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AU Low interest rates fueling Sydney market, but elsewhere less so

Property Here - Friday, December 20, 2013

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With most mortgage holders on variable rate products in Australia, our housing markets are sensitive to interest rates, and all things being equal lower rates could result in dwelling prices being re-set higher (and vice-versa).

However, other things are rarely equal.

Over the past two decades I've watched Britain turn into a dramatically two-speed housing market comprising a booming London market (and its surrounds) and the rest, where prices have essentially been soft now since 2007.

London is a global city and The City has continued to thrive as a financial centre, but as a developed country Britain's manufacturing and other industries have floundered.

Property investors who chased yields investing in far-flung areas and the north of England got badly burned, and many never recovered, while London prices are at record highs and have risen relentlessly through UK downturns and recessions as we charted here and have reproduced below.

In particular, note the difference between the massive out-performance of prime-location London stock, the lower-demographic London boroughs and the stagnation of markets across the remainder of England and Wales.

Source: Land Registry

I've suggested for years that Australia could follow a similar path, with the major capital cities attracting a level of interest from domestic and international investors in their supply-constrained inner suburbs, but other locations struggling badly as households become disinclined to take on ever-increasing household debt levels.

Specifically, I've felt inclined to invest in Sydney's inner ring suburbs, but rarely to venture outside that zone.

Low interest rates have seen prices in Sydney growing fast: up by around 18% since their last trough.

The worst performing capital city continues to be Adelaide, where I've been this week for fire and brimstone of Ashes cricket...or in England's case, a rather dis-spirited imitation thereof.

It's no real surprise to me that Adelaide has been a lacklustre market in recent years. There is so much more land potentially available to be developed close to the South Australian capital, population growth is relatively moderate, investor interest is lower than elsewhere and overall there is less upwards pressure on prices.

New stock is being built, which can drag median prices higher, but existing dwellings have seen little in the way of capital growth for more than five years.

I noted a similar dynamic in Port Augusta on my South Australian travels this week: it was quite clear that there are acres of land for sale and zoned for residential development, although it may be doubtful as to how quickly it will be sold due to the lively whiff at that end of town.

Source: RP Data

RP Data's dwelling price index is currently a sea of green text, with prices rising almost everywhere thanks to Australia's presently low interest rates. However, don't expect increasing household debt to carry prices forward in future.

As the below chart clearly shows, household debt levels are no longer rising as a percentage of disposable income as they once did, with the percentage peaking out more than half a decade ago.

Household Finances graph

This chart should be of great concern to investors in certain areas. Times are tough, for example, in parts of South Australia following on from the shelving of BHP Billiton's planned $30 billion Olympic Dam expansion.

I drove down that way this week from Alice Springs and according to the local rag I read in Roxby Downs a decision might be expected on future expansion plans in approximately two years' time with BHP considereing new and cheaper designs for the expanded operations. However, you'd presumably want to see copper prices stronger than the lacklustre ~US$3.20/lb we've seen this week in order to see the proposed project expansion attract a definitive green tick.

While an expansion of Olympic Dam a few years down the track could certainly be a net plus for the state, any direct link with real estate prices in Adelaide which is located more than 500 kilometres of barren land away may be somewhat tenuous.

Meanwhile, businesses such as Holden are in a world of bother with closure threats and pleas being lodged for government support of the car industry. With Australia's dollar having been so strong for so long, manufacturing industries have been hurting, and some exporting companies have also gone to the wall. 

This article in The Conversation posed this week whether Adelaide's economy could be damaged beyond expectation by Holden's potential closure, which also raises serious questions for the outlook for dwelling prices in the city:

"A second part of the debate are the implications at a regional level – what impact is there on the economies of regions that depend heavily on the automotive sector, specifically Melbourne and Adelaide?

"Our study on the contribution that the GMH manufacturing facility in Elizabeth makes to the South Australian (and northern Adelaide region) economy was recently presented to the Productivity Commission inquiry. There are currently 1,750 jobs at GMH and the operations purchase A$530 million of supplies per year from core suppliers based in Adelaide. Through direct and first round (GMH and its direct suppliers) activities the operational spend of GMH in 2013 is estimated at A$750 million, contributing A$400 million to South Australia’s Gross State Product (GSP) and supporting 4,340 jobs.

