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Banking wars to end in tears

Well, the battle is on with the Big Banks involved in a fight for market share with some offering refinance bonuses, honeymoon rates and NBN sweetener deals, to entice borrowers to change lenders.

According to ABS (Australian Bureau of Statistics), home loans are down 35% since January 2022 and are the lowest since 1992 when we were in the last recession. I remember as a homeowner with a young family paying some 10% on my home loan and feeling good about it since I had been paying   21% in 1987!  So, it’s all relative to your recent experience isn’t it?

While interest rates are momentarily paused by the RBA, I feel it may only be a temporary reprieve. While we have slowing credit growth, and a slowing economy with consumer spending falling as cost-of-living pressures bite, inflation remains and Australia’s cash rate remains well under the US, Canada, and New Zealand cash rates. The aim of the RBA will be to stop inflation whatever the impact, so I don’t think we are there yet.

With $220 billion in fixed term rates coming off monthly repayments are likely to jump by some 35% – 40%.This is when things are going to get really interesting as nett savings go to zero and redraws start to occur against the home loans and offset account balances start to fall under the combination of principal and interest repayments by borrowers not yet prepared to pull the financial belt in tighter. Those claiming interest rates will peak and fall are mistaken. In the 90’s they peaked and sat there for a number of years. Why should this time be any different.

Who will be the winners and who will be the losers? I struggle to see how the banks can be winners this time around with profit margins having peaked and now on the decline. Mortgage new business is difficult to get while overseas banks are demanding more safeguards before they will lend money to us.  The result, a battle for the diminishing market share.

However, I don’t see the prices of residential homes abating for very long. Maybe at the higher end, but with too few homes, too much demand, increased migration and a continuing supply crisis with low housing starts, housing prices should continue to hold up. Property will remain a safe bet for those cashed up or with low debt to equity ratios and the ability to borrow.

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