Friday, October 16, 2009

Rate rises do matter to consumers

Just incase you think that a rate rise wont dampen consumer confidence, or that it takes time to work its way through to discretionary expenditure, maybe you should consider the take up of pay TV as a guide.

Robert Gottliebsen was interviewing Kim Williams for Business Spectator. Williams is the head of Foxtel in Australia. If you've been watching any TV lately, you'll know that Foxtell are currently conducting a major marketing campaign (perhaps irritatingly so). In the interview Williams mentioned he noticed that when the Reserve Bank increased interest rates last week, pay TV order conversion dropped sharply, despite inquiries remaining strong.

Bull market or just bull?

"Foundations for a bull market are now as strong as they've been in years,
though an early and sustained uptrend can't be taken for granted"
"I think it is pretty well conceded that we have reached or passed the bottom of
this depression and from now on can look to gradually improving business"

Do these quotes from news reports sound familiar?

They probably should. Lately we've been hearing them as regular as clockwork. However, these particular ones aren't from last weeks papers or your favourite business show, they're from the Wall Street Journal back in October, 1930

This is not 1930 but back then, a few good months months lured investors back into the market, just like they're doing now. Hindsight is a wonderful thing and it tells us that the optimism apparent the year after the 1929 stockmarket crash soon proved woefully premature.

Back in 2009 and the Australian sharemarket has risen by more than 50 per cent since it bottomed in March. Even more incredibly, the troubled US market is up almost 50 per cent! What is driving these gains?

There are concerns we're becoming a bit complacent – and in some cases, even irrationally exuberant. Cautious optimism beats irrational exuberance in any market, but especially this one.

(source: Sydney Morning Herald)

Thursday, October 15, 2009

BIS says rate increases a mistake

Chief economist for BIS Schrapnel, Frank Gelber, thinks the Reserve Bank has increased interest rates too soon. Glenn Stevens was as nervous as all hell about a cash rate at 3 per cent but rates in most other economies are going to be stagnant and hovering at less than 1 per cent for some time to come. Although a significant contributing factor, the Aussie dollar was rising independent of interst rates. Further increases in the dollar's value is going to have an real impact on a range of sectors beyond commodity exports.

Here is Gelber's argument;

We all know that interest rates have to rise, and rise substantially, at some stage. These are emergency rates resulting from the global financial crisis and intended to prevent recession.
Australian rates aren't nearly as low as overseas rates. Mind you, most of the Western world really needs low rates. They face severe recession. To turn around the old saying, America has a bad flu but we're only sneezing. The US, Britain and parts of Europe are experiencing financial crisis but we're experiencing a credit and equity squeeze.

I thought the rate rises would start later. But now that they have begun, the question is not so much how many more rises are to come, but when. One, or even several, rate rises won't be fatal. The damage would come from a series of aggressive rate rises, stifling recovery.
And there is still time for the Reserve Bank to postpone further interest rate rises until the economy does strengthen. By the end of the tightening process, cash rates will go back to a neutral rate of about 5.5 per cent. Indeed, we think they'll overshoot and end up at about 6.5 per cent. But we think that will be in 2012 when the economy is strong.

Timing will be important. As always, for the RBA it's a balancing act. The trick is to tighten from the current unsustainably low levels without damaging economic recovery.
Why did they raise rates so early? What are they trying to achieve? I hate trying to second-guess the RBA's logic, but this is important. The RBA obviously thinks the economy is a lot stronger than we do. Even in these more open and enlightened times, RBA statements tend to be vague, and open to several, often contradictory, interpretations.

Having said that, they seem to think that investment is recovering. It's not. The capital expenditure figures were boosted by the tax concessions on equipment investment. And government building and infrastructure spending, though strong, won't be enough to offset the prospective collapse of business investment.

The construction sector's direct and indirect contribution of about minus 2.5 per cent this financial year, won't be as bad as the negative 4.7 per cent that caused the downturn in 2001. But the shock will be hard to withstand. Worse, not only will investment decline this financial year, but it will happen when household disposable income is weak. Business profits have started to fall. The sector is just emerging from a credit squeeze and, when finance is available, companies face high interest rates. So business is in cost-cutting and cash preservation mode, curtailing unnecessary investment.

Meanwhile, sluggish wages and employment growth means that household disposable income is weak, indeed negative in real terms, and that will constrain spending. Rising interest rates will further weaken household incomes. The run of good data will end. There will be some pretty weak readings towards year end as government stimulus recedes. The data will weaken with the economy. And confidence will sag with the data.

Confidence can't be sustained under its own steam. It's strong now with the improvement in the economic indicators and less fear of unemployment. But the world isn't a series of indicators in isolation. When news on the weaker economy comes through, the indicators will deteriorate and confidence will weaken.

Having said that, a few interest rate rises won't do a lot of damage. And just as well.
In this environment, households are tending to absorb much of the stimulatory effect of last year's interest rate declines by maintaining their mortgage payments, thereby reducing debt more quickly.

The other side of the coin is that this gives them more leeway to maintain (and not increase) payments in the face of rising interest rates, thereby cushioning the impact on spending. The cohorts most affected are recent housing buyers who stretched to finance large mortgages.
But it's bad for the dollar and competitiveness. And that's contractionary. Australia is tightening before other Western countries, raising the interest rate differential and boosting the Australian dollar.

That's a disaster for what's left of the domestically produced tradables industries -- in particular manufacturing, tourism and education for overseas students. And, while primary production and Chinese demand remain strong, the higher dollar hurts prices received for agricultural and minerals commodities. With weak investment, weak household disposable income and an overvalued dollar, I wouldn't be surprised to see a negative September or December quarter gross domestic product result.

