Homebuyers have spring in their step - MORE than 100,000 Sydneysiders are waking from winter hibernation ready for a spring home-buying spree that experts predict will jump-start Sydney's property market.
Sep 07, 2010
Real estate agencies are anticipating a record flood of inquiries in coming weeks.
They predicted buyers would unleash in October, a late spring bloom brought about by a recent positive turnaround in economic and market sentiment, albeit delayed by the continued stalemate in federal parliament.
The build-up of buyers is like a coiled spring, Sam White from Ray White told The Daily Telegraph.
He said agents were anticipating more than 100,000 Sydneysiders would go head-to-head for limited property in the next three months, with roughly 24,000 homes expected to change hands.
"Spring will see the usual spring rush, but perhaps even more so because people are getting much more confident about the market," he said.
Last spring brought the biggest quarter of sales since 2002, helped substantially by the mad scramble from first-homebuyers making the most of an increase in the Federal Government's First Home Buyer's Grant.
With a distinct lack of first-homebuyers this spring, agents believe their place will be taken by investors and families wishing to upgrade.
Laing+Simmons general manager Leanne Pilkington said a shortage of available property would ensure Sydney house prices rose.
"Underlying demand remains strong and the critical supply shortage will continue to buoy prices across all grades of property," she said.
"The spotlight this spring may well be on more affordable suburbs in Sydney's west and southwest."
McGrath chief executive John McGrath said spring would also be a "strong selling market" with more listings and growing buyer confidence courtesy of an improving economy.
With luck, recently engaged couple Alana Rose Bognar and Nicholas Horder will be off the house-hunting merry-go-round just as the market hits its stride.
They have their hearts set on a postcard-perfect Paddington cottage that goes up for auction at 9.45am today.
Having searched for the past four months they have noticed an increase in the number of properties being listed. "Winter has been pretty quiet but we have seen a bit more come into the market in the past month," Ms Rose Bognar said.
Gen Y on banking: Big brands are better - BIGGER is better is the prevailing attitude of younger Australians when they look for a financial institution.
Sep 06, 2010
Research by Datamonitor has found 74.2 per cent of Generation Y consumers aged between 18 and 30 have a strong preference towards the four major banks for their savings and transaction accounts.
But they are also much more likely to switch banks, and they like special offers and savings accounts based on recommendation from friends, it found.
Datamonitor senior analyst and author of the report Harry Senlitonga says young Australians demand convenience, access to branches and more ATMs. He says Gen Ys are more receptive to special offers on fees or interest rates, compared with other age groups.
"Gen Ys are twice as receptive as Gen Xs (aged 31 to 50) to special offers on transaction accounts, and nearly four times more than retirees," he says.
Their decisions are predominantly influenced by recommendations from someone they know, with 50 per cent of Gen Y members generally asking their friends, family or colleagues for advice when choosing their deposit providers.
"The key challenge for financial institutions targeting Gen Ys is to overcome their low level of loyalty," Senlitonga says.
"Gen Ys are up to five times more likely to switch their transaction account than the older generations.
"This indicates there is a strong need for deposit providers to offer incentive schemes to increase levels of customer loyalty within the institution."
The chief executive of the Queensland Teachers' Credit Union, Mike Murphy, says Gen Ys demand options and personalised service.
"They like to see their financial institution work for them and provide tailored responses to their needs," Murphy says.
"We understand their desire for immediate action and their preferred communication channels which is why we offer products like our online account."
Senlitonga says consumers are also looking for convenient, everyday banking from their deposit providers.
"Some 26 per cent of Australians switched in 2009 to providers with better banking infrastructure in the form of better branch and ATM locations facilities," he says.
NAB's leadership on banking fees starting with removal of exception fees, followed by other fee initiatives on transaction accounts since mid-2009, has attracted consumers seeking a lower fee for their transaction account.
A total of 58 per cent of consumers indicated better fees as one of their reasons to switch their transaction account to NAB.
Terry McCrann: RBA earns a breather - THE Reserve Bank will not increase its official interest rate at its board meeting next Tuesday.
Sep 01, 2010
And that probably holds for the October meeting as well. On the assumption that the GDP numbers won't show a boom, or if they do it'll be unreliable.
Then, thus, it's over to the banks. If they want to lift their home mortgage rates -- they probably would prefer to tack 15 points on top of 25 from the RBA -- they are going to have to do it all on their own.
The RBA isn't intending to cut its rate, either next week or any time soon, either. But I have to make the qualification that it would if we got ambushed by some form of global meltdown.
The simple point is that it can if necessary. Indeed, it can slash rates by as much as it did in 2008 and they would actually flow through to borrowers. Fed head Ben Bernanke can only whistle nervously and unconvincingly in a very cold wind.
There's a very tiny bit of politics in this. Or perhaps more accurately, political economy. RBA chief Glenn Stevens would not want to hike -- with the banks quite possibly adding their bit -- into the current political gridlock.
To stress, he most certainly does not want to hike. He would be entirely happy to wait and watch. And he and the RBA have earned the luxury to do that, by the timely and sensible rate hikes through the new year.
And further the 'decision' not to hike in September was really made in the decision not to hike in August.
All that said, he would be thankful that the RBA is not being put to the test. Hiking in September would be seen as very political.
But he would be thankful as much for economic as political reasons. A hike out of the blue into the gridlock could be highly destabilising.
It is not going to happen. It's on to Cup Day and a decision in the wake of the September-quarter inflation data, crucially, in the context of what is happening in the global economy and world financial markets.
Downsizing your home? Prepare yourself - DOWNSIZING to smaller homes is adding even greater pressure to property prices as households under financial stress compete with younger families and investors for homes in the popular middle-price ranges
Sep 01, 2010
Job losses, family separations, the global financial crisis and lifestyle changes are some of the reasons for downsizing.
However, increasing demand from these buyers is pushing up prices, wiping out much of the expected savings.
Empty-nesters and retirees, in particular, are often now faced with little or no extra cash left over after selling the family home and downsizing.
Investors are finding yields and rental income cannot justify the purchase prices, while families trying to downsize to cut their debt are also being squeezed.
Lachlan Partners property adviser Ana Bennett says the strategy of freeing up equity from larger homes and downsizing does not always pay off.
"One problem with downsizing is that, while prices may have risen such that it is tempting to sell and unlock money, the prices for the kinds of properties you might want to downsize to have also risen," Bennett says.
Squeeze on housing
"In theory, it is a good idea but it only works if the new property gives the downsizers both the kind of swap in lifestyle and finances they are looking for," Bennett says.
Morgan Stanley chief economist Gerard Minack, who recently forecast Australian property to be 40 per cent overvalued, says the price pressure is also bad for investors.
The number of loss-making landlords has increased dramatically during the past 10 years, with 70 per cent of landlords now making a loss, compared with only 50 per cent in 1998, he says.
Property investing has become a "Ponzi" scheme, where people are increasingly hoping for future capital gains to make the investment worthwhile, Minack says.
Finance broker Loan Market's chief operating officer Dean Rushton says there are more households downsizing for financial reasons or to help out their adult children.
Although most downsizers are empty-nesters or people close to retirement, other families and households are also buying smaller homes to reduce their debt.
"By selling up and buying a smaller and less expensive property, they can reduce their mortgage and create a comfort zone," Rushton says.
A fighting chance to beat bank fee traps -
BANK fees drain billions of dollars each year from households, but there are several ways you can cut your costs.
Aug 30, 2010
Credit cards, transaction accounts, home loans and ATM transactions are all hit by a wide range of fees, charges and penalties, which have been growing in number and size for several years.
The latest data from the Reserve Bank of Australia says total bank fees for households rose 3 per cent last year to $5.03 billion, and have climbed 11 per cent since 2007.
However, consumers are fighting back, and the banks are taking notice.
A class action against the unpopular exception fees which alone cost customers $1 billion last year has been gaining momentum, and some of the major banks have been cutting their fees in an effort to improve a tarnished image.
Australian Bankers' Association chief executive Steven Munchenberg says competition has been driving banks to reduce fees in the past year.
"This has resulted in a significant fall of 11 per cent (according to the RBA) in the amount of fees collected by banks from households on transaction accounts," he says.
"There is a lot of choice in the marketplace accounts with no monthly fees, free accounts for children, students and pensioners or low-cost accounts for those who make a lot of transactions.
"If you think you're paying too much in fees, get smart about your banking and call your bank and see if there's a better product."
Info Choice says the average annual fee from the big four banks for a low-rate credit card is $57.50; for everyday transaction accounts it's $4 a month and for standard variable rate home loans it is $7.75 a month.
