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)