The property market appears increasingly close to being caught in a pincer between a big increase in supply and the start of moves by banks to increase interest rates on home loans. Buying on the fringe is the only way for some families to get into the market. Credit:Virginia Star Westpac announced today it will be the first of the big banks to raise interest rates for owner-occupied home loans. Over the past few months rates on some investment residential property loans have increased but the owner-occupied residential heartland has until now been shielded from an increase in variable rates. It is a fair bet that in the Australian banking landscape where there is limited price-based competition between the major lenders, that others will follow.

When Westpac boss Brian Hartzer​ was asked whether other banks would follow suit he said he couldn't speak for them but noted the pressure was not specific to Westpac. Reading between the lines, he thinks the others will also move. While Westpac's smaller brands like St George and Bank of Melbourne customers were spared the interest rate increase there is no guarantee how long this situation will continue. There were plenty of mortgage holders still hoping the Reserve Bank would usher in another cut to official rates this year. They will now receive a jolt at the news of the first large bank to increase rates. And those predicting the fall in residential property prices as early as the first quarter of calendar 2016 should feel they are on safer ground.

Mr Hartzer would not rule out that sections of the property market would fall in an absolute sense but predicted others would just see growth rates ease. The head of the consumer bank at Westpac George Frazis​ said raising interest rates was a "difficult decision and one that is not taken lightly. We acknowledge that it does impact customers, even in an environment where interest rates remain near historic lows. "We have sought to carefully balance the needs of our borrowers, depositors and our shareholders, as well as the competitive market we operate in. Increases in the cost of doing business inevitably influence business decisions, including price," Mr Frazis said. The reason for the rise in interest rates is simple and understandable enough. The amount of capital that the banks need to hold against mortgages has increased by 50 per cent thanks to recent regulatory changes. Banks are also feeling the pressure from additional requirements to hold more capital to be systemically safer. Over the past six months all the banks have been able to fortify their balance sheets by either raising fresh equity or selling assets to bolster cash.

Westpac is the last of the four majors to make a big move in this regard but on Wednesday announced it would raise $3.5 billion. The regulatory moves are designed to ensure the major banks are in the top quartile among their global peers – as recommended by the Murray Financial System Inquiry – and these were always going to come at a cost. And there were plenty of bank executives who, while disagreeing with the need to raise more capital, made it clear enough that those costs were more likely to be passed onto customers than to shareholders. Westpac announced its 2015 result yesterday including a 2¢ increase in its dividend and cash earnings up 3 per cent. But shareholders are not immune from the cost of bolstering capital. The bank's return on capital fell in 2015 by 57 basis points to 15.8 per cent. Meanwhile thanks to the discounted rights issue existing shareholders will get the opportunity to buy some well-priced additional shares.

Having said that Mr Hartzer noted that the bank plans to continue its approach to steadily increase dividends. For the most part Westpac delivered a sound set of profit numbers despite some industry headwinds that, apart from the need for more capital, include a weak lending demand from larger business. Westpac's institutional bank, which looks after the big business end of the market, saw cash earnings down 12 per cent and revenue down 1 per cent. But overall the profit was slightly better than analysts had been expecting. Loan growth came in at 7 per cent and Mr Hartzer takes the view that based on the economy this should be about 5 per cent going forward. But where to from here for Westpac and its peers? Looking at today's snapshot all four of the big Australian banks are comfortable in a capital sense.

Loading But there are still some serious regulatory balls that have yet to land. The detail around the internationally based Basel 4 has yet to finally determined and it is possible that the hat may need to be passed around again. Ratings agency Fitch said on Wednesday that it believes further increases in regulatory capital requirements for Australian banks are possible, mainly as a result of changes to the global framework, and subject to APRA's final definition of "unquestionably strong banks" as raised by the Financial Service Inquiry in December 2014. More banking and finance news and analysis