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 economics. Show all posts
Showing posts with label economics. 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)
Thursday, September 9, 2010
Home buyers returning to market
HOME buyers, lured by a steady interest rate outlook and cooling house-price growth, have been returning to the market, with demand for home loans picking up. At the same time, there are
emerging signs that some banks are again letting home owners borrow more, with some lenders starting to relax recent tight standards with the reintroduction of higher LVR loans.
Demand for home loans eased earlier this year, pressured by three consecutive monthly interest rate rises and ballooning prices along Australia's east coast. In May, housing credit was running at a three-month annualised growth rate of 6 per cent; however, this had since increased to 8.2 per cent.
Yesterday the Australian Bureau of Statistics released figures showing housing finance commitments rose 1.7 per cent in July, seasonally adjusted. The result easily beat the market forecast of a 1 per cent rise.
(Source: Sydney Morning Herald)
emerging signs that some banks are again letting home owners borrow more, with some lenders starting to relax recent tight standards with the reintroduction of higher LVR loans.
Demand for home loans eased earlier this year, pressured by three consecutive monthly interest rate rises and ballooning prices along Australia's east coast. In May, housing credit was running at a three-month annualised growth rate of 6 per cent; however, this had since increased to 8.2 per cent.
Yesterday the Australian Bureau of Statistics released figures showing housing finance commitments rose 1.7 per cent in July, seasonally adjusted. The result easily beat the market forecast of a 1 per cent rise.
(Source: Sydney Morning Herald)
Friday, October 16, 2009
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.
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
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)
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)
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)
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)
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)
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.
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)
Tuesday, September 8, 2009
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)
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)
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)
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)
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.
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.
Subscribe to:
Posts (Atom)