Only housing is picking up. But we need the housing recovery to drive growth. And we need the housing. The rate rise will reduce household disposable income and therefore expenditure and reduce the affordability and hence demand for residential property. Maybe the RBA is trying to dampen the aggressiveness of housing owner-occupiers and investors so that there is less damage as interest rates do rise.

Meanwhile, there is no hurry to raise interest rates. With overseas rates likely to remain low, the resultant strong dollar will dampen already weak growth and perhaps cause structural damage to the remains of our tradables industries. I would have waited until well into next year.

Wednesday, October 14, 2009

Budgets: A tale of two garages

Of course budgets can be very useful, it’s just that when created they usually require a great deal of self discipline. The simple fact that you need a budget to get out of financial trouble is exhibit number one that self-discipline was probably absent in the first place. Pinning your financial dreams on the assumption that you’re going to be “good” next month generally leads to devastatingly poor results. Your personal finances are too important to risk with little more than hope and optimism.

Just incase you think that the previously absent self discipline will save you from financial flagrancy tomorrow, take this brief exercise:

Question: How much self-discipline do you have today?
Answer: Exactly the same amount as you’ll have tomorrow.

In his book “How to live within your means and still finance your dreams”, Robert Ortalda suggests that to understand the discipline required to maintain a budget; “you have to think about garages”. He says, and I agree, there are generally two types of people when it comes to garages. There are those that have clean and tidy garages, and those that have messy ones.

The clean ones are maintained by an exclusive group of garage zealots. They have peg-boards on the walls with pictures of the tools and things that should be hanging there. You never get to see the picture of the thing because the thing that should be hanging there always is. Jam jars are screwed into lids that are nailed to shelves. These contain every sort of nut, screw, nail, grommet and widget any self-respecting handy-person could ever need. Everything has a place and everything is in its place. And may whatever god you believe in help you if you move anything or don’t put something back.

The other type of garage is always full of mess. Things go in there and then they don’t come out again. The car has trouble fitting in. It’s full of dust and empty paint tins. The people who have these kinds of garages have a mantra they keep chanting over and over again “One day I’m gunna clean out the garage”.

Finally that day eventually does arrive and after several mini-skips, the garage is beautifully clean. It’s so good its just missing the peg-board with the pictures. But after a while is gets messier and messier and finally it’s back to the way it was. Then the mantra begins again “one day I’m gunna clean the garage”

The people who own the first type of garage demonstrate a tremendous amount of self-discipline. They have to. It takes a lot of thought and a lot of work to keep a garage that clean. Daily maintenance – sweeping, tidying, putting things back on the pegboard after you finish with it – not leaving it where you were working.

For a budget to work, it’s got to be designed with the second type of person in mind. Those who sporadically like to clean out the mess.

If you think it’s easier to tweak the little expenses and do it week after week to save twenty or thirty dollars, then go ahead and knock yourself out. I reckon it’s a lot easier to just to do one or two biggies and enjoy the savings over and over without the effort. Why scrimp on essentials that call out to you every time you shop when you can just scrap the cable TV and save heaps. These are ‘structural’ changes to the way you previously spent your money. Doing things this way makes daily self-discipline significantly less important. Kind of like ripping off a band-aid – do it fast and do it once. Or if you’re into it, you can go the other way and slowly take it off over and over again, day after day of band-aid ripping.

Sure the once off clean-out can cause pain. I know you can’t watch re-runs of Seinfeld and keep up with the latest on Fashion TV when you dump cable but when you get your financial house in order you can always put it back on. When you do you might find that Jerry has come out of retirement and you can watch new episodes – oh but wait, you’ve already seen those on free to air!

Tuesday, October 6, 2009

October interest rate rise?

(source: Sydney Morning Herald, 6 October 2009)

Monday, October 5, 2009

40 per cent less millionaires

Australia has taken third place in a survey of the biggest casualties of the global financial crisis, a report shows. Boston Consulting Group's latest Global Wealth Report found Australia suffered the third largest drop in personal wealth among 62 countries surveyed, due to a high exposure to equities markets.

Personal wealth in Australia - excluding housing and self-owned businesses - fell 27.1 per cent to $1.67 trillion in 2008, from $2.3 trillion in 2007. Only the UK and Sweden experienced larger declines in personal wealth, losing 32 per cent and 28 per cent respectively.
Globally, personal wealth dropped to $US92.4 trillion in 2008, from $US108.5 trillion in 2007.

The report also shows that the financial crisis slashed the number of millionaire households in Australia by 40 per cent. Millionaire households in Australia, as measured by households with minimum personal wealth of $US1 million, fell to 49,452 in 2008, from 82,242 in 2007.

(source: Sydney Morning Herald)

Wednesday, September 23, 2009

US economic recovery - slow and painful

A year after the US financial markets went into a tailspin, the US economy is showing tentative signs of a weak recovery but jobless numbers are continuing to rise, though not at the terrifying rate of six months ago, when 600,000 people a month were joining the unemployment lines.

Something else is happening in America as well. The era of easy credit which fuelled two decades of spectacular growth is over. The American consumer has started saving. Mortgages, personal loans and even credit cards are harder to get. Consumer credit was down 5.2 per cent between April and June. Revolving credit, which includes credit cards, was down 9 per cent. As a result, the turbo-charged consumer market that has powered the American economy since the 1980s has run out of puff.

