Melbourne Cup blues


Two newsletters ago on 21 October 2010, I cautioned readers to think about issues affecting the property markets before popping the bubbly on Melbourne Cup day. The Reserve Bank pre-empted a bucking of the form book by defying analysts predictions today and raised the official cash rate by 25 basis points to 4.75%, the seventh rate hike since October 2009.

Therefore, it should not come as a shock that Bart Cumming’s favourite pedigree So You Think failed to win the Cup as much as the Commonwealth Bank’s decision to raise their standard variable home loan rate by 45 basis points an hour after the announcement. Notwithstanding their 2010 net profit of $5.7 billion and CEO Ralph Norris’ salary of $16 million, we should not be suprised the bank is crying foul that rates need to go up due to rising cost of funds.

On the one hand, this decision demonstrates the strength of the Australian economy on the back of economic gloom in the US and Europe. It also underlies Australia’s decreasing dependency on the US as our major trading partner with the Australian dollar moving to a high of 99.89 US cents during the afternoon trading session.

Then again, who gives a damn about interest rates on a day where glamour and celebration takes centre stage. What’s a day in spring racing without champagne and frolic, albeit under dark and gloomy Melbourne weather. Then again, perhaps it may well be this dark and gloomy stage in 2011 upon which we reminisce the 2010 Melbourne Cup, albeit  with much cheaper plonk in the glass.

For those nursing the Melbourne Cup blues both in the head and wallet, I have compiled the most competitive standard variable rates and fixed rates per Rate City’s top 5 to be as follows:

Variable Rates

1. Carrington National Online Power Home Loan – 6.29%
2. Collins Home Loans Standard Variable – 6.37%
3. Match Home Lonas Altitude Loan Variable – 6.38%
4. State Custodians Standard Variable – 6.39%
5. Homestar Finance Superstar – 6.47%

Fixed Rates
1. Heritage Building Society – 6.89%
2. Holiday Coast Credit Union – 6.97%
3. Resi Mortgage Corporation – 6.98%
4. Greater Building Society – 7.09%
5. MECU – 7.09%

It may be good to nudge your bank to see how much it will cost to switch but do remember there will also be establishment fees for the new loan in the new bank, they get you either way.  Just like the Melbourne Cup, even if you don’t get hit in the wallet, celebrations would have given the head a beating by tomorrow morning.

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Mortgage stress of Sydney’s outer west

New South Wales is the home to 44% of Australia’s mortgage delinquencies where mortgage holders in the outer western and south-western suburbs of Sydney are the most at risk of losing their homes, according to a Moody’s Investors Service report on 750,000 housing loans.Mortgage stress

The national average delinquency rate is 1.34% while the areas listed below have more than 2% of mortgages which are more than 30 days behind in repayments.

These mortgage stressed suburbs include the following regions where delinquency rates are between 2.4% – 2.8%:

  • Fairfield / Liverpool
  • Canterbury / Bankstown
  • Macquarie Fields, Minto, Camden and Narellan
  • Penrith, Mount Druitt, Blacktown and Richmond

The arrears in the north-west area of Sydney represented 6.5% of all arrears nationally, although the region accounts for only 3.7% of home loans written in Australia.

The study above was based on mortgages which represented approximately 12% of all mortgages in Australia.

Sydney is forecast to have a median house price of $750,000 by June 2013, a 20% increase from the current $624,000 median house price according to a QBE housing survey compiled by researchers and forecasters BIS Shrapnel. Forecasters predict a 4% increase in prices this financial year and 6% in 2011 / 2012. The forecast 9% increase in 2012 / 2013 comes despite a forecast variable interest rate rising to 9.1% during this time.

Will the RBA raise interest rates in June 2010?

