SYDNEY — Australian banks are cutting the cost of fixed-rate mortgages to the lowest level in more than two decades as a marked drop in funding costs and fierce competition combine to offer a glimpse of light in a moribund housing market.

Any easing in financial conditions, or use of lower interest rates or increased money supply to stimulate activity, will be welcomed by the Reserve Bank of Australia. The central bank is counting on a revival in home building to help cushion the economy as a long boom in mining investment cools this year.

The banks’ generosity has not extended to variable rates, however, which cover the vast bulk of the country’s 1.3 trillion Australian dollars, or $1.3 trillion, in home loans, putting pressure on the central bank to cut official rates if it is serious about a housing recovery.

“The banks are not going to cut variable rates on their own,” said Brian Redican, a senior economist at Macquarie. “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. Only the R.B.A. can do all that.”

Although the central bank did ease rates in both October and December, the effect on borrowing has been all but imperceptible.

Data released Monday by the Australian Bureau of Statistics showed that the number of home loans taken out in December had dropped 1.5 percent, the third straight month in which that number fell, and a five-month low.

Annual growth in housing credit slowed to an all-time low 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 that the central bank struck an unusually mournful tone in its quarterly report card on the economy last week, lamenting the life missing from investment spending outside mining.

The outlook for tame inflation and gradually rising unemployment fueled expectations that not only would the Reserve Bank probably have to cut the cash rate again, it would also have to keep it low for longer.

In recent weeks, it is that dawning realization in the markets that has dragged down key swap rates, which are the fixed portion of an agreement for cash flow in a particular market. The rate on three-month swaps hit an all-time low 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, which identifies the relationship between swap rates at varying maturities, giving them scope to ease independently of any move in official rates.

The average fixed-rate mortgage at the end of January was already the lowest in two decades at 5.52 percent, but the latest cuts by banks mean it is even lower now.

The Westpac bank lopped 0.4 percentage point off its packaged two-year fixed rate, taking it to 4.99 percent. Another bank, St. George, cut its entire fixed-rate suite, from one to five years. Rates for a three-year fixed loan from Commonwealth Bank of Australia, National Australia Bank and Australia New Zealand Banking are all at 5.29 percent.

Still, although fixed-rate mortgages have been coming down for months, their popularity 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 effect on housing demand, and there are signs that intense competition is driving banks to offer better deals.

Although the average standard variable rate is about 6.44 percent, a couple of phone calls to banks will get a discount of 0.75 to 1 percentage point.

But the banks are reluctant to ease any further on their own, because 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 precrisis levels of about 40 percent — driven in part by tougher regulations.

But the competition for that money is fierce, making it costly. Rates on bonus saver accounts, with higher interest rates, have increased by 2.5 percentage points relative to the cash rate since 2009.

That shift in the funding mix is one reason the cash rate may have to fall further than in the past.

Shane Oliver, chief economist at AMP Capital, said that at this stage of the easing cycle in 2009, house prices were rising 12 percent annually, while approvals for 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,” Mr. Oliver said.

Article source: http://www.nytimes.com/2013/02/12/business/global/australian-banks-try-to-stimulate-home-building.html?partner=rss&emc=rss