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Analysis: Mortgage rates are going up as house prices are falling and that’s unusual … and a worry

The move by two of the big six home lenders, as well as a second-tier outfit, to raise rates was simultaneously expected and unusual.

This week in finance:

  • June quarter GDP (Wednesday)
  • RBA interest rates decision (Tuesday)
  • House prices and Retail sales (Monday) Trade balance (Thursday) Home loans (Friday)

The banks and economic commentators had been warning borrowers for month about rising rates overseas inevitably driving up rates here.

Westpac and Suncorp delivered 0.14 and 0.17 percentage point increases respectively within days of each other.

Scrutiny now turns to the other big players — CBA, NAB, ANZ and Bank West — about their intentions.

All the banks are under pressure on narrowing margins. Westpac was under the most pressure and it blinked first.

More rises are likely. The fact they are coming as house prices are falling is uncommon and a worry.

The last time this unhappy coincidence played out was in 2008.

There are similarities and differences between then and now.

Like today, the rate rises a decade ago were not being driven by the Reserve Bank, but by funding costs escalating. Back then, the banks' access to funds was strangled as the GFC unravelled and credit markets shut down.

However, mortgage rates were coming off a much higher base, above 9 per cent for a standard variable loan rather than a bit above 5 per cent now.

The unemployment rate was much lower at 4.5 percent and wage growth had been stronger leading into 2008.

Mortgage rate vs house prices

Risks rising

The hikes so far should be no more than an aggravation. A bit more aggravation for Suncorp customers given they have been hit with the second rise in the past six months.

If the hike is unaffordable, the borrower should never have been sold the loan in the first place — but that is another story and the subject of some scrutiny at the banking royal commission.

As the RBA has repeatedly pointed out, it won't be particularly anxious about modest out-of-cycle hikes. The RBA's view is they are basically reversing an overall decline over the past year or so as lenders slugged it out for market share.

Australia is a long way from recession, but the risks are rising according to Capital Economics's Paul Dales.

Mr Dales laid out three conditions for an Australian recession, or financial crisis within the next five years:

  • A big fall in house prices
  • A big tightening in credit conditions
  • A big rise in mortgage rates, or some combination of all three

"The news that Westpac will raise its standard variable mortgage rates by 14 basis points is significant as it means all three conditions are now present," Mr Dales said.

Mr Dales said these developments were not large enough yet to cause many problems and if all the banks were to follow Westpac's lead it would be the equivalent of the RBA raising rates by 0.1 percentage points.

Consumers will cut spending

ANZ's head of Australian economics, David Plank, said normally increases in the range of 0.1 to 0.15 percentage points would not be all that material to households.

While nobody would welcome an extra $35 a month on a $300,000 loan, it shouldn't be a make-or-break sort of thing.

So how did consumers respond to the combination of rising mortgage rates and a weakening housing market a decade ago?

"They reduced spending. Household consumption fell in the June 2008 quarter and again in the September quarter," Mr Plank said.

"This weakness in spending came before the global financial crisis gathered steam.

"Perhaps the key difference between now and then is the level of interest rates. This meant that household interest payments were much higher relative to disposable income than they are now."

The worry is consumers are responsible for around 60 per cent of domestic demand and delaying or abandoning spending can have nasty consequences on the broader economy.

Mr Plank said the consequences this time around are likely to be less severe than a decade ago. However, add political uncertainty into the mix and it might just be too much weight for the struggling consumers' psyche to bear.

"But, again, the combination of falling house prices, political uncertainty and a rise in mortgage rates — if only very modest — may be more negative for households than a small increase in interest rates would be in isolation."

Interest payments relative to income

Debt is higher this time

The other key difference is the level of household debt.

Westpac and Suncorp's moves mean that the RBA's straight-jacket has been tightened another notch or two.

It might want to get back to normality, but it can't move — and there is nothing to suggest the shackles will be removed in the foreseeable future.

RBC's Su-Lin Ong said the RBA latest commentary — in its annual Corporate Plan, of all the unlikely places — included an explicit linkage between household debt and the cash rate:

"The high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks," the RBA's plan noted.

