MS: Property investors hit by five rate hikes

From Morgan Stanley:

We believe the 20bp rate hike across WBC’s entire mortgage portfolio will put a meaningful dent in fragile housing sentiment. Alongside tighter lending standards, new investors face 100-120bp higher rates since the RBA’s last move, strengthening our thesis that Australia’s housing boom has peaked.

Another hit: Alongside today’s capital raising, Westpac hiked interest rates across its entire mortgage portfolio by 20bp, impacting ~12% of the mortgage market and $155bn of balances.This adds to the 27-29bp in sector-wide repricing of investor loans in July (interest-only for NAB),as well as the less recognised ~70bp in front-book hikes through reduced discounts, meaning the typical new investor is seeing 100-120bp higher rates than in June.

To an already softening market:We expect WBC’s repricing is likely to have a disproportionate impact on housing sentiment, given it affects the entire back book, comes without the cover of an RBA rate cut,and takes effect right ahead of two ‘super-weekends’ of elevated auction volumes. We have been surprised at the extent of investor push back to our call that the housing market has peaked. Already, we have seen evidence of softening in auction clearance rates and investor activity alongside weaker house price expectations and slowing house price growth (see Exhibits 5 and 10).

Challenging investor fundamentals: WBC’s mortgage rate hike further weakens the investment proposition on housing. With CoreLogic-RP Data estimating gross rental yields at 3.4% for houses and 4.3% for apartments, our estimate of effective investor property loan rates of 5.5-5.7% imply a running loss of 1.2-2.3% per annum, even before agency costs and maintenance are factored. Of course, Australia’s negative gearing framework subsidises these losses, but our forecast for a looming housing oversupply makes the prospect of both rental growth and capital gains particularly uncertain.

Strengthening our concerns: This mortgage repricing forms only part of what wes ee was a deliberate macroprudential strategy to rein in the housing market, given concerns around bubble-dynamics and worsening fundamentals.We also note the risks of a credit crunch for apartments from the 10% speed limit on investor property loans and materially tighter credit standards across the board.We think the cooling-off period for housing will take growth momentum lower, lift recession risks, and amplify the need for easier fiscal policy under the new Federal government leadership.

RBA implications: We highlight our call that the RBA cuts another 50bp this cycleto 1.50%. November remains our basecase, implying a much closer decision than the 30% chance of a cut currently priced.