But we’ll see.
#6 – It’s not the end of the world
Since this is still fairly small fry, and since this is mostly domestic politics rather than some fundamental seismic shift in the financial landscape, it’s not the end of the world.
There are always risks to the outlook for property. Always. But right now, this funding costs BS isn’t one that keeps me up at night.
Don’t let it get to you.
What do you think the risks are here?
ron goddard says
hi jonno,
always something ‘going on’. wars, depression etc. etc. etc. i read yesterday somewhere that ‘wars lead to peace and peace leads to war’. written in 1563 by some fella in england. so maybe leo tolstoy read that too. now onto interest rates and seismic shifts.
in 1983 the world almost exploded ..yes interest rates were 14 % from banks, average 15% from building societies and 23-23% from laurie connell (last resort laurie, one of the ‘wild west’ bandits of the 80s in perth: alan bond, brian burke, connell etc. etc. etc.sort of ‘black’ heroes) we are a long way from that(i hope). still, one never knows whats around the corner. we take our lead from the ‘fed’, as you all know that our reserve ‘bank’ is merely an extension(branch) of the fed. or you should know. our taxation office (ATO) is a profit making organisation run by the americanos. what!!!?? shock, horror. no thats not right! sorry folks thats the game. and if we buck the yanks, well big trouble.
risk taking is life. everything we do is a risk. we step outside into the wide world. yes a big step. many people get blasted or run over or shot etc. etc. etc. so, yes life is a risk, so why not extend that to your monetary affairs. that won’t kill you, i don’t think. if its lawfull (legal?) well do it. if things go wrong, start again.
we live in troubled times, from 5000b.c. to a.d.2017, forever trouble and wars. will it ever change? i doubt it. already and ever the drums of war are increasing in volume and the military hardware makers are extremely happy.
did you know that UK is the 6th largest economy on out planet, and if, sorry, when ms may signs off on that section 50 today the world will soon know if that is a risk. if it fails, according to some erudite people, the world economy will calypso collapso…. thats west indian for a batting collapse. lol mainly back in the 50s and 60 s.
so jonno, to answer your question, what was the question again? oh yes risk taking in an australian market of real estate and interest rates. sort of buggered if i know and i really don’t care that much. i will still sell my share of real estate what ever the weather. cheers, ron.
edd says
Thank you Ron for your comment. Would you lead me in the right direction about ATO “profit making organization”? I would like to do some research this further. I know that Commonwealth of Australia is a listed company at the New York Exchange. In fact most countries are listed corporations…
ron goddard says
should read 23-26%
Tom says
Jon, If the banks make a move, you can be sure that the main purpose is their bottom line and that secondary motives are all based on their self-interest. As you pointed out, the ulterior motives are based around avoiding scrutiny. Meanwhile, the scapegoat “Cost-of-Money” BS is opportunistic greed – pure & simple – as usual.
“Oh what a good boy am I.”
“Look! We’re doing our bit to try to curb the market pressure caused by investors.” An ineffectual token move at best – a cynical, self-serving, money grab in reality!!!
Judith Giddings-Hincks says
We should be more focussed on how the population vs construction numbers are tracking particularly in Melbourne. Large scale apartment construction is happening in every suburb, it seems,even though there is an increasing default on settlement at completion. We should take our warning from the Perth market where the majority of building approvals coincided with a population decline. WA is still on a downward spiral and is a bargain hunters paradise for the cashed up buyer and the renter alike. Investors there are experiencing rental returns that have dipped by 30% in the space of 2 years and a market that is consistantly only offering 6 month leases. It should be noted that agent fees there are some of the highest in Australia cutting rental revenue by another 20% after regular commission and extraordinary fees. All this makes for many investors giving up and offloading the property onto an already saturated market.
It will only take a few shifts in economic tightening for the property investor market in Melbourne to get the jitters and our live on credit homeowners to start feeling real pain. My approach is be alert but not alarmed.
Judith Giddings – Editor The J Curve
ron goddard says
hi edd, the info on ato is not automatically available to anyone. as you say australia is a listed foreign company on the n.y.e. and embodied in that would be the niceties about the a.t.o. the people who run these shenanigans would not in a thousand years(or more) disclose things of that nature to all and sundry. my sources tell me things that many, many people are not privy to. but strangely, there were public meetings throughout oz a few years ago with printed pamphlets about the whole shebang about oz. i still have a pamphlet… and read it occasionally. we mushrooms are expected to obey the rules and laws of our country, and a good thing it is too, but….we are still kept in the dark about so many things. from the age of 15 years onwards i was advised/ told to never discuss politics or religion at social gatherings etc. that was sage advice because nothing is so boring as p. and r. and that precluded any investigations into the whys and wherefors of my life. but then along comes the internet and info becomes available and all is revealed. we are a dependant nation run by politicians who toe the line. is that a good thing? maybe. cheers ron
i could email the pamphlet to you if i had your email addy. (and i can find the wretched pamphlet)