These developments are likely to define the trajectory of the US recovery - it will be slow and painful.

The US jobless rate rose to 9.7 per cent in August and is expected to peak above 10 per cent in the months ahead. It's already at that level in at least 15 US states and it could be five years before the national economy generates enough jobs to overcome those lost and to employ the new workers entering the labour force.

This fear of joblessness is likely to keep consumers' wallets in their pockets. Without a return to spending - retail sales make up 70 per cent of the US economy - it seems inevitable that the recovery will be slower than in the past.

Of course the pace of a US recovery will have implications for economies worldwide. The Chinese depend on the US as a destination for their manufacturing, and Australia sells China the commodities and energy to power their factories.

As a result we can expect the Reserve Bank to hold fire on rate rises this year despite the recent raft of reasonable economic data here. Even though Glenn Stevens and the RBA board will be itching to get rates back to more normal long term levels, they will be mindful of the precarious state of the global recovery.

The US Fed will be forced to keep rates at near zero levels for some time yet. Increasing rates in Australia will put upward pressure on our currency and endanger the recovery of exports. The Debt futures markets have already reduced their outlook for interest rate rises by half of one per cent, expecting the cash rate to be 4.5 per cent by September 2010 (down from their previous forecast of 5 percent). The cash rate in Australia is currently 3 per cent.

(Source: The Brisbane Times, 21 September 2009)

Sunday, September 20, 2009

US bank failures rise to 94 in 2009

Two more US banks have closed down, including the sixth largest bank bankruptcy this year, to bring the total number of bank failures this year to 94, according to the government banking insurer.

The Indiana-based Irwin Union Bank was shuttered with a total of $US2.7 billion ($A3 billion) in assets and total deposits of about $US2.1 billion ($A2.41 billion), the Federal Deposit Insurance Corporation (FDIC) said in a statement on Friday."

(source: Sydney Morning Herald)

Friday, September 18, 2009

Weekend at Bernie's

According to reports, Bernie Madoff's New York home, located on the beach at Montauk, with sweeping views of the Atlantic Ocean, has been sold for more than the asking price of $8.75 million.

While the property is under contract, the name of the buyer and the purchase price are not being disclosed "to protect the integrity of the sale," the U.S. Marshal's Office said in a statement.

Several buyers had submitted bids for the four-bedroom, three-bath, 3,000-square-foot home, which was on the market for two weeks. Sale proceeds will go toward reimbursing victims of Madoff's estimated $65 billion Ponzi scheme.

If you are in the market for real estate, Montauk is roughly 120 miles east of Manhattan on Long Island and is known for its many large summer homes owned by famous and wealthy people.

Note: wasn't to sure how to categorise this one, so I put it under "goal-setting"

(source: Reuters)

Monday, September 14, 2009

US house price crash - could it happen here?

The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers.

Analysis by researchers from South Australia's Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period. The Flinders Institute for Housing, Urban and Regional Research analysis found home ownership fell by 15 per cent over the two decades to 2006 for low income earners over 45 years of age and medium-high income earners under 45 years.

Other findings included large gains in national income from the resources boom were "wasted" by increasing house prices and accumulating debt to unreasonable levels. The analysis found the first home owners scheme boosted home purchases for people under 25 years of age but many lower income earners in the 25-44 age bracket were unlikely to ever own their own homes because their parents were spending their inheritances and prices remained high.

Dr Joe Flood, the institute's adjunct professor, said the "the writing is on the wall for the 'Australian dream'."

"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance," Dr Flood said in a statement on Monday.

Dr Flood and his team assessed Census data to conclude that Australia's housing market is in "a very dangerous and unstable situation which has received little adverse attention". The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.

"On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse ... or to a long slow decline as in Japan since 1988," Dr Flood said.

(Source: Business Spectator)

Saturday, September 12, 2009

Americans continue to unload debt

Several economic reports this week showed data that shows a change in the way Americans and U.S. businesses are handling their finance as debt has continued to fall and business inventories are leaner.

The US Federal Reserve released the July consumer credit report. Data showed a $21.6 billion drop in consumer debt as both revolving and non-revolving facilities shrunk by more than 8 per cent compared to a year ago. This is the largest decline since records began in 1943. The decline in consumer credit came as a surprise to most economists who predicted a $4 billion drop in July following a $15.5 billion decline in June. Though consumer debt has fallen the past few months, total U.S. consumer debt still stands at $2.6 trillion.

While the lower debt levels are good for families and businesses on an individual level, collectively it will ultimately mean lower short run economic activity.

(source: All Headline News)

Friday, September 11, 2009

Banks may raise rates regardless of RBA

Variable mortgage rates offered by the banks might increase by around 10 to 15 basis points regardless of what the Reserve Bank (RBA) does between now and Christmas.

At a historical low of 3 per cent, the cash rate is at emergecy levels and will have to rise in time anyway. With some good economic data lately leading to improved business and consumer optimisim, sentiment on a rate rise has shifted to sooner rather thna later. However, the last few days has seen a fall in retails spending and home loan approvals that will be giving the Bank reason to reconsider any upward movement in rates before Christmas. Regardless of any pause by the RBA, variable home loan rates might increase anyway.

An important contributer to the cost of bank funding is the 'Bank Bill Swap Rate' - the cost of short term funds lent between banks. Over the last few weeks this rate has crept steadily higher. In the event the RBA does increase rates before Christmas the banks would almost certainly tack on an extra few points when the pass the increase to customers. If the RBA decides to hold, the major banks may just go it alone.

