CBA’s Rate Cut Sparks a Buying Opportunity in MBS and REITs—Banks Take a Back Seat

The Reserve Bank of Australia’s (RBA) May 2025 decision to cut the cash rate by 25 basis points to 3.85% has set off a seismic shift in Australia’s financial markets. While the immediate focus has been on relief for mortgage holders, the broader implications for mortgage-backed securities (MBS) and housing-related equities are profound. Commonwealth Bank of Australia (CBA), the first major lender to fully pass through the rate cut to its 1.7 million home loan customers, has inadvertently created a roadmap for investors to capitalize on a prolonged accommodative monetary environment.

The Catalyst: RBA’s Rate Cut and CBA’s Response
The RBA’s move was driven by a sharp drop in inflation—headline inflation is now at 2.4%, within its 2–3% target—and global headwinds like U.S. trade tensions. CBA’s subsequent reduction of its variable home loan rates to 5.59% from 5.84% marks a critical turning point. For borrowers with a $600,000 mortgage, this translates to $95 in monthly savings, or over $1,100 annually. Crucially, however, only 14% of eligible customers have actively reduced their repayments, opting instead to accelerate loan paydowns or build redraw balances.

This inertia among borrowers underscores a key risk for banks: prolonged exposure to compressed net interest margins (NIMs). While CBA’s move aligns with the RBA’s easing cycle, it also signals that banks reliant on mortgage lending face narrowing profit buffers as rates trend lower.

Implications for Mortgage-Backed Securities (MBS)

The RBA’s pivot to accommodative policy has created a tailwind for MBS. Lower borrowing costs reduce prepayment risk—the risk that borrowers will refinance or pay off loans early—thereby stabilizing cash flows for MBS investors. With the RBA’s forward guidance emphasizing “heightened uncertainty” but a commitment to price stability, MBS issuances are poised to expand.

Australia’s MBS market, already the second-largest in the Asia-Pacific region, could see accelerated growth as banks seek alternative funding sources amid thinner margins. For investors, MBS offer a risk-averse entry point into the housing market, backed by government guarantees and diversified loan portfolios.

Real Estate Investment Trusts (REITs): The New Safe Haven

The rate cut’s most compelling opportunity lies in residential and industrial REITs. Lower mortgage rates directly boost housing demand, benefiting REITs with exposure to apartment complexes, student housing, or logistics facilities. For instance, Scentre Group (owner of Westfield malls) and Dexus (focused on office and industrial spaces) could see occupancy rates and rental income stabilize as borrowing costs ease.

The RBA’s inflation moderation also reduces the risk of sudden rate hikes, providing REITs with predictable financing costs. Meanwhile, residential REITs like Goodman Group or Charter Hall could benefit from pent-up demand for housing as affordability improves.

The Cloud on Banks: Compressed NIMs

While CBA’s rate cut is a boon for borrowers, it paints a bleak picture for banks. With NIMs—the difference between loan and deposit rates—already under pressure, further cuts could squeeze profitability. CBA’s data reveals that only 14% of customers reduced repayments, meaning most borrowers are effectively acting as “voluntary lenders” by overpaying, reducing the bank’s interest income over time.

Investors in banks like CBA, NAB, and Westpac should brace for a prolonged period of margin compression. This is especially true for lenders with high mortgage portfolios, as refinancing activity remains muted and deposit costs remain sticky.

Investment Strategy: Shift to Real Estate Exposure

The writing is on the wall: underweight banks, overweight real estate. Here’s how to position:
1. Buy MBS: Target AAA-rated securities with government guarantees to minimize credit risk.
2. Rotate into REITs: Focus on diversified REITs with exposure to both residential and industrial properties.
3. Avoid Mortgage-Heavy Banks: Proceed with caution on CBA and peers until NIMs stabilize.

The RBA’s easing cycle isn’t just about today’s relief—it’s a signal that low rates will persist longer than markets anticipate. For investors, this is a once-in-a-cycle opportunity to lock in gains in real estate while avoiding banks’ margin-related headwinds.

Risks and Considerations

• Global Trade Tensions: Escalating U.S. tariffs or geopolitical risks could delay housing demand recovery.
• Bank-Specific Risks: Non-performing loans or regulatory changes could disrupt REIT financing.
• Rate Cycle Miscalculations: If inflation rebounds sharply, the RBA may reverse course, spiking volatility.

The RBA’s May rate cut is more than a temporary reprieve—it’s the beginning of a new monetary paradigm. For investors, the path forward is clear: pivot toward MBS and REITs, and leave mortgage-heavy banks in the rearview mirror. The era of easy bank profits is over. The era of real estate’s comeback is now.