Low Interest Rates

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The Reserve Bank has warned there was a risk that low interest rates could lead to "over-exuberence" with asset prices, including in the housing market.

The RBA suggested Australian banks' lending standards remained prudent and that households, businesses and banks were well-placed to deal with any weakening economic conditions.

But the central bank warned of a risk that assets could be pushed beyond their fundamental value.

"A sustained period of rising asset prices may lead to over-exuberance ... with increased risk-taking and leverage in an environment of accommodative financial conditions," it noted in its biannual financial stability review, released on Friday

“A correction in asset prices, if borrowers’ income were to fall and so they defaulted on debt repayments, would expose lenders to large losses on the increased debt, particularly if the quality of that debt had been eroded.”

The review also noted households and businesses that derive their incomes from sectors most heavily affected by the COVID-19 pandemic face an elevated risk of repayment difficulties "if their buffers prove to be insufficient.” 

The RBA said these risks were greatest for leveraged assets, including housing, which thereby meant it was crucial banks did not cut credit standards.

"[In this environment] it is particularly important that there is no excessive risk-taking by the financial sector," the RBA said.

"Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending."

"This would weaken the resilience of businesses and households, and so the financial system, to future shocks," the RBA concluded.
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The RBA suggested that Australian banks' lending standards remained prudent

jchancellor

RBA warns on "over exuberance" in home buying

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Homestar Finance is offering the lowest two-year fixed rate in the home loan market. Homestar Finance has cut its two-year fixed owner-occupier rate by 14 basis points to 1.74%.

The rate cut move knocks Westpac from the top spot after it offered the lowest rate. The increased rate competition was dubbed a "raging rate war" by the Mortgage Professional Australia website.

“This loan is the lowest two-year fixed rate on the market and also the lowest overall home loan rate available nationally,” RateCity research director Sally Tindall told The Australian. “It also has one of the most competitive revert rates at 2.24%.”

Some 450 fixed mortgage rates have been cut over the last two months. Homestar is also equal lowest with Reduce Home Loans for the lowest variable rate at 1.79%.

Greater Bank has the lowest fixed rate in the market, with its one-year fixed rate sitting at 1.69%, with the rate only available to customers in New South Wales, Queensland and the Australian Capital Territory.

<h2>Recently listed properties:</h2>

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Homestar is equal lowest with Reduce Home Loans for the lowest variable rate at 1.79%.

New low as Homestar Finance cuts its two-year fixed owner-occupier rate to 1.74%

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Heritage Bank will offer variable rate home loan rates from as low as 2.54% after announcing cuts to its rates last week.

Heritage has reduced selected rates for new loans across its owner occupier and investment range from making it more attractive for prospective borrowers to take out a loan with Australia’s largest customer-owned bank.

Heritage has dropped its Discount Variable home loan interest rate to 2.54%, for eligible borrowers taking out a new owner occupier loan of $150,000 - $699,999 with a loan to value ratio equal to or less than 70%. 
  
Other rate reductions for new owner occupier loans include:

<ul>
<li>Selected Discount Variable loans reduced by 0.09%</li>
	<li>Selected Home Advantage Variable loans decreased by up to 0.19%</li>
</ul>
There is also news for investors with further rate cuts for new loans as follows:

<ul>
<li> Investor Discount Variable loan rates reduced by up to 0.14%</li>
	<li> Investor Home Advantage Variable loan rates cut by 0.14% - 0.24%</li>
</ul>
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Heritage has dropped its discount variable home loan interest rate to 2.54%

jordan_55689

Heritage Bank cuts variable home loan interest rates

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The Reserve Bank could seek tightened lending standards if the current record low interest rates triggers a housing boom, according to a RBA document obtained by Nine Entertainment.

While not the official position of the central bank, the research paper found low interest rates, along with the RBA's quantitative easing program, were supporting assets including the prices of houses.

It noted higher asset prices could translate into increased spending by "credit-constrained households".

"Housing prices are likely to (increase) alongside other asset prices," it suggested.

The research paper noted loan-to-valuation ratios were increasing but were still well below the levels that prompted APRA to tighten lending standards progressively from 2015.

