Aussie home buyers pay for crisis steps as Westpac raises rates

[SYDNEY] Australian home owners look set to pay for regulators' efforts to make lenders safer in the event of a financial crisis, after Westpac Banking Corp. raised borrowing costs for mortgage holders.

The Sydney-based bank's first increase in five years for owner occupiers may be followed by other major lenders as they respond to more stringent regulatory burdens. Higher borrowing costs can risk crimping consumer spending and weigh on housing demand, weakening support for an economy already struggling to regain momentum amid tumbling commodity prices and a drop in mining investment.

Traders boosted their bets on the prospects of an additional interest-rate cut from the Reserve Bank of Australia to offset the damage. While concern that the housing market was becoming frothy had already spurred higher rates for landlord mortgages in recent months, the increase for owner occupiers took many analysts by surprise.

"A move by a bank to raise mortgage rates represents a tightening in financial conditions which the Reserve Bank may not have been looking for, so it therefore increases the probability that the RBA will respond," said Andrew Ticehurst, a Sydney-based interest-rate strategist at Nomura Holdings Inc. "That tightening in financial conditions would obviously be more appreciable if the other banks follow suit."

The decision to lift home-loan rates in an economy growing at a slower pace than its historical average comes after Australian banking regulators said increased risk weights for mortgages will take effect next year. It also follows a request by the prudential overseer to contain growth in landlord loans to cool a rampant housing market.

Goldman Sachs Group Inc said Westpac's move adds to the risks for Australia's economy, which also faces the prospects of a severe drought.

"The combination of preemptive independent interest rate hikes by the banking system and the emergence of a new and significant threat to Australia's economic growth comes at a particularly uncomfortable time in Australia's economic cycle," Goldman Sachs economists led by Tim Toohey wrote in a note Wednesday. They said it was "highly likely" that Australia's other major lenders would also increase their mortgage rates and predicted that would probably prompt the RBA to cut its benchmark both in November and again in the first quarter of 2016.

While home prices increased 28 per cent in the three years through September, there have been some signs of softening within the market of late. New residential building activity fell 3.4 per cent in the three months through June compared with the previous quarter, government data showed on Wednesday.

"The credit rationing aimed at curbing investor activity is having a broad impact and risks generating a sharper fall," said Harley Dale, chief economist at Australia's Housing Industry Association. "The new home building sector has delivered a strong economic dividend to Australia during a period when many other sectors of the economy have struggled." In addition to changing lending behavior, the tighter regulatory environment and the prospect of even greater capital requirements has led all four of Australia's biggest banks to engage in equity issues. Westpac's announcement this week that it would seek A$3.5 billion ($2.5 billion) in a rights offering takes to almost A$20 billion the amount of capital the big four have raised this year.

BLOOMBERG