Many people pay too much in bank fees simply because they refuse to change their habits or don't spend time researching the options. It can easily add up to several hundred dollars a year.
Here are some ways to cut your bank fees:
Transaction accounts
Budget Freedom managing director Martin Grace says people need to understand what fees apply to their account.
"Try to minimise doing the transaction types that attract fees," he says. "Reduce the number of times you access your account. How about once a week withdrawing enough cash to cover your week's general living expenses?
"The advantage is that you only make one withdrawal each week. This strategy helps to reduce any overspending."
Infochoice.com.au financial services analyst David Lalich says most providers offer low-cost transaction accounts for people who do most of their banking over the internet and phone rather than in a branch.
"Many banks will often waive the account-keeping fee if a minimum monthly deposit amount is transferred in each month," he says.
"Customers should do their research to identify the number and types of fee-free transactions to avoid paying unnecessary charges."
ATM tips
ATM fees have long been a sore point, but at least now the ATM tells you how much you are going to be charged if it is not linked to your bank.
"Withdrawing money out at the point of sale, pinpointing your bank's ATMs near home and work and planning ahead should help customers to avoid paying foreign ATM fees," Lalich says.
Grace says one way to avoid ATM fees is to withdraw cash when buying things from petrol stations and supermarkets.
A positive development for customers in recent years has been financial institutions forming ATM alliances where customers can use each group's ATMs for free.
Datamonitor senior analyst Harry Senlitonga says examples include Westpac and St George, the Commonwealth Bank and BankWest, Suncorp and Bendigo and Adelaide Bank, and NAB with the credit unions' RediATM network.
He says the simplest way to cut ATM costs is often to walk a few extra steps to one of your own bank's ATMs.
"People might find 100m away there is an own network ATM, but many just go to the nearest one, get charged $2.50 and in the end they complain about it," he says.
Credit cards
Chasing a credit card with the lowest fee can be a mistake.
Senlitonga says there are still some cards available with no annual fee, but people who usually carry over a debt from month to month are better off finding the lowest interest rate.
Infochoice's Lalich says the biggest cost to credit card users is interest charges, and people who pay interest each month should opt for a low-rate card rather than a rewards card as the interest savings should outweigh the reward.
"For customers who pay off their balance each month and are more concerned about saving on fees, all the major banks also offer a low-annual- fee or no-annual-fee card option," Lalich says.
Home loans
Lalich says the major banks charge ongoing fees for having a mortgage with them.
"There are some real cost savings by looking beyond the big banks for a home loan, with some of the smaller players offering lower rates and no ongoing fees," he says.
Damon Nagel, a director at property investment group Ironfish, says home loan fees and interest can be reduced using a professional package offered by most banks.
"Each bank is slightly different. You might pay $375 a year and get a credit card with no service fees, no cheque fees, no loan fees and on top of that you can get 0.75 percentage points off loans."
Nagel says for many people the cost of these professional packages is often offset by interest savings alone.
For other home loan customers, his advice is simple. "Shop around and stay on top of it. Check what other banks are doing, and if you find a better deal go back to your bank and say, 'can you do it?' Nine times out of 10 they will match it."
Penalty fees
While banks have been cutting transaction account penalty fees, consumer group Choice says they have been recouping the lost income with new fee revenue from credit cards and personal loans.
Penalty fees, or exception fees, on credit cards make up the biggest share of exception fees paid by households, rising 10 per cent to $400 million in the past year.
Choice's tips for avoiding penalty fees include:
o Know your account and be familiar with how penalty fees are applied, so you have better odds of avoiding them.
o Know your incomings and outgoings. Check that expected payments have been made into your account, and be aware of the timing of direct debits, so you have enough money in your account to cover them.
o Contact your bank and ask for penalties to be reversed. Many consumers have been successful at getting their penalty fees reversed or waived.
o Arrange for automatic payments to your credit card. This can ensure you at least pay off your minimum monthly amount due each month, to avoid late payment fees.
Reserve Bank 'comfortable' with current rate levels - THE Reserve Bank was "comfortable" leaving interest rates at average levels at its August board meeting during a period of market volatility, minutes of the monetary policy board meeting reveal.
Aug 26, 2010
The Reserve Bank left the cash rate unchanged at 4.5 per cent at its August 3 board meeting, saying that the existing level was "appropriate" for the time being "pending further information".
The minutes, released today, show the updated Reserve Bank forecast is for GDP growth to increase gradually to the 3.75 to 4 per cent range in 2011 and 2012.
The forecasts were in line with those published in the Reserve Bank's statement on monetary policy on August 6.
They show the major news for the domestic economy had been that underlying inflation continued to "fall in line with the bank's expectations and was below three per cent".
The board members noted that were it not for the effect of the rise in tobacco excise earlier in the year, CPI inflation would have remained below three per cent.
"By May, interest rates on loans to households and businesses had returned to around average levels," the minutes said.
"In the subsequent two months, with economic growth close to trend and inflation expected to decline to the target range later in the year, the board had felt comfortable with the existing level of interest rates, particularly in an environment where there was a significant degree of market volatility."
The Reserve Bank's forecast continued to suggest that GDP growth would strengthen in 2011 and 2012 to above-average rates, the minutes said.
"Accordingly, even though underlying inflation was expected to remain around 2.75 per cent over the next year, it was forecast to pick up a little thereafter."
The board members noted that sentiment in financial markets had improved over the past month, "particularly following the publication of results of the stress test of of the European banking system.
"Volatility in financial prices nonetheless was still higher than normal," the minutes said.
It also said the economic data suggested the global economy was continuing to expand, though the pace of growth had probably eased since earlier in the year and it was still uneven among regions.
Developments over the latest month had not materially changed the board's assessment, it said.
"The inflation data released during the month were in line with the board's expectations for a decline, and the outlook for economic growth had not changed," the minutes said.
"Markets had settled somewhat, but there was still more uncertainty over the global outlook than there had been earlier in the year.
"The board therefore judged the existing level of the cash rate as still appropriate and decided to leave it unchanged for the time being, pending further information."
Board members also discussed broader trends in household behaviour and noted that the saving rate was now at a higher level than a few years earlier and credit growth was much lower than over the past decade.
"Looking ahead, members observed that the challenges of dealing with a terms of trade boom and strong growth in investment could be lessened if these trends in behaviour continued," it said.
It noted a cooling in established house prices after a year of strong price increases, with housing loan approvals estimated to have declined further in June.
The updated Reserve Bank forecast for GDP growth to increase gradually to the 3.75 to 4 per cent range in 2011 and 2012.
"The outlook was underpinned by the positive prospects for the resources sector, which in turn rested on on the bright medium-term outlook for the economies in Asia," the minutes said.
Gimmicks, gadgetry replace old-fashioned techniques to lure real estate buyers - REAL estate agents are turning to gimmicks and gadgetry like iPhone apps in an effort to lure buyers.
Aug 26, 2010
The tricks have gone from baking bread and brewing coffee just before the start of an open house or setting up a sausage sizzle at an on-site auction to music video clips, iPhone applications and Facebook pages.
George Hadgelias, of Ray White Paddington in Brisbane, said agents needed to be more creative and make full use of a home's features during open house inspections.
"If we are marketing a property with a home theatre or media room we will have live concert videos playing during our opens," he said.
Mr Hadgelias said video was crucial in property marketing.
"Many homes on our listings can be viewed via an online video tour," he said.
Chris Hinds, 26, is Australia's youngest RE/MAX principal, setting up RE/MAX Everything Property in Brisbane's CBD. A Gen Y-er, he produces video clips on the properties he has for sale, providing more than a virtual tours.
He said the videos put the property into a "lifestyle setting", profiling not just it but local bars, shops and infrastructure.
"Inner city property is prestigious and should be marketed like fashion or cars," Mr Hinds said.
Technology also is continuing to develop to meet the demands of information-hungry house hunters.
LJ Hooker has introduced an iPhone application that lets potential buyers view property listings and photo galleries, see listings on Google maps and find their nearest LJ Hooker agent direct from their iPhone.
And in an Australian real estate industry first, it comes bundled with SunLocator, which can give potential buyers an insight into how sunny or shady their new home may be.
It lets buyers track the path that sunlight travels over the block on any given day - overlaid on the camera screen of their phone. Predicting a property's sun exposure can help to plan the position of outdoor rooms, clothes lines and even solar panels.
Ray White New Farm has also set up a Facebook page for residents at the luxury Cutters Landing development at Teneriffe in inner-city Brisbane.
"New owners and tenants have become friends of the page and they can post photos about Cutters Landing," Ray White New Farm principal Heatley Cush said.
But sometimes the key to making a sale is ensuring agents are at the top of their game.
