The dream run of falling mortgage rates as the banks fight for market share could be drawing to a close with Credit Suisse predicting a big rise in out-of-cycle rate hikes that'll hit households.
This will have big implications for ASX investors as a material uplift in mortgage rates, even as the Reserve Bank of Australia (RBA) keeps our record low cash rate on hold, will have flow-through consequences for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The broker points to the unexplained widening of the interbank credit spreads, which is the difference between the rates banks lend to each other and the RBA's cash rate, for its disturbing conclusion.
"The additional problem is that for as long as wide interbank spreads cannot be easily explained, pent-up pressure on mortgage rates will continue to build," said Credit Suisse. "This sets the stage for more than 50 bp [basis points] worth of out of cycle rate hikes."
This is particularly troubling given the record amount of debt that households are sitting on. A more than 50 bp increase in residential loans will force consumers to cut back on spending.
Embattled department store Myer Holdings Ltd (ASX: MYR), electronic and home appliance retailers JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) will have a new headache to deal with on top of a slowing housing market and online competition.
Speaking of a slowing housing market, higher mortgage rates is also bad news for home and apartment builders like Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP), particularly if it comes at a time when the big banks like Commonwealth Bank of Australia (ASX: CBA) are tightening their credit approval processes.
This adds up to fewer consumers who can borrow less and at higher interest rates! Consumers fuel around two thirds of the Australian economy so this is bad news to everyone.
What's worse is that we have more reasons to fear the unknown and Credit Suisse notes that the blowout in credit spreads cannot be explained by conventional macro factors, such as credit default swap spreads, stock market volatility, the slope of the yield curve or housing sentiment.
Commercial banks have historically lifted their standard variable rates relative to the RBA's rate whenever the interbank credit spreads are significantly above long-term average levels.
If the broker's prediction comes to pass and mortgage rates remain elevated over the medium to long-term, it won't just be retailers and homebuilders that will be impacted. Just about every other sector will feel the pinch.
This isn't the time to panic as the fundamentals still point to more gains for the market, but don't expect a smooth ride.
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