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.
#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?