Australian Interest rates

RBA cash rate trend

Source: Reserve Bank of Australia

The RBA has increased the cash rate from a 49-year low of 3% in October 2009 to the current 4.5%, a strategy of six 25 basis point increases over the last 8 months to bring interest rates to “more normal” levels. During this time, there were an estimated 270,000 first home buyers who entered the property market, taking advantage of the lower interest rates and the First Home Buyers Grant which have since been wound back by the government. As a result, property prices across Australia rocketed up by 20% in the year to March 2010, fuelled by the record low interest rates, a strong Australian economy with solid export figures fuelled predominantly by a growing Chinese economy where GDP grew by 8.7% in 2009. This is a strong case for the RBA to try and keep housing prices in check. However, the RBA’s over-riding priority is to keep Australia’s underlying inflation rate in check, that is to have the CPI fluctuating between 2 – 3% in the long run. Moreover, there are now signs the property market is beginning to feel the effects of the 6 rate rises:

  • Auction rates have cooled down, particularly in hot markets in Melbourne and Sydney. Australian Property Monitors indicate Melbourne’s clearance rates were down to 73% last weekend from 82% in the same weekend last year and from 62% to 60% for Sydney.
  • New home loans have been decreasing over the last 6 months to March 2010 to hit a 9-year low.
  • A drastic decrease in first home buyers who have put off buying their first home due to a combination of near unaffordable prices in popular and high growth suburbs across major capital cities, rising interest rates, job security and the end of the FHOG.
  • Home buyer sentiment is now weaker compared to 2009.
  • The Melbourne property market is bracing for a record 1,210 auction listings to enter the market over the next 2 weeks where REIV CEO Enzo Raimondo says is mainly due to the sharp increase in interest rates which are reducing pressure on house prices.

However, I believe the current housing shortage in Australia and strong population growth coupled with strong migration figures will continue to support house prices at current levels although there have been some recent indication the stock of supply is increasing albeit very slowly. Unless there is a clear solution to address the supply shortage and barring any major downturn in the world economy such as the current European debt crisis, there will still be pressure on house prices in the near future. Personally, I am tipping a 95% chance that interest rates will remain on hold at its current level of 4.5% and a mere 5% chance the RBA may actually reduce rates by 25 basis points to 4.25%.

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Statement by Glenn Stevens, Governor, Reserve Bank of Australia ~ 1 June 2010

Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.

European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time.

The effects of these various factors on the world economy will need to remain under review. At this stage, global growth is still expected to be at about trend pace in 2010. Conditions in Europe overall have been relatively weak, and the foreshadowed budgetary tightening will probably mean that this will continue, but growth is becoming more established in North America. In Asia, growth has continued to be quite strong and may need to moderate in the year ahead.

In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year.

Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the Board views this setting of monetary policy as appropriate for the near term.

Source: First Chartered Capital

Reasons for 6th interest rate increase since October 2009


20-year interest rate trend in Australia

The Reserve Bank of Australia has increased interest rates by 25 basis points today for the sixth time since October 2009’s 49-year low of 3%, bringing the cash rate to 4.5%. The RBA cited increasing demand from the reviving mining boom as being one of the reasons for the rate increase. On a broader note, the increase was mainly due to signs of a strengthening domestic economy, falling unemployment rate and price increases. Property prices increased by 20% in Australian capital cities in the year to March 2010, the biggest jump in 20 years according to the Australian Bureau of Statistics report on 3 May 2010.

Credit for housing has been expanding at “a solid pace”, even though new housing loan approvals have decreased over the last 5 months as the effects of the sharp interest rate rises took effect and the First Home Owner’s Grant tailed off.

“Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months”. the central bank said.

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Rationale for RBA’s 0.25% interest rate rise

One of the key rationale for the recent interest rate increase given by the Reserve Bank of Australia was that the economy has performed incredibly well compared to all the major developed nations around the world.  Unemployment remained steady at 5.9% although this figure is expected to increase over 2010.

Given the cash rate of 3.00% was at historical 49-year low prior to the rate rise, the RBA felt this level of interest rate is no longer required in view of the recent economic performance. It is expected the cash rate will gradually increase over the next 6 – 12 months.

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