This is ironic because the knowledge of the potential for an adjustment by the banks will most likely add to the RBA's decision to keep rates on hold a little longer.

Thursday, September 10, 2009

US Consumer credit in retreat

US consumers are reducing their use of credit at a much higher rate than expected, casting doubt on recent hopes of a robust economic recovery.

Consumer credit, including credit cards, car, student and personal loans dropped at an annual pace of 10.4 per cent in July according to the US Federal Reserve. Economists say the data is an indication of bank write offs of bad debts, though consumers may also be using the higher savings created by reduced interest rates to pay down debt. Recent surveys suggest banks will maintain tight lending standards until at least the second half of 2010.

(Source: Australian Financial Review, 10 September 2009)

Tuesday, September 8, 2009

Money doesn't buy happiness. Happiness buys money

Arun Abey of IPac says the wealthiest and most contented people he knows were happy before they became rich. He says parents are better prioritising a love of learning and pursuit of passions in their children, rather than encouraging them into career paths based on income alone.

Aurn was interviewed by Richard Aedy on ABC Radio National's "Life Matters" program. Listen to what Arun has to say here.

Prime borrowers start to default - US

In the US, the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

This new trend signals more bad news for US banks. Rising delinquencies on prime mortgages helped drive the total delinquency rate to a record 9.24 per cent in the second quarter of this year, according to the Mortgage Bankers Association. The data reflect loans that are at least one payment past the due date.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt. These borrowers tend to have fewer financial levers to pull to stay ahead of their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have already worked their way through the financial system, causing billions of dollars in losses to the nation's banks.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them, since it is harder to tap the equity in their homes to pay their bills if they lose their jobs.

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money.

(Source: The Australian, from an article published in the Wall Street Journal)

Friday, August 28, 2009

US recession loosing its grip

Evidence is mounting that the longest recession to grip the United States since World War II is losing its grip. The latest hint is due Friday when the US government releases data on consumer spending and income for July.

Importantly, personal spending is expected to have posted a modest gain last month, driven higher by the popular Cash for Clunkers program. Economists surveyed by Thomson Reuters expect personal spending rose 0.2 percent in July after a 0.4 percent gain in June. Economists believe that personal incomes, the fuel for future spending increases, probably rose 0.2 percent as well, following a 1.3 percent decline in June.

(source: Associated Press)

Wednesday, August 26, 2009

US consumers optimistic

Sentiment among US consumers rose more than expected in August and expectations hit the highest level since the recession began, indications that Americans' pessimism about the economy may be lifting. The housing sector also showed signs of life as a national measure of home prices posted its first quarterly increase in three years.

However, at 54.1 the Consumer Sentiment Index is still well below 90, the minimum level associated with a healthy economy. Anything above 100 signals strong growth. Economic commentators closely monitor confidence because consumer spending accounts for about 70 per cent of all US economic activity. Consumer sentiment - fuelled by signs the economy is stabilising - has recovered somewhat since hitting a record-low of 25.3 in February earlier this year.

Many analysts expect the economy to grow 2-3 per cent in the current July-September quarter, spurred by a more stable housing market and the Cash for Clunkers program, which has boosted auto sales.

(source: Sydney Morning Herald, 25 August 2009)

Tuesday, August 25, 2009

GFC claims life cover

More than 65 per cent of consumers consider affordability to be a key reason for cancelling a life insurance policy, according to a recent independent study commissioned by ING. Australians are increasingly stating the Global Financial Crisis as a reason to cancel a life insurance policy as they struggle with the prospect of recession, unemployment, stock market declines and other bad financial news.

(source: Money Management)

Monday, August 17, 2009

Housing affordability takes a tumble

Housing affordability dropped more than 5 per cent in the June quarter on the back of rising house prices, the Housing Industry Association-Commonwealth Bank First Housing Affordability Index has found.

The Index, released yesterday, slid to 152.5 index points in the June quarter from 161 index points during the March quarter.

The median house price rose to $419,900 for the quarter, from $386,400 in the March quarter, taking the median monthly mortgage repayment payment to $1,983 – up from $1,843.

Housing Industry Association chief economist, Dr Harley Dale said that while affordability had taken a tumble, it was still well ahead of the corresponding period last year thanks to a sharp recovery in house prices from mid 2008.

(source: Mortgage Business)

Friday, August 14, 2009

Low interest rates fuel refinancing boom

New data has showed a record number of Australian consumers are refinancing their home loans to take advantage of the current low interest rates. Housing finance figures from the Australian Bureau of Statistics revealed borrowers refinanced a total of $1.5 billion in June - a whopping 94.7% jump from a year ago.

Mortgages taken to buy a block of land climbed by 48.4% while loans to build new homes fell by 6.9% dragged down by lower investment loans. (see previous post)

"Home loan customers are refinancing at a record rate and in the process, unleashing fresh spending power," said Craig James, chief economist with Commonwealth Bank's CommSec. "The reduction in work hours in the community is clearly not a restraint on consumer spending. Consumers have been actively unlocking spending power by refinancing loans at super-low rates. The benefits of the cheaper debt are long-lasting, erasing fears of a slowdown in consumer spending later in the year."

Could you save by refinancing to a better rate? Get a free assesment

(source: Your Mortgage, 14 August 2009)

Thursday, August 13, 2009

Housing Finance Approvals

Alan Kohler is a well know and respected finance analyst. Take a moment to view his "August Economic Report". Pay attention to the Housing Finance Approval -in particular to the graphic showing owner occupiers verses investors.

