Australian interest rate remains unchanged

The Reserve Bank of Australia held it’s monthly meeting today and decided to freeze interest rates, leaving the official cash rate unchanged at 3.00%.

The RBA said confidence remained fragile but there were some signs economies around the world were stabilising.

RBA governor Glenn Stevens said Australia’s economy was poised to benefit from the significant cuts to interest rates made so far, combined with the Federal Government’s fiscal stimulus. “Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt-servicing burdens considerably,” he said.

“Much of the effect of these changes is yet to be observed. “The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.”

Domain spokesman, Anthony Ishac commented, “The official cash rate remains unchanged at the current level in response to signs of a stabilising world economy. However, the RBA remains vigilant, maintaining enough scope on rates to manoeuvre in anticipation of forecast rising unemployment later in the year. Any future action will also need to factor the reluctance of the major banks to pass on rate cuts in full to mortgage holders”.

Most economists had not expected interest rates to come down again.

“In pondering the cash rate level … the RBA board will likely be persuaded by both international and local developments since the April decision to leave the cash rate unchanged,” said HSBC chief economist John Edwards yesterday.

“The downturn in China has been arrested. In a number of other major economies, including the US and Japan, the rate of deterioration is slowing.”

Earlier today, building approvals posted a stronger-than-expected 3.5 per cent jump for March above the market expectations of a 2.3 per cent rise.

Economists said the building sector could be recovering.

“It had been expected for some time that the tight rental market, low interest rates and soaring population growth would translate to stronger building activity, and it now appears to be taking hold albeit from a very depressed level,” said Commsec chief economist Craig James.

“It is important to remember that it does take awhile to for approvals to follow the improvement in economic conditions.”

US mortgage rates lowest in nearly 40 years

Long-term mortgage rates this week reached the lowest level since at least 1970, falling for the third consecutive week.

Freddie Mac’s weekly rate report said the average 30-year, fixed-rate mortgage fell to 4.78 percent, matching a low set April 7. It is the lowest rate on such mortgages since Freddie Mac started keeping track in 1970.

Adjustable-rate mortgages also eased, but one-year, adjustable-rate mortgages are averaging rates nearly the same as 30-year fixed rates, at 4.77 percent.

Freddie Mac said borrowers who refinanced their mortgages in the first quarter reduced their combined mortgage payments by about $2.5 billion over the coming year.

UK housing recovery? maybe not

In March, the number of homes sold in the UK jumped by 40% from the previous month, (according to figures from HM Revenue & Customs). There were 60,000 property sales worth at least £40,000 each, compared with 43,000 in February. The figures seemed to indicate that the slump in home sales seen in the past 18 months may have been coming to an end. Even when the figures were adjusted for seasonal trends, they still showed a rise from 54,000 to 61,000, a jump of 13%.

However, come April and it was back to bad news. In April, UK House prices fell by 0.4%, reversing some of the rise seen in March, (according to data supplied by the the Nationwide).

The Nationwide’s figures show that the pace of decline in house prices slowed, but the typical home still cost 15% less than a year ago. The price of the average property in the UK was £151,861 in April.

Figures from the Land Registry relating to March, also published on Thursday, showed different price shifts in different parts of England and Wales. The figures suggested typical property prices rose by 1.8% in the North East of England in March compared with February, but fell by 2% in the same period in the West Midlands.

The Nationwides’s Figures showed that prices fell 3.1% in the quarter to the end of April, compared with the previous quarter.

This was less of a decline than than the 4.1% fall, using the same measure, seen a month ago.

The building society surprised many homeowners last month when it announced that prices rose by 0.9% in March compared with February.

But it warned at the time against reading too much into the change, saying that it was not a sign that the market had turned.

In a speech a week ago, Matthew Wyles, chairman of the Council of Mortgage Lenders (CML), said that the mortgage market remained “highly dysfunctional” and that 2009 would be a tough year.

Melbourne real estate in a flux

Recent data from the Real Estate Institute of Victoria (REIV) reveals that residential property in the more affordable Melbourne suburbs are appreciating faster than those in traditionally affluent areas such as Toorak, Canterbury and Camberwell.

The REIV’s quarterly house price figures show that fifteen of Melbourne’s “top 20″ growth suburbs for the first three months of the year had a median price below $500,000.

Real estate industry executives say this is because of falling interest rates and first home buyers’ grants.

