Over the last year the Reserve Bank has regularly voiced its concerns about the strength of the housing market, the rapid expansion of mortgage credit at low margins and the impact on the banking sector of a future correction.
While there has been substantial growth in registered banks' lending assets (12.3% in 2006) we don't think the banks have been guilty of putting all their eggs in the housing basket.
They've recorded broad based growth across most lending categories, including agricultural and business lending.
However the Reserve Bank's concerns with low interest margins are borne out in our survey of bank results.
Interest margins contracted over the sector by 17 basis points to 2.35%.
There has been margin pressure on all lending but a key factor has been the mortgage market where the strong bias for fixed rate mortgages has continued with the growth focussed on longer fixed rate periods. This was a particular feature of the second half of 2006 as two-year fixed rate mortgages written in 2004 came up for re-pricing.
Given the very tight interest margins on two-year fixed rate mortgages, banks focussed on writing longer term mortgages on more favourable terms.
By the end of February 2007, almost 30% of all mortgages had a fixed rate term of more than two years.
Competition and margin pressure has also seen growth in the number of mortgages being written for borrowers with less than a 20% deposit.
There is now a considerable number of options for borrowers wanting to borrow above 80% or even the entire value of a home.
Recently published statistics indicate that over a quarter of all new mortgages being written by our four largest banks are for more than 80% of the value of the property.
While this development has drawn the attention of the Reserve Bank we take the view that banks, as financial intermediaries, are in the business of balancing risk and return. Ultimately, it will be the requirement to provide their owners with a satisfactory and sustainable return on the capital employed that will ensure the banks lend prudently, and appropriately price risk.
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