Will the banks have a 'free for all' with rate rises now?

[Wishlist]

Seems now that the banks have divorced themselves from their long held relationship with RBA interest rates, what is to stop them raising rates again and again if they deem that their profit margins are insufficient? Negative public sentiment isn't stopping them, and the competition is falling by the wayside, so can we anticipate several more rate increases led by the big banks?
What kind of economic factors would be most likely to cause them to put the brakes on their own rate hikes?
What do forumites with a bit of savvy about the economy think?
Wishlist

 

[boomtown]

I can get 8.1 on a term deposit and I can get a 8.79 variable rate mortgage.

Those margins are razor thin. Given processing costs and mortgage broker fees I cannot see how a bank can make a profit on that transaction. Don't expect bank hikes to stop until the gap between the two rates is at least 1.5 percent. I think it historically has been 2.5 percent or more?

 

[BayView]

I can get 8.1 on a term deposit and I can get a 8.79 variable rate mortgage.

Those margins are razor thin. Given processing costs and mortgage broker fees I cannot see how a bank can make a profit on that transaction. Don't expect bank hikes to stop until the gap between the two rates is at least 1.5 percent. I think it historically has been 2.5 percent or more?

Only a guess, but given that the average savings of Australians is now negative, I'd say the banks exposure to T.D's and savings accounts would be minimal compared to how much they make out of c/cards and loans.

Most Aussies are totally hocked up with c/c loans, car loans, Harvey Norman "pay next century" loans and their PPoR etc.

 

[northie]

any further increases by the banks will increase profitability but will be partially offset by increase in bad debt provision as well.

 

[Gremlin]

What kind of economic factors would be most likely to cause them to put the brakes on their own rate hikes?
What do forumites with a bit of savvy about the economy think?
Wishlist

Put simply, it's supply and demand. At the moment there is more demand for mortgages than ability (or willingness) for the market to supply them at current rates. And that's going to keep pushing rates up until the supply meets demand.

Competition would help through Non-Bank Lenders, but they can't access funding at current rates that make it profitable to underwrite loans. They won't be providing competition until margins are considerably greater than now.

I'm just a mug punter, but I'm running my calcs on IR movements of another 50bps independently of the RBA for full doc loans and 100-125bps for lo doc loans.

 

[grossreal]

hi all
not savvy about the economy butlenders are getting tighter with regards to risk.
and thats the problem.
and its a big problem and I can see alot of very dark clouds on the horizon.
there is only two ways to balance a book.
1 increase rate not alot of movement
2 reduce risk drop lvrs
now the issue here is if you take the lvr to a min and thats curently were most banks are they have been cutting lvr( out goes the 90% no/lo doc lending down to 80%)
now they can't or would not want to go under the min lvrs as then they would have to change credit criteria and that would be a real problem.
so what left
number two is at the bottom.
move number 1.

and if 1 moves up
the rba unless it want alot of aussie mums and dads on the street will need to drop rates.
why
to do the same as petrol to force the banks to hold the line and drop rates.
now this is a guess so don't go to the casino on it.
now what happens if they don't drop rates.
bring in banks that will.
just my uneducated guess

 

[Cashflow]

Banks will soon have a strangle hold on the market as many of the smaller lenders have now left the scene. Mortgage brokers are now having their upfront commissions reduced by 30% in some cases and have trails cancelled for a minimum of at least 1 year and the if paid in the 2nd they will receive only 30% of their old commission on new loans. A lot of lending institutions have now ceased paying their old trails altogether. Brokers are now leaving the market.

 

[keithj]

Seems now that the banks have divorced themselves from their long held relationship with RBA interest rates, what is to stop them raising rates again and again if they deem that their profit margins are insufficient?

Nothing to stop them.... however they will run the risk of stuffing the economy.... the RBA won't want that to happen, so they'll reduce official IRs... the banks will make token gestures about following rates down in dribs & drabs, but the end result is

• banks margins will increase to close to what they were before non-bank competition
• official IRs will fall
• actuals IRs will fall somewhat less
• banks will continue to be profitable businesses

 

[boomtown]

You are assuming that the RBA will not deliberately put Australia into a recession in order to avoid high inflation.

Thats a big assumption to make and not one you should make lightly. Remember our recession we had to have?

 

[willair]

Negative public sentiment isn't stopping them, and the competition is falling by the wayside, so can we anticipate several more rate increases led by the big banks?

I still think the rates will go above 12% by early next year, because the facts of the matter are,no one knows what will happen over the next 6 months, but everyone knows just how obscenely profitable Banks can be to protect their investment independence,even with the significant underperformance of the past six months..willair..

 

[Sunder]

Only a guess, but given that the average savings of Australians is now negative, I'd say the banks exposure to T.D's and savings accounts would be minimal compared to how much they make out of c/cards and loans.

It's not "exposure". Banks are using term deposits and savings accounts as a cheaper means of funding than money markets. So knowing that Australia has a poor savings record, they'll put their interest rates paid as high as they can, as long as it's below what they can borrow it for from the money market.

