Archive for the 'Loan Finance' Category
Source: The Australian, 
Frank Gelber – Economist
WE need to build more housing. A lot more. And we will, but we probably won’t build enough.
There is a severe shortage of stock and that will mean rising prices. The question is by how much they will rise. And how the Reserve Bank contains price rises.
This cycle has a lot longer to run. But already we can see it will be prematurely curtailed by rising interest rates.
The long-awaited property upswing is only now starting. Prices around Australia have risen strongly over the past year.
Forecasts of a collapse have been dismissed. Owner occupiers and investors now regard housing investment as safe.
Concern has swung to the problem of affordability, doubly affected by the combination of rising prices and rising interest rates. But this is just the beginning. Both housing prices and interest rates have a long way to go. And affordability will get a lot worse before this is over.
As prices and interest rates continue to rise, people will need to match their aspirations to what they can afford. Existing homeowners will ride the cycle. Upgraders or downsizers will have the capital gains to help finance the next purchase.
But, as the upswing continues, first-home buyers will buy smaller, perhaps older houses and units in less salubrious suburbs. Some may well be locked out of the market. And as rents continue to rise, investors will return.
Increased prices will stimulate new building. Price rises and volume rises have been a boon for state governments which are heavily reliant on stamp-duty revenues from conveyancing.
Hopefully, they’ll have learned the lesson that they make their money from the volume of transactions rather than by extracting maximum return from each.
If you get too greedy, you affect the volume of sales and revenues fall, not rise. NSW learned this lesson when it killed the goose in the post-2001 housing boom by raising infrastructure charges on new development, thereby putting a floor under housing prices. When the RBA burst the housing price bubble by raising interest rates at the end of 2003, housing prices fell by 10 to 15 per cent. Construction collapsed and NSW has been under-building ever since. That’s why the shortage of stock is so extreme in NSW.
The fall in residential construction over the past decade was a primary reason for the weakness of the NSW economy.
The other player is the RBA, which appears petrified of a housing price bubble and, with prices already rising and about to rise a lot further, the danger is that it will be too aggressive with interest rates. The RBA can stop price rises, but the collateral damage will be on housing construction. It needs to be careful.
This is not about levers and levels. Interest rates are a trigger. For a long time, rising interest rates appear as though they are not working and then, suddenly, the housing market collapses.
We’ve seen this scene played out time and again in Australia.
It’s the shortage of housing, partly caused by the RBA’s 2003 action, that has built up the current latent pressure on housing demand and prices. We don’t want to curtail housing construction: we need the housing.
If we are to stimulate building, further house price rises are inevitable. The real objective is to contain the extent of price rises, keeping housing affordable.
The key is on the supply side. It’s no accident the housing recovery has been strongest in Victoria, where land is relatively cheap and readily available.
Facilitation of medium-density development in inner areas makes sense. We have a ready source of reasonably priced land throughout our inner suburbs and it is already serviced, making it cheaper to develop.
We have a number of excellent examples of residential and mixed-use redevelopment of industrial sites scattered around Australia. So far, too few.
Certainly, we need to build a lot more stock to satisfy demand. And that will entail price rises.
Meanwhile, the RBA will continue raising interest rates as the economy strengthens and, later, to contain emerging demand-inflationary pressures. It would be foolhardy to target the housing sector too aggressively.
We’re building about 140,000 dwellings compared with an underlying demand of 190,000. The shortage is worst in NSW where building is about half that of the underlying demand.
All considered, we think the upswing has another three to four years to run. By then variable housing interest rates will be about 9 per cent. And the downturn will come before there is a surplus of residential stock, particularly in NSW where the shortage is so extreme there won’t be time to build enough. This is the beginning of an upswing that will build momentum into a boom before being cut short by rising rates. We’ve seen it all before.
Having held off raising interest rates in February, the RBA has, as expected, pushed up the official cash rate by 0.25%.
So far 3 out of 4 major banks have mirrored the Reserve Bank with a 0.25% increase to their standard variable rate. CBA now has a standard variable rate of 6.86%, ANZ 6.91%, and Westpac 7.01%. NAB has yet to confirm an increase.
Try this quick exercise:
Work out your future repayments.
