CBA pushes against the tide

The poor performance of the housing market mixed with banking competition has finally seen a move by a major bank. CBA has announced a small rate cut to one of its lending products.

The Commonwealth Bank has cut the interest rate on its recently launched ”no fee” home loan offer as the battle for market share among the big banks intensifies in a low-growth lending environment.

Having introduced its new mortgage product at a debut rate of 7.24 per cent – a price that includes the ”normal” discount offering on the more expensive mainstream standard variable home loans – the bank has lopped a further 13 basis points off the cost. The new variable rate of 7.11 per cent will reduce monthly repayments on the average size mortgage by $27 and comes as three of the banks counter attempts by National Australia Bank to corner a big chunk of new and refinanced home loans.

I think it is great for consumers to finally see some competition in the lending market, however $27/month certainly isn’t about to create a stampede back to the housing market. As I mentioned over the weekend in a response to another post, the Australian consumer is currently under pressure from 3 things.

Firstly, interest rates which set the price of debt.

Secondly, the level of outstanding debt

and thirdly, the basic costs of living.

I am not sure that mainstream economists appreciate points 2 or 3. In regards to the third point I am seeing increasing pressure on many fronts. As the housing market slows the state government’s revenue from housing transactions also slows. In order to maintain the previous level of public sector expansion those governments need to find a new source of income. Over the weekend the Australian reported on what that new source could be.

State governments will squeeze 11 per cent more revenue from their water and power utilities over the next year, just as households are hit with higher bills for power and water. Dividends from state-owned enterprises will siphon $3.9 billion into treasury coffers during 2011-12 — almost $400 million more than governments grabbed this financial year.

Most of the dividends will come from government-owned electricity and water utilities, which will raise prices next Friday in every state except Victoria. Electricity industry analyst Ben Freund, of GoSwitch, said yesterday it was ironic that governments were claiming to be concerned about the cost of living at the same time they were pocketing higher profits from their utilities.

and then there is food.

Families are paying $1300 a year more than two years ago for the same groceries – and it’s about to get a lot worse. Experts warn food inflation is set to stretch household budgets to breaking point, pushing the average household’s weekly food spend dangerously close to the $200 mark. With electricity prices set to rise 17 per cent in the next 12 months, further compounded by increases to gas, water, rates and taxes, the surge in food prices is merely the latest in a long line of rising costs helping to erode the savings of Australian families.

…. an average basket of groceries at any Coles and Woolworths supermarket in Sydney has jumped a staggering 16 per cent since 2009. That adds as much as $26 a week to the average bill.

Another measure of the actual cost of living is the ABS’s analytical living cost index. The ABS describes the index as

[a measure of ] by how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period

The issue of higher cost of living is clearly reflected in the index which shows over the last 15 months actual living expenses for many types of consumers have been far in excess of CPI

Under these conditions it isn’t really a surprise to see banks offering incentives to attract customers. However with  interest rates at current levels and cost of living rising above CPI I think the banks are fighting a losing battle.

Latest posts by __ADAM__ (see all)


    • Bubblelicious

      Commissioned research, although BIS won’t disclose who commissioned it?!

      Looks like questionable ethics to me.

    • “Honestly, who pay these people to stay in business”

      Thats a freaking good question Rob.

    • BIS Shrapnel are notorious for their property spruiking.
      They normally say that prices will rise by 20% so if they’re saying its less, then the market must be really bad!

      • Personally, I find it had to trust a mans opinion with a girls first name… But that’s just me. 🙂

        I just dont think he/she understands, that house prices are dropping because of the single most important reason, and its the same reason what happened in the US 3 years ago. Home owners pockets are being picked dry, either by increasing mortgage rates and/or Govt caused utility inflation. It isnt much of an environment where house prices could increase.
        Another FutureBull misreading of the situation, I think.

