Speculation has ended in regards to forecasted interest rate rises, with two of the big four banks, NAB and Westpac, announcing an interest rate increase to the standard variable rate for homeowners to 5.32 per cent per annum. Commbank and ANZ remain at 5.22 per cent and 5.25 per cent respectively, but it is expected that they will soon fall in line with the others.
Fixed rates, investor rates, and interest-only rates have already seen increases this year, leaving the standard variable home rate untouched by the big four until this week.
Smaller banks had already signposted things to come before Christmas last year, when ING Direct lifted variable rates by 15 basis points on owner-occupied interest rates, while Bendigo bank raised owner-occupier and investor rates by 10 basis points, which left them at 5.48 per cent and 5.76 per cent respectively.
What has driven this announcement? A swelling property market and stakeholder expectations have led the big four to assess their need to both protect their profit margins and address the pressure from both within and outside of the industry to cap the growth in loans to investors.
Coupled with an increase to owner-occupier rates, NAB and Westpac’s standard variable rate for investors will move to 5.80 per cent and 5.79 per cent respectively. This follows the news two weeks ago that investors had increased their presence in the market to more than half of home loans taken out in January.
“Clearly the investor market is seeing very strong levels of demand across Australia, particularly in Sydney and Melbourne,” NAB chief operating officer Antony Cahill said in response to this news last week.
But will NAB and Westpac’s drive towards interest rate increases be enough to effectively address these challenges to housing affordability?
The proportion of household disposable income that goes into interest payments today is at 6.8 per cent. In the late ’80s when interest rates famously reached 17 per cent, this proportion of household disposable income was only at 6.1 per cent. On top of this, the percentage of national housing debt to household disposable income has reached 132.2 per cent, exceeding that of 113.1 per cent just before the Global Financial Crisis in 2008. During this time the proportion of household disposable income that went towards interest payments was at 11 per cent, as such we have been paying less (6.8 per cent) due to lower interest rates, which are now rising.
There are suggestions that these increases by NAB and Westpac, and the forecasted increases by the other two big banks, will need to continue to beyond 6 per cent to challenge skyrocketing house prices. One thing to watch out for will be whether the proportion of household disposable income being paid towards interest payments starts to climb back up towards the 11 per cent that was seen before the GFC.