The four major banks ANZ, CBA, NAB and Westpac’s credit ratings have been recently downgraded by Moody’s, a large US firm that advisor’s investors, due to perceived risks in the Australian housing market. Moody’s has cut all four major Australian banks long term measure of their creditworthiness from ‘AAA’ the highest rating to ‘AA’ the second highest rating. Moody’s did not change the bank’s short-term ratings, and did not foresee any more imminent cuts.
The reason for the decision Moody’s says is because of the banks’ exposure to a potential economic downturn linked to the Australian property market. When you combine Moody’s move with recent Reserve Bank Of Australia’s housing figures showing housing prices are more than five times household income, with household debt well above 150 per cent of household income, it’s not hard to see why Moody’s has made the move.
And with Parliament passing the new $6 billion-dollar bank levy, it’s not great timing for the banks who may find the cost of borrowing money to be higher in the future due to the Moody’s downgrades.
It makes for an interesting time for the banks because the bank regulator here, the Australian Prudential Regulation Authority (APRA) will announce in the coming weeks how much (if any) extra capital the banks must hold to be more resilient and shock proof, in case of an economic down turn or sudden shift in the market.
Property Investors Are A ‘Soft’ Target For The Banks Politically At Present – Thanks To The Current Affordability Crisis.
Interestingly, in response to none of these issues specifically say the major banks, the four majors all recently increased interest rates in June on interest-only home loans by 0.3 and 0.35 percentage points.
Given the politically sensitive nature of the current housing affordability crisis in NSW and Victoria, it’s hard for any politician to go on the front foot and attack the banks, because some analysts are predicting this interest rate hike could add as much as $900 million in additional annual profit for the major banks, but at the same time – this measure will also make it a little easier for first home buyers to compete for property in an already heated property market.
Earlier this year, APRA set a 30 per cent cap on the proportion of new mortgage lending that can be interest only so there is a definite beginning of a squeeze here on interest-only property investing loans.
So with the ever changing banking landscape combined with recent Tax Office changes (including changes to how investment property depreciation is treated moving forward), has investors reworking their numbers and some are discovering they are now better off switching out from their interest only loan to a loan where they pay back capital as well. With that said, there are always more options available to you to meet your unique property investing finance needs.
Moody’s Didn’t Stop There.
The eight smaller institutions didn’t escape Moody’s downgrades either. Bendigo, Adelaide Bank and Newcastle Permanent Building Society were downgraded from AAA to AA. Heritage Bank, ME bank, QT Mutual, Teachers Mutual, Victoria Teachers Mutual and Credit Union went from AAA down to BAA.