Ms Ong said the "independent" rate rise from Westpac meant there is barely any chance the RBA could hike next year.

"We think it's too soon for the market to price in a realistic chance of RBA cuts, but the already very moderate hiking profile priced in by the market will be pushed even further out by the news," she said.

"Given a highly leveraged consumer, though, the potential for further and more widespread hikes could see a hit to household disposable incomes, which would be a handbrake on the RBA's ability to hike."

All of which means the safest bet in the financial market is the RBA will extend its record stasis of the emergency cash-rate setting of 1.5 per cent by another month at its board meeting on Tuesday

It's now two years and one month since the last move if anyone is still counting.

GDP growth to slow

Scott Morrison with GDP chart

The second safest bet in the market is GDP growth will fall back below an annualised pace of 3 per cent when the June quarter numbers are dropped on Wednesday.

Three months ago, the then-Treasurer Scott Morrison said the March quarter's 3.1 percent showed that the Australian economy had, "climbed back to the top of the global leader-board" in terms of global growth — among developed economies, that is.

"Importantly, today's results validate our budget forecasts and confirm the strengthening economic outlook we presented in the budget just a few weeks ago," Mr Morrison said.

As with comedy, timing is important in such pronouncements.

Gross Domestic Product, as measured by the Australian Bureau of Statistics, has bounced around dubiously for yonks. The overall trend is a better gauge than the quarterly snapshots with their inherent volatility.

March had two ripper quarters in the annualised figures: One per cent growth in both the March 2018 and June 2017 quarters.

June 2017 will drop out this time, replaced by June 2018 which is shaping up as a much more hum-drum affair.

The consensus view is 0.7 per cent growth over the quarter, which would knock the annualised pace down to 2.8 per cent and down to around fourth on the developed economy leader board.

A fair effort, but no medal.

External Link: GDP- annualised

What about households?

There are still a few bits of the puzzle to put into place before the ABS cranks out the final number.

The nation will wait breathlessly for the remaining "partials" such as company profits and inventories (Monday) followed by net exports and government spending (Tuesday).

Public sector spending, housing construction and household consumption should make pretty solid contributions, with business investment and net exports a bit "meh", or flat in more economic terms.

While the headline figure makes the headlines, some of the bits buried in the middle of the national accounts are often far more pertinent to the majority of those slugging it out in the real economy.

The accounts trot out insights into household spending, savings and income

Real net disposable income per capita is a pretty solid indicator of how households are going. It ticked up in the March quarter, but from a very low level.

NAB's GDP preview forecast the fairly weak trend to continue for some time yet.

"We expect a raft of headwinds to continue to restrain the consumer over the next couple of years — including high debt levels, slow wage growth and to a lesser extent slower growth in household wealth," the NAB economic team wrote.

External Link: Real net disposable income

Markets pause on trade worries

The record-breaking bull run on Wall Street paused to sniff the breeze at the end of the week and didn't necessarily like what it picked up.

The key indices closed flat on Friday with the US and Canada still at loggerheads in trade talks and the likelihood that the next $US200b escalation in tariffs on Chinese imports will be put in place as early as this week.

Nonetheless, the S&P500, Dow Jones and Nasdaq indices all gained over the week, month and quarter.

The ASX, which had a pronounced reverse on Friday (-0.5 per cent), also had a good week overall, up more than 1 per cent.

Futures trading point to a fairly solid start to month as well.

Markets on Friday's close:

  • ASX SPI 200 futures +0.4pc at 6,330 ASX 200 (Friday's close) -0.5pc at 6,319
  • AUD: 71.9 US cents, 62.0 euro cents, 55.5 British pence, 79.9 Japanese yen, $NZ1.08
  • US: Dow Jones -0.1pc at 25,965 S&P500 flat at 2,902 NASDAQ +0.3pc at 8,110
  • Europe: FTSE -1.1pc at 7,432 DAX -1pc at 12,364 EuroStoxx50 -1.1pc at 3,393
  • Commodities: Brent oil -0.4pc at $US77.45/barrel, Gold +0.1pc at $US1201/ounce, Iron ore +0.8pc $US65.50/tonne

Results season "a bit soft"

The 2018 August reporting season is now history.