Mr Cush said he also kept staff and agents on their toes by using "mystery shoppers" to evaluate performance and "ensure we are always offering the highest standards of service".
Investors 'disappointed' over quick housing gains - PROPERTY investors are targeting off-the-plan apartments hoping for short-terhort-term capital gain, with thousands of prospective pre-sale buyers eyeing Sydney projects.
Aug 26, 2010
Ray White is reporting a 6 per cent lift in investor buying as shares weaken and with the end last year of the boosted first-home buyer's grant.
But analyst Michael Matusik predicts investment properties will flood the market in the near term, leading prices to soften.
An Australian Housing and Urban Research Institute report this month said 80 per cent of investors buy for long-term gain, but at least half sell within five years because of cashflow problems or disappointing capital growth. One in four investors sells within 12 months.
Developers in Sydney are reporting strong demand for new residential projects following stamp duty concession by the NSW government this year.
Tim Casey of St Hilliers Group says his company has had 650 people interested in apartments at the Caritas site in inner Sydney's Forbes Street, for which marketing begins this week.
And Harry Triguboff's Meriton Apartments reports strong interest for proposed apartments at the former Seven Network site at Epping, with more than 300 applications.
The majority of the Meriton inquiries are for apartments under the $600,000 stamp duty concession threshold. It is understood Meriton has lodged a planning application to expand the development from 650 to 800 apartments, with more one- and two-bedroom properties.
Mr Matusik said property prices would not crash, but there would be deflation in values over time. "In the next decade, we might see very little growth, and if investors keep buying and thinking 'I'm going to make a killing and then move on', they're going to find themselves a little disappointed," he said.
This would be mostly the case in Melbourne, where the market had been strong, he said. In Perth, Brisbane and Adelaide, the trend had already started to occur.
Ray White real estate's joint chairman, Brian White, said the proportion of investor buyers, usually about 30 per cent, was now 36 per cent. Australia was following the trend in the US, where property prices were holding up best in the big cities. "That's where the government is and jobs are," Mr White said.
Reserve Bank signals interest rate pause -
* Rates return to 'normal levels'
* Europe could lead RBA to pause next time
* Could threaten or worsen global recovery
May 18, 2010
BORROWERS can expect a break from interest rate rises on June 1, the Reserve Bank has indicated.
The RBA raised its benchmark interest rate in early May to bring borrowing rates back to average levels, despite growing concerns about the effects of the European debt crisis.
But in a possible reprieve for borrowers, the central bank has also hinted it might not lift the cash rate again for some time.
In the minutes of its May meeting, released today, the RBA said it raised the cash rate to 4.5 per cent from 4.25 per cent at its May 4 board meeting to bring borrowing rates back to their decade long average level.
"On balance, members judged it prudent to undertake some further monetary policy tightening at this meeting," the minutes said.
"They noted that, if lenders responded as expected to another rise in the cash rate, interest rates faced by most borrowers would then be at around average levels over the past decade."
It was the sixth time the bank raised the cash rate since October last year.
The RBA also weighed falling retail sales and housing loan approval figures published before its May decision against the stimulatory effects of the resources boom over the year ahead.
This analysis was lined up against the worsening debt situation in Europe, around which the RBA said a case "could be made for a pause in the process of normalising interest rates".
The bank also noted that there was a risk the European debt crisis, particularly in Greece, could worsen further and threaten the global economic recovery.
But the RBA noted that while global stock markets and some currencies had seen a decline stemming from the European problem, there had not been a significant contagion to debt markets outside Europe.
"The direct impact of Greece on Australia was considered to be small,'' the minutes said.
Meanwhile, in a sign the bank might not be eager to lift the cash rate again anytime soon, the minutes penultimate sentence said "members felt that this would leave monetary policy well placed for the present."
"The board therefore supported another rise in the cash rate.''
No more rate hikes 'until September'
The debt futures market is currently not pricing in another rate rise until September or November 2010.
All four of the major banks answered the RBA's May decision by lifting the rates on their standard variable mortgage products, adding about $50 a month to the cost of a 25 year, $300,000 mortgage.
The RBA also noted that the central driver behind recent higher-than-expected inflation figures had been the strong rise in prices of services, which suggested that those sectors of the economy were operating with limited or spare capacity.
The central bank recently upgraded its own inflation forecasts and now expects that over the next couple of years, it is likely that inflation "would not be much below the top of the target range''.
"The RBA's stated mission is to keep inflation within a target band of 2 to 3 per cent on average over time."
RBA signals rates pause - Borrowers can expect a break from interest rate rises on June 1, the Reserve Bank of Australia has indicated. In the minutes of its May 4 monetary policy meeting, the RBA said its board "had judged it to be prudent to undertake s
May 18, 2010
That decision took the cash rate to 4.5 per cent with the the sixth increase of a quarter of a percentage point since the monetary tightening began in October.
In doing so, the RBA has achieved its aim of restoring interest rates faced by borrowers to "around the average levels over the past decade".
Now, the RBA looks set to rest on its oars, at least for a while.
"Members felt this would leave monetary policy well placed for the present," the RBA said in the minutes.
The move in May was spurred by improved economic conditions and rising inflationary pressures.
The RBA said the global economy continued to improve, despite concerns over Greece, which the board "spent considerable time discussing".
"The major news on the domestic economy had been the further strengthening in commodity markets and the slightly higher-than-expected inflation data for the March quarter," the RBA said.
And there is more to come.
The expected resurgence to new highs by the terms of trade, the ratio of export to import prices, "would provide a large boost to nominal income", the RBA said.
There were some "early signs" that interest rate rises to date "were beginning to affect behaviour", the RBA said, but domestic output growth still was expected to strengthen over the next couple of years.
In its quarterly monetary policy statement earlier this month, the RBA upgraded its forecasts for growth and inflation, and reiterated them in the minutes released on Tuesday.
The RBA said the March quarter inflation figures were "a little above the expectation", with strong price rises for many services "which suggested that these sectors of the economy were operating with limited spare capacity".
Gross domestic product (GDP) was expected to grow by around 3.25 per cent (about the long term average) over 2010 and by 3.75 to 4.0 per cent in the following two years, the RBA said in the minutes.
The RBA said inflation would be "not much below the top of the target range" over the next couple of years.
Importantly, this is despite the contrary effects of policy.
"The latest forecasts suggested that domestic output growth was likely to strengthen over the next couple of years, with the expansionary effects of the rise in the terms of trade more than offsetting the scaling back of fiscal and monetary policy stimulus," the RBA said in the minutes.
With the economy picking up pace and inflation skating on the thin ice near to top of its target range, the likely pause in the RBA's schedule of rate rises may not last very long.
Borrowers have not been let off; they have just been given a stay of execution.
It pays to act quickly after divorce - DIVORCE is rarely pretty and it's the first couple of days which really can be crucial in terms of your financial outcome.
May 18, 2010
Unfortunately, we've had several friends who've been slow to react to this situation and it has cost them dearly.
It's that time right after a marriage breaks down when you feel you're most at risk, financially and emotionally.
If you aren't the major breadwinner in the relationship, those first couple of days after the breakdown can be critical for your future financial security.
Not only is it vital to shore up short-term finances to pay bills but also make a plan to ensure you receive your fair share of the assets you've both worked hard to build.
Under no circumstances should you spend the first 24 hours after your partner leaves locked away in your room.
There are several things you have to do straight away. You never know, your partner may have been planning this for a while and could have even received legal advice already.
Here are some ways to secure your emotional, physical, and financial security:
- Take money out of your bank account to get you through the first few weeks, but try to be fair. For example, if there is $10,000 in a bank account, take out $5000.
- Change the password on your bank accounts. The last thing you want them to do is spend all the savings.
- Apply to the bank to change your accounts to two signatories. This means both you and your partner have to sign any cheques or withdrawals from the accounts.
- Organise to receive all correspondence with the bank relating to your accounts.
- Collect as many important documents as possible and make copies of the lot. We're talking about things such as the deeds to the family home and any investment properties, share certificates and super fund details.
- Secure your paperwork. Take it away from your family home to your parents' place or to a close friend.
- Secure things that are vital to you such as jewellery, photos and family videos.
- If your partner's moved out, change the locks. You don't have a legal right to do this, but it will make your home more secure.
- Make an appointment to see a solicitor and counsellor.
- Don't agree to anything without taking time to get advice and think about it. You never know, they may have already been legally advised to take advantage of your shock and unpreparedness.
- If you have children, let their school know what is happening. They can put into place good processes for the kids to be looked after.
- Be fair if your partner is moving out of the family home. Let them take some stuff, such as the second television and some crockery.
