Mortgage Rate

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<p>GUEST OBSERVER</p>
<p>If you’ve owned your home for a number of years, it’s likely you’ve racked up some impressive gains in home equity – that’s the difference between the property’s market value and the balance of your home loan.</p>
<p>This means there’s a whole stash of cash just waiting to be tapped into either through a home loan refinance or a loan top up. While it’s tempting to spend up big, treating your home as an ATM isn’t healthy. We share some smart, sensible, and downright frivolous ways to use your home equity.</p>
<p><strong>Smart moves</strong></p>
<p>Use equity to renovate your existing home – Quality home improvements can add to your lifestyle; save on the cost and hassle of relocating to a new home, and best of all the renovations can increase the market value of your home.</p>
<p>Invest in a rental property – Using your home to grow wealth? Now that’s a smart move. Tapping into equity may even mean you don’t need to save for a cash deposit.</p>
<p><strong>Sensible – with strings attached</strong></p>
<p>Consolidating personal debt – If you’re juggling a few credit cards, a personal loan and maybe a car loan, consolidating the lot into your home loan can streamline your finances. It means just one monthly repayment to manage, and as home loans usually have a lower rate, you’ll save on interest costs.</p>
<p>But – and it’s a big but – you could be turning short term debts into a long term debt and end up paying more than necessary in long term interest. Use the savings on monthly repayments to make extra home loan repayments and keep a lid on interest costs while you whittle away the loan.</p>
<p>ME’s 10<sup>th</sup> biannual <em>Household Financial Comfort Report </em>shows that more households ‘paying off or owning a home’ reported to be drawing on their home equity to ‘pay off debt’ and ‘to make ends meet’ during the first half of 2016.</p>
<p><strong>Think twice</strong> </p>
<p>Here today, gone tomorrow purchases – using home equity to fund a round the world vacation, a new designer wardrobe, or any purchase with no real lasting value calls for some serious soul searching. Not only will you be whittling away precious equity, you are adding the cost of long term interest to the purchases.  </p>
<p>The time may come when you really need that equity for must-haves rather than luxuries. So think twice and weigh up other finance options like, say, a personal loan, which will allow you to pay off big ticket purchases buys in just a few years.</p>
<p><em><span lang="EN-US">Patrick Nolan is head of home loans for industry super fund-owned bank ME. You can contact Patrick <a href="https://www.mebank.com.au/personal/home-loans/home-loans/" target="_blank">here</a>.</span></em> </p>
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jchancellor-FAypfDUnLy

The good, the bad and the ugly of dipping into home equity: Patrick Nolan

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<p>GUEST OBSERVER</p>
<p>With an RBA rate rise looming and big banks already hiking rates across fixed rate home loans, it seems the rock bottom rates of 2016 are now a thing of the past for property buyers.</p>
<p>All four big banks have now slammed home borrowers with rate rises in the past couple of weeks, joining another 14 lenders who have pushed up variable rates out of cycle this month alone. </p>
<p>The big banks have a history of higher than average interest rates - so far, since 2009, all the big banks have increased rates by more than the RBA did two times each (except NAB, who did it once.) They also all held back a full RBA rate cut 7 times a piece (although ANZ only did it 6 times.)</p>
<p>There are a couple of reasons for these recent rate hikes - the excuse the banks have given is that cost of funding is getting higher, so loan rates need to increase as well. </p>
<p>The likelihood of an RBA rate increase sometime next year is also a consideration, particularly for fixed rate offers, as banks factor that into current rates that they won’t be able to adjust for the next two years or more. So for the rest of this year at least, it seems rates will only be pushed higher.</p>
<p>Investors will have it particularly tough, with APRA breathing down the necks of lenders after investment loans spiked toward the end of 2016. CommBank, which grew its investment loan portfolio by 8.02 percent over the last 12 months, has already started tightening criteria for lending to investors by dropping LVRs and limiting refinancing loans.</p>
<p>In fact, <a href="https://mozo.com.au/" target="_blank"><span>Mozo</span></a> data shows that the average big banks interest rate premium on variable rate investor loans has doubled in the last year.</p>
<p>So things are looking gloomy for borrowers hoping to get a foot on the property ladder with a low rate loan, especially since big bank loans now account for 85% of the investor loan market, and 81 percent of owner-occupier loans.</p>
<p>That means now, when record low rates seem to be squarely behind us, is the time for new borrowers to really do their research into what offer is going to work best for their budget, and for those already paying off a mortgage to re-evaluate their situation and decide if it’s worth refinancing to lock in a good deal while they’re still around.</p>