Suburbs with the fastest growing prices included Mount Martha, up 16.3 per cent to $500,000, Keysborough, up 12.9 per cent to $390,000, Epping, up 8.1 per cent to $303,000, and Boronia up 6.9 per cent to $355,000.

However, the overall Melbourne median house price fell 3.1 per cent to $410,000.

Prices for the cheapest 25 per cent of houses also fell, down 1.4 per cent, while the most expensive 5 per cent of houses dived 12.9 per cent.

That compares with data yesterday from rival analyst RP Data-Rismark, which is used by the Australian Stock Exchange, and which showed Melbourne houses rose 2.4 per cent to $426,423.

REIV chief executive Enzo Raimondo said the institute collected its data directly, and the results reflected about three-quarters of total sales.

He said the figures showed that while the first home buyers’ boost was clearly working to stimulate activity, it was not dramatically inflating prices, as some industry commentators had suggested.

“Everybody’s saying that the first home owners’ grant is pushing up prices but I think what’s happened is it’s helped activity, not necessarily driven prices up,” he said. “Growth actually slowed in all the parts of the market, whereas last time it was only the top.”

The number of transactions in the first three months of this year was about the same as in the December quarter, at just over 12,000 — even though January is traditionally very quite in real estate because of school holidays.

He said the financial crisis meant people were reluctant to sell their homes and stock levels were extremely low compared with the 2007 real estate boom.

Mr Raimondo said stock levels and transactions could drop further if governments removed their first home owners’ boosts as suggested after June 30.

The Federal Government has doubled its grants to $14,000 for existing homes and tripled them to $21,000 for new homes, while the State Government is offering $3000 for existing homes or $5000 for new homes.

However, Prime Minister Kevin Rudd last week suggested the boosts would expire as planned on June 30. Developers are calling for the boosts for new homes to stay, arguing that it is better to direct money towards construction than to owners of existing homes.

But Mr Raimondo said the removal of grants for new and existing homes would mean a drop in economic activity and employment.

“It’s going to affect transaction numbers, it’s going to affect competition, it’s going to affect how many people are going to be employed in real estate after June,” he said.

Australian Housing Market Outlook

John Symond, gives his views on the state of the Australian Residential property market. He discusses the future of the first home owner grant and talks about why the big 4 banks are justified in not passing on the latest interest rate cut in full.

Alternative investments to bricks and mortar

If you’re looking for alternatives to the usual ‘bricks and mortar’ investment strategy, the you may consider the following:

Australian shares
Part-ownership of a company listed on an Australian stock exchange. Shares provide income through capital growth and dividends, and have the advantage of a low buy-in cost, tax benefits and high liquidity. But volatility is high as they suffer the day-to-day fluctuations of the market. In a down market, they are the easiest asset for investors to sell.

Overseas shares
Stocks listed on overseas exchanges. These offer dividends and capital growth like local shares but not the tax benefits. Have provided lower returns than local shares during the past decade, with higher volatility. Adds to the diversity of investment portfolios. Can be positively or negatively affected by currency movements.
Residential property: Owner-occupied or investment dwellings. Has the benefit of low volatility and strong long-term growth. Investment properties offer negative gearing benefits but have management costs. Tenants can sometimes prove problematic. Highly illiquid, dwellings can take a long time to sell, so are not ideal for investors who need to have their cash on call.

Listed property
Also known as Australian real estate investment trusts (A-REITs). Property-focused shares listed on a stock exchange. Can be purely rent collectors or have exposure to development and funds management. With the liquidity of shares, they are easy to buy and sell. However, values are more volatile than direct property due to sharemarket exposure. Different models offer different levels of risk. Have posted weak returns on high volatility during the past decade.
Unlisted property trusts: Fund managers pool money from a set number of investors, usually to buy a targeted asset or an asset the manager already owns. They are seen as more stable than listed trusts because of their lower exposure to day-to-day stockmarket fluctuations. However, they are highly illiquid – many have set investment periods – and can have costly break fees.

Fixed interest
Investors receive a fixed amount of interest, or interest according to a formula, for periods up to about 10 years. The capital invested is returned at the end of the investment. Includes products such as term deposits, bank bills, unsecured notes and bonds offered by banks, governments and companies. These do not offer the tax benefits of property or shares and do not record capital growth. Can be illiquid, given money is usually locked in for a set period. Have posted reasonable returns with low volatility during the past decade.