- Don't say anything really bad about the other person. This is the most emotionally exposed you are ever likely to be, so curb your tongue.
- Keep the lines of communication open. If you do, you will increase the chances of an amicable separation. You do not want to pass a message on to your partner through your solicitor, who speaks to their solicitor, who relays the message to your partner. That drastically increases the chance of miscommunication, which can lead to litigation.
- If your break-up is civilised and you have children, take them to see where their other parent is living. Reassure them that they are not sleeping on the streets.
- Be careful about verbal threats. If you are genuinely scared or intimidated, contact your local police station.
This list can seem a little callous but it's vital to put emotion aside. There is nothing worse than being behind the eight ball because you were too slow from the start.
Housing loans drop on rising interest rates - WEAK lending finance figures show the economy is stalling and give the central bank a reason to keep interest rates on hold for at least the next two months, economists say.
May 18, 2010
Figures from the the Australian Bureau of Statistics (ABS) show total personal finance commitments fell 1.3 per cent in March, seasonally adjusted, to $6.874 billion, from $6.968 billion in February.
Housing finance for owner occupation fell 3.4 per cent to $13.534 billion in March from $14.014 billion in February, the ABS said.
"This is further evidence that the domestic economic recovery is going sideways and stalling rather than seeing any significant growth,'' CommSec economist Savanth Sebastian said.
Lending finance now was down 12 per cent on a year ago, recording its weakest annual growth rate in 13 months, Mr Sebastian said.
The Reserve Bank would be concerned that the decline had picked up, rather than bottoming out, he said.
"The latest result gives the Reserve Bank more room to pause at its next board meeting in June.
"Not only has retail sales been consistently weak, but consumer borrowings, which is a good lead indicator of future spending, is actually tracking lower as well, with personal finance recording its weakest monthly reading since last October.''
Total commercial finance was up 1.1 per cent in March, seasonally adjusted, to $28.373 billion, from $28.072 billion in February, the ABS said.
Lease finance was up 5.8 per cent in March to $388 million, compared with $367 million the month before.
Mr Sebastian said the frequency of six interest rate rises in the past eight months was "starting to bite'' on the household budget.
Given the latest round of economic data, the Reserve Bank probably would be inclined to pause at the next board meeting.
"There are factors on a global front that are still having a significant impact on equity markets,'' he said.
"We've seen that housing finance has come off the boil and, with new construction significantly picking up, there's a very good chance that the housing sector should consolidate over the next few months.''
Mr Sebastian forecast the RBA would pause its interest rate rises over the next few months.
"We'd expect two to three months with the Reserve Bank sitting on the interest rate sidelines,'' he said.
Bank workers join fight against fees - PEEVED bank staff are among those wanting to join the nation's biggest class action to recover $5 billion in bank fees.
May 18, 2010
The claims company behind the planned landmark case said most finance staff seeking refunds with angry customers were genuine claimants.
"We believe most are legitimate rather than snoops digging dirt on the claims process," Financial Redress head James Middleweek said.
A staggering 85,000 people have registered interest in IMF Australia's bid to force a dozen banks to refund penalties, known as "exception" fees, charged over the past six years.
Some of the hardest hit include businesses stung with fees of up to $40,000 from daily charges on overdrawn accounts.
Individuals lodging interest in the legal action allege they have lost up to $12,000.
The fees, on overdrawn accounts, late payments and bounced cheques, raised $1.2 billion for banks in 2008.
Victoria's Supreme Court will be asked to find that the ANZ, Bank of Queensland, BankSA, BankWest, Bendigo Bank, Citibank, Commonwealth Bank, HSBC, NAB, St George, Suncorp and Westpac gouged customers with unfair charges that far outweighed the actual cost to banks.
The big four banks finally axed or reduced the fees last year, but some financial institutions continue to charge hefty penalties.
The Consumer Action Law Centre believes a successful class action could also prompt a crackdown on some fees slugged by telephone carriers.
Spokeswoman Nicole Rich said some fees, such as charges for ending mobile phone contracts early, seemed excessive.
Claims specialists waging war on bank greed say the true cost to banks for customers exceeding account limits is more like a few cents or several dollars, rather than the $25-$60 charged in recent years.
Perth-based IMF Australia will bankroll the planned class action and pocket 25 per cent of any damages awarded. If it loses it will charge nothing.
Melbourne law firm Maurice Blackburn will run the case.
Huge cash kick from resources - AUSTRALIA'S booming resources sector is expected to inject a massive $30 billion into the economy by the middle of this year, underpinned by China's renewed appetite for iron ore and coal.
May 12, 2010
Treasurer Wayne Swan yesterday paid homage to the sector which saved Australia from the worst of the global slowdown and will be key to an economic rebound.
However, he warned that while the resources boom presented "enormous opportunities" it would also throw up significant challenges including skill shortages and other capacity constraints.
He also drove home the government's key policy aimed at harnessing the fruits of the mining boom - the Resource Super Profits Tax.
Budget papers reveal $38.5 million will be spent on marketing the new tax to the Australian public, which has raised the ire of the mining industry.
"Booms are not a permanent part of the economic landscape even if they might be expected to run for a decade or more," Mr Swan said last night in his third Budget speech.
"The revenue we raise (from the tax) will be directed to strengthen and broaden the whole economy, to invest in our productivity capacity, and to boost our national savings."
A rise in global prices for Australia's key commodity exports are set to drive a substantial lift in Australia's terms of trade, according to the Budget papers. They forecast terms of trade to rebound by around 25 per cent by mid-2010 - forecast to pour $30 billion into the economy.
The government yesterday said private sector activity was likely to fire economic growth of 3.25 per cent in 2010-11, rising to 4 per cent in 2011-12.
It said the jobless rate, which stood at 5.3 per cent in March, would likely fall to 5 per cent by the end of 2010-11, dipping to 4.75 per cent in late 2011-12.
This is well off the 8.5 per cent peak predicted in last year's Budget.
The Treasurer also confirmed that the Budget will be back in the black three years ahead of schedule.
A gradual recovery in tax receipts and a tight rein on spending will deliver a $1 billion surplus by 2012-13.
"This represents the most rapid fiscal consolidation in Australia since at least the 1960s," according to the Budget.
"As a result, Australia has one of the strongest budget positions in the developed world, returning to surplus before any major advanced economy."
Last year's Budget predicted that Australia would not climb from deficit until 2015-16.
An underlying cash deficit of $40.8 billion is expected in 2010-11, which is equal to 2.9 per cent of GDP.
This is almost $6 billion less than the Government's last set of forecasts and $16 billion less than the deficit predicted a year ago.
However, the Budget's updated economic growth forecasts are not as bullish as those in the Reserve Bank's latest quarterly statement on monetary policy.
The central bank last week predicted Australia's GDP would grow by 3.75 per cent in the year to June 2011, up from the 3.5 per cent it forecast in February
2010 Federal Budget offers modest tax cuts, further relief if re-elected - A TIGHT-fisted Budget offers voters modest income tax cuts now and a promise of further tax relief if Kevin Rudd wins this year's election.
May 12, 2010
A $500 standard tax deduction option will replace the annual arm-wrestle with shoeboxes crammed with receipts.
And a tax cut on interest earned from bank accounts will be attractive to savers.
But the promises will only be delivered in full if the Senate passes the controversial "super profits tax" on mining companies.
Treasurer Wayne Swan said the personal tax cuts will flow from July 1 and deliver $8.65 a week to people earning between $40,000-$60,000.
"They are not big tax cuts, they are modest," Mr Swan said.
He said it would help with the rising cost of living pressures faced by families.
Government insiders admitted it was likely to be the last cut to personal income tax for at least three years.
Mr Swan said if Labor wins the election it would move to deliver the tax cuts on interest earned in bank accounts and introduce optional standard tax deductions to save time and simplify tax returns.
Individual taxpayers would have the option of a one-size deduction to replace the time-consuming process of calculating work-related expenses and accountancy costs.
The $500 deduction will become available from July 1, 2012, and increase to $1000 the following year.
Rather than a $500 cheque in the mail, Mr Swan said it would be worth about $192 a year to a typical taxpayer.
The Budget papers show a taxpayer on $30,000 who claims about $400 in deductions, including the cost of using a tax agent, will gain $17 extra a year from a $500 deduction if they opt into the new scheme because they are giving up existing tax breaks. They will be $83 a year better off under a $1000 deduction.
A person earning $50,000 will get an extra $178 from a standard $1000 deduction.
"We have decided to provide taxpayers with the choice of a standard deduction instead of the hassle of shoeboxes full of receipts and the costs of professional assistance," Mr Swan told Parliament.
