Investors should expect further increases to mortgage rates in the near future, with a leading market analyst predicting that the banks are set to continue passing on the cost of stricter regulatory guidelines due to persistent growth in house prices.
Digital Finance Analytics principal Martin North believes that further rises to mortgage rates beyond those already announced are inevitable, unless a significant external shock dampens buyer demand.
Mr North believes that the Australian Prudential Regulation Authority’s recent directives requiring several banks to retain a greater amount of capital against loans has effectively isolated mortgage pricing from interest rate movements.
“We will see more capital raisings,” Mr North told Smart Property Investment’s sister title, Mortgage Business.
“That means the prices of mortgages will continue to rise irrespective of what happens to interest rates.
"We are in a circle where bigger house prices allow bigger loans to be made, which allows the banks to make more loans and require more capital, like a black hole sucking everything in."
At the end of June, APRA released a temporary directive for ANZ, CBA, NAB, Westpac and Macquarie Bank to increase the amount of capital required for their residential mortgage exposures, meaning they will have to retain billions of dollars that would otherwise have gone out in home loans.
CBA announced a $5 billion capital raising exercise last week, while earlier this month, ANZ raised $3 billion to meet its CET1 capital ratio requirements. NAB announced a $5.5 billion capital raising in May and Westpac raised $2 billion the same month through its dividend reinvestment plan.
Speaking with Mortgage Business last week, HSBC chief economist Paul Bloxham said more capital raisings are likely as Australia's banking sector seeks to meet the new, tougher requirements set out by the authorities.
Interest rate hikes on investor home loans came into effect last week with three of the four major banks charging higher rates. NAB raised its interest-only loans by 29 basis points while CBA and ANZ both added 0.27 per cent to their investor loans.
The repricing has been viewed as a response to APRA’s crackdown on credit growth in the investor segment and the need for increased capital.
However, analysts are sceptical whether higher home loan rates actually will cool investor demand.
"Given the momentum in the housing market, it is not clear that the lift in lending rates to investors that has occurred so far will have a significant impact on investor interest in the market,” Mr Bloxham said.
“Further increases in lending rates or a genuine change in direction by the central bank may be required to take the exuberance out of the Sydney and Melbourne housing markets."
Mr North notes that interest rates are still extremely low and demand for home loans remains “extremely strong”.
“The only thing that will dampen demand is a one or two per cent rise in the official cash rate. Or some other external shock,” he said.