It raised the spectre of borrowers "likely to be in negative equity".

The paper said the Council of Financial Regulators (CFR) - the RBA, APRA, the federal Treasury and the Australian Securities and Investments Commission - would intercede if required.

"Australia’s financial regulators will monitor and control risks," the paper noted.

"CFR will act if needed."

The document obtained under Freedom of Information date back to late November considerations by the RBA.

The paper cites previous research by RBA economists that a permanent percentage point reduction in official interest rates can drive up real house prices by 30 per cent over a three-year period. 

A "temporary" percentage point reduction would push up real prices by 10 per cent.

The central bank has cut official interest rates by 1.15 percentage points since last June.
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The document obtained under Freedom of Information date back to late November considerations by the RBA.

Reserve Bank may seek tightened lending standards if record low interest rates triggers housing boom

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GUEST OBSERVATION
Australian taxpayers won’t face a rise in taxes now that Treasurer Scott Morrison announced the government will not increase the Medicare Levy by 0.5% as planned. This was to originally fully fund the National Disability Insurance Scheme (NDIS).
This is on the back of strong company tax receipts stemming from companies using up carry-forward losses accumulated in the wake of the financial crisis.
Australian Bureau of Statistics data for 2016/17, released this week, showed tax revenue for the federal government (including taxes received from other levels of government and public corporations) increased A$19.4 billion (5.2%).
The averted tax rise will be welcome news for Australian taxpayers. It also wedges the Labor opposition.
They have said that the NDIS was fully funded on their watch. So now they are proposing a 0.5% tax rise on all incomes over A$87,000. That’s pretty close to full-time male average weekly earnings and comes close to capturing half of Australian households.
The federal budget on May 8 will no doubt have further goodies for voters in the run-up to the net election, which will be either this year or relatively early next year. As usual, we will be reporting directly from the budget lockup.
One of the central economic puzzles of the last several years has been persistently low inflation in all advanced economies, despite general economic recovery and falling unemployment.
This week’s Australian consumer price inflation figures revealed a 0.4% increase for the March quarter, and 1.9% for the last 12 months. The March quarter figure was below market expectations of 0.5%, and also the previous (December quarter) figure of 0.6%. Education prices were up 2.6% on the quarter, and health prices up 2.2% (or 4.2% for the year to March 2018).
This puts inflation still below the Reserve Bank of Australia’s (RBA) target band of 2-3%. That band, of course, has been in place since the early 1990s – beginning with this speech by then governor Bernie Fraser.
Numerous central banks around the world have a similar approach. The basic idea is that a central bank can build a reputation over time to commit to monetary policy such that inflation lies in the band.
Now there are pros and cons to this approach to monetary policy, and it has its critics. But that is another tale for another day.
Just assuming that inflation targeting is the correct objective, how is the RBA doing? Well, one small hitch in the plan is that inflation has been outside the band for a long time now (basically since 2014), as the RBA’s own figures show.
Given the level of unemployment in Australia, low wages growth, and stubbornly low inflation, the RBA probably should have cut rates further a fair while back. But they seem, probably rightly, terrified of further fuelling a potential housing bubble.
Meanwhile, the credibility of their commitment to the inflation target withers. If only the regulation of our banking and finance sector had been better for the last, say, decade or two.
Speaking of such regulation, RBA assistant governor Chris Kent gave a speech Tuesday about the important issue of interest-only loans. Kent’s speech was significant because it followed up on remarks in the RBA minutes about the same issue that I discussed in this column last week.
It seems that the RBA “house view” on interest only loans is as follows. There could be a problem but the Australian Prudential Regulation Authority (APRA) stepped in and the banks have voluntarily tightened lending standards recently. Also because the average household with an interest only loan has a buffer of savings, everything will be fine. Nothing to see here.
I hope the RBA’s conclusion is right, but I know for sure that the reasoning is not. It’s actually the marginal household’s financial position and behaviour that matters, not the average household.
The average United States borrower with an adjustable-rate mortgage did not default in 2007, 2008 or 2009. But these mortgages were a huge contributor to the financial crisis, along with subprime mortgages.
Kent dutifully laid out the risks from interest only loans, saying:
"Because there’s no need to pay down principal initially, the required payments are lower during the interest-only period. But when that ends, there is a significant step-up in required payments (unless the interest-only loans are rolled over)."
Indeed, unless they can be rolled over. Which they can’t now because of APRA and the banks finally doing something.
Now, prices (interest rates) on interest only loans have gone up as part of the bank response. This has led a bunch of folks to shift to amortising loans, where the principal of the loan is paid down over the life of the loan. So those borrowers who haven’t shifted to these loans already, really don’t want to.
Maybe they can’t afford to because of the increased repayments, that can jump 30% or more per month.
So what does happen? First Kent says many borrowers save ahead of time, expecting a rise in repayments. Yes, the prudent ones.
But how many non-prudent borrowers have there been in the Australian property market in recent years? Hint: a lot.
Kent also points to borrowers who seek to refinance their interest only loan. But banks don’t really want to, and APRA doesn’t want to let them. And who is going to be able to? The safer borrowers who did save and so don’t really need to avoid amortisation. The risky borrowers can’t refinance.
Kent says some borrowers will have to cut their spending. Chuckle, chuckle. And the final option is to sell their house.
Sure, no problem, unless lots of folks want to do that all at once. Then it’s a fire sale that detonates the housing market.
I really do hope we escape the interest only debacle unscathed. But if we do it will be pure, dumb luck, not a consequence of good design or sound regulation.
It definitely doesn’t justify the RBA’s house view in Kent’s concluding remarks that: 
"The substantial transition away from interest-only loans over the past year has been relatively smooth overall, and is likely to remain so. Nevertheless, it is something that we will continue to monitor closely."
<img src="https://counter.theconversation.com/content/95518/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">Perhaps a there should have been a little more monitoring before interest only loans got to be 40% of all loans and more than half of the loan book of one of our biggest banks.
Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-interest-only-loans-are-an-economic-debacle-that-could-bust-the-property-market-95518" target="_blank">original article</a>.
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j.ballantyne1990-6AQqhLzZaK