A 50 per cent tax discount on savings for the first $1000 of interest earned on deposits held in banks, building societies and credit unions will start in July 2011. For someone earning $30,000, it will be a tax cut of $83 a year while a person earning $50,000 gets a $178 cut.
Mr Swan said it would make interest-bearing products more attractive to savers.
Windfalls made the difference in Wayne's World - changes in budget numbers you haven't actually planned for, and in this budget it's bringing home the bacon, and propelling the budget into surplus three years earlier than expected.
May 12, 2010
One of the keys to the coming election campaign will be to what extent the government can claim the credit.
The newly announced resource rent tax and 25 per cent higher tobacco excise are major money-spinners for the government - the resource tax as announced will raise $12 billion in its first two years to 2013-14, and the excise hike will raise $5.2 billion in the next four years - but it is a parameter variation that turns a year-old budget prediction that the government would be running a $30.3 billion deficit in 2012-2013 into a new projection that the government will post a small surplus in 2012-2013.
Since the previous budget was handed down a year ago, what the boffins call parameter variations and the layman might call windfall gains are estimated to have put an extra $95 billion of tax revenue into the pipeline in the four years to 2012-2013, and to have improved the projected underlying budget balance in that period by no less than $83.3 billion.
The variations in question all flow from Australia's unexpected and very welcome failure to follow the rest of the Western world into the funk of recession, and its swift recovery from the mild downturn that it did experience, just as China roared back from six months of navel-gazing to reignite demand for Australian commodities.
There are more people in work and still paying taxes than expected a year ago. Those who lost jobs are getting new ones more quickly than anticipated, and shifting from being government income receivers to income generators, and tax payers. Household demand and taxable company profits have stayed relatively strong, bolstered by low interest rates and the government's two stimulus packages. And the spectre of asset-price deflation has receded, to be replaced in the residential property sector at least by price gains that are shoring up capital gains tax revenue.
These are all windfall gains in Wayne's World: they haven't been tagged to any particular budget measure, even though they are the main drivers of the improved outlook.
But as the spring election campaign approaches, the government is going to want to take a lot of the credit for creating the wind that created the windfalls.
It will say that its fiscal stimulus and economic stewardship was crucial in keeping the economy's sails full. And it will say that its own spending discipline enabled the windfall gain to be ''banked'' in yesterday's projections for a shorter, steeper climb out of deficit and back into the land of the surplus holy grail.
The government's assertion that it is honouring its commitment to increase spending by no more than 2 per cent a year is the subject of a slight sleight of hand because the $26 billion or so that the government will spend to get the national broadband network off the ground is in the books as an investment when the reality is that it is far from assured it will make money.
Still, the 2 per cent target has been hardened - the government was saying that it would hold spending in real terms to 2 per cent until the budget moved into surplus, and is now saying it will hold the 2 per cent line until the surplus reaches 1 per cent of gross domestic product, probably in 2015-2016. It will require discipline: spending growth averaged 3.7 per cent in the decade that led to the global financial crisis, and a 2 per cent increase is not even keeping pace with inflation.
The spending restriction is evident in the underlying architecture of the budget, which envisages the private sector and resources investment in particular (despite the new resource tax) taking over, as government and stimulus spending recedes. It is also evident in the government's obsession with offsetting new spending with myriad, ultimately equivalent cuts elsewhere, and the relative paucity of pre-election handouts. There are only two big ones, both from the Henry review: a 50 per cent income tax deduction on up to $1000 of fixed-interest income from sources as diverse as bank deposits and corporate bonds that the government intends will be as easy for most companies to issue as shares; and the decision to let taxpayers sack their tax accountant and accept a standard $500 deduction for work-related expenses from 2012-2013, and $1000 from 2013-2014.
The opposition will be having none of it, of course. It will say that the nation is being led by a bunch of big-spending spivs who got lucky - lucky to have had the Reserve Bank cutting rates as the crisis escalated; having already boosted them to a level sister central banks in the northern hemisphere could only envy. Lucky too to have had China and the resources-hungry Asian economy on its doorstep.
Both sides are right, in part.
We are indeed a lucky country. Similar policies elsewhere in the developed world did not come close to producing these stellar results. But by spending big to prevent Australia descending into a recession and then throttling back as the recovery gained traction, the Rudd government sits on the right hand of the Reserve Bank as joint creator of the kick that created parameter variation. Despite its policy backflips, its management of the economy continues to be one of its big selling points, as today's quietly powerful budget papers underline.
Recovery is on the near horizon - Budget indicates economy will bounce back strongly from last year's slowdown as China's hunger for raw materials flows through into rapid expansion of the mining sector, higher household incomes and stronger jobs growth.
May 12, 2010
The Treasury forecasts gross domestic product - the value of all goods and services produced in the economy - will grow by 3.25 per cent in real terms in 2010-11, driven mainly by stronger growth in household consumption and a splurge in business investment spending.
The forecast rate will mean the economy has returned to its long-term trend rate of expansion following a shallow downturn by world standards. The growth rate slowed to 1.9 per cent in 2008-09 but will rise to an expected 2.75 per cent in the current year.
The forecast is healthier still for 2011-12, when Treasury predicts real GDP will expand by 4 per cent.
The economic outlook in the budget papers is for a resumption in the mining boom as demand from China, India and other Asian economies drives up prices of resource exports such as coal (where prices on the spot market are already up 70 per cent) and iron ore (where spot prices almost trebled over the past year).
That will not only generate sharp increases in investment spending by mining companies as they expand existing projects and develop new projects but will also bring higher incomes throughout the economy.
Treasury expects compensation of employees to increase by 7.25 per cent in 2010-11, with wages growing 3.75 per cent and the number of people in jobs rising by 2.25 per cent. This is expected to lower the jobless rate from the current 5.3 per cent to 5 per cent by June 2011 and to 4.75 per cent by June 2012.
Despite the healthy growth outlook, Treasury sees inflation stabilising within the Reserve Bank's target of 2 to 3 per cent. It is forecasting the ''headline'' consumer price index will rise by 3.25 per cent over the year to June 2010 and then by 2.5 per cent to June 2011.
Treasury says the government's fiscal stimulus measures combined with the Reserve Bank's interest rate cuts in 2009 ensured Australia experienced a much milder slowdown than other rich countries, meaning it is well positioned to benefit from the global recovery.
''While the global economic recovery is expected to be uneven, the outlook for the Australian economy is increasingly positive with strong prospects for the Asian region expected to support a rising terms of trade and a rebound in business investment,'' the budget papers say.
''The shallower downturn has meant that Australia has largely avoided the business failures and large-scale employment losses that have occurred in many other countries, providing a solid foundation for the recovery.''
Consumers are expected to increase their spending by 3.5 per cent in real terms, reflecting stronger incomes, more people in jobs, improved confidence and higher household wealth due to rising house and share prices. Business investment is forecast to rise by 7 per cent next financial year, led by a surge in mining investment. Treasury foresees spending on engineering construction projects - mostly in the mining sector - jumping 19 per cent in 2010-11 and by another 20 per cent in 2011-12.
Spending on new housing construction will be up 7.5 per cent next year, despite rising interest rates.
Treasury forecasts healthy growth in exports (up 5 per cent next financial year) will be swamped by even stronger growth in imports (up 9 per cent) meaning Australia's trade performance will subtract 1 percentage point from GDP growth.
The main risks to the economy are that concerns over the financial position of countries such as Greece trigger renewed global financial instability or that inflationary pressures derail China's rapid growth.
'We are the envy of the world' - GOOD resolutions make for boring budgets. The big story in this budget is not what it does, but what it doesn't. It doesn't have tax cuts. It doesn't have much new spending. It doesn't even have much in spending cuts.
May 12, 2010
In Treasurer Wayne Swan's words, the budget ''produces an economic and fiscal position the envy of the developed world''.
This budget doesn't give and it doesn't take. More than any other budget I've seen, it leaves things as they are. And that's the reason it is able to forecast a return to surplus by 2012-13, three years earlier than previously forecast.
Leaving things as they are delivers two benefits to the bottom line. First, it means stimulus spending programs are allowed to run out without being replaced. That's the main reason Canberra's spending as a share of GDP is forecast to shrink from 26.2 per cent of GDP now to 23.8 per cent in 2012-13.
Second, leaving things alone means there are no tax cuts - and so bracket creep brings home the bacon. Taxes will rise from 20.2 per cent of GDP to 22.5 per cent in the same three years, primarily because incomes will rise but income tax thresholds will not. Without any formal tax increase, Australians will pay a higher share of their income in tax.