Put simply, it's supply and demand. At the moment there is more demand for mortgages than ability (or willingness) for the market to supply them at current rates. And that's going to keep pushing rates up until the supply meets demand.

There has always been more demand for borrowed money than for supply in Australia. This is nothing new. In fact, demand for mortgages is in multi-year lows, and savings are at multi-year highs. The difference is not supply and demand, it's risk. You play blackjack because you have a 51% chance of losing right, but the payout is 100%. So the odds are reasonable right? Would you play Oz lotto for a 1 in 54 million chance if the payout was 100% (ie, Payout was $2, not last nights 50 million?) You wouldn't would you?

The market is seeing that the chance of default is skyrocketing, as well as the chance of recouping the entire mortgage amount on default is much lower and so is no longer happy to accept margins 1%, they've hiked up their margins substantially. What is it now? 2.40%? (Cash rate 7.25%, Std Variable 9.65%)

Did you read this morning that in the US, the mortgage recoup rate went from 93c in the dollar in 2005, to 74c this year? That's a hell of a risk to be taking, even if the default rate is only 1.15%... So far.

 

[ArJay]

Nothing to stop them.... however they will run the risk of stuffing the economy.... the RBA won't want that to happen, so they'll reduce official IRs... the banks will make token gestures about following rates down in dribs & drabs, but the end result is

• banks margins will increase to close to what they were before non-bank competition
• official IRs will fall
• actuals IRs will fall somewhat less
• banks will continue to be profitable businesses

• which will leave the door open to non-bank lenders to enter the market again...

and so the wheel turns....

R

 

[Gremlin]

There has always been more demand for borrowed money than for supply in Australia. This is nothing new. In fact, demand for mortgages is in multi-year lows, and savings are at multi-year highs. The difference is not supply and demand, it's risk.

Huh?

When you state that the demand for mortgages is in multi-year lows, that's simply wrong. What is at multi-year lows is the demand for NEW mortgages. Demand for mortgages is at or near (depending on the source) all time highs. ALL mortgages need to be funded by lenders, not simply new mortgages.

You then talk about risk re-pricing having no bearing on supply. Again, simply wrong. Plenty of market participants have scaled back operations (RHG, Virgin Money, MacBank) and availability of supply has reduced considerably (much harder to get cheap high LVR low docs, etc).

It may be that at a market level risk re-pricing has led to choked supply, but this is a supply-side pricing issue, not a risk issue. Any loan written today is not inherently riskier than a corresponding loan written 12 months ago, it's simply that it's priced at a higher rate. Banks have not necessarily changed their recognition of risk, but have moved from an environment where they couldn't reasonably price for it (due to competitive pressures) to one where they're getting closer to being able to do so. The risk has stayed the same. The supply side pressures have not.

So, the demand has stayed broadly the same, but the supply has diminished due to risk re-pricing. But somehow that's not supply and demand in action?

 

[Sunder]

When you state that the demand for mortgages is in multi-year lows, that's simply wrong. What is at multi-year lows is the demand for NEW mortgages. Demand for mortgages is at or near (depending on the source) all time highs. ALL mortgages need to be funded by lenders, not simply new mortgages.

Yes, we have a "glut" from an artificial high from cheap money over the last 5 years, but let me phrase it another way: "Demand for mortgage money is falling."

You then talk about risk re-pricing having no bearing on supply. Again, simply wrong. Plenty of market participants have scaled back operations (RHG, Virgin Money, MacBank) and availability of supply has reduced considerably (much harder to get cheap high LVR low docs, etc).

All those vendors you listed are retail lenders, they do not affect the credit spread.

It may be that at a market level risk re-pricing has led to choked supply, but this is a supply-side pricing issue, not a risk issue. Any loan written today is not inherently riskier than a corresponding loan written 12 months ago, it's simply that it's priced at a higher rate. Banks have not necessarily changed their recognition of risk, but have moved from an environment where they couldn't reasonably price for it (due to competitive pressures) to one where they're getting closer to being able to do so. The risk has stayed the same. The supply side pressures have not.

So, the demand has stayed broadly the same, but the supply has diminished due to risk re-pricing. But somehow that's not supply and demand in action?

I disagree. Interest rates are up. Repayment commitments are up. Unemployment is up. Default rates are up. Delinquency rates are up. House prices are falling. Did you not see my earlier post that said that in the US, the recoverable amount from most defaults has fallen 20 percent? That's serious risk, vs what we had 3 years ago. It'd be interesting to see what numbers we'll see here in 3-6 months for default recoveries.

There is plenty of money out there - just that it's priced higher than people want to pay. Or rather, those that are holding the money, are demanding more for it, for the risk they are taking.

 

[boomtown]

Unemployment is up. House prices are falling.

Unemployment seasonally adjusted dropped 0.1% this quarter Australia wide.

House prices for outer ring low income families are falling. That is a very narrow sector of the market.

 

[Sunder]

Unemployment seasonally adjusted dropped 0.1% this quarter Australia wide.

House prices for outer ring low income families are falling. That is a very narrow sector of the market.

