As residential property prices in Australia soared 23.7% through 2021 to the December quarter - recording the most substantial annual growth since September 2003 - the country’s top four banks, including ANZ, NAB, CBA, and Westpac, now clutch a staggering $1.87 trillion in home loans.
All through the last year, Australian home buyers pushed on with their aspirations for bigger and better residential properties, buoyed by attractive options and record low interest rates.
Low rates and strong demand continued to support growth in property prices. As per statistics released by ABS, house prices soared 27.5% throughout the year, and prices of attached dwellings increased 14.0%. All the capital cities witnessed an annual rise in residential property prices in the December quarter of 2021.
Home buyers have been taking on bigger mortgages, exceeding six times their income, resulting in enormous profits for the big four banks.
The recent EY analysis of Australia’s major banks’ 2022 half year results reveals a combined cash profit after tax of $14.4 billion. These figures denote an upturn of $700 million from the 2021 half-year results, representing an increase of 5.1%.
Of the $2.9 trillion held by the top 4 banks in business loans, personal loans and home loans, the latter accounts for $1.87 trillion and comprises a massive slice of Australia’s total housing loans.
According to news reports, home loans written by the leading four banks grew by $43.9 billion, representing an increase of 2.4%.
While many Australians took on high debt-to-income ratios, which could be a warning bell, the EY report observed that the household balance sheets are in good shape. Many households have created substantial buffers on their mortgages.
As per news reports, with the four leading banks representing nearly a quarter of all the new loans by approved deposit-taking institutions, in the December 2021 quarter, it marks a significant rise in their share in this category since the pandemic in March 2020.
At the same time, it notes that while home loan borrowers pose a higher risk of defaulting on their repayments, thanks to their improved collection capabilities during the pandemic, banks are in a position to offer home loan borrowers a variety of customised payment solutions and strategies.
Home Loan Margins Tighten Temporarily
With net interest margins (NIM) dropping down 14 basis points from the 2021 half-year to an average of 1.75% across all the banks, propelled by low interest rate scenarios and aggravated by high competition and a mix of fixed-rate mortgage loans, the pressures on the banks remain.
Home loan borrowers attracted by fixed rate loans have moved to lenders. Additionally, many borrowers opted for refinancing during the pandemic, shifting with the top four lenders or moving out of the circle to lenders not part of the leading four.
Although these tight margins look set to linger into the second half of the year, it won’t be so for long. The forecast appears to be brighter with the recent cash rate rise. Last week, the Reserve Bank of Australia decided to increase the cash rate target by 25 to 35 basis points.
Economists at the big four banks predict that more rate hikes are in the pipeline. While CBA expects the cash rate to rise by February 2023 to 1.60%, Westpac predicts that it will touch 2.25% by May 2023.
NAB bank’s economists speculate that 25bp increases in June, July, August, and November will take the cash rate to 1.25% by the end of 2022, reaching 2.60% in 2024, while ANZ predicts it will reach 2.25% by May 2023.
Analysis by industry experts indicates that if the cash rate touches 2.60% by August 2024 and if you are a home loan borrower having a $500,000 mortgage, you could be looking at an increase of $675 in your monthly home loan repayments compared to the amount you currently pay. If you have a $1 million mortgage, your repayments could increase by $1,350.
In the existing scenarios, economists predict the rate hikes may result in house prices dropping down over two years by about 15%. Home loan experts advise potential borrowers to review their financial situation and the debt-repayment capacity if they plan to take up a new home loan in the next few months.
Home Loan Competition Set to Intensify
The increase in loans to businesses during the pandemic also helped drive profits, and the big four’s profit results were back to the rates witnessed pre-COVID.
However, experts predict that competition will intensify further, especially for home loans. The big four banks need to enhance their digital capabilities, increase automation and work towards strategically reducing their overheads to remain profitable in the current environment.
There are concerns about how the Australian economy will continue to grow, considering the impact of rate rises on the housing sector. Experts feel that home loan buyers may not borrow as much as they have been doing in the recent past with the higher interest rates.
This analysis was for the banks' 2022 half-year results. While the half-year reporting periods for ANZ, NAB and Westpac ended on March 31, 2022, the half-year reporting period for CBA ended on December 31, 2021.