* Falling swap rates allow banks to slash fixed-rate mortgages
* But variable rates also need to fall to truly entice borrowers
* Puts the onus on the RBA to ease policy further
By Wayne Cole
SYDNEY, Feb 11 Australia's banks are cutting the cost of fixed-rate mortgages to their lowest in over two decades as a marked fall in funding costs and fierce competition combine to offer a glimpse of light in a moribund housing market.
Any easing in financial conditions will be welcomed by the Reserve Bank of Australia (RBA) which is counting on a revival in home building to help cushion the economy as a long boom in mining investment cools later this year.
The banks' generosity has not extended to variable rates, however, which cover the vast bulk of the country's A$1.3 trillion ($1.7 trillion) in home loans, leaving the onus on the RBA to cut official rates if it is serious about a housing recovery.
"The banks are not going to cut variable rates on their own. And first-home buyers need to know that rates are going to stay down for them to have the confidence to jump into the market," said Brian Redican, a senior economist at Macquarie.
"Only the RBA can do all that."
While the central bank did ease in both October and December, the impact on borrowing has been all but imperceptible.
Data from the Australian Bureau of Statistics out on Monday showed the number of home loans taken out in December dropped 1.5 percent, the third straight falls and a five-month low.
Annual growth in housing credit slowed to an all-time trough of 4.5 percent at the end of 2012, a long way from the double-digit pace common in the previous two decades. Indeed, growth peaked at no less than 22 percent in 2004.
That could be one reason the central bank struck an unusually mournful tone in its quarterly report card on the economy last week, lamenting the lack of life in investment spending outside mining.
The outlook for tame inflation and gradually rising unemployment fuelled expectations that not only would the RBA likely have to cut the cash rate again, but that it would also have to keep it low for longer.
It is this dawning realisation in markets that has dragged down key swap rates in recent weeks. The rate on three-month swaps hit an all-time trough early in February at 2.92 percent , lower even than during the global financial crisis.
That is important for banks as fixed-rate mortgages are priced off the swap curve, giving them scope to ease independently of any move in official rates.
FALLING NOT FIXED
The average fixed rate at the end of January was already the lowest in two decades at 5.52 percent, but the latest cuts by banks mean it's even lower now.
Westpac lopped 40 basis points off its packaged two-year fixed rate taking it to 4.99 percent. St. George cut its entire fixed rate suite, from one to five years. Rates for a three-year fixed loan from the CBA, NAB and ANZ are all at 5.29 percent.
Still, while fixed-rates have been coming down for months their popularity still lags. Late last year, 14 percent of new loans had fixed rates, up from 10 percent six months earlier.
Lower variable rates would have a much bigger impact on housing demand, and there are signs that intense competition is driving banks to offer better deals.
While the average standard variable rate is around 6.44 percent, a couple of phone calls to banks will get a discount of 75 to 100 basis points from that.
But the banks are reluctant to ease any further on their own since much of their funding comes from deposits, rather than markets, and rates on those accounts remain relatively high.
Deposits now make up 54 percent of the banks' total funding, a marked increase from pre-crisis levels around 40 percent -riven in part by tougher regulations.
But the competition for that money is fierce, making it costly. Rates on bonus saver accounts have increased by 250 basis points relative to the cash rate since 2009.
This shift in the funding mix is one reason the cash rate may have to fall further than in the past to get the same bang for the buck.
Shane Oliver, chief economist at AMP Capital, notes that at this stage of the easing cycle back in 2009, house prices were rising 12 percent annually while approvals to build new homes were up 41 percent on the year. The latest comparable numbers are 1.8 percent and 13 percent.
"Most economic indicators remain far weaker than they normally are this far into an interest rate easing cycle, suggesting monetary conditions are still too tight." (Editing by Eric Meijer)