      • Yes, BIS are notorious for incorrectly predicting a boom, with regularity every year. Their report is always the same – 20% increase over three years. It never changes. Take anything they say with a cask of salt.

  1. I’m not sure whether the arrangement continues but in the past the BIS Shrapnel report was sponsored by QBE Mortgage Insurance (previously PMI). So perhaps we should not be surprised by the content

  2. If anynone wants to know how the housing market is really going, have a look at – it will show you over 8,600 newly discounted properties just in the last 7 days. BIS should be sued for MISLEADING and DECEPTIVE conduct.

      • The Land of Landlords. We, not too long ago washed each other’s laundry to keep our economy going. Now we’re going to rent each other’s homes?

        If those trends continue (refering to the Graphs on, where are the Landlords going to live?

        Oh no…! Don’t tell me… Thailand!

  3. Some fairly aggressive lending tactics at the moment, mostly looking for the refinance market chasing the ‘no frills’ sector. CBA have been losing a stack of business to Ubank (NAB) and their 6.8% deal. I’d say this is to try to save some of that business, although seems like they are still a bit off the mark.

    • I’m certainly depressed.
      Just looked at my financials for the fin year to date …. ouch

  4. It has been mentioned on this blog a number of times and I believe correctly. The only way house prices are going to go up is with debt issuing growth. Considering there is a limited number of people in this country and most of us are already maxed out on debt there is noone left to take on new debt. So the only way to kick start it again is by relaxing lending standards and getting people already in debt to get more debt. The problem is the lending standards are already extremely relaxed. So some extreme measures would be needed. Something like 50 year loans or allowing access to super to get private debt going again. I agree, don’t think $27 extra a month by CBA is going to do much.

  5. Politicians have no idea how ordinary people live … that’s why John Brumby and Kristina K. lost office. Labor is so far removed from the people that they pretend to represent they practically need a telescope to see an average punter (and that’s about as close as they liked to get to them too).

    Now watch as greedy Ted Baillieu continues right on from where hopeless John Brumby left off… first with jacking up utilities, next comes increased payroll tax, increased fines (always easy to justify) increased stamp duty (to pay for new estates). The fact that so many people are hard up against it doesn’t concern them at all as long as they can keep taxing the buggery out of them.

    Same goes for the banks – they don’t care about over-extending their customers because at the moment they can probably recoup most of their losses from a mortgage sale… as soon as people in negative equity start defaulting that’s going to change the landscape entirely. Unless we change the system to something like interest only or 50 year loans as Al (above) suggests then we could soon find we’ve hit the ceiling on house prices.

  6. uh oh…

    2009 was Ruddprime, 2011 Rupeeprime!!

    Today from CBA
    We are expanding the eligible borrower policy to accept applications from the following new customers for Owner Occupied or Investment Home Loan purposes:
    – Temporary Australian residents holding a current 457 VISA living and working in Australia (a copy of the 457 VISA must be included in your supporting documents)
    – Permanent Australian Residents living and working overseas.

    • CBA banksters should seek information from their Dubai and Irish brethrens as to what happened when house prices started falling – plane loads of expats taped credit cards on to their car windows (bought with a loan, of course) and left, knowing they will never come back.
      But what does Sir Norris have to worry about this, anyway – taxpayers are always there to compensate his bank’s loss.

      • Isn’t this something like sub-prime considering it could be more difficult to collect debt from people based overseas if housing does fall.

        • Why would banks care about loan book quality when its almost garanteed that tax payers are going to bail it out.

  7. On a side note-

    If tonight’s episode of ‘Offspring’ in ANY way represents the true nature of the Australian Housing Market, then..


  8. Credit creates deposits


    “A drop in general price levels, usually caused by increased demand for money that isn’t offset by an increased money supply, or a drop in the money supply that isn’t offset by a drop in the demand for money.”

  9. More rate competition between the bank’s lending products means lower earnings for the banks. Shareholders can kiss +20% ROE goodbye for the forseeable future.