The mortgage market will continue to grow in 2024 despite high interest rates and strong house prices, experts say, with banks continuing to compete despite a period of intense home-loan competition that hurt their margins over the past two years.
Finspo chief executive Angus Gilfillan said he expects continued growth in the mortgage market and “a period of more stability” as interest rates stabilise, which will benefit first home buyers.
“The market will continue to grow, but not at the levels we saw during the pandemic,” said Gilfillan.
“It’ll be a great year for first-time buyers because there are a lot of really good government grants, and they should have relatively stable repayments for the next couple of years. But borrowers will have to look a lot harder for the best deal.”
Interest-rate increases in 2023 reduced borrowing power, Gilfillan said, making it more difficult for borrowers to refinance their loans, with many banks raising mortgage prices on newer loans.
Over the past two years, banks have competed aggressively to attract and retain customers by offering ultra-low fixed-rate loans and cashbacks in what has been called a “mortgage price war”. However, the intense competition for home loans has eroded banks’ profit margins, with many lenders now winding back cashbacks and raising mortgage rates.
Gilfillan said the peak of the mortgage price war passed in 2022, with a further reduction in intensity in 2023, but that mortgage competition would probably increase slightly in 2024.
‘Borrowers will have to look a lot harder for the best deal.’Angus Gilfillan, Finspo chief executive
“There are still some lenders out there that have been very aggressive on wanting to grow market share, and they are taking market share from some of the bigger players,” he said. “I think there will have to be a response at some point.”
The latest statistics from the Australian Prudential Regulation Authority showed all four big banks and Macquarie grew their owner-occupied housing loans in November. Home loans for owner-occupied properties increased by 1.1 per cent for Macquarie and 0.6 per cent for Westpac and ANZ, while Commonwealth Bank had the lowest increase at 0.1 per cent.
PropTrack senior economist Paul Ryan said home loan competition in 2024 will probably remain similar to the past six months, with higher interest rates taking some of the pressure off banks’ margins and being passed on to borrowers through stronger competition.
“As the volume of lending has decreased, there’s been some appetite to compete a bit stronger to keep those volumes up,” said Ryan.
“Banks have had a challenging funding environment, but lenders are in a good position to lend to borrowers at quite competitive rates, and they’re willing to compete on margins a bit more as interest rates have increased.”
Ryan said strong house prices and high interest rates may dampen first home buyer activity, but it will probably continue to grow at a “solid but not exceptional” rate.
CoreLogic data on Tuesday showed monthly house-price growth slowed to 0.4 per cent in December, but national average home prices rose 8.1 per cent across 2023, more than reversing the 4.9 per cent fall in 2022.
Lendi Group co-founder Sebastian Watkins said it will be a challenging year for people purchasing their first homes, but innovation from lenders and government bodies in the refinancing space could ease some of the challenges.
“When you’re not taking on more credit, and when the credit is already in the system, it doesn’t make sense to apply the 3 per cent buffer if you can demonstrate you’ve had the ability to service the loan to date,” he said, referring to the 3 per cent buffer applied when assessing a borrower looking to refinance their loan.
“We’ll see continued affordability pressure in the purchasing space, but I suspect we’ll start to see it become a little bit easier for borrowers to refinance.”
While there will probably be continued competition among the big four banks in particular, Watkins said, there would be limited room for most lenders to move given pressures on their margins.
“We probably won’t see any more aggressive pricing, but I do suspect the major banks will probably tit-for-tat as they continue to wrestle market share away from each other.”
AMP chief economist Shane Oliver said the flow of home loans being granted has slowed and that the market looks set to remain constrained for another six months, especially if interest rates remain high.
“We’re probably not going to see a stronger mortgage market until sometime in the second half.
“We may start to see a pick-up in competition later in the year until the Reserve Bank starts to cut rates again, but for the time being, I suspect competition will remain fairly low.”
RateCity director of research Sally Tindall said competition in the mortgage market will depend at least partly on how borrowers respond.
“When it comes to refinancing, I think the peak has passed, unfortunately,” said Tindall.
“But it’s really up to customers to continue to switch, continue to haggle their lenders. Because if they do that, that will force the banks to continue to be competitive.”
Source: Thanks smh.com