Housing credit growth will remain fragile over the next 12 months, forcing banks to try and maintain profit margins by finding better deals on their own borrowing.
A joint report released on Wednesday by JPMorgan and Fujitsu Australia showed housing credit growth in Australia softened during 2010 as the November interest rate rise and natural disasters took their toll on borrowers and consumer confidence.
The three-month annualised growth rate dropped from nine per cent in September 2010 to 6.7 per cent in February 2011 and is unlikely to return to double-digit growth rates seen before the global financial crisis (GFC).
"The outlook is not inspiring," JPMorgan bank analyst Scott Manning told reporters after unveiling the mortgage industry report with Fujitsu’s industry group director Martin North.
Because housing credit growth is a function of house prices, new housing starts and borrowers’ loan to valuation (LVR) ratios, any housing growth rate above four per cent will be entirely due to rising house prices and/or a higher LVR on new lending, Mr Manning said.
Both Mr Manning and Mr North think system housing credit growth will likely remain between the mid to high single digits in coming years, with growth potentially crimped by banks’ having limited funding for housing credit.
As the cost of term funding in wholesale markets increased after the GFC, banks have been forced to refinance their outstanding bonds at higher prices.
This has resulted in an increased proportion of funds from annual bond issuance being consumed by refinancing, rather than being available to fund more credit growth, Mr Manning said.
"In the current environment, where housing credit growth is likely to remain lower for longer, banks are actively managing profit margins through the liability side of their balance sheets."
On a bank’s balance sheet, mortgages and other lending are recorded as assets while deposits and other borrowings are recorded as liabilities.
"Banks that were growing strongly during the GFC have dramatically slowed their domestic mortgage growth rates and are focusing on the profitability of the existing mortgage book," Mr Manning said.
Overall profitability of loan books had improved over the last 12 months, Mr North said.
As well, Commonwealth Bank and Westpac Banking Corporation had substantially pulled back on funding household deposit growth – a move Mr Manning said they could not afford over the long term given the importance of deposits to banks’ funding bases.
Meanwhile, household debt levels remain at historical highs, with about 10 per cent of disposable incomes being used to service mortgage interest payments assuming a standard variable borrowing rate of 7.8 per cent, Mr Manning said.
"If mortgage rates increase by 50 basis points by the end of 2011, then the proportion of disposable income servicing interest payments will return to historical highs about 11 per cent."
A survey of 26,000 bank customers by Fujitsu found higher interest rates and cost of living pressures were now the key reasons for mortgage stress, with 32 per cent of respondents who refinanced saying they did so to reduce monthly mortgage payments.
The JPMorgan and Fujitsu report came ahead of the Australian Bureau of Statistics’ consumer price index report which showed Australia’s annual inflation rate climbed to 3.3 per cent in the March quarter, increasing the chances of more interest rate rises.
Housing prices rose by 1.3 per cent during the quarter, making an annual rate of 4.8 per cent, while increases in food prices reached an annual rate of 4.3 per cent.
The price of finance and insurance services rose by 2.6 per cent in the quarter, making the annual rate 2.8 per cent.