<p><em><span>STEVE JOVCEVSKI</span> is a property investment and h</em><em>ome loan negotiator at </em><em><a href="https://mozo.com.au/" target="_blank">Mozo.com.au</a>.</em></p>
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The low rate mortgage party is over for property buyers: Mozo

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<p><span>GUEST OBSERVER</span></p>
<p><span>At the start of a new year many of us make a number of resolutions that we wish to integrate into our lives.</span><br><br><span>These resolutions can often include a commitment to eat better, exercise more or be better with our finances.</span><br><br><span>Whether you’re aiming to become a better saver, or you’re wanting to save for a home deposit, the key is to not let your resolution fall flat.</span><br><br><span>There are a few easy steps everyone can follow to ensure any financial resolutions become a reality.</span><br><br><strong>1.  </strong><strong>Set a goal </strong><br><br><span>The key to saving more money is setting a financial goal that is specific and realistic.</span><br><span> </span><br><span>You can have a large goal in mind, such as buying a home, but you should also break it up into smaller goals that will be easier to achieve.</span><br><span> </span><br><span>If your goal is to save more money, give yourself a dollar figure and a target date to achieve that by, as this will keep you accountable. </span></p>
<p><span>Savings calculators are helpful tools that can assist you in working out how much you can save a month and how long it will take for you to reach your savings goal.</span><br><span> </span><br><span>You should review your goals at least once every six months to track how you’re doing. If you find that you are not making much progress, rather than giving up, make changes so that you can achieve your goals.</span><br><span> </span><br><strong>2.  Set up a budget </strong><br><br><span>Mr Flavell said a budget was an essential factor in achieving any financial goal.  </span><br><span> </span><br><span>By creating a budget, you will have full control of your finances as you will know how much you are spending and saving.</span><br><span> </span><br><span>Tracking where your money is going also allows you to make clear decisions about your purchases, see what expenses you can potentially cut back on, and plan your spending ahead of time.</span><br><span> </span><br><span>A budget did not have to be too complicated.</span><br><span> </span><br><span>It can be a simple document such as a spreadsheet, where you note down your income and all your expenses for the month.</span><br><span> </span><br><span>The trick is to review and update it regularly to make sure it always aligns with your current financial or personal situation.</span><br><span> </span><br><strong>3.  Review your spending </strong><br><br><span>You can boost your savings significantly by cutting back on certain expenses, or finding more affordable options.</span><br><br><span>Look at your current contracts – like gym memberships and or your phone contract and see if there are easy ways for you to reduce the amount you spend each month. Call your gym up and ask for a discount, or research your phone provider options online and see if there is a cheaper supplier on the market.</span><br><span> </span><br><span>While you may only save a few dollars here and there, not only does every cent count, but every cent takes you one step closer to your end financial goal.</span><br><br><strong>4.  Reduce debt </strong><br><br><span>Another great way to reach your financial goal faster is to pay down your existing debt.</span><br><span> </span><br><span>The Christmas period is an expensive time of the year, so you have probably racked up debts on your credit card.</span><br><span> </span><br><span>When you get your credit card bill, aim to pay these off completely or minimise them as soon as possible. You should also try and pay more than the minimum amount, which is typically 2 percent of your closing balance, to avoid paying additional interest.</span><br><span> </span><br><span>When you pay off your debts, you free up your cash flow. This means you have more money in your back pocket each month that you can put towards your financial goals.</span><br><span> </span><br><strong>5.  </strong><strong>Shop around for better deals </strong><br><br><span>Now that you know how much you’re saving and how to potentially increase your cash flow, the next step is working out the best place to put your money.</span><br><span> </span><br><span>If you want your money to work as hard as possible for you, you need to ensure you are saving it in the right location.</span><br><span> </span><br><span>Get online and research the various options provided by Australia’s lenders. By doing your research, you will see what term deposit facilities or savings accounts will offer you the greatest return on your dollar. </span><br><span> </span><br><span>Before making any final decisions however, speak with your bank or your local broker to ensure it is the right financial move for you and your end goals.</span></p>
<p><span><em>John Flavell is chief executive officer <a href="https://www.mortgagechoice.com.au/" target="_blank">Mortgage Choice</a>.</em></span></p>
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Make your financial resolutions a reality this year: John Flavell

