Time to 'short' Australia's housing bubble (update 4). Banks facing funding shitstorm, oversupplied bond markets and interest rates spiking.

Australian banks have funding issues. They have had since the 2008 credit crisis it was backstopped by the government underwriting bank debt and guaranteeing deposits and RBA creating liquidity for the banks via purchasing commercial mortgage back securities and mortgage bank securities, this won't go on forever, especially when LTR write-downs (property: commercial/residential) are probably going to occur rapidly into the tail end of 2010. Meanwhile the banks are hedging on parity via AUD/USD and passed on interest rates, they (banks) are taking two market bets on their bullish 'predictions'.

Of course fatal bet/s.

Especially when global bond markets are oversupplied with yield demand competing with real rates. In other-words, interest rates will hit the credit markets in full effect thus effecting high interest rate mortgages, thus effecting mortgage repayments.

WSJ

"SYDNEY (Dow Jones)--Australia's banks are appearing increasingly likely to make the unpopular decision of hiking interest rates on their loans to customers out-of-step with any movements in the country's official cash rate to claw back higher funding costs.

Australian banks rely heavily on retail deposits and offshore inter-bank lending markets to fund their loan books and the cost of wholesale credit, although moderating somewhat since late 2008, hasn't returned to pre-financial crisis levels.

In the latest rhetoric from an Australian banker foreshadowing a possible re-pricing of their loan book, Westpac Banking Corp. (WBK) Chief Executive Gail Kelly said Monday that Australia's second biggest bank continues to experience materially higher funding costs and that interest rates on its loans to customers will rise "over time".

Australia's major banks are experiencing record profitability but their most recent financial progress updates indicate earnings growth is slowing as still-cautious small businesses continue to hoard cash rather than risk expansion.

The Reserve Bank of Australia made the surprising decision last Tuesday of keeping Australia's official cash rate on hold at 4.50% as it attempts to balance the impacts on inflation from a booming Australian mining sector with continued signs of fragility in the U.S. and Europe.

Any move by the banks to raise rates on their home loans and credit cards independent of the central bank could take pressure off the RBA to raise rates because the banks had already done some of the job.

Kelly said at a business lunch in Sydney that Westpac is still replacing offshore wholesale borrowings it didn't replace before the global financial crisis with more expensive money, and that competition between banks for additional funding is pushing up the cost of retail deposits.

She didn't specify when rates on Westpac's products could rise but said the bank expects its cost of funding to keep rising for another 18 months.

The Sydney-based bank said immediately after last week's RBA decision to keep rates on hold that it was also leaving its rates steady and had "no current plans" to change its standard variable rate on mortgages ahead of the next central bank meeting in early November.

Australia & New Zealand Banking Group Ltd. (ANZ) Chief Executive Mike Smith told reporters last week that "something has to give at some stage" on loan pricing and National Australia Bank Ltd. (NAB) said that it hadn't made any changes to its mortgage rate "at this time".

Commonwealth Bank of Australia (CBA.AU), which is Australia's largest bank, is the only one of Australia's major banks that hasn't yet commented on the RBA's decision. "We don't speculate on possible interest rate movements," a spokesman reiterated Monday.

History has shown that when one Australian bank sticks its neck out and leads with an out-of-step rate rise, copping the related bad media publicity, the other banks usually quietly follow.

Westpac, though, may be more reluctant to lead than in the past after the wave of outrage it generated last December for leading with a 45 basis point hike in its mortgage rate in response to just a 25 basis point rise in the official cash rate.

Lawmakers from both sides of politics have consistently criticized the banks for raising rates independently of official moves in the cash rate, but that didn't stop them from doing so on several occasions in 2008 and 2009.

Southern Cross Equities banking analyst TS Lim said there is "a very strong possibility" that the banks could raise their rates before the next RBA board meeting in November. "There's pressure on margins and every month that they're delaying is going to cause the banks some grief," he said.

Lim, however, added that Commonwealth Bank might be reluctant to anger customers with a rate rise prior to its annual shareholder meeting on Oct. 26 to avoid any ugly public confrontations.

An analyst from a large international investment bank, who wished to remain anonymous, agreed that it's possible the banks could move before the next RBA board meeting, which happens to be on the same day as Australia's biggest horse race, The Melbourne Cup.

But he said it's more likely they will "piggy back" onto another rise in the official cash rate by adding some more on top.

Morgan Stanley said last week that Commonwealth Bank would need to raise its standard variable home loan rates by as much as 50 basis points outside any moves by the RBA to offset higher funding costs enough to maintain its 2011 financial year's margins at the previous year's levels.

"However, we think this will be difficult to achieve and our forecasts assume just 30 basis points of 'out-of-cycle' rate rises," Morgan Stanley said."