If you backtrack to August last year, things were looking gloomy for the housing sector and property investors. After years of breakneck property appreciation (often in the double digits), it seemed that house prices had finally come off the boil. Millennials who had become despondent at million dollar median house prices in Sydney and Melbourne were sniffing the air hopefully – could this be their chance? Well, if someone bought a property in the past year, it turns out it was their chance. The bottom seems to have been found, and property is apparently on the rise once more.
The Australian Financial Review even reported today that the Reserve Bank of Australia (RBA) has noticed "further signs of a turnaround in established housing markets, especially in Sydney and Melbourne", which helped stay the RBA's hand today when it left official interest rates steady at 1%.
If the housing market continues to climb, what does this mean for our big ASX banks?
Well, it's a definite positive. Banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are usually the 'go to' for property investors seeking a housing loan. If it's not the banks themselves, it is usually a bank-owned subsidiary like CommBank's Aussie Home Loans or Westpac's St. George Bank.
Mortgages and property loans are valuable assets for the banks to hold, as they provide both certainty of earnings (a 30-year mortgage is a long commitment) and a financial instrument which the banks can leverage.
With interest rates at record lows, and perhaps going lower still, the banks' earnings base is being squeezed. There is enormous pressure (both competitive and political) to pass on interest rate cuts to consumers' mortgages in full, and interest rates banks are paying on term deposits and savings accounts can't go too much lower to compensate without risking an exodus of capital. Thus, rising demand for property loans are a way out of this quagmire for the banks.
Foolish takeaway
It's no coincidence that last year's property slump saw bank shares follow suit (the Royal Commission didn't help). APRA's new regulations allowing banks to consider a lower interest rate for mortgage evaluation should also see further interest. If property prices continue to rally, it will draw more investors in and (in my opinion) lead to more business for the banks – and possibly higher share prices.
