Rate moves may have “unintended consequences”

Banks risk “unintended consequences” from their latest round of mortgage repricing, warn analysts from Morgan Stanley.

Aussie banks may enjoy some near-term earnings growth as a result of their recent mortgage rate increases, but their lending growth is likely to slow. Moreover, the banks’ share price valuations “ignore the risk of unintended consequences”.

In a conservative assessment of prospects for the banking sector last week, Morgan Stanley analysts warned that the domestic mortgage market is entering a new era, with the banking industry facing more burdensome capital rules, higher mortgage rates, tighter lending standards, and credit rationing.

“We now expect the major banks’ investment property loan growth to drop to 1 per cent in fiscal 2018 due to APRA’s new cap on interest-only loans, restrictions on higher-risk lending, more differentiated repricing and the prospect of further measures to prevent the build-up of household debt and address housing affordability concerns,” said Richard Wiles, analyst at Morgan Stanley.

Wiles further warned that the advent of higher mortgage rates and tighter lending standards at a time of sky-high household debt and unfavourable conditions in the labour market could lead to unintended consequences.

Meanwhile, Annette Beacher, head of Asia-Pacific research at TD Securities, reiterated her view that the Reserve Bank should lift interest rates later this year to limit a potentially “severe macro-economic correction”.

Beacher thinks the regulators’ renewed focus on curbing interest-only mortgage loans is unlikely to contain the “overall relentless rise in owner-occupied debt,” because it impacts only a fraction of the appetite for housing, while not affecting demand from retirees, self-managed superannuation funds, and foreign buyers.

“Unless broader macro­prudential tools are deployed, a small rate rise soon could limit what could be a severe macro-economic correction down the track,” she said.