Interest only loans are an economic debacle that could bust the property market: Richard Holden

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RBA STAFF DISCUSSION PAPER
Most of the cumulative 75 basis points of cash rate reductions in 2019 has flowed through to mortgage rates paid by households.
Interest rates on outstanding variable-rate housing loans have declined by almost 70 basis points (Graph 11). Following the reductions in the cash rate in 2019, lenders lowered their SVRs on housing loans by an average of 60 basis points, which automatically flowed through to all variable-rate loans.
The average rate paid on outstanding variable-rate loans declined by more than this, reflecting strong competition for new high-quality borrowers as well as households switching away from interest-only loans (which generally have higher interest rates). Following the 25 basis point reduction in the cash rate in March 2020, the major banks have lowered their SVRs on housing loans by 25 basis points.
Rates for fixed-rate housing loans have also declined. Over the past year, the major banks reduced their advertised 3-year fixed lending rates by around 100 basis points for owner-occupiers. This decline was consistent with a similar decline in interest rate swap rates, which are often used as a benchmark for pricing fixed-rate loans (given that they reflect expectations about the future path of the cash rate). 
<div><img src="https://www.rba.gov.au/publications/bulletin/2020/mar/images/graph-0320-4-11.svg" alt="Graph 11: Variable
					Housing Interest Rates" width="620" height="482" data-imagetype="External"></div>
Interest rates on loans to large businesses – which tend to move with BBSW rates – are estimated to have declined over recent months and are at very low levels (Graph 12). Lending rates for medium and, to a lesser extent, small businesses have also decreased over recent months. 
<div><img src="https://www.rba.gov.au/publications/bulletin/2020/mar/images/graph-0320-4-12.svg" alt="Graph 12: Business
					Lending Rates" width="620" height="482" data-imagetype="External"></div>
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Housing and business lending rates both reach historic lows: RBA discussion paper

