Banks spend big for little gain

The major banks’ 1.5% cashback campaign at the end of last year cost them $100 million, with only a small share of home loan borrowers benefiting.

Kicked off by the ANZ, the cashback offer coincided with mortgage rates being near their lowest point and a larger than normal share of mortgages rolling off fixed-rate terms.

New customers to the major Australia-owned banks were offered up to 1.5% off their mortgage balance as an upfront payment to attract new mortgage business, compared with typical levels of about 0.9%.

As a result, nearly three times the usual amount of mortgage debt switched banks in December, while their market shares remained largely unchanged afterwards.

The offer benefited a small share of borrowers at the expense of banks, although it may be offset by generally higher lending margins.

Assuming no offset from higher margins, the RBNZ, in its latest Financial Stability Report, estimates the higher cashback offer cost banks around $100 million, which is a small share of their annual profits before tax of around $10 billion.

Earlier this year Squirrel Mortgages chief executive David Cunningham said the banks’ scramble to attract new customers through the cashback offers meant fixed rates for borrowers who couldn’t take advantage of them were probably 10-20 basis points higher than they would otherwise be.

“So, it’s a tax on any borrower who didn’t change banks to try and get a cashback. It’s classic legalised anti-competitive behaviour. I’d argue that the FMA under its fair treatment principles should be investigating things like this.”

Since the offers home loan rates have risen from a low of about 4.5% to about 5.2% for a two-year rate.

Housing risks are contained overall

The housing market generally remains soft. National house prices have been broadly flat over the past three years, the central bank’s stability report shows. 

Elevated housing inventories are weighing on house prices, particularly in Auckland and Wellington. House prices remain around the top of the RBNZ’s estimated sustainable range. 

While this suggests the risk of a correction is not particularly elevated, rising mortgage rates could reduce house prices further. Growth in mortgage lending has also been subdued.