Enter your loan amount and an interest rate of at least 7.5%. Go To Loan Calculator
Make the loan term equal the years remaining on your home loan (so if you have had your loan for five years, change the 30-year term to 25 years).
Is this Comfortable or Scary?
If it looks a bit scary though, it’s time to make some changes.
Know your money habits
You have to first identify your ‘bad’ money habits – the ones that can get you into trouble by overspending. Next, you have to start being strict with yourself on what you can and can’t do.Take action NOW!
Do not wait for rates to become so high you are really starting to stress out – pretend we are in the position now and make adjustments to your life. Your action now will start to safeguard you against the rate rises to come.
You need to be savvy with your money. Do you spend all of your income each month? Is it because it is just there or is it out of necessity? Most of us spend what we earn, no matter how much that is. We often see people with extremely high salaries and no savings – human nature does not seem to change much no matter your financial position. Contact us here for a link if you require one.
It might be time to for a lower interest or a better product to suit your lifestyle. Contact us here. We can help you find out if your current loan is the best for you going forward.
Commonwealth Bank and Westpac have combined to take 80% of credit growth over the six months from March to October 2009. During this period, credit growth had slowed to its lowest level since 1992.
Our domestic banks wrote $53bn of credit, while foreign and regional banks & non-bank lenders reduced their lending by $43bn, netting $10bn increase over the 6 months. Despite the slowing, we may have hit the low point in the credit cycle as there are signs of increased credit growth for Australia in 2010.
What does this signal?
There is a clear lack of competition at the moment. CBA (who own Bankwest, and 33% of Aussie Home Loans) and Westpac (who own St George, Bank of SA, RAMS, Bank of Melbourne) are very dominant in Australia, using their advantage with domestic deposits to provide a cheaper source of money. There was a big flight to deposit safety in banks during the GFC, and overseas money is still expensive for our other lenders who are struggling to compete. So much for the 4 pillars policy…
Remember, if you are confused which lender to use, Plan Assist have over 21 residential and 12 commercial lenders on their panel providing you with choice to suit any need. Call Anton or Garry with your loan scenarios on 02 9449 2333 for the latest and greatest on lender choice.
Last weeks decision by the Reserve Bank to raise interest rates by a further 25 basis points has been met with mixed reaction. First Home buyers and low income households will feel the pinch the most while other parts of the market aren’t as likely to be affected – those who have budgeted prudently (or at least those who have taken our advice) will have built a more normal rate of mortgage payments into their financial plans and investors are probably thankful for the rate rise as it means less competition in the market place for relatively scarce real estate stock.
If the financial markets are anything to go by, the tightening cycle of interest rate rises has some way to go. As can be deduced from our interest rate chart by February next year financial markets are suggesting the cash rate will be at 4.0% and by June about 4.75%. If banks move in line with the cash rate, this means the average standard variable rate will be about 6.8% in February and 7.55% in June. A long way from where we were a couple of months ago.
However, in the interests of relativity as the graph below from RP Data shows the average mortgage rate over the last 10 years has been 7.25% which highlights the fact that mortgage rates are still well below average and are likely to remain so well into 2010.
On the day where we all get together and pin our spare change on a horse, the RBA pulls the reins and increases the official cash rate by 0.25%.
The RBA argues that increases are needed to cool the pace of the economy and let some steam out of the housing market, so that inflation stays on course for its target in the years ahead. So who wins when rates go up?
The Winners: Cash holders earning more interest.
The Losers: The Mortgage Belt. It’s another $15 a week on a $300,000 home mortgage.
Ok, I hear you….its not as simple as that. What about the effect this will have on home buyers in the market, what about house prices, the Aussie dollar, exchange rates, inflation, unemployment? How do you really know if you win or lose?
Well, it’s a bit like explaining how $15 a week less in your pocket means you don’t buy your wife a bunch of flowers this week, and whether or not she still makes you breakfast in the morning and how that impacts you getting to work on time, and how your boss frowns when you arrive late, and then he doesn’t give you a pay rise next month, and then you don’t buy your wife flowers again.
In an interconnected economy, it all goes around in circles…just like the runners in the Melbourne Cup.
So put your money in wise investments and make sure you have enough savings to run the RBA interest rate race in the coming year, with more rate rises expected.
P.S. Don’t forget the flowers.