Real estate market fears wipe $46 billion from bank stocks

“The housing market is just beginning to enter this downturn and it will be as big as the biggest we’ve seen in the last 40 years. In the past ten periods of falling house prices, banks have underperformed in nine of them.”

Higher interest rates have limited the maximum homeowners can borrow from the banks, with Rate City director Sally Tindall calculating the May and June rate hikes, wiping out about $66,000 of the amount a $150,000-earning couple can borrow.

“But if the cash interest rate rises to 2.35 percent in April next year as predicted by Westpac, the maximum the same family could borrow from the bank would be about $163,500 less than a year ago, before the hikes began. ” she said.

Hugh Dive, chief investment officer of Atlas Funds Management, said the sell-off was exaggerated as banks are still essentially in good shape and net interest margins will improve, especially given that they rely much less on wholesale financing markets compared to previous downturn.

“I think it’s a bit of a knee-jerk reaction to say that everything will be terrible for the banks,” he said.

“It seems a bit too aggressive. The banks will probably have higher profitability than anyone thinks, it’s a bit premature to throw them all out this week.”

Mr Tevfik said the Reserve Bank’s aggressive move on Tuesday to raise cash interest rates by 50 basis points, which would normally incentivize banks by increasing the margin they earn on loans, had startled investors.

“What this week has made clear to many investors is that the RBA will not waste time trying to normalize policy,” he said.

New loans phased out

“We have had a short position in the banks and I am not tempted to hedge it quickly. You still need to make a profit and the current drop in prices reflects weakness in future earnings.”

He said Westpac had the largest mortgage portfolio relative to its size and while many investors hoped rising net interest margins would support banking profits, “history suggests it is declining volumes that tend to dominate at this stage of the cycle.” .

ABS data released last Friday showed that the value of new home loans fell much deeper than expected in April by $2.13 billion, with new loans to owner-occupiers falling $1.57 billion, or 7.3 percent compared to March and $2.92 billion or $12.8 per year. cents from a year ago.

Meanwhile, investor lending declined $557 million, or 4.8 percent, from the previous month, but rose $3 billion, or 37 percent, compared to April last year.

“Everyone could have seen it coming, when you brought up this huge demand for housing during the pandemic,” Tevfik said.

The market is now on a declining trend, given the stricter lending criteria introduced last November, when APRA said usability buffers should be increased by 50 basis points to 3 percent. It has also asked NAB and ANZ to cut debt-to-income ratios on new loans from nine times in early June, while higher interest rates have also capped the maximum homeowners can borrow.

Mr Tevfik said the analysts’ focus on non-performing loans or fears of a broader recession had been exaggerated, but it was difficult to see volumes grow in the current real estate market, especially with tighter credit restrictions.

“We do not expect a material increase in NPLs. The banks have provided a lot of mortgages in recent years, but they have not been stupid with relatively low LVRs compared to previous cycles,” he said.

Mr Dive agreed that the financial results of the banks are good, with healthy household balance sheets after people spent the pandemic getting ahead of repayments

“A shift in bad debt costs from 10 basis points to 15 or 20 basis points is more normalized. We have gone through a very strange period in history when it comes to almost zero bad debt,” said Dive.

He said that while the RBA was more aggressive than expected, with a “big move early rather than many small moves”, this was “probably a good thing”.

“Historically, in an environment of rising interest rates, they’ve done quite well and their books are a lot cleaner than they were in 2001 or 1990,” Dive said.

“The RBA going a little hard early on was the right move. Banks have historically been very profitable in that rising interest rate environment.”

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