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<p><img src="https://counter.theconversation.edu.au/content/63512/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>The big, but completely unsurprising, news this week was the Reserve Bank of Australia cutting the cash rate to an historic low 1.50 percent.</p>
<p>As Vital Signs has been saying for some time, this month was a likely candidate for a cut, once second-quarter inflation was confirmed to be disturbingly low – as it was last week.</p>
<p><a href="/images/2016/08/05/Screen%20Shot%202016-08-05%20at%208.48.39%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/08/05/Screen%20Shot%202016-08-05%20at%208.48.39%20AM.png" alt=""></p>
<p>Australia is faced with extremely low inflation, low effective growth, a squishy labour market, and prudential regulation measures enacted last year partially reigning in the housing market. Given this, it was almost inevitable Glenn Stevens would engineer another cut.</p>
<p>But there were some other figures of note this week. Australian retail trade rose 0.1 percent in June, compared to market expectations of 0.3 percent – further underlining the weak domestic economy.</p>
<p>Adding to that story of gloom, private sector building approvals were down in June, both in absolute terms and relative to expectations. House approvals fell 2.3 percent implying a 5.9 percent drop compared to a year earlier. Apartment approvals fell 2.4 percent, implying a 4.8 percent drop year-on-year.</p>
<p>Chinese manufacturing data was mixed – or perhaps just confusing – with the official Purchasing Managers' Index (PMI) down to 49.9, from 50.0 the month before. Recall that 50 is the break even between expansion and contraction. Meanwhile, the private Caixin index came in at 50.6 in July, up from 48.6 in June. This was the first jump above 50 since February 2015.</p>
<p>Why the difference? The likely answer is that the official government PMI is more relevant for large, state-owned enterprises, while the Caixin index is a better gauge of smaller and medium-size companies.</p>
<p>In the US, payroll processing firm ADP’s latest data revealed a 179,000 increase in non-farm payrolls in July. This was essentially confirmation of the official Bureau of Labor Statistics figures (though on a slightly different scale) of strong job creation in the US. This is further evidence of the likelihood of a rise in official rates by the Fed in the next month or two.</p>
<p>Now, back to Australian interest rates. Lower rates only have a potential stimulatory effect if they are passed on to borrowers by (largely) the big 4 banks. About half of Tuesday’s cut was passed on – with the rest “kept” for bank shareholders.</p>
<p>On Thursday afternoon, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison announced at a press conference that the big 4 banks would have to front the House Economics Committee annually to “explain” their interest rate decisions.</p>
<p>Populist nonsense? Interventionist joke? Meaningless charade? Those are all phrases that come to mind. Turnbull grinned like a Cheshire cat as he described it as a “great opportunity” for the banks. Ho, ho, ho.</p>
<p>I’m no apologist for the banks, but they do have a legitimate argument that their funding costs have been rising. The US money market funds are much harder to tap as they have become significantly more conservative after the Primary Reserve Fund “broke the buck<a href="https://www.investopedia.com/terms/b/broke-the-buck.asp">”</a> during the financial crisis. Deposits now make up about 60% of bank funding, compared to 40 percent in 2007-08 – and those rates have been rising.</p>
<p>Nonetheless, the banks do have a good deal of market power. It’s legitimate for them to use that, unless they are violating competition law. That’s a matter for the Australian Competition and Consumer Commission, not the House Economics Committee.</p>
<p>One final note. To all those people who keep saying “rates have been cut a lot and it hasn’t done any good”: please search my name and the word “counterfactual”.</p>
<p><em><span class="fn author-name">Richard Holden is p</span>rofessor of economics, UNSW Australia and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">here</a>.</em></p>
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Vital signs: only the banks know

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<p>GUEST OBSERVER</p>
<p>Last week, Westpac hoisted its lending rate by 20 basis points in a bid to recover the costs of recent capital raisings. There is speculation other banks will follow. Australia’s non-bank lenders could be winners from such a scenario - but the choice may not be as simple as the lowest interest rate.</p>
<p>The outcome of the Financial Systems Inquiry</p>
<p>The background to Westpac’s move lies in recommendations by the Financial System Inquiry that the capital base of Australian banks should be increased to an “unquestionably strong” level and that there should be a narrower gap in different mortgage lending requirements between institutions.</p>
<p>As a result Australian banks have considerably increased capital levels this year by approximately $16 billion.</p>
<p>However, higher capital levels and bank stability may come at additional costs, even if trade-off theory suggests greater bank and system resilience would normally equal lower funding costs. That’s because bank investors have high dividend expectations, so this means the costs of boosting capital may be passed onto borrowers.</p>