Cash
Cash investments include bank accounts and term deposits. They offer stable, low-risk returns in the form of interest. Provide easy access to cash but offer no capital growth. Usually used for short periods. Have posted average returns in the past decade, on low volatility.
Managed funds: These pool investors’ money to buy assets. Investors are allocated units in the fund and receive income from dividends or interest and distributions on the sale of assets. Professional fund managers select asset allocation and give investors access to a wider variety of asset classes than they would usually have. Can be illiquid, making it difficult for investors to access funds. Have posted lower-than-average returns during the past decade, with higher volatility than property but lower than listed shares.

Commercial property
Comprises any non-residential property, including office, industrial, retail, hotel and leisure assets. Can be bought directly by individuals or a syndicate of investors. Good assets have offered strong returns during the past decade, on low volatility levels. However, assets are costly and choosing a good one can be difficult for new investors. Tenants can also be tough to manage. Commercial property assets are relatively illiquid and can take time to sell. Commercial assets have posted strong returns with low volatility during the past decade.

The stress of re-entering the housing market

(By Guest Columnist) Re-entering the housing market can prove to be a disheartening experience, despite the grants.

I’m fuming. After the financial catastrophe of divorce several years ago, I’m trying to get back into the housing market.

I’ve found a beaut little place that I can afford, but I’ve done this once before, so I know that a mortgage is like a marriage in one very real way – decide in haste, repent at leisure.

The problem is I am bidding against young, inexperienced buyers with $14,000 from the federal government’s first-home-buyers grant in their pockets, being hurried and harried into purchases that they cannot truly afford by (some) real estate agents and by the artificial cut-off date for the grant of June 30, this year.

If they don’t get their house before that arbitrary date, the $14,000 vanishes; or $21,000 if they build a new home. Then add the other $5000 or $7000 that most state governments offer first-home buyers, and the $10,000 cash-back deals from some developers.

The fact that these grants have pushed up prices isn’t really on their inexpert minds.

Sure, I got my grant of $7000 back when I bought a place. But I thought it was bad policy then and I think it is bad policy now.

The first-home-owners grant was introduced by the Howard government in 2000, just in case home-price inflation benefit to the people to smooth over the introduction of the GST back the 10 per cent tax dampened demand.

Instead, the grant caused another mad flurry of and entrenched a policy that provides the least it is supposed to help – first-home buyers.
It should be called the home-vendors bonus.

Low interest rates, tax policy and government handouts have pushed home prices to absurd levels in Australia.

But every time market forces threaten to actually drive prices down enough for people like me to afford to get into the market, the government intervenes to prop up prices.

Why? Because most voters have mortgages, and they are used to the value of their homes growing in leaps and bounds – not going backwards.

The reality is the house prices are decided not by the market, but by the value of those votes.

The latest Australian Bureau of Statistics employment figures released last week showed that unemployment rose to 5.7% and boy did the media have a field day, with headlines like; “The worst rise in unemployment in 18 years”.

Unfortunately unemployment will keep rising over the next year or two,; that’s what happens in a recession. So it is natural for us to ask, “How will unemployment affect the property markets?”

Interestingly, as I spoke with numerous investors over the last few weeks whilst conducting my seminars around Australia, many highlighted the fear of rising unemployment as their single greatest concern for the property markets in the near term.

My simple answer to them was – unemployment will affect different parts of our markets differently, but the good news is it probably won’t affect property as much as you fear.

Just putting things into perspective, our current unemployment rate is coming off recent historic lows. In 2001, at the start of the strong property boom that worked its way around Australia over the next few years, the unemployment rate peaked at 7.1%. In 2006 unemployment was at 5% and the 10 year average rate of unemployment is 7.2%.

In fact, most economists consider 5% unemployment to be full employment.

To help you understand this, let’s use a property analogy…

I’m sure you’ve heard that when looking at rental vacancy rates, it is said that our property markets are in equilibrium when vacancies are at about 3%. Higher vacancy rates mean that there are more properties available than there are prospective tenants, so rents don’t rise. When vacancy rates fall below 3% and there are more tenants in the market than there are properties, landlords can push up rentals.

It’s much the same with employment – there is generally considered to be full employment when the unemployment rate is 5%. In fact I remember when first learning about this years ago, many thought we’d never see the unemployment rate in Australia below 10%.