Monday, August 10, 2009

Faux fixed rate: The fixed rate you're in when you're not in a fixed rate

The time to get a fixed rate was about eight months ago. Unfortunately, this was when there still seemed considerable pressure on the Reserve Bank to lower its cash rate. With people talking about cash and variable rates at 2 and 4 per cent respectively, there was naturally some reluctance to fix at say, 5 per cent.

Now however, if you could get a 3 year fixed rate at 5 per cent, chances are, you would jump at it. As we write this, rates are bouncing around a bit but an average 3 year rate is in the vicinity of 6.50 per cent. A five year rate is about one per cent dearer at seven and a half. With discount variable rates at an average of 5.10 it would be difficult to contemplate locking in for five years and to start paying 7.50 even if you were extremely pessimistic about interest rates. Locking into a 5 year rate at seven and a half on a mortgage of $300,000 would increase your principle and interest repayments by around $468.00 per month. You then have to wait until the reserve bank increases rates by over 2 per cent before variable rate customers are paying the same rate as you. However, while those in variable loans have been enjoying lower rates, you need to wait until rates increase a further 2 per cent before you might consider you have broken even on the deal.

All this is a matter of timing of course and it may not pan out exactly this way but its representative of the dilemma customers are now facing when it comes to finding a fixed rate that offers some certainty.

However, if paying your mortgage now at a much higher fixed rate is something you are considering, why not do it within the terms of your current variable rate?

What this requires is for you to start paying your mortgage as if you were being charged 7.50 per cent (Remember, you would be doing this any way if you took out a fixed rate loan). The big difference is that under the terms of your current variable mortgage, your loan is only being charged at around 5.10 to 5.50 per cent. (If you are paying more than this you should talk to us right away). This way you can pocket the savings yourself, instead of giving it to the bank, and get ahead on your mortgage. This way when rates start to go back up your loan principle will have been reduced and the amount of interest charged will be lower.

The beauty of a fixed rate loan is its ‘set and forget’ so you will require a certain discipline to operate your loan in suggested way. However, It will offer the flexibility to leave when you want to refinance or sell with out paying the enormous exit fees involved with most fixed rates.

This isn’t a dead set certain interest rate solution because it is possible rates may go up a lot more than we currently expect, but it is an alternative to locking into a fixed rate. If you’re interested, talk to us about the method that will best suit you and your faux fixed rate loan.

Saturday, August 8, 2009

Under-employment and unemployment

In spite of the global financial crisis, Australia’s unemployment rate is holding steady at around 5.8 per cent. Although high, it compares favourably to the continued rising unemployment in other countries such as New Zealand where the rate is 8.5 per cent or the United States: 10 per cent.

However, the Australian Bureau of Statistics has provided a breakdown of hours worked in the economy with this month's labour force data. On its estimates, Australians are working more than 35 million fewer hours than they were a year ago. This fall in working hours, with employment holding fairly steady over the past year, seems to confirm what the fall in full-time jobs and the compensating rise in part-time employment implied: that the downturn in Australia has revealed itself as under-employment rather than unemployment. If this is so we may yet see significant falls in consumer spending even in the absence of the expected rise in unemployment.

The Reserve Bank has made clear it is moving from loose monetary policy with an easing bias (expansionary) to loose with a neutral bias. Commentators have been quick to see this as the Bank signaling that rates are on the way back up. While this may ultimately prove to be correct, we need to see how employment performs before we make the call on increases to interest rates in the next few months.

Despite the welcome smattering of recent good news, the economy is still fragile. I would be keeping an eye on business investment which, due to tight credit conditions is still weak, and some areas of construction like multi-dwelling complexes, which is also showing signs of weakness.

Wednesday, August 5, 2009

Paying the price of keeping our wealth

Interest rates are near zero per cent in countries like the US and Japan. Our rates at the current 3 per cent are higher than that in New Zealand but not as high as China, Brazil and Iceland. So why are Australians paying some of the highest interest rates in the world?

Well, Australia has always had high interest rates relative to other OECD countries but in this instance there’s a very specific reason - house prices.

The global financial crisis started an unprecedented collapse in property prices around the world (some might say it was the other way around – an unprecedented collapse in property prices started the global financial crisis). In most places they’re still falling, but not here, they’ve recovered the small amount they lost last year. The Australian Bureau of Statistics has just reported that house prices grew 4.2 per cent in the June Quarter. This is a monthly, seasonally adjusted figure so it’s a little unreliable but still impressive none the less.

If our house prices were under the same downward pressure that other economies are experiencing, the reserve bank would almost certainly be cutting rates to somewhere closer to 2 per cent.

So we’re lucky, we get to hang onto our wealth. “Our houses have kept their value, but the price of hanging on to that wealth is higher mortgages rates and kids who never leave home because they can’t afford to buy a house.”

(source: Business Spectator, 5 August 2009)

Wednesday, July 15, 2009

Do your sums on FHOG

The Boost to the First Home Owners Grant has been extended until 30 September, 2009. After that it reduces by half until 31 December 2009. In the New Year, the grant returns to an ongoing amount of $7000 for both new and established homes for those buyers who are eligible.

However, being eligible for the grant doesn’t necessarily make buying a house achievable. Prior to the announcement of its extension, we were inundated with calls from customers who wanted to take advantage of the government’s generous offer, particularly for the $21,000.00 for the purchase of a new dwelling. While the $21,000 is still up from grabs for those whose construction commences on or before September 30, it might not be enough to get you into a home on its own.