Income tax on individuals, now at a 40-year low as a share of GDP, is forecast to climb from $120 billion this financial year to $174 billion in four years - a rise of 45 per cent. Part of that is because we are forecast to have almost a million more jobs by then. But the main reason is that our wages are forecast to rise roughly 4 per cent a year, and with no tax cuts apart from the long-scheduled nip and tuck from July 1, that means with each year a higher share of our income is in our highest tax bracket.
Unfair? No, I think that's very fair. It's in our interests to get the budget back in the black as soon as is feasible, and anyone who says we can do it just by cutting spending should spell out where he (it's usually guys sounding off this way) would cut another $36 billion a year from spending. I'll bet it's not from spending on him or the interest groups he represents.
In fact, with GDP itself forecast to grow reasonably fast - 28 per cent in those four years, or 14 per cent excluding inflation - that would still leave the taxman taking just 10.5 per cent of GDP off us in personal income tax in 2013-14. That's well below the 25-year average of 12 per cent of GDP from 1980 to 2005.
The return to growth would see company profits soar, so tax on them would rise 47 per cent in four years. And the proposed resources tax on the miners would add its bit, though mostly after we are already back in surplus.
The bottom line in all this is the Rudd government's political calculation that it is more vulnerable to attack for spending too much than too little, so it has made restoring the surplus its first priority. Everything else can wait.
There is no money in the forward estimates any more for an emissions trading scheme - not even in 2013. It is now government policy in principle only, with no commitment to putting it into practice.
There are a few fiddles here. To make the coming year's budget deficit look smaller, Team Rudd has pulled $1.5 billion of grants for roads and local government into the dying weeks of 2009-10, exaggerating the improvement in next year's budget balance.
It has ripped more than $1 billion out of the forward estimates for foreign aid. While it is still committed to lifting Australia's development programs to 0.5 per cent of our national income by 2015-16, more than two-thirds of the work has been left for the last four years. One may well ask whether that is another Labor promise halfway to being abandoned.
The biggest budget saving, apart from abandoning emissions trading, is $1.9 billion saved by slashing payments under the Pharmaceutical Benefits Scheme to manufacturers.
The Government has also cut $840 million from its future superannuation co-contributions for lower-income earners. Does it see the scheme now as a bit of rort for the families of the well-off?
But that's all the bad news for ordinary folk. What about the good news?
Well, that's the problem. There's really not much positive news to take out of this budget, apart from the fact that, in an election year, it is a very restrained document that sets Australia up to be back in the black by 2012-13. That is its real achievement.
The budget completes the government's response to the Henry review by introducing a 50 per cent discount on up to $1000 of interest income from bank savings, and by allowing ordinary taxpayers to opt for a standard $1000 tax deduction for work-related expenses without having to fill out all the details.
Given that the average work-related expenses are about $2000 per taxpayer claiming them, that offers a good deal for people who make small claims, while leaving those with bigger expenses to keep filling out the forms.
The savings tax break is a good first step towards Ken Henry's goal of levelling the playing field for taxation of savings, but it is just the first step. A discount rate of 50 per cent, applied to investment income and losses alike, would go a long way to improve the taxation system.
By halving the tax break for negative gearing, it would also greatly improve the Australian housing market, incentives for productive investment, and the prospect of younger and less wealthy Australians being able to own their own home.
In ruling out reform, Labor has failed hundreds of thousands of people who voted for it.
The best thing about this budget is its restraint.
By refraining from tax cuts or new spending, Labor has allowed fiscal policy to play its part in getting policy settings back to normal. That will relieve the pressure on interest rates, and maybe our overexcited Reserve Bank now will also settle for a bit of welcome restraint.
Federal Budget 2010: What's in it for you - FEDERAL Treasurer Wayne Swan has rejected suggestions that his Budget is based on "quicksand" and "heroic assumptions".
May 12, 2010
The Opposition today accused the Government of bringing out a Budget that made no provision for any financial instability that might flow from the debt crisis in Europe and assumed a return to surplus in three years on the back of the assumption that Australia would have its best terms of trade in 60 years.
"It's a budget based on quicksand," treasury spokesman Joe Hockey told ABC Radio on Wednesday.
But despite Europe's financial troubles, this year's Federal Budget will offer some relief to everyday Australians.
The Budget is promising more cash in your savings accounts, simplified tax returns and a little bit more in your take-home pay.
Although heavily layered with pre-announced changes and producing little in the way of surprises, last night's Budget revealed long-awaited changes to the way millions of Australians do their tax returns, more money for hospitals and incentives to keep cash in savings accounts.
The Budget also returns the nation's coffers back to surplus three years earlier than first thought, although the $16 billion turnaround is reliant on the successful passage of the controversial super-profits mining tax.
Those are the key changes for Australian taxpayers, one which Treasurer Wayne Swan said formed a "solid buffer against the troubles of Europe".
But Mr Hockey said the Budget had no provision at all for Greece or the impact that instability in Europe might have on the rest of the global economy.
The Budget was based on higher taxes and "heroic assumptions and huge contradictions".
"For example there's an assumption that a $9 billion-a-year tax on mining profits will not flow through to everyday households," Mr Hockey said.
He dismissed as "not real" the budget's forecast of a $1 billion surplus by 2012/13 saying there had been cost blowouts in government spending including border security.
"It's a wish, a hope and a prayer."
Prime Minister Kevin Rudd today denied the Budget is based on overly-optimistic economic assumptions, saying he's sure Treasury officials have done their homework.
"The treasury boffins analyse these things very carefully," he told Channel 7 today.
He again defended the resources super profits tax, which he says will boost the mining activity by 5.5 per cent, dismissing the industry's vocal opposition as "standard negotiation".
Here is how the Budget changes affect you.
Say goodbye to that shoebox of receipts
The Budget revealed changes to the way millions of Australians do their tax returns.
Rather than collecting receipts throughout the financial year to claim money back on workplace expenses, from July 2012 workers will be able to claim $500 in a standard deduction, increasing to $1000 from July 1, 2013.
In what Mr Swan called "the tick and flick", it is expected more than six million Australians will benefit by getting more back in the their tax refund without having to fork out fees for an accountant or tax agent to do it.
These changes will be available on an "opt-in" basis, so workers can still claim expenses above the standard deduction.
The Treasurer was widely tipped to reveal the changes in last week's response to the Henry tax review. The main idea behind the change is that it will curb the country's reliance on tax agents when it comes to filling out a tax return.
Pay less tax on your savings
Millions of Australians' savings accounts will receive a boost thanks to a new 50 per cent tax discount on interest.
At the moment, any interest earned from a savings account is taxed at your marginal rate. Say if you put $50 pay a week into your online savings account, when tax time rolls around you have to declare how much interest you earned.
From July 1, 2011, you will only pay tax on half of the total interest earned on those savings. For example, if your savings account generates $1000 in interest, you will now only have to pay tax on $500 of that, giving you an extra $177 a year in your pocket.
The Government hopes the change will boost the nation's saving habit and increase competition in the savings and term deposit market. The discount is tipped to benefit more than 5.7 million people in the next financial year, the majority of whom earn under $80,000 a year.
Unpopular first home savings accounts made more flexible
The Government's first home saver accounts, rolled out in Labor's first Budget in 2008, haven't been popular because of restrictions on withdrawals and lengthy time rules.
To apply for the tax break at the moment, savers are required to keep their money in an first home saver account for four financial years before they can use those savings to buy a home.
The first $5000 saved in the account gets a 17 per cent contribution from the Government. In a bid to improve the take-up of these accounts, last night's changes allow money from the accounts to put towards a mortgage on a house bought during the four-year savings period.
At the moment, if the account holder buys a home during four-year period, the balance of their first home saver account can't be put towards the mortgage and has to be rolled into superannuation.
The changes will affect savers who buy houses after the proposed legislation is passed.
Tax cuts - final wave comes into effect
In Labor's first Budget back in 2008, Wayne Swan announced a $47 billion tax cut package. This year the third wave of that package comes into effect, meaning a bit more in your take-home pay from July 1 this year.
Compared with tax paid in 2007-08, by July 1 this year a worker earning $50,000 will have received a tax cut of around 18 per cent, according to Government figures. So come July 1 it equates to an extra $9 a week for a worker earning $50,000.
Economic health at a glance
Wayne Swan has used the Budget as an opportunity to trumpet the country's economic health as having "outperformed every other advanced country".
The Government will return the nation's books to positive territory sooner than expected, with a return to surplus in 2012-13, three years earlier than first projected.
The Budget deficit of $40.8 billion for 2010-11 is $16.3 billion less than expected one year ago, a stunning turnaround from last year's dire projections.
It's worth noting however that these projections are reliant on the successful implementation of the controversial Resource Super Profits tax, which will take 40 per cent of mining company profits. If the tax isn't introduced, or if the tax badly impacts the mining industry, the country's coffers will remain in the red for much longer.
