Banks will continue to offer owner occupiers steep discounts on standard variable rates to protect their market share as investor lending is tightened, and property prices around the country will continue to climb, leaders of the mortgage industry say.
Deloitte's annual Australian mortgage report released on Thursday said in 2016 major banks had been offering owner occupiers discounts on the standard variable rate of up to 130 basis points. Discounts are currently tracking at 100 basis points, where loans are for 80 per cent or less of the value of the property.
This means new owner occupiers or those refinancing loans should be able to access financing at around 4 per cent per annum. Mortgage experts expect discounting for owner occupiers to continue, perhaps at a reduced rate of between 80 and 120 basis points this year.
"I'm leaning towards 80 basis points next year," said AFG executive director Malcolm Watkins, who expects banks to use out-of-cycle SVR rate rises to "put some margin back in their business".
Lisa Claes, managing director of CoreLogic, said "I think it will be greater than 80 basis points discount."
However, for investors, loan discounts have tightened on top of standard variable rates being increased, Deloitte said.
The ongoing discounts on banks' "front book" (new loans) are putting pressure on net interest margins, which is increasing the pressure to increase standard variable rates on the "back book" (existing loans).
Deloitte's report was based the report on a survey with 10 leaders of the mortgage industry. Participants in the survey were: banks Commonwealth Bank of Australia, National Australia Bank, Bank of Queensland and Suncorp; non-bank lenders Pepper Group and Homeloans; mortgage brokers AFG and eChoice; and consultants CoreLogic and Steve Weston.
The level of bank discounting of SVRs would be closely scrutinised by the Australian Prudential Regulation Authority given regulators' heightened focus on responsibile lending, warned Deloitte partner Kevin Nixon.
"If you are offering big discounts, you can expect APRA to ask why, particularly if it looks like the main goal is to increase volumes ahead of quarterly announcements. Further, under the broader culture remit there will be a focus on transparency and fairness in pricing," Mr Nixon said.
Discounting pressuring BOQ
As Bank of Queensland reported its interim profit on Thursday showing a weak margin and no lending growth, and highlighting regulation, competition and changing customer demands as reasons for a weaker performance, BOQ group executive product and strategy, Vimpi Juneja, said the level of discounting by the big banks is the biggest competitive challenge for regional banks.
"The single biggest challenge regional banks like BOQ face in being a legitimate and profitable competitive alternative in mortgages is access to funding. We have to pay more for wholesale funding. Also because we have a smaller branch footprint, you have lower transaction deposits.
"Put that together with higher operating costs – though in the case of BOQ, we can outsource a lot of them through our franchise model – and you see the economic challenge for regional banks."
He added that regional banks have to match the discounts being offered by the big banks in order to stay competitive. "...And that's 120 basis points discount on the front book. That's the only way, whether we want to or not. Mortgages are a vanilla product."
Population growth driver
This is the 12th year that Deloitte has produced its report. Deloitte Access Economics' director Michael Thomas said stronger immigration and a new baby boom from 2005 had lifted Australia's population growth from an average rate of 220,000 to 360,000 per annum but "the home building response was tardy".
"Unmet demand mounted until 2013, when work on 170,000 new homes kicked off," he said. "Unsurprisingly, house prices have risen while the shortfall in dwelling construction is being made up."Ongoing population growth was likely to underpin prices in the absence of a sharp increase in supply, he added.
Australia's population growth is likely to stay above 300,000 per annum, which "suggests underlying demand for new dwellings will also be notably higher going forward". "Housing analysts suggest underlying demand [for new dwellings] now may reside in the 180,000 to 200,000 per annum range...And this means if dwelling starts drop back below these underlying levels for any length of time, price pressures will begin to build again."