This is largely because lending has changed significantly over the past several months. In the current environment, the great majority of banks will only lend you 90 per cent of the value of the property you are considering for purchase. This means you have to come up with the other 10 per cent yourself. In some circumstances you can still borrow 95 per cent but even 5 per of an average property is still a lot of money.

The other stumbling block is the fees. While state governments have come to the rescue on stamp duties (for example: first home buyers are virtually exempt from transfer and mortgage duties on homes under $500,000 in Queensland) there is still the matter of mortgage insurance. To get a loan where the borrowing amount is greater than 80 per cent of the purchase price, you have to get your loan mortgage insured and this comes at a cost - the lower the LVR the cheaper the premium. However, as we’re talking 95 per cent, these premiums are at the upper end and even with the discounts some insurances offer first home buyers, the amount can be several thousand dollars.

The last hurdle you need to overcome is the requirement to provide evidence of genuine savings. This means you have to demonstrate to a bank that the money you are contributing as 5 per cent has been saved over a period of time – usually 6 months.

Table 1. Estimate of Savings Required – Established Home

Purchase Price $350,000.00
Lenders Mortgage Insurance (approx)* $ 6,949.00
Government Fees (estimate) $ 676.00
Legal/Conveyancing (allow say,) $ 1,000.00
A Total Costs to Purchase $358,625.00

Borrowings from Bank @ 95% $332,500.00
First Home Owners Grant $ 14,000.00
B Total Funds Available $346,500.00

A - B = Your contribution (savings) $ 12,125.00

After December this year when the FHOG reduces, this same scenario will be $7,000.00 dearer. Trying to do the same thing with only a 90 per cent loan will be even more difficult. You should note that there are conditions surrounding your circumstances in qualifying for a 95 per cent LVR loan apart from the obvious issues of affordability.
In summary, if you are nearly in a position to buy your first home it might make sense to explore your options sooner rather than later. However, don’t put yourself in a situation where you can't afford your new loan just for the sake of the extended first home owners grant.

* Lenders Mortgage Insurance will vary depending on bank and Mortgage Insurer

Sunday, July 12, 2009

Be climatesmart

Over the last several quarters we’ve been getting electricity bills that are enough to make you cry. Despite our best efforts, we’ve had little luck in reducing our electricity costs. We’ve installed energy saver light globes in all our lights; turned off the second fridge in the office. Reduced the amount off time the pool filter runs but we still can’t seem to make any significant impact in amount of each bill.

Recently we had an electrician come and conduct and audit out as part of the Queensland Government’s “climate smart home service”. He checked a number of things as well as looking at previous electricity bills. For me however, the most significant aspect of the audit was the provision of a wireless energy monitor. It shows how much energy we’re using in a very meaningful way – in dollars and cents.

The monitor tells you how many cents per hour its costing you to run your house based on the electricity you use. When we’re not doing anything significant with electricity it shows a cost of around 12 to 15 cents per hour. Turn an electric kettle on and that goes to 55 cents per hour. Electric irons, hair driers, clothes driers, anything that uses an element to create heat really adds up.

Now we already knew this and always tried to keep the use of such things to a minimum. But when you can see the meter ticking on the energy monitor it becomes very motivating to turn the offending item off and in some cases not to use it in the first place.

It’s also helped my boys understand the cost of electricity and they’ve really got on board and are trying to keep the use of electrical appliances to a minimum. My youngest boy rang me the other day to tell me the monitor was showing an increase from 18 cents to 57 cents and he couldn’t work out why. He said he wasn’t using anything that he could account for. We soon figured out it was the instant electric water heater in the office switching on as its store off water was being re-heated. We’ve yet to figure out how we can reduce the cost of this, we’re experimenting with the temperature at present.

If you know any money saving tips through more efficient use of electricity please don’t hesitate to share them with us. We’ll be glad to put them into effect. In the meantime, I urge you to have an audit arranged for your own home. In the interest of saving some money and reducing your carbon footprint go to climatesmarthome

Wednesday, June 17, 2009

Official rates will fall - retail rates may not

The Commonwealth Bank of Australia (CBA) is under fire from all quarters over its decision to raise its standard variable rate (SVR) loans by 10 basis points. Of the four big banks, CBA had the lowest SVR and even after this increase its SVR is still equal lowest. Prior to this, other banks had been quietly making adjustments to fixed rate loans. But this most recent increase has brought forth howls of gouging leading a federal senator to suggest a committee to investigate the incidence of bank gouging. However, what appears to be going on is just some good old fashioned speculation and supply and demand issues.

The speculation comes from the recent run of stronger than expected economic figures, including the 0.5 per cent GDP growth in the March quarter and last week's strong employment report. This has led financial markets to start trading on the basis that the Reserve Bank (RBA) will keep interest rates at 3 per cent this year before raising them to 4 per cent early in 2010. As a result, the cost of three-year funding for the major banks has increased by nearly 150 basis points, from 3.5 per cent to almost 5 per cent, over the past three months. Economists argue that it is this trading pressure that is forcing the CBA and other banks to raise their mortgage rates. In these circumstances the banks can either reprice the cost of lending to reflect their costs and continue to lend or they can leave prices where they are and restrict the amount they lend.

Now the government is within its rights to become indignant about all this. After all it wants to encourage spending and having the cost of borrowing as cheap as possible assists in this outcome. Also a little bank bashing goes down well with the electorate in any circumstances. But there are real implications for monetary policy if funding costs continue to rise. This will only be exacerbated as governments around the world continue to raise debt to fund deficits as part of their attempts to stimulate economies.