"Then there are the full flow-through effects of this activity (such as the purchases of suppliers, and spend of wages and salary income). When modelled, the total economic activity linked to GMHs operations was estimated in 2013 to be a A$0.9 billion contribution to GSP, and 9,500 jobs and a contribution of $53 million per year to the state taxation base. (The model used a simple input output framework, which evidence supports as sufficient for order of magnitude long run modelling of impacts at the regional level). But if GMH were to cease activity, the impact would ultimately depend on how the local economy responds."

AU Tips to avoid mortgage pain when interest rates rise

Property Here - Saturday, October 26, 2013

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CAN you hear the rumbling? It's very faint at the moment, but will get louder as it draws near.

And, like a giant train or truck approaching, if you're not aware you may end up as roadkill.

It's the next move in home loan interest rates, and a growing number of forecasters are predicting they will go up, rather than down.

If the current strength in the share and property markets leads to increased confidence and rising inflation, you can bet that the Reserve Bank will be quick to raise rates from their current record low levels, to prevent things getting dangerously hot.

Fortunately, it appears that borrowers still have some breathing room, with the earliest expectations for rate rises being later next year.

However, now is the time to plan for a potential rise in your repayments.

Firstly, understand what it's going to cost you. As a guide, a 1 percentage point rise in variable rates from current levels would add about $186 a month to the cost of a $300,000 mortgage. A 2 per cent rise- back to 2011 levels - would add $379 a month. There are plenty of free online calculators to help your with your own personal calculations.

Secondly, start looking for fat in your household budget that could be trimmed. Almost everyone can find savings if they separate their needs from their wants. You don't have to make the cuts now - just be ready if they're needed.

Many borrowers have kept repayments at higher previous levels as rates have fallen. This has not only helped them pay down their mortgage faster, but also provides a ready-made buffer for when rates eventually rise.

Finally, make sure your current home loan is the best you can get. Are there cheaper options available? Can you haggle with your lender to lower your repayments? A fixed-rate loan or split loan could be an option, but be mindful of the restrictions around fixing.

The key is to be prepared and not be greedy.

That light at the end of the tunnel that you think may promise more mortgage rate cuts is more likely to be a freight train heading your way, so don't become a squashed Skippy.

AU Not always smart to pay off the mortgage early

Property Here - Saturday, October 19, 2013

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The mortgage is usually the very last of your household debts that you should be paying extra off.

The mortgage is usually the very last of your household debts that you should be paying extra off.

IN this crazy debt-fuelled world that we live in, paying off a home loan faster is often seen as a sign of financial success.

However, the mortgage is usually the very last of your household debts that you should be paying extra off.

That's because it's a percentages game, and one that every borrower should understand.

Sure, if a mortgage is your only debt, kill it off quickly. But if you're like many Aussies and also have credit cards, store cards, car loans, personal loans, and possibly a short-term cash loan from a scary brute named Crusher, those other debts should all be wiped out first (particularly Crusher's).

Put simply, a home loan is likely to be charging the lowest of all of your interest rates. That means all the other debts are costing you more, even though the biggest repayments go to the mortgage because of the loan's size.

While a $10,000 credit card debt at 18 per cent interest will cost $1800 a year and a $200,000 mortgage at 5 per cent costs a much larger $10,000, paying off the card first means you are effectively earning a ``return'' on your money of 18 per cent on the card, versus just 5 per cent on the home loan.

In other words, you would need an investment earning 18 per cent a year to make it a financially better move than paying off the credit card debt, and one earning 5 per cent to beat the mortgage repayment. Bank deposits are paying below 4 per cent interest, so avoid them.

There also is a psychological benefit in wiping out the smaller debts first because it feels like you're getting on top of your finances.

Once the smaller, expensive debts are paid off, you'll have more to pump into the mortgage.

There are couple of situations where rules can be broken. If you have student debt with an effective interest rate in line with inflation - currently 2.4 per cent - it can make financial sense to rank mortgage repayments above that debt.

Also, if you are a real estate investor who has borrowed for an investment property, you should pay off your own mortgage first and have an interest-only investment loan, which is tax-deductible.

Controlling your debts starts with understanding the interest rates you are paying. And remembering to send Crusher a Christmas card.

AU Reserve Bank signals interest rates to remain low

Property Here - Tuesday, August 20, 2013

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RBA Governor Glenn Stevens. Photo Philip Norrish

RBA Governor Glenn Stevens. Photo Philip Norrish Source: News Limited

THE Reserve Bank has indicated that the official cash rate is likely to remain low.

The minutes of the RBA's August 6 board meeting, at which it cut the cash rate to 2.5 per cent, contained unfamiliar language from the board about the possible timing of future rate decisions.