Macquarie Wealth's take was it was a bit soft compared to previous years.

Around half the results were in-line with expectations, with an even split of hits and misses either side.

Some significant themes emerged.

  • Rising costs are back after years of cost cutting.
  • Capital management again saw investors showered with dividends and special dividends.
  • Slowing property markets showed up in the banks and developers results.
  • Regulatory scrutiny is likely to hit financials and utilities.

All this led Macquarie to take the knife to its 2019 earnings growth expectations, cutting it from 13.5 per cent to a still respectable 12.1 per cent.

The downgrade was pretty broad across property, banks, resources and industrials.

Diary

Putting Q2 GDP and the RBA rates decision to one side, the finance dance card is still pretty full this week.

House prices (Monday) are expected to see another retreat in August with former hotspots Sydney and Melbourne again dragging things down.

July's retail sales (Monday) should slow after three pretty strong months, weighed down by falling house prices and souring consumer sentiment.

The trade balance (Thursday) has been bouncing around, although these days with a pretty robust surplus. That surplus may narrow from June's blockbuster $1.8b surplus with iron ore shipments lower over the month.

Home loans (Friday) is likely to be more of the same; falling with owner-occupier buying more than offset by investors sitting on the sidelines.

Overseas, the key release are US jobs and wages data (Friday). A array of manufacturing surveys will be scanned to see whether increased trade hostilities are showing up in export orders.

Australia

Date Event Comment

Monday

3/9/2018

House prices Aug: CoreLogic series, data points to another fall around 0.4pc over the month
Company profits/inventories Q2: Two more GDP partials. Profits should post a modest lift but lower than Q1, inventories lower
Retail sales Jul: Sales have picked up after a sluggish start to the year, but forecast to slower than June's be 0.4pc rise
Manufacturing surveys AiG & CBA series published. Both still showing expanding activity

Tuesday

4/9/2018

RBA rates meeting No change, the record hold at 1.5pc will extend for another month
Current account Q2: The deficit should narrow slightly to around $11.5b
Net exports Q2: After a strong contribution to Q1 GDP, net exports may only add 0.1pc this quarter
RBA speech RBA governor Philip Lowe speaks in Perth

Wednesday

5/9/2018

GDP Q2: Annual growth forecast to slow from 3.1pc to 2.7pc as strong Q2 in 2017 drops out

Thursday

6/9/2018

Trade balance Jul: Another surplus, although pundits have difficulty picking it. $1.4b is as good a guess as any

Friday

7/9/2018

Home loans Jul: Overall loans tipped to fall as impact of falling investor interest outweigh and increase in owner occupiers

Overseas

Date Event Comment

Monday

3/9/2018

EU: Manufacturing survey Sep: Disappointed last month, with softness in Germany. Economy slower than this time last year. Export orders will be of interest
US: Labor Day holiday Markets closed
CH: Manufacturing survey Unofficial Caixin PMI focussing on SMEs. The Official survey last week was OK. Smaller export-driven factories may be slowing

Tuesday

4/9/2018

US: Fed speak Chicago Fed president Charles Evans discusses policy normalisation
US: Manufacturing survey Aug: Solid expansion, trade conflict unlikely to be an issue yet

Wednesday

5/9/2018

US: Trade balance Jul: Another big deficit of around $US46b. Composition of China & Europe trade will be of interest
CA: BoC rates decision The Bank of Canada looks like being back on hold at 1.5pc after July rise. Next hike priced in for Q2 2019

Thursday

6/9/2018

US: Employment Aug: ADP employment change, 220K new jobs expected
US: Factory orders Aug: Expected to fall after a solid rise in July

Friday

7/9/2018

US: Jobs, unemployment, wages Consensus forecast round 180K new jobs, unemployment at 3.9pc and wage growth picks up to 2.8pc YOY
EU: GDP Q2: Second estimate likely to remain at 2.2pc growth YOY

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