The effects of last week’s Federal Budget will range from negative to neutral, according to global ratings agency Moody’s, giving an overall pessimistic critique of the government’s proposed measures.
In a report sent from Moody’s Investor Services on Wednesday (10 May), the agency said the Budget’s housing affordability measure will have “little immediate impact” to curb risks in Australia’s housing market.
While measures such as the first home buyers savings scheme, additional housing supply, and further tax exclusions for property investors may improve affordability for local residents over the long term, these measures do not address risks in the property market such as rising house prices and household debt during a time of low wage growth.
“Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks.”
“In Moody’s view, home loan borrowers are more vulnerable to a change in financial conditions, increasing the risk of loss in banks’ residential mortgage portfolios and, more importantly, triggering negative second-order consequences for the broader economy, such as reduced household consumption.”
The agency was also critical of the proposed bank levy, saying it would place further pressure on profit growth at the major banks. Analysts estimate that the levy will reduce pre-tax profits at the five affected banks by approximately 3.8%.
“This levy comes at a time when bank earnings and profitability are already facing multiple headwinds from moderate credit growth, low interest rates, strong price competition for new business, rising capital requirements and the potential for rising credit costs.
“Furthermore, as a result of other measures announced within the Budget, such as the introduction of a residential mortgage pricing inquiry, banks may not be able to pass the additional costs of this levy to bank customers.”
New regulatory initiatives such as the proposed residential mortgage pricing enquiry by the Australian Competition & Consumer Commission (ACCC) would also constrain the banks’ traditionally strong pricing power in the future.
“Banks have been raising the standard variable interest rate applicable to existing mortgages to stem the contraction in margins and improve profitability. However the pricing inquiry to be conducted by the ACCC will likely constrain the banks’ ability to undertake further rounds of mortgage loan re-pricing, resulting in them having to absorb most of the cost of the bank levy.”
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