Banks to be the biggest winners in booming market

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    Australian banks are likely to be the biggest winners in the current housing boom, according to an analysis by Citi.

    The housing market has been heating up following an unprecedented raft of stimulus measures enacted to mitigate the economic impact of the COVID-19 pandemic, and is “unlikely to be stopped” by regulators in the near future, according to Citi.

    While macroprudential policies are the usual way for regulators to mitigate the heating effect of low rates without actually raising rates, “this time is different and the toolkit available is looking sparse,” Citi said.

    While the recent spike in house prices has resulted in a chorus calling for intervention by regulators, the fact that the current boom is driven by first-home buyers and upgraders rather than investors has rendered the usual macroprudential measures less effective, according to a report by The Australian.

    Any move to tamp down high debt-to-income lending risks runs the risk of leaving first-home buyers out in the cold, since they are “likely to be the most politically sensitive” group, Citi analyst Brendan Sproules told The Australian.

    “Unfortunately, this housing boom was engineered by fiscal and monetary policy to make us feel wealthier and consume more,” Sproules said. “However, those not rushing off to buy another plasma TV or add another cabana out the back are being refreshed of the affordability and social issues of a hot housing market. Regrettably, the nature of this housing boom means that it is unlikely to be stopped soon.”

    Sproules said that banks will be among the biggest winners, with more applications and better collateral in their housing books. Since house-price growth is usually a harbinger of credit growth for banks, Citi expects analysts to upgrade their earnings forecasts for the banks and lower their estimates of bad and doubtful debt upgrades, The Australian reported.

    Share prices of the big four banks rose by an average of 0.5% on Monday. The banking sector has spiked about 75% since March 2020, when it hit a decade low in the midst of the COVID-19 crisis.

    Sproules said that the only way to tamp down a strengthening housing market was by lifting interest rates. But the Reserve Bank would find the prospect “unattractive” given the weakness in other sectors of the economy, he told The Australian.

    Sproules’ analysis came as Commonwealth Bank defied the trend to slash fixed rates. CBA hiked its four-year fixed home loan Monday, even as it cut its two-year fixed rate below 2%.

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    While CBA lowered its two-year rate to 1.94% from 2.14%, the hike in its four-year rate from 1.99% to 2.19% was “the most significant change,” said Sally Tyndall, research director at RateCity.

    “This is the first big-four bank to hike its four-year owner-occupier rate since October 2019 – a sign the bank is pricing in a higher cash rate from 2024,” Tyndall told The Australian.

    Tyndall said that standard variable home loan rates “could very well go up” within four years as long as the economic recovery remains on track. Other banks could start raising their four- and five-year fixed rates soon to account for a possible cash-rate hike in 2024, she said.

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    Original Article