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How much more financial pressure can Australian mortgagees take?

How much more financial pressure can Australian mortgagees take?

Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another. Inflation has risen steadily since the beginning of 2022 despite the determined efforts of Reserve Bank of Australia (RBA) to bring it back towards its target range of 2-3 per cent.

In less than 1 year and 11 interest rate rises later, official interest rates have risen from 0.10 per cent to 3.85 per cent but inflation remains stubbornly high at 7 per cent. Interest rates have never risen this fast before nor from such a historically low level either.

As previously outlined in an earlier blog entry on Commonwealth Bank (ASX:CBA), the big four banks of Australia have just under 80 per cent of the residential property mortgage loan market. In “normal” economic times of rising interest rates, banks should be natural beneficiaries of these conditions. However, these are not normal times.

The business model of banks has generally stayed the same for centuries, i.e. borrow money from one source at a low interest rate and lend it to a customer at a higher rate. Today, the Australian banks generally get their funding from wholesale and retail sources. However, the banks were offered a one-off funding source from the RBA called the Term Funding Facility (TFF) during the COVID-19 period to support the economy. This started in April 2020, priced at an unprecedented low fixed rate of 0.10 per cent for 3 years with the last drawdown accepted in June 2021 for a total of $188 billion. Fast forward to today and the first drawdowns from this temporary facility have already started to roll-off which means that these fund sources need to be replaced with one of considerably more expensive sources, namely wholesale funding or retail deposits. As a result of this change in funding, bank CEOs have unanimously declared that net interest margins, and hence its effect on bank earnings, have peaked for this cycle despite speculation that interest rates may still rise later in the year.

Prior to the start of the roll-off of TFF drawdowns, the entire Australian banking industry engaged in cutthroat competition for new and refinancing mortgage loans in a bid to maintain or grow market share. In the aftermath of the bank reporting season, two of the big four banks have stated they are no longer pursuing market share at any price, with CBA and National Australia Bank (ASX:NAB) announcing they will scrap their refinancing cashback offers after 1 June and 30 June respectively.

Turning our attention back to the average Australian, the big bank mortgage customers have been remarkably resilient. The Australian dream of owning the house you live in is still alive for now, with owners willing to endure significant lifestyle changes in a bid to keep up with mortgage payments. The big banks have reflected this phenomenon with a reduction in individual loan provisions and only a modest increase in collective loan provisions.

Time will tell how much more financial pressure Australian mortgagees can take, especially with the RBA still undecided on the future trajectory of interest rates. What has been agreed on by the big banks, is that things are not going to get easier. At least not in the short-term.

The Montgomery Funds own shares in the Commonwealth Bank of Australia and National Australia Bank. This article was prepared 29 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

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Sean Sequeira jointly established Australian Eagle Asset Management in 2004. Sean was appointed Australian Eagle’s Chief Investment Officer in 2016. In addition to stock selection and analysis, Sean is responsible for all aspects of the investment process. Sean is head of Australian Eagle’s portfolio risk committee and process integrity committee. He is also one of the three investment team members that make up the portfolio construction committee.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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6 Comments

  1. Hi,
    Yes, one factor to consider is mortgage stress (eg raising interest rate from home loan). Do you know what the other factor? Rental stress. Interest rate may have increase but rental rates have increase more. The question to ask is what is more affordable mortgage interest or rental payments.

  2. Phil Crossan
    :

    Around the corner from my place in Melbourne, 3 in ground swimming pools have been installed in a court of 12 houses all in the last 12 months.

  3. People are not struggling out there; take a look at Qantas’ recent results – “Bookings indicate continued strong travel growth. with revenue currently at 118 per cent of Qantas’s pre-pandemic levels for domestic flights and 123 per cent for international journeys”. The airports are full and restaurants and pubs are still operating.

    People SAY they’ve got no money, but things like this above show otherwise…there is plenty of demand – both corporate and personal – for completely discretionary services like flights at eye watering levels. Check out SQ LHR-Aus economy returns for $4,500 during June as an example, which used to be $2,200 on a bad day.

  4. People aren’t suffering THAT badly; go and take a look at the pubs, restaurants, clubs, football matches and the airports…still FULL of people. Try getting an overseas flight to Europe in the next two months, there’s no seats (especially not rewards seats) available and if there is, the prices are ridiculous; $4,400 with SQ LHR-Australia.

    People are making a lot of noise about being poor and having no money but the reality of normal life is very different from those indicators above…

    • Hi Chris, thanks for your thoughts and observations. Interestingly, the ABS data for the month of March showed household spending growth has begun showing signs of slowing. We will keep monitoring the situation. All the best.

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