Big Four banks poised to gain the most from Housing Guarantee Scheme

Despite regulatory concerns emerging in the private credit sector and uncertainty around the rate-cutting cycle, major banks are poised to benefit from a combination of improved credit growth and stabilising interest rates, according to Citi analysts.

The analysts point to next week's implementation of the expanded Home Guarantee Scheme as a key catalyst that will stimulate housing demand and credit growth over the coming 12 to 18 months, even as recent inflation figures suggest the RBA may be nearing the end of its easing cycle.

Policy shift tips scales toward demand

From 1 October, the government's Home Guarantee Scheme will cover lenders mortgage insurance on deposits between 5% and 20% for all first home buyers. With previous caps on places, eligible income (formerly $125,000 for singles, $200,000 for couples) and property prices now removed, a Sydney first home buyer can purchase a $1.5 million property with just a 5% deposit.

RBA Assistant Governor Brad Jones told parliament this week the policy could add 1% to 2% to overall housing credit and push house prices higher in the short term. However, he expects the stronger demand will eventually trigger a supply-side response that dampens price effects over the medium term.

However, Citi notes this is yet another demand-side policy following HomeBuilder and the Housing Australia Future Fund, reflecting that stimulating demand remains easier than tackling supply-side reforms.

Credit growth has legs

Last week's stronger-than-expected monthly CPI print prompted Citi economists to remove their November rate cut forecast, with the three-year yield rising 15 basis points over the week. Some market commentators now suggest the rate-cutting cycle is already finished.

Citi argues housing credit typically continues to accelerate well beyond the final rate cut. Pre-COVID history shows housing credit can peak six to 12 months after the last cut, as lower rates drive sentiment improvements that take time to flow through to actual purchases.

Notably, banks report only 10% to 15% of borrowers have requested lower mortgage repayments despite recent rate cuts, suggesting the psychological impact on sentiment matters as much as the direct cashflow benefit.

First home buyers to buoy growth

First home buyer lending growth has moderated to 2% year-on-year ahead of the scheme's introduction, representing around 18% of total new sale commitments excluding refinancing. During the COVID mortgage boom, first home buyer commitments peaked at 27% of new sales activity, a level Citi suggests could be retested.

Regulatory clouds

A potential headwind emerged this week when ASIC released Report 214 examining the private credit industry, which has effectively replaced banks as the primary financier of residential construction and development over the past decade.

The report highlighted concentration concerns, with 40% to 60% of the roughly $200 billion private credit sector exposed to real estate. ASIC identified funds targeting higher-risk construction and development as the "greatest priority" for addressing potential conflicts of interest and transparency issues.

Citi warns new regulatory standards risk constraining a material source of finance to residential construction, even as institutional private credit providers stand to benefit from increased oversight. This matters because dwelling commencements are running at around 175,000 annually, well below levels needed to meet the government's 1.2 million homes target.

Commencements continue to skew toward houses rather than multi-residential developments, which would favour first home buyers and investors, partly reflecting the feasibility gap between construction costs and sales prices for apartments.

Major banks best positioned for growth

The Home Guarantee Scheme's eligible lender panel is restricted to banks, where first home buyers typically head anyway. Macquarie is not participating given its customer base, while regional banks are currently out of the market, meaning incremental housing credit growth will likely favour the major banks.

Citi nominates ANZ (ASX: ANZ) and Westpac (ASX: WBC) as its preferred banking exposures (both rated Neutral), though notes Commonwealth Bank is also well-placed to benefit from enhanced housing credit conditions.

With more stable rates and better credit growth, the revenue outlook for major banks continues to improve slightly. Higher house prices would strengthen loan collateral and signal larger loan sizes, both positive for bank revenues.