Spending to boost skills, jobs
In his Budget speech, Mr Swan boasted of creating 225,000 jobs during the past year while other economies were "shedding hundreds of thousands of jobs".
In an effort to offset the emerging skills shortfall and deal with persistently high youth unemployment, the Government will spend $661 million to provide up to 70,000 new training and places and support about 22,500 new apprentices.
Health and hospitals get more cash
In what forms the centrepiece of new spending leading into this year's Federal election, the Government announced a raft of new cash to boost the number of hospital beds, modernise hospitals and implement an online health record for every Australian.
More than $2.2 billion in new money will be spent over the next four years on the National Health and Hospitals Network, which was brought in earlier this year when the Government wrangled with the states over who controls the nation's hospitals.
Nurses are among the winners in the new spending, receiving more than $500 million over the next four years in training and support, plus an extra 300 nurse scholarships and 600 training places.
This year's Budget also borrows heavily from announcements previously made in last week's Henry Tax Review, covering changes to the superannuation guarantee, a cut in the company tax rate to 28 per cent and a 40 per cent tax on mining profits to fund infrastructure in resource states.
Handouts will be hard to find in Budget - LESS tax on individuals' savings may be one of the few highlights in a tough Budget with an eye on the election.
May 10, 2010
LESS tax on individuals' savings may be one of the few highlights in a tough Budget with an eye on the election.
The recession has left many companies and investors with huge accumulated losses, which will affect the flow of revenue to the Government for some time.
Finance Minister Lindsay Tanner has warned the Federal Budget will be a tough one, with little in the way of electoral giveaways.
The outlook for the Australian economy has improved, but the crisis has left a big hole in the Budget.
Tanner says the primary focus for the Government is returning the Budget to surplus and paying off debt as quickly as possible. "The task is certainly achievable, but only if we display serious discipline," he says.
Brian Richards, tax partner at BDO Kendalls, says this year's Budget will reflect the tough period the economy has travelled through.
"This year is a conundrum, and people in my industry are not expecting any significant tax changes as the reality is we are coming out of a pretty tough period when we had a lot of economic stimulus and this year we've got to pay for it," Richards (pictured) says.
"I don't see this as a 'giving Budget' because I don't think the Government has the capacity to make fundamental spending announcements, especially after COAG, and the health reform package. I just don't know where Kevin (Rudd) will get the money from.
"The Government is coming out of the economic recovery cycle and its budgetary capacity is definitely limited."
Richards expects there may be some changes made to the capital gains tax discount, where investors may have to hold an asset for more than 12 months to take advantage of the tax discount.
"I don"t think it'll have any real impact on investors. But self-managed super funds will have to make decisions on whether or not to hold or sell.
"Everyone has suffered significant losses in recent years, so CGT revenue has been damaged and while markets were depressed it had a revenue impact," he says.
"The harsh reality is, even if there is an upshoot in returns and asset values, people and businesses still have losses to offset against."
Perpetual senior manager of strategic advice Chris Balalovski says it's worth noting that the Budget is expected to be relatively bland, in that it won't contain drastic 'bad news' measures.
"We think that this may be because the Australian economy's emerged from the global economic crisis in relatively good shape and is gaining momentum," he says.
"Although this means that the deficit is likely to be lower than originally expected, we don't expect there to be tax cuts for individuals or other taxpayers this time around, and perhaps not for the next several years.
"Don't forget that this is an election year, and the Government will also be very reluctant to take a risk and make unpopular announcements."
Balalovski says there are also strong suggestions the Government will deliver good news for individuals who earn interest.
"In particular, interest earned on savings may be taxed at concessional rates, rather than the marginal rates that apply to all of the other income of the individual, in an attempt to encourage greater savings," he says.
Given there have been many changes to superannuation rules in the past few days and years, along with confusion and complaints, it's expected the superannuation system will be left largely untouched, he says.
Treasury boss Ken Henry wanted to see the tax on super contributions abolished.
He also recommended the rate of tax on super fund earnings be halved to 7.5 per cent and that the Government should consider offering an immediate lifetime annuity.
Balalovski says there has been great concern about the extraordinarily high taxes, of up to 93 per cent in total, which apply when individuals exceed the caps on the amounts that can be contributed to superannuation.
"Many are optimistic that the Budget presents the Government with a prime opportunity to do something about it (high taxes), but questions remain about the extent of the measures and whether they would apply retrospectively as well as prospectively," he says.
Money can't buy happiness, says Fed chief Ben Bernanke - MONEY can't buy you happiness, and you'd think the chairman of the US Federal Reserve would know.
May 10, 2010
"We all know that getting a better-paying job is one of the main reasons to go to college. . . . But if you are ever tempted to go into a field or take a job only because the pay is high and for no other reason, be careful!," Ben Bernanke told University of South Carolina graduates this weekend.
"Having a larger income is exciting at first but as you get used to your new standard of living, and as you associate with other people in your new income bracket, the thrill quickly wears off."
Studies found that just six months after winning a large lottery prize people reported being not much happier than before, Mr Bernanke said.
His advice blended what economics and social science have to say about personal happiness.
Other findings include:
- Happy people tend to spend time with friends and family.
- Happy people tend to do what they love for a living or a hobby.
- Happy people tend to feel in control of their lives.
But Mr Bernanke said that sometimes being unhappy was a good thing.
"It is possible that doing the ethical thing will make you feel, well, unhappy," he said. "In the long run, though, it is essential for a well-balanced and satisfying life."
House prices set to stall, say experts - REAL estate experts are bracing for the housing market to finally slow down, as the effects of the latest interest rate rise filters through to buyers.
May 10, 2010
Despite six interest rate rises in the past eight months, the demand for housing has outweighed the extra costs. Buyers have continued to push house prices up to 20 per cent higher in many cities in the past year.
However, evidence is now starting to show that a slowdown is under way.
Australia's largest real estate group Ray White, reported a sluggish March quarter with turnover up only 8 per cent compared with last year.
This is the smallest increase since the global financial crisis and the reduced activity has continued in to April, Ray White joint chairman Brian White says.
"Judging by our April results, it looks as if the interest rate increases are having an impact on activity," he says. "With the additional interest rate hike, it would be the first time that the Australian market has not shrugged off the pattern of increases in the past.
"At last, it would appear that the ambition of the Reserve Bank to slow down the residential activity has been achieved."
Independent interest rate monitor RateCity says about 27,000 households have already missed mortgage repayments and thousands more are expected to fall behind after the latest interest rate rise.
The number of securitised home loans more than 90 days in arrears has rapidly increased from 0.05 per cent in January to a current rate of 0.6 per cent, RateCity says.
However, there is still optimism out there, with a Bankwest and Mortgage and Finance Association of Australia survey finding 76 per cent of people surveyed believed house prices will continue to rise this quarter.
Buying an investment property Step 1 - Location Step 2 - Buy quality Step 3 - Gross vs net returns Step 4 - Coping with vacancies Step 5 - Triggers for failure Step 6 - Top tips
May 10, 2010
The number of property renters in Australia is rising as homes become less affordable to buy. This is good news if you own an investment property because maintaining a good occupancy rate is crucial to your investment success.
During the property boom of the 1990s, investment properties were all about capital gains; properties often jumped in value whatever you bought. That's no longer the case. Now that the boom has passed, investors need to be more selective about the properties they buy.
Step 1 - Location
For a successful investment, you must acquire the right property in the right location at the keenest possible price and with its long-term viability in mind - in both terms of good rental potential and capital growth.
Check for proximity to transport facilities, schools, shopping centres, sports and entertainment facilities and areas of future jobs growth.
The property needs to be located in a safe, clean, attractive environment and the area will have an already established high rental demand.
Step 2 - Buy quality
The quality of the property is crucial.
The building must be appropriate for the market - for example, with at least three bedrooms if located in a family rental area, or with some security if inner-city high-rise.
It should be well-built (brick and tile is desirable) and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are in good order).
If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution.
Step 3 - Gross versus net returns
You've collected your rents (the gross return or yield) and now it's time to pay out all your investment expenses.
You are then left with the net return or yield. This net return is this figure you need to capture regularly in order to understand how your investment is travelling.
While rents may not rise so quickly, sometimes the cost of the investment fluctuates and it is this you must keep a close eye on.
A quick way to calculate the net return is to determine the gross rental and then deduct 25 per cent (for outgoings such as rates, insurance, maintenance and body corporate levies). This gives you a rough idea of the net return before tax.
Step 4 - Coping with vacancies
Around 30 per cent of all Australians are renters, providing a huge pool of around 5.4 million people who are housed in or looking for rental accommodation.
