Banks are threatening to raise interest rates by more than any official rise in the cash rate by the Reserve Bank of Australia. They further threaten that these additional rises might come about even if the RBA does not raise interest rates any time soon. They say this is necessary because funding costs are reducing their margins.
Question: If bank interest rate margins are really threatened by increased funding costs, why are banks offering generous discounts on home loans - in some cases up to 0.80 per cent?
Showing posts with label Interest rates. Show all posts
Showing posts with label Interest rates. Show all posts
Friday, October 1, 2010
Thursday, September 30, 2010
Aussie reaches parity with Loonie
The Aussie was fractionally more valuable than the Canadian currency briefly overnight and this morning was fractionally lower. It is the first time the two currencies have been one-for-one since 2004.
The Australian dollar broke through the 97-US-cent mark yesterday afternoon and touched the 97.3 mark again in evening trade. This morning it was buying 96.88 US cents and about midday east-coast time it was buying 96.8 US cents after taking a drop on the news that building approvals were worse than had been expected.
The softer housing figures means there is now some doubt about the Reserve Bank's resolve to increase interest rates when its board meets next week.
(Source: Sydney Morning Herald)
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.
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.
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.
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.
Tuesday, October 6, 2009
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)
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)
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.
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)
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)
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)
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)
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.
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.
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)
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, 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)
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,
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.
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.
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.
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.
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.
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.
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.
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.
Friday, December 5, 2008
Rates on credit cards not coming down
Rates on most Australian credit cards have not budged despite the Reserve Bank (RBA) slashing cash rates by 3 per cent since September.
Consumer advocate, Infochoice traced 140 credit cards issued by banks, credit unions and building societies and found rates had fallen just 0.28 per cent on average since September less than a 10th the Reserve's cuts. In fact, rates on some products have risen.
According to Infochoice, Wizard's Clear Advantage card rate has risen 2.75 per cent and GE Money's low-rate MasterCard is up 2 per cent since the RBA started cutting rates in a bid to boost the economy. Suncorp, Encompass Credit Union and Bank of Queensland have also lifted rates on some cards by up to 0.84 per cent. Card providers have denied rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.
ANZ Bank has bucked this trend by passing on the RBA's latest 1 per cent cut in full to key credit cards, just a day after it was condemned for refusing to pass the full reduction onto home loan customers. ANZ's Rewards Visa and Frequent Flyer Visa rate will drop to 18.99 per cent from next Friday. First and Gold cards will fall to 18.24 per cent. The Commonwealth Bank will cut rates on all cards by 0.4 per cent from December 19. A spokesman for the bank said less than half the bank's credit card customers paid interest, instead paying out their cards in full by the due date.
Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.
Consumer advocate, Infochoice traced 140 credit cards issued by banks, credit unions and building societies and found rates had fallen just 0.28 per cent on average since September less than a 10th the Reserve's cuts. In fact, rates on some products have risen.
According to Infochoice, Wizard's Clear Advantage card rate has risen 2.75 per cent and GE Money's low-rate MasterCard is up 2 per cent since the RBA started cutting rates in a bid to boost the economy. Suncorp, Encompass Credit Union and Bank of Queensland have also lifted rates on some cards by up to 0.84 per cent. Card providers have denied rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.
Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.
ANZ Bank has bucked this trend by passing on the RBA's latest 1 per cent cut in full to key credit cards, just a day after it was condemned for refusing to pass the full reduction onto home loan customers. ANZ's Rewards Visa and Frequent Flyer Visa rate will drop to 18.99 per cent from next Friday. First and Gold cards will fall to 18.24 per cent. The Commonwealth Bank will cut rates on all cards by 0.4 per cent from December 19. A spokesman for the bank said less than half the bank's credit card customers paid interest, instead paying out their cards in full by the due date.
Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.
Tuesday, November 25, 2008
Good news and bad news
If the Debt Futures Market (DFM) know their stuff, the Reserve Bank of Australia (RBA) is going to lower its cash target rate to 2.75 per cent by April next year. That represents a fall of another two and a half per cent from the current cash rate 5.25 per cent. To kick off this reduction, markets are pricing a massive cut of 125 basis points when the RBA meets at its next board meeting on December 2. That would be the biggest one-month cut in official rate since the onset of the 1990 recession.
If these forecasts prove correct, the cash rate will be at its lowest level for several decades. According to the monthly average of official daily data published by the RBA , the cash rate was at a low of 2.98 per cent in January 1960.
Economists argue that a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively. A 125-basis-point rate cut next month would take the cash rate to 4 per cent. It would be the biggest cut since April 1990, when the RBA slashed the then 16.5 per cent cash rate by 150 basis points, as the Australian economy entered into a recession.
This is both good news and bad news.
However, its really bad news though because rate cuts of this magnitude highlight the seriousness of the economic conditions we are about to head into.
(source: Faifax Ltd)
If these forecasts prove correct, the cash rate will be at its lowest level for several decades. According to the monthly average of official daily data published by the RBA , the cash rate was at a low of 2.98 per cent in January 1960.
Economists argue that a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively. A 125-basis-point rate cut next month would take the cash rate to 4 per cent. It would be the biggest cut since April 1990, when the RBA slashed the then 16.5 per cent cash rate by 150 basis points, as the Australian economy entered into a recession.
This is both good news and bad news.
- Good news because exsitng and new mortgages will be so much more affordable. In the long run, this will help the broader economy in areas like retail, property and personal and business services.
- Bad news for people who rely primarily on bank deposits for income (retirees) as deposit rates fall.
- Good news for equities markets as return on investment in shares become more attractive relative to income earned in bank deposits
However, its really bad news though because rate cuts of this magnitude highlight the seriousness of the economic conditions we are about to head into.
(source: Faifax Ltd)
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