Australian banks' net interest income growth suffering from a weak housing market

Westpac has alreadly limited loans from 95% to 80% of the home value.

Financial stability risks have been rising in Australia due to the overvalued residential property market, particularly in Sydney and Melbourne, and BMI Research believes that net interest income growth of Australian banks will suffer from a weakening housing market.

The Australian authorities, including the APRA and state governments, have been attempting to cool the property market by curbing speculative activity through various measures, which the analyst expects to continue to weigh on investor-related housing credit growth.

Here's more from BMI Research:

While data from Corelogic LP showed that growth in home values such as Sydney moderated to moderated to 11.3% y-o-y in June (which was much lower than the rate of 18.4% y-o-y growth recorded in July 20 15), the authorities will be keen to see prices head lower in order to contain risks to the financial system.

The biggest Australian lenders continue to respond to the APRA's demand to limit the growth of their property investment-lending portfolio to less than 10.0% per annum by tweaking mortgage policies.

For example, Westpac announced that starting from July 6 it will limit loans to 80.0% of the home value for those being bought by prospective landlords, from 95.0% previously. Meanwhile, the New South Wales and Queens land state governments introduced stamp duty charges for foreign real estate buyers of 4.0% and 3.0% respectively, in June.

This followed the decision by the state of Victoria to increase the existing stamp duty charge for foreign property investors in April to 7.0%, from 3.0% previously. Indeed, investor-related housing credit growth declined to 6.0% y-o-y in May, which was lower than the 7.4% y-o-y growth rate for the owner-occupier category.

In addition, with risks mounting for the housing market, we expect the Reserve Bank of Australia (RBA) to maintain its accommodative monetary policy stance in a bid to provide support to the economy, and keep interest rates near historical lows for a prolonged period. Therefore, we also expect the low interest rate environment to also weigh on net interest income.