<p>Capital levels are likely to increase further as regulators seek to narrow the gap between the practices of the big banks and smaller lenders, and amid their increasing concern at Australia’s house prices. In particular, large banks are expected to increase capital required under their internal risk weighting models for mortgages.</p>
<p>Will non-bank lenders grow their mortgage books?</p>
<p>Non-bank lenders provide mortgage loans with comparable features but unlike banks are exclusively funded from wholesale markets and not from consumer deposits.</p>
<p>As a result, banks face minimum capital requirements enforced by the Australian Prudential and Regulation Authority to protect depositors, while non-bank lenders are unregulated and may more freely choose their funding mix and hence have lower funding costs.</p>
<p>This often implies lower capital ratios for non-banks than banks. Raising capital levels for banks only may have an impact on the balance between bank and non-bank competitors.</p>
<p>The following chart shows the counts and total assets of banks and non-bank lenders in Australia over time:</p>
<p><a href="/images/2015/10/19/image-20151018-25135-1sqzbqr.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2015/10/19/image-20151018-25135-1sqzbqr.jpg" alt=""></p>
<p> </p>
<p>The size of non-bank lenders ($120 billion) is much smaller than the size for bank lenders ($3.8 trillion) and has shrunk in relative terms over the past years. This may suggest that Australians fail to really consider this sector to finance their homes despite competitive mortgage rates from non-bank lenders.</p>
<p>There are many reasons for this – convenience may be one of them as banks are able to offer a larger product range and cover most financial needs of consumers, and consumers prefer to bank with a single institution.</p>
<p>The small size is a great disadvantage as relative fixed costs are higher for small firms than for the major banks.</p>
<p>Should you choose a bank or non-bank to finance your home?</p>
<p>Consumers seeking mortgage finance for a property – either a new borrowing or refinancing of an existing loan – can choose between a large number of banks and non-bank lenders, along with hundreds of loan products.</p>
<p>Comparison websites generally rank lenders and products according to the most obvious criterion – the interest rate. Non-bank lender often provide the cheapest terms. But the lowest rate loan is not necessarily the best loan.</p>
<p>The choice between bank and non-bank lender can be important if you want to use an offset facility. Offset facilities are not always included and they can expose borrowers to lender risk.</p>
<p>Having savings in an offset facility means that in effect the lender owes you money. Banks are much less risky in this regard because they benefit from government guarantees as well as greater scrutiny that are tied to the bank status.</p>
<p>Non-bank lenders are excluded from such guarantees and furthermore may have a greater exposure to market instability.</p>
<p>During the global financial crisis non-bank lenders (especially overseas firms) that were funded through capital markets, rather than customer deposits, were challenged as wholesale funding markets dried up. Some failed and total volumes shrank between 2009 and 2013 (see chart above).</p>
<p>Still, it is likely that more Australians change to non-bank lenders in the future. Changing a lender is easy as mortgage brokers often provide the legwork, plus exit fees have been considerably reduced since new laws came into effect on 1 July 2010 limiting mortgage exit fees to the lender’s losses directly connected to the borrower exiting the loan early.</p>
<p>Are non-bank lenders dangerous to our system?</p>
<p>Low volumes mean non-bank lenders are currently of no systemic concern to the economy and regulators. However this may change in the future as volumes shift and grow for non-bank lenders.</p>
<p>New market participants enter as new non-bank loan platforms are developed. One example is internet-based peer-to-peer lending.</p>
<p>Australians may adapt to this new regime and take on new technologies offered and seek the lenders providing the cheapest funding. Consumers generally do not care about the lenders’ own funding and may arbitrage the differences in mortgage rates by shifting the business from regulated banks to unregulated non-banks.</p>
<p>A concern may arise if non-bank lending is successful and to become a large player that is systemically important. In such a scenario the government would be well advised to consider regulating the industry.</p>
<p>Such regulations may include minimum lending and funding standards with the mission to protect de facto consumer deposits via offset accounts and to ensure the credit supply in economic downturns when wholesale funding markets are constrained.</p>
<p>We may be some time away from such a scenario in light of the increasing dominance of bank lenders.</p>
<p> </p>
<p><em>Harry Scheule is a<span style="line-height: 1.3em;">ssociate professor, Finance, UTS Business School</span><span style="font-weight: bold; line-height: 1.3em;">, </span><span style="line-height: 1.3em;">University of Technology Sydney and author for <a href="https://theconversation.com/profiles/harry-scheule-3573" target="_blank">The Conversation</a>.</span></em></p>
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Rising mortgage rates - is it time to refinance your home loan?

