March was another positive month for the Australian share market, with the All Ordinaries index closing 2.5% higher at 5,904 points. The Australian Dollar was steady in March, with 1 Australian Dollar currently buying 76.41 US cents. Once again, the Reserve Bank of Australia (RBA) left the official Cash Rate on hold at 1.50% per annum.
Global share markets provided mixed results in March. The United States Dow Jones index fell 0.7%, the London FTSE gained 0.8%, the Japan Nikkei 225 fell 1.1% and the Hong Kong Hang Seng Index gained 1.6% for the month.
The decision by major Australian banks over recent weeks to unilaterally raise interest rates on residential property loans (especially for investors) appears to be officially sanctioned by the regulators, and could helpfully ease demand pressures in the Sydney and Melbourne housing markets.
But there's also a handy pay-off for banks in taking this action – it boosts net-profit margins, and possibly reduces the need for further capital raising down the track. While some banks have argued that recent interest rate increases reflect higher funding costs, this point is debatable.
Reflecting concerns with the strength in Sydney and Melbourne property markets in particular (and the rate of household debt as a percentage of disposable income being at record levels as shown in the chart below), the Australian Prudential Regulation Authority (APRA), in conjunction with the RBA, announced a series of "macro-prudential" controls in late 2014.
These "macro-prudential" measures required banks to limit certain types of "high risk" loans, such as those with high loan-to-valuation ratios, lengthy terms, or provided on an interest-only basis. The regulators also insisted banks limit growth in their property investor loan books to 10% per annum.
With the benefit of hindsight, it now appears the "macro-prudential" controls put in place were not sufficient to contain housing price pressures (particularly in light of the further drop in interest rates from the RBA). There is now growing speculation that "macro-prudential" controls will be tightened further.
Specifically, there is speculation that the regulators will move to further limit growth in bank investor loan books to no more than 5% per annum. There's even some speculation that the RBA could raise rates to prick an alleged "bubble" mentality among property investors.
While the banks unilaterally increasing lending rates outside of a RBA movement is good for shareholders, the banks' actions still leave certain challenges in place. Such a move may slow credit growth.
However, given the regulators want credit growth to slow in any case, it's probably best for banks to be able to do this via increased net-interest margins (rather than through an RBA-driven increase in overall funding costs). Unless, of course, you are a depositholder with the bank and are dependent on the interest income...
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.