To gain a better understanding of how unemployment will affect property prices there are a number of other points we need to consider.

Firstly, just looking at a figure of say 5% or 7% unemployment isn’t enough. When examining the statistics, we need to look at the participation rate and the levels of female employment, which have risen substantially over recent months as households prepare themselves for the hard times ahead.

The current unemployment figures also reflect the influx of school leavers and graduates who can’t find work, more so than the number of workers being laid off (of course very few school leavers or graduates are home owners who would suddenly need to put their property on the market).

If you think about it, just under 30% of all Australians rent their homes and about 34% of Australians own their homes outright. This latter group are unlikely to put their properties on the market if they lose their job and while those who are unable to work or don’t have work are over-represented amongst renters, they don’t have properties to sell.

The groups that will be hardest hit by unemployment will be the 35% of households who have a mortgage and highly geared property investors.

And of course not everyone who loses their job will suddenly put their homes on the market. Many will come from double income families where both the husband and wife work. Combine this with higher household equity, lower interest rates and the measures being put into place by some of the banks who will delay payments or capitalise interest for up to a year, giving payment relief to the unemployed, and this should result in fewer forced sales and more price stability.

That’s not to say that all areas will get out of this downturn easily. Levels of unemployment will vary significantly from suburb to suburb. Some areas will feel the brunt of unemployment to a greater extent and as a result the property markets in these areas will be affected. For example, Fairfield in Sydney currently has an unemployment rate of over 15%, three times the national average while Bondi has a rate of only 3.7%.

Looking back at the past 3 downturns, rising unemployment did not necessarily cause property prices to fall. In our major urban property markets it seems that unemployment has to rise to above 10% and stay there for some time before it negatively impacts on property values.

In smaller labour markets and especially those based around a single industry, persistent unemployment rates higher than 7% start to affect property prices.

Regional communities, as well as holiday locations, are likely to be in for a bit of a shock. Some are already beginning to feel the heat, including Adelaide which appears to be struggling with relatively high unemployment figures.

Of course different industry sectors will be affected in different ways. The mining and manufacturing industries will be hit hard and areas that have an economy underpinned by these workforces are more likely to fall in value.

And unemployment is not necessarily going to be higher at the bottom end of the labour market, as many people seem to think. Many in the finance, banking and marketing industries are losing their jobs. On the other hand health, education and public service industries will have a low risk of rising unemployment and workers in these fields have more certainty around their income.

As I tend to mention regularly in these market commentaries, there are 2 worlds out there. During this recession some people are hurting, and that is terrible, but others are thriving. The gap between the rich and the average Australian is widening. If you want to thrive and not just survive in these difficult times, please check out details of my new book – Thriving not just Surviving in Changing Times. Please click this link to find out more and order your copy – stocks should be available in a week or so.

Although these statistics are dreadful for people who are unemployed (because they are not just numbers, it’s their life), the reality is if 7% or 8% of the population is not working then over 90% of our population is, and for those people nothing changes part from the fact that rising unemployment will continue to put downward pressure on interest rates…so interest rates will be lower, petrol will become cheaper and their level of disposable income will in turn be significantly boosted.

Some will go into recession mode and put off big buying decisions like a new car, or a new house or an investment property. While others will take advantage of the reduced competition and lower prices and buy that new car, upgrade their house or purchase an investment property before the next property upswing, which will surely come.

These sophisticated property investors see absolutely amazing opportunities out there right now, because the field has been cleared for them. There is much less competition and property holding costs are cheaper.

They will have the confidence to go out and buy the right type of property – one bought well below its intrinsic value, in an area with a proven record of strong capital growth and a property to which they can add value through renovations or redevelopment.

While these investors will thrive in these difficult times, others will have difficulty surviving.

Are property sales building momentum?

Well, what do you know – there’s life in the property market again. After years of Australia languishing in the doldrums, the heady combination of falling prices, record low interest rates and generous financial incentives to take the first step onto the property ladder are enticing buyers in droves. In fact, attend a Saturday morning showing for a property in the first-home buyers’ domain of $600,000 or less and you could be forgiven for thinking the boom is back.

