On Bank Pricing of Single‐Family Residential Home Loans: Are Australian Households Paying Too Much?

ABSTRACT

This paper examines the persistent divergence between observed mortgage rates and a capital‐market‐implied benchmark in the Australian residential housing finance market. Using quarterly data from 1998 to 2025, we construct a synthetic variable‐rate mortgage benchmark based on fixed‐rate mortgage yields, interest rate swaps, and swaptions to isolate fundamental funding costs and embedded interest rate risk. We estimate an autoregressive distributed lag (ARDL) model to decompose the spread between observed and benchmark rates into risk‐based pricing and sluggish pass‐through. The empirical evidence reveals a large and persistent long‐run spread. On average, mortgage rates exceed the synthetic benchmark by approximately 146 basis points, widening to more than 240 basis points during periods of elevated credit risk. This divergence reflects not only risk‐based pricing but also incomplete and delayed pass‐through, consistent with structural market power in Australia's concentrated banking system. As a result, mortgage rates adjust slowly to changes in capital‐market conditions. The persistence of this spread has important economic implications. By raising mortgage rates relative to their capital‐market benchmark, these pricing frictions increase the income required to qualify for homeownership, thereby exacerbating affordability constraints in an already highly leveraged housing market.