Mortgage increases show that dancing is almost over at Australia's credit party Australia news

IIn 2007, Chuck Prince, the former leader of the huge American bank Citigroup, rejected concerns about a looming credit crisis and committed to continue making deals by declaring bullish: "As long as the music plays, you" must stand up And dancing. "

The debt lasted a little longer for Prince and others in Wall Street, but soon the last number was gone and the lights were on. The party was well over.

The opinion is divided about what the stage of the party is that we are in Australia, but the events of the last week indicate that it might be a good time to think about ordering the Uber.

The game-changer was that Westpac, one of the four major banks, chose to raise the standard mortgage rate at a time when the Reserve Bank kept the spot rate at a fixed 1.5% for two years.

Former Citigroup boss Chuck Prince, who compares the pre-GFC tribute to a party in the spotlight.

Former Citigroup boss Chuck Prince, who compares the pre-GFC tribute to a party in the spotlight. Photo: Yuriko Nakao / REUTERS

Such so-called out-of-cycle interest rate hikes are rare and it is a flashing red signal of increased stress in the inflated $ 1.6tn mortgage market in Australia.

Rising interest rates in the US are helping to increase the costs for Australian banks that have to borrow money on international markets to finance their own loans. It makes it more difficult for banks to make money here, because the regulators already tell them that they are much pickier about who gets a mortgage.

Suncorp followed Westpac by raising his rates on Friday and many economists expect Commonwealth, NAB and ANZ to do the same. Homeowners will therefore be faced with finding more money to pay refunds at the same time that the cost of living is greater than the wage increases.

It is also predicted that family budgets will collapse when house prices start to fall, especially in the big eastern cities. Over the past twelve months, prices fell by an average of 5% in Sydney – the first annual decline in six years – and Melbourne is not far behind.

According to Paul Dale of Capital Economics, the conditions for a crisis are present: falling house prices, tighter credit and rising mortgage rates, although he does not think that the movements are likely to be large enough to cause a meltdown.

"Australia is still very far from a recession or a financial crisis, but the news this week that Westpac is running its mortgage rates has increased the risk a little," he said.

Others are less confident. Now that the supply of cheap money is stifled, Martin North of Digital Finance Analytics says that Australia faces a full credit crisis, illustrated by the number of people being rejected by banks due to new mortgages.

"In the past five years, lending has been so lax that you only needed an incentive to get a loan, as the Royal Commission has shown," said North, whose firm collects data from a survey of 52,000 households. "But credit is now much harder to get than it was." The credit standards were ultimately tightened by the banks in terms of the most important assessment criteria of the income, expenses and loan to value ratio, and all the critical parameters on the credit market have been tightened.

"A year ago, 5% of people were rejected by banks when applying for refinancing their mortgage, now it is 40%, which is a huge difference."

The main reason why people try to refinance is that they want to reduce their monthly expenses, said Noord, which shows that many households are under mortgage stress.

"At the same time, the cost of living is rising because wages are falling, so it is a perfect storm for households, and the price of their house is falling." When people want to sell, they notice that they have to accept less than they want. prices have fallen, lending has failed, the whole market has deteriorated and that is because the credit has been eliminated. "

It is unlikely that such local problems will deter banks from increasing all rates. One investor, David Bassanese, from Betashares in Sydney, thinks it is "inevitable".

"It is a very competitive market," he said. "So they feel that if they can pass it on and the market carries it, they can get away with it – most borrowers will take over because they do not want the hassle of switching because the bureaucratic and monetary costs are high."

But there is some hope that the music can continue. Jonathan Mott, bank analyst at UBS, said the banks might not transfer the costs for broader political reasons, noting that the royal commission's exposure to banking practices had left them with high levels of friends at low levels.

"If the big banks are all reprinting their mortgage books, one response from the government may be to raise the bank levy," Mott wrote. "The bank levy has been increased nine times in the United Kingdom."

Source link

Leave a Reply