The prudential regulator’s recent home loan crackdown and the banks response to the tougher rules will fundamentally alter the Australian mortgage market.
This is the view of Morgan Stanley analyst, Richard Wiles, who said for the first time in a decade, Australia is seeing a combination of more onerous capital rules, higher mortgage rates, tighter lending standards and credit rationing.
To him, the mortgage market is entering a new age. As he sees it, the future features higher margins, but lower loan growth, more capital and heightened risk.
"Mortgage re-pricing should support banks' near-term earnings, but we forecast lower loan growth and believe current multiples ignore the risk of unintended consequences.”
By unintended consequences, Wiles is talking about the advent of higher mortgage rates and tighter lending standards when household debt is at record levels and conditions in the labour market are soft.
Clearly the banks should be worried about the Australia Prudential Regulatory Authority’s latest round of prudential measures even though they will still make a fast buck on mortgages.
“While our 2018 earnings per share forecasts are lifted by an average of 3.5 per cent we think credit rationing increases the probability of a weaker economy and higher non-housing loss rates next year," said Wiles.
The analyst is expecting the major banks' investment property loan growth to drop to 1 per cent in 2018 due to APRA’s new cap on interest-only loans, restrictions on higher-risk lending, more differentiated re-pricing and the prospect of further measures to prevent the build-up of household debt and address housing affordability concerns.
This sees his forecast for total Australian housing loan growth slowing to 4.5 per cent with Commonwealth Bank the most and ANZ the least affected.
The Morgan Stanley analyst upgraded his major bank margin forecasts by 1 basis point in 2017 and 4 basis points in 2018, with National Australia Bank the biggest beneficiary.
But one thing is for certain. The cap on new interest-only loans could have a material impact on the value of housing loan approvals in Australia.
The big four banks approved $290 billion of new housing loans in the year to December 2016. While this was broadly in line with the value of loans they approved in 2015, it was almost 50 per cent higher than the value approved in 2012.
While the proportion of interest only loans fell from 44 per cent in 2015 to 39 per cent in 2016, the value of these loan approvals was still $100 billion.
“All else equal, we estimate that the value of the major banks' new interest only loans will need to fall by $36 billion or 32 per cent to meet APRA's new target, and the value of total loan approvals would be down 12 per cent,” Wiles said in a client note.
“In fact, we estimate that the value of principal-and-interest loan approvals by the majors would need to increase by 15 per cent to a record $205 billion to maintain total loan approvals at 2015-16 levels.”
Commonwealth Bank is likely to benefit from a margin rebound, but it also needs to slow its loan growth more than the other majors.
“At CBA where interest-only mortgages reached 42 per cent of new loans in the 2017 first half - up from 33 per cent in 2013 - the change in customer behaviour needs to be significant," said Wiles.
On the other hand, while ANZ benefits less than peers from home loan re-pricing, he concluded, it looks to be less affected by mortgage growth headwinds and has the strongest capital position, the smallest wholesale funding burden, the greatest cost focus, the biggest margin for error on loan losses and the most valuation support.