"Members agreed that the bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates," the RBA minutes said.

The minutes effectively rule out a pre-election rate cut when the board next meets on September 3, indicating its view is more long term.

"The board would continue to examine the data over the months ahead to judge whether policy was appropriately configured.

The minutes also said the Australian dollar, despite falling to three years lows, remained at historically high levels, supporting the case for a cut in August.

"It was possible the exchange rate would decline further over time, which would assist in rebalancing growth in the economy," the minutes said.

ANZ foreign exchange strategist Andrew Salter said the comments caused a small amount of volatility for the Aussie dollar.

"The minutes seem to have suggested that the RBA is thinking a little more deeply about its communication and how it communicates the outlook for policy," Mr Salter said.

"Participants are unsure how to read this."

Mr Salter said the Australian dollar had already fallen by almost one US cent overnight, after being sold against the euro following comments from the German central bank that the European Central Bank could hike rates if inflation pressures increased.

Meanwhile, Australian bond futures prices were unchanged from 1630 AEST on Monday.

At 1200 AEST, the September 10-year bond futures contract was at 95.970 (4.030 per cent).

The September three-year bond futures contract was at 97.170 (2.830 per cent).

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AU ANZ passes on Reserve Bank's rate cut in full

Property Here - Friday, August 09, 2013

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ANZ has followed the other major banks and passed on the Reserve Bank's rate cut in full.

The bank today slashed its standard variable rate to 5.88 per cent - making it the joint lowest with National Australia Bank.

After the meeting of the bank's interest rate committee, ANZ Australia chief executive Phil Chronican said the decision was taken to pass on the RBA 0.25 per cent cut in full as a result of the economic conditions on our customers.

"In making our decision this month, we took into account our cost of funding, our competitive positioning and the impact of economic conditions on our customers," he said.

The decision comes after the RBA on Tuesday lowered the official cash rate to 2.5 per cent - its lowest level in 53 years in a bid to boost demand as the mining investment boom slows.

Earlier this week, Westpac gave its customers a cut of 0.28 per cent in a bid to play catch-up with its rivals as it has the highest SVR.

NAB and the Commonwealth cut rates by 0.25 per cent.

ANZ has also lowered its lending rate for seal businesses by a similar amount.

by 0.25 per cent.

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AU Mortgage enquiries rise to the highest in three years

Property Here - Wednesday, July 31, 2013

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IN ENCOURAGING news for the property sector, mortgage enquiries spiked 6.9 per cent in the June quarter, the highest level of growth in three years, according to credit reporting agency Veda.

The volume of inquiries increased from 1.9 per cent in the March quarter.

"The fact that the June quarter recorded the largest volume of mortgage enquiries in three years suggests house price growth is likely to remain in positive territory in the near term, for those states and regions experiencing inquiry growth,'' Veda general manager of consumer risk Angus Luffman said.

Mr Luffman said the level of interest in mortgages would translate to the market over the course of the next six to nine months.

Potential Queensland property buyers were more cautious, however, with enquiries increasing by 1.6 per cent for the June quarter.

"The results have reversed a negative trend of the preceding five quarters,'' Mr Luffman said.

"There is an underlying positive trend but we need to see a strong set of ongoing results.''

The volume of mortgage enquiries were at their highest in Western Australia (+15 per cent), New South Wales (+13 per cent), the Northern Territory (+10.3 per cent) and South Australia (+7.5 per cent), according to Veda's latest quarterly report.

The positive trend in mortgages was balanced by a reduction in personal loan applications, which dropped from 10.3 per cent to 6.3 per cent nationally.

Mr Luffman said the slowing demand for consumer credit could be attributed to a drop-off in vehicle sales.

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AU Best day on sharemarket since 2011 as RBA leaves interest rates steady at 2.75 per cent

Property Here - Tuesday, July 02, 2013

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Best day on sharemarket since 2011

Shares gained about $39 billion in value, in the largest one-day rise for the ASX200 index since October 6, 2011.Source: AFP

THE sharemarket has posted its strongest day in 20 months as the global economic outlook improves and interest rates remained on hold.

Shares gained about $39 billion in value on Tuesday, in the largest one-day rise for the ASX200 index since October 6, 2011.

CMC Markets chief strategist Michael McCarthy said the market had regained all of Monday's losses, which was caused by worries about manufacturing in the world's major economies.

Data from the US and Europe overnight had painted a more optimistic picture.

"It's been a big bounce back from yesterday's pre-emptive sell off,'' he said.