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<p><span style="line-height: 1.3em;">GUEST OBSERVER</span></p>
<p><span style="line-height: 1.3em;">As lenders seek to wind back their level of investment lending, competition in the owner occupied space has started to heat up. </span></p>
<p><span style="line-height: 1.3em;">Many lenders were starting to offer some “very competitive” owner occupied home loans in a bid to pick up more of this business. </span></p>
<p><span style="line-height: 1.3em;">Over the past few months, many of Australia’s lenders have made significant changes to their investment product pricing and policy in a bid to curb their level of investment lending growth. </span></p>
<p><span style="line-height: 1.3em;">But just because many of Australia’s lenders are actively trying to reduce their level of investment activity, doesn’t mean to say they are not hungry for business – quite the opposite.</span></p>
<p><span style="line-height: 1.3em;">Australia’s lenders are just as hungry for business as they ever were and because the Australian Prudential Regulation Authority has told them to limit their level of investment lending growth, the lenders have been forced to turn their attention to owner occupiers.</span></p>
<p>M<span style="line-height: 1.3em;">any of Australia’s lenders are currently offering owner occupied borrowers a raft of incentives including, interest rate discounts, cash back offers and fee waivers. </span></p>
<p>In the 20 years I have worked in financial services, I have never seen the level of lender competition we are witnessing now. Regardless of whether people are looking to buy a home or refinance their current property, they can be guaranteed of securing an incredibly competitive home loan deal.</p>
<p><span style="line-height: 1.3em;">For those borrowers who have been in the same home loan product for a while, now may be a good time for them to give their mortgage a much needed spring clean. </span><span style="line-height: 1.3em;">A good de-clutter never goes astray and often borrowers uncover financial aspects of their life that need some reassessment or to be changed altogether. </span></p>
<p>Borrowers who give their home loan a spring clean may realise that they are in the perfect position to refinance their mortgage.</p>
<p><span style="line-height: 1.3em;">Refinancing may allow borrowers to repay their home loan sooner and ultimately achieve their next financial goal sooner. </span></p>
<p><span style="line-height: 1.3em;">Further, refinancing can be a great way for borrowers to lower their mortgage repayments, consolidate their debt and even access equity in their home.”</span></p>
<p><em>John Flavell is chief executive officer <a href="https://www.mortgagechoice.com.au/" target="_blank">Mortgage Choice</a>.</em></p>
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Competition for owner occupied business heats up: Mortgage Choice's John Flavell

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<p class="Body">Media coverage of the Westpac decision to lift mortgage rates 0.2 percentage points has been typically sub-standard.</p>
<p class="Body">Many articles, inspired by economists suffering from limelight deficit syndrome, have portrayed this as a death knell for property markets.</p>
<p class="Body">As someone who has studied the relationship between interest rates and price movements, I can tell you that this is a not a reasonable conclusion.</p>
<p class="Body">Economists and journalists, with their simplistic thought processes, tend to believe that <em>low interest rates = property boom</em>, and <em>rising interest rates = property decline</em>. This contradicts both common sense and historical precedent.</p>
<p class="Body">Falling interest rates usually coincide with subdued property markets. The RBA cuts interest rates when the economy is struggling, consumer confidence is low and unemployment is rising – i.e. conditions which are least likely to produce property booms.</p>
<p class="Body">This is why most of Australia does not have booming property markets. Only Sydney, which is the centre of the one economy (NSW) that is really pumping, has had a boom. Melbourne, the capital of a state with an okay economy, has displayed some buoyancy but nothing approaching the dizzy heights of Sydney.<span style="line-height: 1.3em;"> </span></p>
<p class="Body">Most of the state and territories have struggling economies and their capital city property markets – Perth, Hobart, Canberra, Darwin, Adelaide – have been stuck in neutral or reverse. Years of very low interest rates have been utterly irrelevant in all of these places.</p>
<p class="Body">Regional Australia is dotted with markets that have dropped sharply and others that have gone nowhere in terms of price movements. The exceptions are relatively few and most of them are located amid that one strong state economy, New South Wales.<span style="line-height: 1.3em;"> </span></p>
<p class="Body">The bottom line is that interest rates usually are irrelevant. Economists appear to think they’re the only thing that matters and the sole determinant of outcomes in real estate. In truth, they have little or no bearing.<span style="line-height: 1.3em;"> </span></p>
<p class="Body">Other factors have much greater influence. Sydney had its boom because a change of State Government in 2011 returned sanity and competence to governance, the economy started pumping again and infrastructure spending was revitalised. Money started circulating, businesses started spending, consumers started feeling good about things and the property market, which had been largely dormant for a decade, burst to life.</p>