So should you join the throngs at the auctions? The external factors are certainly appealing. Interest rates are at 45-year lows and tipped to fall further yet. This means it’s now at least $800 a month cheaper to pay off and own a $400,000 property. What’s more, nowadays $400,000 probably gets you a bit more.

Nationally, prices have fallen by just under 3 per cent in the past year, RP Data states. And you may get a particularly good deal in Perth and along the eastern seaboard at the moment.

Then there’s the enhanced first-home buyers’ grants. Until June 30, the base grant of $7800 has been doubled to $14,000 for buying an existing property and tripled to $21,000 for new ones. This assistance provides significant impetus to get in now – and let’s hope the success of this stimulus measure will persuade the government to extend it.

Meanwhile, the situation for prospective investors is also better than it’s been in years. Thanks to the steady rent increases generated by a dearth of properties in recent times, along with the price stagnation, yields are looking attractive again. In fact, positively geared properties ? so long the Holy Grail of investors ? are a real possibility.

Just remember that whatever is going on in the broader market, the time to buy is when you are ready, not before. Ensure you have a decent deposit, you borrow an amount you can service with no more than one-third of your before-tax income and that you can cope with rapid interest rate rises. After all, we’ve seen recently how fast things can turn.
Happy hunting,

National Australia Bank won’t pass on interest rate cut

Despite Treasurer Wayne Swan trying to ramp up the pressure on the banks, The National Australia Bank  is still defying the Government by refusing to pass on any of the latest official interest rate cut, despite Treasurer Wayne Swan accusing it of endangering economic recovery.

The other thee of the ‘big four’ banks – ANZ, Westpac and St George fell into line with the Commonwealth Bank, who agreed to pass on 0.10 points of the Reserve Bank’s 0.25 point cut. Westpac also undertook to pass on the full 0.25 points to business and credit card customers.

Smaller lenders, including the Heritage Building Society and agribusiness lender Rabobank, passed on the 0.25-point cut in full.

Speaking on the radio, Mr Swan said NAB’s approach was “not helpful when we’re trying to get everyone in the community working together to deal with the global crisis”.

Finance Minister Lindsay Tanner opened up the possibility of withdrawing privileges from the NAB, saying there were “potentially other things we can do, but there are also downsides to those things”.

He and the Treasurer would apply pressure to the bank in private, “but we are not going to do it in public”.

Opposition Leader Malcolm Turnbull said Mr Swan should consider threatening to remove the NAB’s Government guarantee. “The banks have had unprecedented support from the Government,” he said. “They benefit from a deposit guarantee, they benefit from a wholesale term funding guarantee, and despite all of that assistance they don’t seem to pay much attention to the Prime Minister.”

Mr Swan ruled out threatening to withdraw guarantees, saying it would “rebound not just on the banks but on the Australian economy”.

NAB defended itself late yesterday putting out a statement saying that “between September and February NAB passed on more of the Reserve Bank’s cuts than any of our major competitors”.

But the accompanying table showed that wasn’t true for cuts starting in September, with the Commonwealth Bank cutting deeper than NAB and offering rates 10 points lower.

The difference amounts to $18 a month on a $300,000 mortgage.

Consumer organisation Choice blasted each of the big banks that had failed to pass on the cut in full saying the only reason the Reserve Bank cut rates was so the banks would pass on the cut. “But it’s very hard to shop around, and hardly worth it for 10 points when the rates might change again soon,” said spokesman Christopher Zinn.

“This is really the birds coming home to roost. The Government allowed the big banks to take over mid-tier banks such as St George and BankWest. Now there’s very little competition.”

Figures released separately yesterday showed banks accounted for a record 92.4 per cent of new mortgages taken out in February.

“This is the highest market share ever recorded by the banks,” said Coalition housing spokesman Scott Morrison. “At a time when people are asking why banks are not passing on rate cuts it is worth noting that the level of competition in home lending has also reached its lowest level on record.”

The number of new housing loans climbed again in February for the fifth straight month since the Government announced a boost to the first home owner grant.

A record 16 per cent of the new loans were for first home buyers.

Consumer confidence also improved in what Westpac economist Bill Evans said was most probably “a further positive response to the fiscal stimulus package”.

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About Me

Kate Williams has extensive experience working in property valuation and property rental in the UK and Australia over a 10 year period. Kate is now the Managing Director of a Melbourne based Relocation company which initially finds short term fully furnished rental accommodation for new arrivals to the city.

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