"There's a better growth outlook for the globe and a better outlook from the Reserve Bank.

"The global outlook has improved, regardless of what happens in China, and given we're pricing a worst case scenario in China any pullback should lead to rallies in resource stocks.''


Interest rates stay on hold

Interest rates stay on hold Source: News Limited

The market added to its early gains when the Reserve Bank of Australia (RBA) left the cash rate steady, but said it still had scope for further rate cuts.

Interest rates were left on hold at 2.75 per cent at the Reserve Bank's monthly board meeting.

The steep fall in the Australian dollar since mid-April from $US1.05 to US92c took the pressure off the RBA to act straight away.

But economists said homeowners can expect further rate cuts in the months ahead as the central bank retained its easing bias as the economy transitions away from the mining boom.

This RBA decision comes as the share market has clawed back most of yesterday's losses after the ASX 200 dropped 2 per cent on Monday on fears of a slowdown in China.

But a slew of upbeat data from the US and Europe has fuelled optimism about the global outlook and overshadowed concerns about China.

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AU Mortgage delinquencies rise across Australia

Property Here - Tuesday, July 02, 2013

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Source: Fitch Ratings.

Source: Fitch Ratings. Source: Supplied

INTEREST rate cuts have failed to stem the number of mortgage defaults across Australia, with tourism and retirement postcodes topping the list of repayment blackspots.

Seachange town Nelson Bay in New South Wales has regained the dubious title of the most mortgage delinquent region in Australia, according to Fitch Ratings.

Between September 30, 2012 and March 31 this year, the proportion of mortgage holders more than 30 days behind on their repayments was almost 7 per cent.

The Nelson Bay district includes the areas of Corlette, Fingal Bay, Nelson Bay and Shoal Bay and has been among the worst-performing postcodes since Fitch first published its report in 2007.

Fitch blamed the high delinquency rate in Nelson Bay on "stagnation in the local housing market, which lead to an accumulation of arrears in the 90-plus day bucket".

"Properties that are in arrears in Nelson Bay tend to be high-value, where the mortgage balance is on average almost three times the average loan balance in the area," says Fitch.

Surfers Paradise, the epicentre of the struggling Gold Coast property market, showed a slight sign of improvement falling from third most delinquent postcode by value to tenth spot, with its arrears rate dropping from 4 to 3.4 per cent.

Other regions where mortgage holders are struggling most to meet repayments include Montrose in Tasmania (5 per cent), Budgewoi on the NSW central coast (4.4 per cent) and Kingston between the Gold Coast and Brisbane (3.8 per cent)

Fitch notes that thirteen of the 20 worst-performing postcodes were in NSW, eight of which were in western and south-western Sydney.

Montrose remains the hardest hit postcode by number of mortgages in arrears, with 36 out of 1000 homeowners in delinquency.

Overall, the default rate across Australia increased to 1.45 per cent at end of March 2013, up from 1.2 per cent at the end of September.

"Delinquencies across all six states have increased significantly since September," Fitch notes.

Queensland remained the worst performing state for 30-day arrears.

Delinquencies in Queensland increased 1.4 per cent at March 31, up 25 basis points from 1.2 per cent at September 30, but Fitch analyst, James Zanesi, said it had not worsened as much as other states.

Despite the drop in interest rates, Mr Zanesi told The Courier-Mail that the results showed the Reserve Bank's decision to reduce the cash rate did not have a positive impact on mortgage performance across the nation.

"Christmas spending and an increase to household expenses may have offset the benefits of the cuts,'' Mr Zanesi said.

"The increasing number of delinquent borrowers in lower income areas could indicate there are some serviceability problems which can't be solved by monetary policy.''

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AU Interest rates tipped to drop as low as two per cent by early next year: Westpac

Property Here - Sunday, June 02, 2013

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Association of Australian Business Economists

RBA Govenor Glenn Stevens during an address to members of the Association of Australian Business Economists at the Four Seasons Hotel in Sydney. Source: News Limited

INTEREST Rates are tipped to stay on hold this week when the Reserve Bank board meets as the Australian dollar's descent below parity takes some of the pressure off struggling parts of the economy.

But concerns about the global outlook will push the central bank to lower official interest rates at least three more times over the next 12 months from its current setting 2.75 per cent to a record low of 2 per cent, Westpac chief economist Bill Evans said.

The country's most successful interest rate tipper in recent years said the medium term case for lower interest rates is clear even if the RBA board is likely to stay on the sidelines tomorrow (TUES).