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ME is going below 3% p.a. on its variable rate Basic Home Loan with cuts of up to 59 basis points.
ME’s lowest variable rate for new customers will become 2.58% p.a., one of the most competitive comparable rates in the market – and the lowest advertised variable rate the bank has ever offered.
New and refinancing owner occupier customers paying principal and interest with a minimum loan balance of $150,000 are eligible.
ME General Manager, Home Lending Andrew Bartolo said ME’s Basic Home Loan was already very simple, with no frills or fancy features and no ongoing account keeping fees.
"Cutting variable rates below 3% p.a. for this product will make it even simpler and better value for our customers.”
As an example, eligible customers with a 20% deposit can apply for the 2.58% p.a. variable rate (a 59 basis point reduction) and those with a 5% deposit can apply for the 2.99% p.a. variable rate (a 53 point reduction). The headline rate changes are as follows:
 
<table class="x_MsoTableGrid" border="1" cellspacing="0" cellpadding="0"><tbody>
<tr>
<td valign="top" width="302">
Product
</td>
<td valign="top" width="85">
Previous Rate % (p.a.)
</td>
<td valign="top" width="76">
Change % (p.a.)
</td>
<td valign="top" width="132">
New Rate % (p.a.)
</td>
</tr>
<tr>
<td valign="top" width="302">
Basic Home Loan variable rate owner occupier – principal and interest (new and refinancing customers)
</td>
<td valign="top" width="85">
 
</td>
<td valign="top" width="76">
 
</td>
<td valign="top" width="132">
 
</td>
</tr>
<tr>
<td valign="top" width="302">
LVR 80% or less
</td>
<td width="85">
3.17
</td>
<td width="76">
-0.59
</td>
<td width="132">
2.58
</td>
</tr>
<tr>
<td valign="top" width="302">
LVR more than 80% (LMI applies)
</td>
<td valign="top" width="85">
3.52
</td>
<td valign="top" width="76">
-0.53
</td>
<td valign="top" width="132">
2.99
</td>
</tr>
</tbody></table>
 All changes are effective from 28 August 2020. Only applications submitted on or after this date will be eligible for the new rates.
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ME offers lowest ever below 3% no-frills variable home loan

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Potential investors around Adelaide are warned not to look for short term capital gain and instead concentrate on paying the right price in the right area.
The Herron Todd White July 2015 Month in Review said those looking to buy in the $500,000 price range should concentrate on inner suburban areas close to amenities above anything else.
A townhouse, cottage or unit worth $500,000 within the eastern and southern suburbs would be a more desirable location, the report noted.
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mick.cee-iDmgDDAmu8

Adelaide investors should look past the short term: HTW

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Interest rates remain a hot button issue for Australian consumers, the mortgage belt in particular.
Most recently, the weakening in sentiment in Jun-Sep last year highlighted once again just how sensitive consumers are to actual and prospective rate moves.
The period coincided with increased rates on investor and ‘interest only’ loans following macro-prudential measures from APRA. It also coincided with increased media speculation about the potential for a rate tightening cycle from the RBA. Headline sentiment slid about 4% through mid 2017, registering its lowest read for the year in Aug, with sentiment amongst consumers with a mortgage sinking to an 18mth low.
Notably, actual consumer spending also stalled flat in the quarter, showing that, against a backdrop of weak income growth, high debt levels and risking risk aversion, this sort of sentiment pull back can have an immediate impact on spending decisions.
Click here <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Housing_Pulse/Housing_Pulse_Bites/Housing-monthly-charts-2018-02-2.jpg" target="_blank">to enlarge.</a>
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Housing_Pulse/Housing_Pulse_Bites/Housing-monthly-charts-2018-02-2.jpg" alt="">
We get a specific read on consumer views on interest rates from our biannual question on mortgage rate expectations. The Feb update shows consumers are less hawkish than in Aug last year. The simplest summary measure – the net % expecting rates to rise – declined to 65.1 from 68.2 in Aug, the highest level since Jun 2011, prior to the RBA commencing its current, extended easing cycle. The Feb read is still well above the 43.5 avg since we started running the question in 2010.
Allowing for a clear ‘upward bias’ to consumers’ mortgage rate expectations, history suggests the Feb expectations read is roughly consistent with a 10bp rise in mortgage rates over the next year.
That is a less hawkish view than both current market pricing (+23bps) and the average economist cash rate forecast (+16bps) despite both markets and economists lowering their near term calls on rates. Westpac Economics continues to expect no change in official rates over 2018 and 2019. However, the hawkish tilt to expectations suggests rate concerns will continue to be a dampening influence on consumers' housing market decisions.
Matthew Hassan is senior economist with <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
 
