Today Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) joined with Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) in raising interest rates on mortgages.
In the past few months, we've seen the flow on effects of the banks raising interest rates for property investors and other measures designed to curb investor lending. Housing price growth has already started to cool and is going backwards in some capital cities.
But this time the big four have not only targeted investors but every single mortgage borrowing customer. Doesn't matter if you are an owner-occupier, new home buyer or investor, the banks are going to slug you with higher interest rates.
With an estimated 80% of the mortgage market, the four banks have an immense impact not only on the lending market but also Australian property prices.
There's one very good reason why the banks think they can get away with it too. Most of us are too lazy to bother looking for a mortgage with lower interest rates, despite a host of providers from regional banks, building societies, credit unions and other non-bank lenders, and the fact that we literally save ourselves thousands or even tens of thousands of dollars by switching to a cheap home loan.
Higher rates ahead?
The recently announced interest rate rises are guaranteed to put the bite on house prices around Australia, but in even worse news for homeowners, the Australian Financial Review (AFR) thinks the banks will be forced to raise rates even more.
Here's a bit of background.
The Australian Prudential Regulation Authority (APRA), the official banking regulator has criticised the banks for a lack of common sense lending, and has already taken measures to force the big four to slash their lending to property investors.
The regulator has also required the banks to hold more capital against Australian mortgages – hence the reason the banks have raised around $30 billion in rights issues, DRPs and retaining earnings since June 2014, according to the AFR. To offset the lower returns on their capital, the banks have begun increasing mortgage rates.
The alternative was lower earnings and dividends, which would likely earn the ire of shareholders. Clearly, the banks have put their shareholders above their customers.
More capital required?
Now the AFR's Christopher Joye thinks the regulator is going to ask the banks to raise more capital. According to his calculations, if APRA requires the banks to have a minimum leverage ratio of 5%, the big four banks will be forced to raise an additional $15.6 billion. Up that to just 5.5% and the shortfall soars to $34.5 billion.
And as night follows day, if the banks have to raise more capital, interest rates are sure to rise again.
There will come a point of course where the banks risk their market share crashing if they continued to raise rates and alienate mortgage customers. But they know that and will be monitoring the effects of the current rate rises.
The other problem, of course, is that as the big banks raise their interest rates, property investors will be even more deterred from entering the market and owner-occupiers more willing to stay put. That has the flow on effect of putting more downwards pressure on house prices. And we can forget about the RBA coming to the rescue and lowering the official cash rate in November
Foolish takeaway
If the scenarios laid out by the AFR come to pass and the banks are forced to raise more capital, housing prices are likely to fall dramatically. This won't be slower growth, or a gradual cooling off in the market, but a shuddering halt followed by retreating house prices.
On the bright side, it could make housing more affordable for first home buyers, but for the rest of us, get ready to see your home value shrink.