"We retain our position that the terminal cash rate will be 2 per cent, with single moves in August, late 2013 and early 2014," Mr Evans said.

The futures markets are now pricing in a less than one-in-five chance of rate cut on Tuesday while a move in August rated as a 76 per cent probability.

The Australian dollar's almost 7 per cent depreciation from US$1.03 to US95.7c since the RBA board meet last month is regarded by most economists to have helped rebalance the economy.

HSBC chief economist Paul Bloxham said that while a bumpy ride is still a risk a lower Australian dollar will make the transition away from the mining boom smoother and keep the RBA on hold this month.

If the currency stays below parity that may be the end of this rate cutting cycle, he said.

"The depreciation of the Australian dollar supports local growth and shifts the balance of risks on inflation to the upside," Mr Bloxham warned.

But AMP Capital chief economist Shane Oliver is urging the RBA to follow-up May's 0.25 per cent reduction with another cut this month.

The Australian dollar has not dropped far enough yet and while it is a "close call" Mr Oliver said the central bank should act quickly.

"Forward looking jobs indicators are soft and the toughish budget and Ford's decision to quit manufacturing seem to have added to the sense of gloom surrounding the Australian economy," he said.

"As a result with low inflation providing plenty of scope to ease the RBA should act again on its easing bias and on balance we think it will."

He is tipping the Australian dollar will drop back down to around US80c over the next few years as commodity prices weaken and the US economy strengthens.

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AU Official interest rates tipped to fall to 2 per cent mid next year

Property Here - Saturday, June 01, 2013

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THE LOWEST mortgage rates in almost half a century will deliver homeowners an average saving of around $140 on their monthly repayments and they are being tipped to fall within 12 months as the mining slowdown starts to bite.

The Reserve Bank is expected to keep interest rates on hold on Tuesday at 2.75 per cent but a highest low of 2 per cent is being forecast by some economists for mid next year.

Such a sharp fall, if passed on by the banks in full, would deliver an average standard variable rate of 5.41 per cent - the lowest level since 1968.

Experts expect more cuts to fixed home loans

Reducing the average monthly mortgage repayment on a $300,000 loan from the current level of $1749 to $1609 per month.

The most recent low during the global financial crisis was May-June 2009 when the SVR dropped to 5.75 per cent.

Westpac chief economist Bill Evans yesterday tipped no follow-up move from the RBA next week after the decision in May to by 0.25 per cent but that the deteriorating outlook will force the central bank to cut again in August.

This will be followed by more cuts in last few months of this year and another in early 2014 will bring the official cash rate to a record low of 2 per cent by March next year, he said.

The prospect of lower standard variable rates has also seen the big banks slash their 1-5 year rates in recent weeks as they move much more aggressively into the fixed home loan market.

One of the country's biggest mortgage brokers AFG said demand for fixed loans particularly for a 3-year period have more than doubled in the past four months to historic highs.

"It has risen from about 12-14 per cent of loans we write to around 30 per cent," AFG managing director Brett McKeon said.

The company processed a record $3.2 billion in home loans during April - up 40 per cent on the same month last year.

It was the largest monthly total recorded by the company and compares with just $2.2 billion in April last year.

Mr McKeon said the recent round of official interest rate cuts has seen buyers shy away from fixed home loans as they did not want to miss out on future cuts.

But he believes the current fixed rate offerings won't fall too much further even if official interest rates drop to 2 per cent.

Financial comparison website RateCity spokesperson Michelle Hutchison said that while there are great deals available at the moment and buyers should shop around with even 2-year fixed rate offering varying considerable from a low of 4.79 per cent to a high of 6.09 per cent.

"Fixed home loan rates are still falling and many are lower than variable rates, which is great news for borrowers who are considering fixing their home loan," she said.

"But this could be a sign that variable rates will follow with more rate cuts this year. Nevertheless, it's still a good time to consider fixing your home loan if you're concerned about rising interest rates in the next few years. But there is still a big difference between the lowest and highest rates available so make sure you compare home loan rates to ensure your fixed rate is worthwhile."







*source RateCity based on starting mortgage rate of 5.74% - the average offer from the major banks





* Peace of mind for your budgeting

* Protection from rate fluctuations

* Rates now at close to historic lows

* The double benefit of 50:50 loans that provide flexibility and security at the same time


* Blocked from increasing monthly payments

* Charges for lump sum payments outside of scheduled repayments

* Huge exit fees during the period of the fixed term

* Official interest rates tipped to fall later this year

*source RESI

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