Rate rises reach tipping point

(ASX:AFG) Australian Finance Group Ltd data for the first quarter of the 2023 financial year shows the interest rate levers being pulled by the Reserve Bank of Australia (RBA) are having the desired effect with volumes down 4% on the prior period.

AFG CEO David Bailey said, “Australian mortgage customers have been hit between the eyes over the past six months with interest rate hikes being super-sized to slow the level of activity in the market. With interest rate rises still being absorbed we would argue there is a need for a ‘wait and see’ approach by the RBA as the impact starts to flow through.”

The company recorded $21.5 billion in home loan lodgements for the first quarter of the new financial year. Western Australia recorded the biggest drop of 5.62%, followed by New South Wales at 5.13%.

Loan sizes are also down in line with rising rates and affordability. Nationally the average loan size is lower by $15,000 at $596,000, the lowest since the final quarter of 2021. Significantly, NSW, was down $33,000 while South Australia defied the trend and increased by $2,000. Loan to Value Ratios increased slightly to 65.6%.

After benefitting from the government’s term funding facility through the pandemic the major lenders are holding back on passing on full rate rises to deposit holders and using their balance sheet strength to track the RBA increases. Non-major lenders, who primarily rely on RMBS and international money markets for funding, are feeling the pinch as they are compelled to increase rates above the official cash rate.

“The Big 4 and their associated brands (now including Citibank), have lifted their market share by 4.38% to 60.77%. ANZ saw a significant uplift from 10.90% to 14.82% for the quarter, and CBA and their affiliate Bankwest also increased market share from a combined 18.12% to 20.33%.

“The importance of a competitive lending market cannot be underestimated in driving affordability,” he said. “The non-major lenders have slipped back to their lowest level since the final quarter of 2020 at 39.23% of the market. The broker channel, now responsible for 68% of the market1, is vital to ensure the non-majors can continue to compete.”

“The Westpac Group including brands, Bank of Melbourne, Bank SA and St George, was down 3.47% to 14.89%, while the NAB group, including subsidiaries ubank and Citibank from this quarter, lifted from 8.95% to 10.72%.

“Australia’s brief love affair with fixed rate mortgages during the height of the pandemic has well and truly ended, with customers opting for a fixed rate product plummeting to 3.6% – the lowest level since we commenced reporting,” Mr Bailey said.

“In a hunt for savings, customers are opting for no frills Basic Variable home loans, with these products at their highest level in more than a decade at 24.4%.”

The slowdown has been good news for lender turnaround times, with the average number of days until formal approval at its lowest level since AFG reporting began in 2018, to now be averaging 17.2 days.

*Data note: Following on from the acquisition of Citibank’s consumer business in Australia by NAB, Citibank has been recategorised to become a part of the NAB stable in ‘Majors and their Associated Brands’ tables from Q1 2023.

[1] Mortgage & Finance Association of Australia Industry Intelligence Service Report for the six-month period 1 October 2021 – 31 March 2022.

View full report here

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