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jrobinson-rf4aSBido9

Consumers sensitive to actual and prospective rate moves: Westpac's Matt Hassan

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EXPERT OBSERVER
Developments since the RBA rate cut on Tuesday 4 June have provided us with further confidence that our forecast for three rate cuts in 2019 will prove accurate. Firstly, the Governor has pointed to an ambitious objective for the labour market, with an unemployment rate of 4.5% seen as necessary to bring inflation back to target. This is despite his own forecasts indicating a 5% result on the basis of two rate cuts. That challenge can certainly be interpreted as an expectation of the need to deliver more than just two rate cuts.
Our earlier discussion on 24 May around our target cash rate of 0.75% emphasised downside risks to the cash rate, but noted the difficulties in lowering the cash rate below 0.5% and providing some pass through to the general economy – except for the impact on the currency. We concluded that 0.5% could be the lower bound for the cash rate, although we are comfortable with our 0.75% target. The Governor considered international precedence and referred to the 0.25-0.50% seen in the US, UK and Canada, but did not indicate whether the same level would be effective for Australia.
The other significant development since the RBA meeting has been the disappointing GDP report for the March quarter. This again highlighted the key themes that have been most prominent in our consistent assessment that the Australian economy is likely to continue operating well below potential, namely weak household income growth, a cautious consumer and a turning point in the savings rate.
This report, showing that GDP growth was only 0.4% in the March quarter is likely to trigger a further downward revision to the RBA’s 2019 GDP forecast. Westpac has consistently forecast around 2.2% for GDP growth in 2019, while the RBA has recently lowered its forecast from 3% in February to 2.75% in May (2.6% to 1 decimal point), with a likely further downward revision in August.
We have also argued that it will be difficult to retain the 1.75% underlying inflation forecast for 2019 by August when, as we expect, the June quarter underlying CPI will print 0.4% for a total of 0.7% for the first half of the year. We think it will be important that when the RBA addresses these lower forecasts, it responds with a further rate cut in August and another one to follow in November.
There has been some speculation that the RBA may cut earlier in July. This is not our central view given the likely need to respond to these downward revisions in August.
Turning to the US, we have revised our federal funds rate profile to include two cuts of 25bps in September and December this year.
A key influence on this assessment is that a new variable has entered the US economic model – one labelled “political unpredictability”. This variable is certain to have a negative coefficient on any equation describing US investment decisions and general confidence. We believe that it is now so embedded in US business behaviour that even resolutions of the current trade controversies are unlikely to convince business that the coast is clear.
We expect the FOMC will be assessing current risks in a similar fashion, revising down central growth views, particularly around business investment and confidence, and widening the uncertainty bands around these views. Chair Powell has recently pivoted from his previous “patient” stance to one where he is prepared to act and it is likely that the FOMC are seeing this variable as part of their risk assessment.
At this stage, we are not franking market pricing by extending the rate cuts into 2020 as we expect some reasonable resolutions to the current crises to prevent a ‘worst case’ scenario, particularly for the US consumer. Failure to resolve these issues would lead to a considerable shock to household disposable income and household demand. That development, of course, would require further action from the FOMC than we are currently forecasting. In 2020, with the consumer remaining in reasonable shape, we would also expect the housing market, which has currently stabilised, to respond to this lower profile for interest rates.
With markets currently pricing in more extensive cuts than we are forecasting, we see little scope for further declines in US yields in 2019, and anticipate they will rise modestly through 2020.
Given that markets are still not fully pricing in our RBA view by the end of 2019 and are more aggressive on the profile for federal funds rate cuts, we are comfortable to retain our central forecast that the AUD drifts down to USD 0.66, albeit reaching that level in the first half of 2020 rather than late 2019.
BILL EVANS is the Chief Economist for Westpac
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