<p class="Body">It would have happened whether the official interest rate was 2%, 4% or 6%.</p>
<p class="Body">Conversely, interest rates are most likely to be rising when the national economy is strong, with lots of jobs being created, confidence high and businesses spending big. These are the conditions that drive property booms – and the RBA will lift interest rates to dampen things down.<span style="line-height: 1.3em;"> </span></p>
<p class="Body">Often it requires a long period of multiple rises to quell the buoyancy. Therefore, genuine national property booms – unlike what we have at the moment - usually coincide with periods of high or rising rates.</p>
<p class="Body">In the late 1980s, interest rates were lifted repeatedly without dampening the boom - and mortgage rates went as high as 17% before the bull run ended.</p>
<p class="Body">To suggest that a 0.2 percentage point rise by one lender will kill the (Sydney) boom shows a low level of understanding.</p>
<p class="Body">The reality is that the one major boom in the nation, Sydney’s, has been slowly deflating since the start of the year. APRA didn’t need to take action because the market was taking care of the situation without any interference from self-important bureaucrats.</p>
<p class="Body">And Westpac’s tiny nudge to interest rates will have no bearing on the situation.</p>
<p class="Body"> </p>
<p class="Body"><em>Terry Ryder is the founder of <a href="https://www.hotspotting.com.au/" target="_blank">hotspotting.com.au</a>. You can <a href="https://mailto:ryder@hotspotting.com.au" target="_blank">email him</a> or follow him on <a href="https://twitter.com/hotspotting" target="_blank">Twitter.</a></em></p>
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terryryder-YECXbqmri2

Interest rates usually are irrelevant: Terry Ryder

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<div>The latest AMP.NATSEM Household Debt report showed that the average household debt in Australia has increased to a new high of $245,000, continuing a prolonged run-up which has seen the average debt per household increase by a factor four since 1988, up from $60,000.</div>
<div> </div>
<div>While the bulk of the rise in mortgage debt has been driven by 30 to 50 year olds, the over 65s cohort also accounts for a fair proportion of the increase in household debt, with more Australians than ever before taking liabilities into retirement.</div>
<div> </div>
<div>Despite this, the latest Australian National Accounts implied that interest serviceability has continued to become easier.</div>
<div> </div>
<div>There are a thousand possible ways to measure this, nine of which is satisfactory: the blue points on the chart below denote interest paid on dwellings as a percentage of total employee compensation minus income tax, while the red points show total interest paid inclusive of consumer debt (excluding unincorporated enterprises) as a percentage of gross household income.</div>
<div> </div>
<div><a href="/images/2015/12/14/Interest.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/12/14/Interest.jpg" alt=""></div>
<div> </div>
<div>
<div>You could spend forever debating what should or should not be included in household income (imputed interest on dwellings, benefits receivable etc.) or backed out of gross household income (e.g. other taxes, transfers, insurance premiums etc.) but the results tend to be broadly similar. </div>
<div> </div>
<div>Of course the results generally appear to be "too low" due to the significant number of debt free households. The important thing to note is the trend, which shows that while the mining boom was in full swing the aggregate mortgage interest repayment burden was tending towards excruciating levels by September 2008 (when the official cash rate was still as high as 7 per cent). but since that time serviceability has become relatively speaking very easy.</div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Buffers at record highs</span></strong></div>
<div> </div>
<div>The Reserve Bank of Australia (RBA) has noted in its Financial Stability Review that indicators of household financial stress are presently low, with households pushing ahead on repayments to the extent that aggregate mortgage buffers - as measured by balances in offset and redraw facilities - remain at around 16 per cent of outstanding loan balances, or the equivalent of well over two years of scheduled repayments at current interest rates. </div>
<div> </div>
<div><a href="/images/2015/12/14/Buffers.gif" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/12/14/Buffers.gif" alt=""></div>
<div> </div>
<div>
<div>Loan arrears and mortage delinquencies data are also tracking at historically low levels, with favourable delinquency developments having cascaded lower since the 2008 book year. </div>
<div> </div>
<div>A crude comparison the aggregate interest paid to the total stock of outstanding housing credit implies that the average mortgage rate is well under 5 per cent, suggesting in turn that Australians have taken advantage of the very generous fixed rates available through 2015.</div>
<br><div class="separator"> </div>
<strong><span style="text-decoration: underline;">The outlook</span></strong><br><br><div>The first chart above shows the sensitivity of household finances, and especially mortgage repayments, to the unpredictable changes in interest rates. Mortgage repayments are on average clearly very affordable now, but may not be so if interest rates rise sharply.</div>
<div> </div>
<div>The AMP.NATSEM report found that the highest typical debt repayment burdens are to be found in the outer suburbs of our capital cities.</div>
<div> </div>