In the current economic conditions these pressures on the cost of retail lending rates are certain to push the RBA's hand. According to Macquarie Bank "[as] key lending rates [continue to rise] while unemployment is trending higher, pressure will build on the RBA to cut its policy rate below 3 per cent." How much they might cut and how much will be passed on by the banks remains to be seen.

In the short term a cut of 25 points seems most likely and we believe most or all of this will be retained by the banks to ease current funding pressure. The government will make noise about passing on these cuts to customers but what is more important is that credit remains as widely available as is prudently possible. The cost of borrowing to retail customers is at an all time low. Trying to make money cheaper now wont help the economy as much as ensuring (or even increasing) its supply.

In the medium-term rates are likely to stay low. A large part of the current specualtion about rising rates is mostly based on resurgent inflation. The minutes of the last RBA meeting indicate that concern about inflation in some markets to be unfounded at present stating, ''the outlook is for a fairly gradual expansion getting under way later in the year, with spare capacity tending to increase and inflation tending to decline''. Spare capacity means supply will outstrip demand so price pressure (inflation) will fall.

What concerns the board more is the continuing collapse in business invesment and its implications for unemployment. In its statement the RBA said:

''Business credit had fallen in the past few months, though other sources of funding had been stronger ... Many businesses were facing higher risk margins when loan facilities were rolled over or renegotiated, and many had experienced a significant tightening in the terms under which credit was available.''

Overall we believe the statement to indicate a contiuing bias towards easing monetary policy largely in support of business investment and its implications for employment. Though the cash rate is likely to fall, variable retail rates may not and fixed term rates may see modest increases. Although changes to official rates might provide an opportunity in fixed rate pricing for some banks to attempt to attract increased volumes. As always, we'll keep you posted.

(source: Sydney Morning Herald; News Ltd)

Tuesday, June 2, 2009

RBA keeps rates on hold

At its meeting today, the Reserve Bank of Australia has decided to keep rates on hold, continuing with a cash rate at 3.00%. RBA governor, Glenn Stevens, said Australia's economy was benefiting from the significant cuts to interest rates made so far, combined with the Federal Government's fiscal stimulus.

However, in his statement, RBA governor, Glenn Stevens made specific reference to the decline in business lending "as companies postpone investment plans and seek to reduce leverage, in an environment of tighter lending standards."

Because of these concerns, the consensus among economists is that further rates will still be required later this year as unemployment falls. In confirmation of these views Mr Stevens said,

"Monetary policy has been eased significantly...Business loan rates are below average. Much of the effect of this is yet to be observed...the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed.

Our view: The RBA should cut rates sooner rather than later to help restore business investment that is obviously in retreat. The effect of this will be seen in the unemployment figures over coming months. A lower cash rate would also take pressure off an overvalued currency that has the potential to diminish exports and further damage company profits... but that's another story.

Tuesday, May 26, 2009

Bigger slice of less competitive pie

According to a report just released, two mergers in Australia's banking sector may be reshaping the home loans market. The report shows the merged entities Westpac and St George and that of the Commonwealth Bank and BankWest claimed a whopping 85 per cent share of new mortgages written in the first quarter of 2009.

The banking industry review by Brandmanagement – a market research firm specialising in the finance sector – shows $22.7 billion of the $26.6 billion growth in mortgage books by the big four banks (ANZ, CBA, NAB and Westpac) in the March quarter was achieved by CommBank/BankWest ($15 billion growth) and Westpac/St George ($7.7 billion), as reported by The Australian Newspaper.

The Australian Competition & Consumer Commission chair, Graeme Samuel said advice from other regulators in late 2008, at the height of the global financial crisis, to allow the merger of Commonwealth Bank and BankWest was followed only reluctantly. Mr Samuel said yesterday that the approval the commission had given to the merger between CommBank and BankWest was "not one we had been very happy about." But given the crisis in the international banking sector and on advice from the RBA and APRA "we felt we had no choice", he said.

(this article can be found at Business Spectator)

Thursday, May 14, 2009

FHOG extension a chance to boost savings

The Federal Government’s extension of the boost to the FIRST-HOME Buyers Grant will give would-be first home-owners a chance to get their finances in order before applying for a loan.

Under the scheme as it was, the boost to the grant was due to cease on June 30, 2009. The Federal Government will extend the boost to the first home-owners grant by six months to December 31. This additional six months extension, announced in last night’s federal budget, will allow borrowers to build their savings to meet the current, more stringent requirements of lenders.

The boosted grants were due to end on June 30 but will now apply for homes purchased on or before September 30 this year.

Since October 2008, first home-buyers have received an extra $7,000 when purchasing an established home and an extra $14,000 for new homes, on top of the $7,000 provided under the first home owners scheme. The boosted grants were due to end on June 30 but will now apply for homes purchased on or before September 30 this year. The extra grants will then be phased down to an additional $3,500 for established homes and $7,000 for new homes up to December 31, 2009. After that date the scheme will continues in its original form providing $7000 to eligible persons to purchase either a new or existing home.

Monday, May 11, 2009

Are you on a Financial Treadmill?

Have you ever looked back at the last 5 years and wondered if you are in the same spot now as you were then? Are you doing the same thing with your money today that you were doing 5 years ago?

Your personality plays a huge role in the decisions you make and how you behave with money. Understanding this can play a big part in moving forward with your financial future. For couples this is especially so. The ability to know and understand each other's financial personality can offer a real leap forward in achieving your goals. Ask yourself these questions:

  • What differences have you noticed in how you and your partner treat money?
  • What are the strengths and struggles you see between you and your partner?
  • Have you and your partner discussed your wealth creation needs?
  • Have you and your partner discussed your attitudes toward money?
  • Do you both understand each others prior experiences towards money?
  • Have you worked out a plan that brings together your wealth creation?
    Does your strategy suit both your needs and is it something you can both comfortably commit to?
  • What financial education do you and your partner have?

