Rising rates put brakes on home loan growth

As the Reserve Bank prepares to raise interest rates again to tame the highest inflation in decades, loan growth in the $2 trillion mortgage market is showing signs of softening and analysts say the slowdown in lending has further to run.

New RBA figures, released on Monday, showed housing credit growth – a key long-term influence on bank profits – slowed to a 10-month low of 7.3 per cent in the year to September, from 7.6 per cent a month earlier.

With the RBA expected to raise the cash rate by at least 0.25 percentage points on Tuesday, analysts say it is still early days in slowdown in mortgage lending, which has occurred as house prices have fallen and banks have cut how much they will lend.

Westpac senior economist Andrew Hanlan said the RBA figures provided further confirmation of slowing credit due to higher interest rates, saying overall credit growth of 0.7 per cent in September was the weakest monthly reading since March. Hanlan said while borrowing had grown strongly in 2021 and early 2022, this trend was now reversing as interest rates rose.

“The RBA is quickly removing ultra-easy monetary policy, on the way to a contractionary stance, to fight a significant inflation challenge. The tightening of policy will reduce demand for credit – across households and, in turn, businesses,” he said in a note.

“The housing market is showing the adverse impacts of sharply higher interest rates.”

Some investment houses such as Jarden expect annual housing credit growth will fall to about a third of its current pace by late year, while the Commonwealth Bank said it expects housing credit growth to slow to 4 per cent next year.

Despite the expected slowdown, investors remain upbeat towards the major banks, as lenders are benefiting from a dramatic widening in net interest margins, which compare funding costs with the price of loans. Lenders are also reporting low levels of borrower stress.

Managing director of White Funds Management, Angus Gluskie, said over the next year banks would get the full benefit of rising interest rates across their loan portfolios, and the majority of bank customers could handle higher interest rates.