<div>If interest rates were to rise by 2.5 percentage points - essentially the equivalent of ten interest rate hikes - then the most indebted households could see mortgage repayments rise from 42 per cent of household income to a stress-inducing 58 per cent, while perhaps unsurprisingly the most indebted low income households would be the hardest hit of all.</div>
<div> </div>
<div>An increase in interest rates of 2.5 percentage points would also see repayments for the typical first homebuyer rising from 21 per cent to 30 per cent of household income, or a shade over an extra $8,000 per year.</div>
<div> </div>
<div>There are few indications that the official cash rate is set to move materially higher any time soon, although shifts in capital requirements and funding costs may be another matter. </div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Fragile markets</span></strong></div>
<div> </div>
<div>Unemployment rates have generally been trending down since January 2015, although unemployment rates in Western Australia and the Australian Capital Territory are in an uptrend, and the housing market in Darwin looks exceptionally fragile.</div>
<div> </div>
<div><a href="/images/2015/12/14/UERATE.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/12/14/UERATE.jpg" alt=""></div>
<div> </div>
<div>
<div>Although household financial stress is currently low, it seems likely that there will be some vulnerable housing markets in 2016, which may include;</div>
<div> </div>
<div>-resources regions and markets, with the terms of trade crunch likely to result in multiple mass lay-offs to add to the winding down of capital investment;</div>
<div> </div>
<div>-suburbs and sub-regions which are experiencing extensive over-building of apartments. particularly inner city high-rise stock, and those areas with already elevated and rising vacancy rates; </div>
<div> </div>
<div>-off-the-plan developments which will be adversely impacted by APRA's tougher deposit measures; and</div>
<div> </div>
<div>-outer suburban fringe locations in Sydney which saw a massive spike in investor activity and rapid price growth in 2015.</div>
<div> </div>
<div>I'd include a generic entry here for "mining towns", but many have been so utterly smashed already, leading to investor defaults and bankruptcies, since not only were prices unsustainable, so too were rents, and even tenancies. </div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Auctions</span></strong></div>
<div> </div>
<div>Sydney's preliminary auction clearance rate rebounded a bit to 55.2 per cent this week, with outer suburban markets looking particularly dormant, The strongest auction market was a resurgent inner west, with a strong preliminary auction clearance rate of 74.6 per cent (<em>CoreLogic-RP Data</em>).</div>
<div> </div>
<div>This month's Labour Force data showed that New South Wales economy has generated a seasonally adjusted +176,000 jobs over the past year, for an outrageous employment growth rate of +4.9 per cent (trend +160,000 jobs, or +4.4 per cent). The Detailed Labour Force figures, which provide more colour by city, region and industry will be released on Thursday. So stay tuned for that and more this week. </div>
<div> </div>
<div>
<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
</div>
</div>
</div>
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pwargent-M4siyDbqQY

Record household debt of $245,000: Pete Wargent

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<div>A couple of things happened in 2016 that changed the outlook for interest rates in Australia. </div>
<div> </div>
<div>Swaps had been seeking out lower and lower rates, yet fairly abruptly around September time someone or something called time on that particular party.</div>
<div> </div>
<div>Well, what happened?</div>
<div> </div>
<div>It wasn't that the economy suddenly became stronger. Hardly! </div>
<div> </div>
<div>In fact, GDP growth was actually negative for the third quarter of the calendar year, while employment growth went backwards in the months of both August and September too.</div>
<div> </div>
<div>And all measures of inflation are actually below the target 2 to 3 per cent range.<br><br>Then, what? </div>
<div> </div>
<div>Change of Governor</div>
<div> </div>
<div>While we should be wary of imposing simplistic narratives over historical trends (with hindsight giving the supposed benefit of 20/20 vision), it appears that the change in Reserve Bank Governor may have been a factor.</div>
<div> </div>
<div>During the month of September, Philip Lowe began suggested that interest rate cuts are losing their power, and seemed to infer that further cuts would only be delivered reluctantly, if at all.</div>
<div> </div>
<div>From the first meeting he chaired in the first week of October, the <a href="https://rba.gov.au/media-releases/2016/mr-16-26" target="_blank">wording</a> of the Monetary Policy Statement concluded that policy was consistent with growth and inflation returning to target over time. </div>
<div> </div>
<div>Since the day of that October meeting, 6-month OIS rates have trended only in an hawkish direction, from 1.42 per cent back up to 1.50 per cent.</div>
<div> </div>
<div><a href="https://www.propertyobserver.com.au/images/2017/01/03/RBA1.jpg" target="_blank">Click to enlarge</a></div>
<div> </div>
<div>
<div><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/01/03/RBA1.jpg" alt=""></div>
</div>
<p> </p>
<p>The Reserve Bank of Australia now has a duty to "keep consumer price inflation in the economy to 2 to 3 per cent, on average, over the medium term", apparently implying no immediate need to cut rates.</p>
<div> </div>
<div>Trump bump</div>
<div> </div>
<div>The other significant event in 2016 was Donald Trump's election victory in the US, which promptly changed the inflation outlook.</div>