Wednesday, May 6, 2009

First Home Owners Grant - about to reduce

We all know the recent drop in interest rates has made home loans that little bit more affordable. With the spiralling price of housing finally easing somewhat, First Home Buyers are presented with an unprecedented opportunity to enter the property market. However, for most part, the days of access to the property market with little or no cash may be gone.

Two reasons for this. The first is that the Federal Government has indicated that the extended First Home Owners Grant (FHOG) will reduce back to $14,000 and $7,000 respectively for new and established homes by June 30 of this year (down from $21,000 and $14,000 respectively). In the current economic environment of government fiscal stimulus, we cannot rule out an extention to the current FHOG but just in case, if you are a first home buyer, consider looking now as you may regret it come June 30.

The other reason is the withdrawl from the market of the 100 per cent home loan. Of the three remaining lenders offering this type of loan, all have now withdrawn it. Prudently, this means buyers will now have to save a 5 per cent deposit and have the FHOG cover the fees and charges including mortgage insurance.

Tuesday, May 5, 2009

Bank service is reaching horror levels

The past 12 months have seen a tremendous shift in Australian banking. Despite the fact our banks are much better off than in other contries, many banks are no longer in the mortgage market. I personally believe this has taken the banking industry back fifteen to twenty years. As a result of the turmoil in credit markets, consumers won't be able to count on serious competition from non-bank lenders for some time.

Recent aquisitions (RAMS and St George to Westpac and Bank West and part of Aussie to CBA) has given the four major banks a huge opportunity to capitalise on a situation where they are handling almost ninety-five percent of all loan applications. The downside of this is that service levels are at an all time low. If you need to use a major bank, please understand that they can take up to 2 - 3 weeks just to look at your application. Refinances are taking an inordinate amount of time as there is not the same urgency as there is in a purchase. Genuine pre-approvals (I'm not talking about the rubbish-waste of paper-internet ones) are not even available. If you're about to purchase a home, please don't be cajoled by your real estate agent into offering a contract that only has a 14 day finance clause on it. It's almost certain you will need to arrange an extension through your solicitor. 21 days should be the minimum in the current environment.

Despite all this there is opportunity for some borrowers to use lenders other than the majors. After being knocked about early on, these second tier lenders are determined to make a come-back, offering good and timely service and pricing their loans similar to those of their cartel-like competitors. But, as always, don't just look at the rate. In some cases we have clients taking a rate which is only 0.10 per cent lower than someone else but unfortunately, we are not seeing the service they require.

Friday, April 24, 2009

Window of opportunity closing

The window of opportunity to secure a low fixed rate home loan could be closing with the major banks now moving to bump up fixed term rates. Effective this week, the four major Australian banks are offering three year rates ranging from a low of 5.49 percent to a high of 6.19 percent. Accross the four banks this represents a rise of between 20 to 40 basis points.
One of the four also took the opportunity to increase its 5 year rate by 45 basis points to 6.84 per cent.

Despite expectations that the cash rate will fall further this year the rising cost of funds has once again been blamed for the banks' decisions to claw back shrinking home loan margins.
While not as attractive as the recent 4.99 percent we offered to customers, a three year rate of 5.49 percent is still reasonably attractive in the context of historical rate levels.

Thursday, April 23, 2009

You have the power to save

I was paying my electricity bill last week and happened across a person instead of the usual machine. In the course of paying my account they noticed I was paying a little extra each week ($0.69) so I could access some renewable 'green' energy. I was told for another 0.31 cents extra I could qualify for additional green power and get one month's electricity credited back to my account.

Check out your current electricity account and see how much you are paying. If this sounds interesting to you simply switch to Origin for your household electricity and natural gas and they'll reward you with a month off from paying your electricity bill.

They calculate the total amount of electricity you used over the previous 12 months and divide it by 12. This amount will then be credited to your electricity bill after your 12 month qualifying period so long as you pay your accounts by the due date or advise them when you will pay if you can't make the due date (this happens to all of us from time to time).

Why not visit and see if this is something you could use.

Do you know any money saving options for other everyday expenses?

Tuesday, April 21, 2009

Big Aussie banks control 95% of all lending

A Federal Treasury analysis has revealed the extent to which competition in the Australian lending market has been eroded by the current financial meltdown in the US. While officials are at pains to explain that Australian banks are in nothing like the situation of their US counterparts, cost of funds has seen competition in the banking sector return to almost pre-deregulation levels.

Non-bank lenders' share of new owner-occupied loans has shrivelled from more than 20 per cent in July last year to around 5 per cent currently, after the financial crisis all but choked off the supply of cash available to smaller lenders. Non-banks comprise mortgage managers like Aussie, Wizard and RAMS as well as building societies and credit unions.

While the Federal Treasurer, Wayne Swan has repeatedly urged disgruntled home buyers to "vote with their feet" and switch to cheaper loans, the growing dominance of the big banks means there is now little scope to do this. Residential mortgage-backed securities (RMBS) - the key source of funds for the non-bank sector - are now being issued at a rate of about $830 million a month, compared with $6 billion a month before the crisis. The Treasury analysis showed if the lending market were to return to normal, home buyers would be able to access interest rates about half a percentage point lower, saving $80 a month on the average mortgage.