Interesting:

JUNE KEY POINTS


TREND ESTIMATES (MONTHLY CHANGE)

* EMPLOYMENT increased to 10,713,300
* UNEMPLOYMENT increased to 474,200
* UNEMPLOYMENT RATE remained steady at 4.2%
* PARTICIPATION RATE remained steady at 65.3%

Source: www.abs.gov.au

Looks like we had a population boom to have increases in both employment and unemployment.

House prices fell in a lot of places, but I'm not going to argue that one with you.

 

[marg4000]

Banks are a business and make as much profit as possible. They can and will charge as much as the market can bear.

Before deregulation, banks were controlled by the govt of the day and interest rates were regulated. Problem was, money supply was rationed.

To qualify for our first home loan in 1974 from a savings bank we had to:

1. have a relationship with the bank of at least 12 months, the longer the better.
2. maintain a deposit balance that averaged xxxxx (can't remember) over 6 months in a savings account, minimal interest. I can remember borrowing money from family to bump up our average balance.
3. have a 33% deposit
4. borrow a maximum of $12,500 (don't laugh, this WAS 1974!). To meet this target we had the builder leave items out of the house quote, bath, HWS, some cupboards etc.

Then, you could apply for a loan. You may or may not have been given one, depending on how the bank manager felt. Banks had quotas for each month and once this money was allocated there was no more.

If you could not meet these conditions, or wanted an IP, or there was no money left for savings loans, you applied to the trading bank arm of the bank - same building, different desk. Interest rate was at least 2% more. Otherwise it was building societies or finance companies, more expensive again.

The good old days??????
Marg

 

[boomtown]

Unemployment rate - Trend 6202.0 Mthly June 2008 % 4.2 0.0 pts -0.1 pts

http://www.abs.gov.au/AUSSTATS/[email protected]/mf/1345.0#Labour Force and Demography_0

So thats the same - neither down nor up.

 

[Gremlin]

Yes, we have a "glut" from an artificial high from cheap money over the last 5 years, but let me phrase it another way: "Demand for mortgage money is falling."

Either you're wrong or the RBA is wrong. My money is on the fact that it's you.

http://www.rba.gov.au/Statistics/Bulletin/D02hist.xls

What is evidently true is that demand for lending is slowing and demand for NEW mortgage money is falling but demand for mortgage money is continuing to increase.

All those vendors you listed are retail lenders, they do not affect the credit spread.

But they're the ones providing supply in the market? Or not, as the case may be...

And their supply has reduced because of risk re-pricing. Not a fundamental increase in the underlying risk.

I disagree. Interest rates are up. Repayment commitments are up. Unemployment is up. Default rates are up. Delinquency rates are up. House prices are falling. Did you not see my earlier post that said that in the US, the recoverable amount from most defaults has fallen 20 percent? That's serious risk, vs what we had 3 years ago. It'd be interesting to see what numbers we'll see here in 3-6 months for default recoveries.

You seem to be terribly confused between the concept of risk and the concept of pricing of risk.

All of the things you've mentioned are reflected in the pricing of risk, not in the underlying risk itself.

Are RMBS holders who bought in May 07 (with low spreads) more likely to be paid out than those that bought in Oct 07 (with high spreads)? Is the risk lower to those purchasing in May 07 or simply the pricing of the risk lower?

There is plenty of money out there - just that it's priced higher than people want to pay. Or rather, those that are holding the money, are demanding more for it, for the risk they are taking.

Or to put it into terms you originally disagreed with, the supply exists just not at prices that meet demand. Aaah, I see...

 

[BayView]

Banks are a business and make as much profit as possible. They can and will charge as much as the market can bear.

Before deregulation, banks were controlled by the govt of the day and interest rates were regulated. Problem was, money supply was rationed.

To qualify for our first home loan in 1974 from a savings bank we had to:

1. have a relationship with the bank of at least 12 months, the longer the better.
2. maintain a deposit balance that averaged xxxxx (can't remember) over 6 months in a savings account, minimal interest. I can remember borrowing money from family to bump up our average balance.
3. have a 33% deposit
4. borrow a maximum of $12,500 (don't laugh, this WAS 1974!). To meet this target we had the builder leave items out of the house quote, bath, HWS, some cupboards etc.

Then, you could apply for a loan. You may or may not have been given one, depending on how the bank manager felt. Banks had quotas for each month and once this money was allocated there was no more.

If you could not meet these conditions, or wanted an IP, or there was no money left for savings loans, you applied to the trading bank arm of the bank - same building, different desk. Interest rate was at least 2% more. Otherwise it was building societies or finance companies, more expensive again.

The good old days??????
Marg

AAh, yes! I remember those.

Let me adjust my recliner and hearing aid as I relate a similar story.

My partner at the time and I decided to buy a (1st) PPoR together in 1985. Both in slightly above average income jobs for the day, I was with ANZ and running a business; had been for 2 years with good profits on paper to substantiate the figures, as well as the trading accounts.

The loan application was knocked back because my partner was "of a child bearing age" and therefore constitued a risk to the loan servicability.