<div> </div>
<div>Australia's bond yields had already starting ticking back up before Trump's election triumph, with the yield on government bonds with a 10-year maturity recovering from a low of just 1.83 per cent in August to 2.31 per cent.</div>
<div> </div>
<div>But then, after an initial post-election blip, the 10-year bond yield increased sharply to 2.87 per cent, before settling down a bit to finish the year at 2.78 per cent.</div>
<div> </div>
<div><a href="https://www.propertyobserver.com.au/images/2017/01/03/RBA5.jpg" target="_blank">Click to enlarge</a></div>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/01/03/RBA5.jpg" alt=""></p>
<div> </div>
<div>Easy, tiger!</div>
<div> </div>
<div>Through November the indicative standard variable rate (SVR) for owner-occupier mortgages was 5.25 per cent, although of course by shopping around you can get much better deals than this (the indicative discounted rate was reported at 4.50 per cent, for example). </div>
<div> </div>
<div>The reported 3-year fixed rates for both owner-occupiers and investors were lower again at 4.10 per cent and 4.25 per cent respectively. </div>
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Can you comfortably afford to repay a mortgage in a 6% or even 7% scenario?: Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>Over the past few weeks three of the four major banks in Australia have announced that they are going to be increasing variable mortgage rates. </p>
<p>While there has been a lot of adjustments to mortgage rates over recent years, the big difference with the latest announcement is that the higher mortgage rates are going to affect owner occupiers. </p>
<p>Most of the previous mortgage rate changes announced by the major banks have only affected investors and those with interest only mortgages.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/9/7/KUSH1.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/9/7/KUSH1.jpg" alt=""></p>
<p>Many of the smaller regional banks have pushed mortgage rates for owner occupiers higher over recent months citing higher short-term funding costs. </p>
<p>Although until now the major banks had resisted making an adjustment to mortgage rates it seems they too have had their hand forced by higher funding costs.  The above chart highlights the cost of short-term funding to banks (the three-month bank bill swap rate) and it clearly shows that the cost of short-term funding has increased.  It currently sits at 2.26% compared to the official cash rate which remains unchanged at 1.5% since August 2016.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/9/7/KUSH2.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/9/7/KUSH2.jpg" alt=""></p>
<p>Short-term funding costs have certainly risen recently however, it is also interesting to look at the composition of funding to Australia’s banks. Short-term funding is not an insignificant part of the funding profile (slightly more than 20%), although the share of funding from short-term debt has fallen over recent years as domestic deposits have increased. </p>
<p>There are other ways to handle higher short-term funding costs rather than lifting mortgage rates but that would likely mean cutting dividends which lenders seem reluctant to want to do or reducing deposit interest rates which would likely see a further reduction in the primary funding source: domestic deposits.</p>
<p>From a housing market perspective the timing of the announcement of higher interest rates is an interesting one. </p>
<p>After many years of strong value growth, Sydney and Melbourne housing is now well embedded in a downturn.  Tighter credit conditions, higher mortgage rates for investors and interest-only borrowers and reduced affordability have already led to the falls of -5.6% from the peak in Sydney and -3.5% from their peak in Melbourne.  This has occurred so far without higher interest rates for owner occupiers paying off principal and interest however, that is about to change.</p>
<p>The timing of the hikes to mortgage rates is also interesting in that it has been announced right at the beginning of the Spring Selling Season.  Although spring, in my mind and according to the data, is somewhat overhyped as a good time to sell, more stock does typically become available for sale over the period and buying activity typically increases. </p>
<p>The other usual occurrence at the beginning of spring is that lenders offer enticing mortgage rates to the market to jostle for market share.  By contrast this year, major lenders are announcing higher mortgage rates.</p>
<p>Higher mortgage rates have already driven a slowing of demand for investors over the past year.  Although the magnitude of the mortgage rate increases announced is fairly small (around 15 basis points by each lender) it is likely that the higher mortgage rates will impact on housing market sentiment. Furthermore it may end up further exacerbating the declines which are already occurring in Sydney, Melbourne, Perth and Darwin and the slowing of value growth being experienced elsewhere. </p>
<p>Overall this move seems likely to lead to a continuation of the currently weak housing market conditions over the coming months and may weaken the market further.  From the lenders perspective, clearly they realise that the housing downturn is becoming entrenched (particularly in Perth and Darwin, but more recently in Sydney and Melbourne) and they are doing what they can to maintain profitability in the face of lower mortgage volumes.</p>
<p><em><span>CAMERON KUSHER</span> is a property research analyst for CoreLogic</em></p>
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