Vacant properties can spell real trouble for the investor and are a security risk.
You should calculate on a loss of around 2 per cent of your gross possible returns for each vacant week.
However, a well kept, appealing property in good condition and in the right area should not be vacant for long periods.
If you are managing the property yourself and having difficulty finding tenants, you might want to approach some local property management agencies to see if they can help (for a fee, of course).
Step 5 - Triggers for failure
o The purchase price was too high.
o The property is in an area of low capital growth potential.
o The property is too high maintenance.
o The rent is too low.
o Vacancy periods are too long or too many.
o The loan taken out was structured wrongly.
o Some tax deductions are missed.
Step 6 - Top tips
Because of depreciation entitlements on properties (including the purchase price, the construction price and the land value), units generally provide higher depreciation and can often provide a better return than houses.
Revalue your properties every year, so that you can use your additional equity to negotiate a larger loan which you can reinvest in another rental property.
If you find the right property, buy it. Don't be put off by the economic cycle. Even in the worst recession, there is always a suburb growing in value and producing good rent.
Getting ready to sell A step-by-step guide to getting your house ready for sale including: deciding on a private sale or an auction; setting the price; choosing an agent; checking the title and more...
May 10, 2010
Step 1 - Private sale or auction?
This will depend on a whole lot of factors, including the state of the market, the interest or potential interest in your property, whether you are in a rush to sell and so on.
If you are unsure, get advice. The best way is to ask a number of agents in your area.
Some of the features, which may influence your decision, include:
o competitive bidding;
o sale is made once the hammer falls;
o certainty of a set date for the sale, assuming the reserve is reached;
o allows for further negotiation with unsuccessful bidders if the reserve is not reached;
o may suit properties in highly desirable areas where competition between buyers is high.
Buyers look to undertake many types of strategies when bidding for a house at auction. Don't be afraid to ask the agent how the auction will unfold. Remember, selling a house at auction is likely to make you very anxious. The auction process is fast-paced, ruthless and anxiety ridden for most people (buyer and seller).
Some of the features of a private sale, which may influence your decision, include:
o plenty of time to look at each potential buyer;
o extended period for sale;
o buyer doesn't know what the seller believes is the right price;
o no auction costs.
Step 2 - Setting a price
What will be your magic figure? There are a number of ways you can try and get a feel for your top and bottom figures:
o Follow the sale prices in your area and get a sense of how marketable your property will be.
o Visit other auctions of comparable properties.
o Ask a number of agents for an assessment (keep in mind that they can pitch it at a high price initially so that you will decide to use them).
o Get a formal valuation from a qualified valuer - this costs money!
o Make sure that your sale price covers the pay-out of your mortgage and any other costs - agent fees, legal fees, etc.
When it comes to the crunch, despite the advice you take, it's up to you to decide what price (or auction reserve) will apply to your property.
In general the price is determined by a combination of:
o location;
o size of property;
o the age of the premises;
o state of the premises;
o the style;
o interest rates;
o property availability;
o buyer demand
Most potential sellers study the local market and auction results to get an idea of a suitable price. These are available in the newspapers.
Of course an estate agent will be prepared to offer guidance, with no obligation to engage the agent. You can also seek other views. It is also possible to employ a registered valuer, but this attracts a fee.
Everyone takes out the magnifying glass and rifles through the newspaper auction results, but it is also well worth taking a tour through one or more of the many internet real estate sites.
Some have complex database information sales and median house prices. This is also often true of the State real estate institutes sites.
Some offer a "property report" for a negligible sum, some offer a free valuation by suburb, but you may have to register your details. It's not possible to determine the accuracy of the sites, you must satisfy yourself whether they are of any real assistance.
Step 3 - What's included in the price?
Many buyers take it for granted that everything they see in the property will be included in your sale. This is not necessarily true. It is up to you to decide what will be specifically excluded in the contract.
Buyers will usually assume (but it is subject to the contract) that an attachment like a burglar alarm or curtains is part of the property and be included in the sale price.
The contrary is also usually true, so if it's not attached it is more likely not to be included.
In that case you will want to ensure that the item is specifically included or excluded in the contract as part of the sale. If there is any doubt about an item, attached or not, make it certain.
Make sure you have considered the:
o curtains;
o blinds;
o burglar alarm;
o washing machine, refrigerator and other white goods;
o light fittings;
o television aerial;
o awnings;
o clothes line;
o above ground pool and equipment etc.
Step 4 - Getting legal advice
At some stage you will need to decide who will do your conveyancing.
It's well worthwhile making this decision early as there are a number of preliminary services you could ask for that can make this entire process easier and possibly cheaper.
For example:
o Advice about the authority you will be asked to sign by the agent. This may result in negotiating terms with the agent that could save you down the track.
o Advice about what is needed to prepare a draft contract, ie, the warranties and disclosure documents that must be provided.
o Advice about potential problems if you have done work to the property, e.g. renovations.
o Checking with your bank about any early repayment fees.
Step 5 - Who does the selling?
Once you decide to sell your house, you need to decide who will do the selling.
You can do it yourself, but this may not be time effective. You will need to allow for preparing advertisements, placing these in newspapers, organising a billboard, showing interested buyers through the house and preparing initial documents.
There are a number of factors you should consider when choosing an agent: What is their track record in your area? What is the advertising strategy; have they had any properties in the special classified sections of the newspapers?; What are their advertising costs?.
If you are selling by auction - see what their auctioneers are like - go to some auctions and check out their style.
Will they negotiate fees? What other conditions will they negotiate? What's your "impression" would you buy a property from this person? Do they understand your property and your needs? Are they subject to a professional Code of Ethics and in what way is the agent accountable for the conduct?
Remember you can appoint more than one agent.
Step 6 - Using an agent
If you decide to use an agent, you will be asked to sign a contract/authority. The types of contract/authority are different in each State/Territory.
Keep in mind that these agreements may not be drafted in your favour. Make sure you read the documents and if you don't understand them, get legal advice.
Agents' fees are not regulated by any law - so feel free to negotiate.
Make sure you ask about advertising costs. The agent may get a discount for news classifieds and you may be able to negotiate to have this discount passed onto you (in some States an agent is not allowed to keep an advertising rebate).
Be careful to ensure you understand what you are getting for your fee.
For example, does it include advertising costs, or some aspect of the advertising? What about other types of promotion? Does it include open house inspections?
Remember, if you don't know what is included in the fee you may not be in a position to determine what is the best service and commensurate fee. In other words, ensure that you are comparing "apples with apples".
Step 7 - What's in the agency agreement?
Depending on your local laws, the agency agreement may include: the agent's authority to act for you and its scope eg can the agent exchange a sale contract on your behalf?; what types of services you will receive from the agent; the sums of fees or commission you agree to pay - remember your right to negotiate; the timing and rights of the agent to receive payments of fees and commissions; when payment can be received eg can the agent deduct their commission from the deposit money paid by the buyer?; an estimated selling price or price range.
Generally the agreement will be for a fixed term, or if not, will tell you how it can be terminated.
In general there are several ways you can engage an agent - make sure you understand which is relevant to your agreement, and whether it reflects what you want:
o "Exclusive agreement" - one agent has the right to offer the property for sale.
o "Sole agreement" - this may permit you to find a buyer on your own, as well as the agent.
o "General listing" (Open agency agreement) - you may list the property with a number of agencies and pay the commission to the one who finds a buyer.<
o "Multiple listing" - generally where an agent is part of a network of agents who work together.
You have a different type of relationship with the agent than does the buyer - remember, the agent works for you! The agent must act in your best interests.
Step 8 - Overquoting
Be aware that in some states it is illegal for the agent to "overquote" to you the potential price of the property in an effort to get your business. Check with your agent the basis for their quote, and what laws they must observe in making the quote.
Step 9 - Checking the title
It is your duty to give "good title" at the time the property is sold.
This means:
o that you must see that there is nothing preventing the buyer's purchase of the property; and
o that the buyer has all the documents necessary to be registered as the owner.
The title will list any person who has an interest in the property. For instance, it will name the registered mortgagee (usually a bank or similar).
It will also list any caveats - a caveat is an alert that someone else claims a financial interest in the property. Neither of these things mean the property cannot be sold, but they (especially a caveat) will need to be discharged before or at settlement.
Make sure you have either the original title or a copy of the title before you get the ball rolling. The title is the starting point for the Vendors' Statement.
Get a good rental deal Step 1 - Set your budget Step 2 - Consider the location Step 3 - Make a checklist Step 4 - Be prepared at viewings Step 5 - Know your rights Step 6 - Inspect the property
May 10, 2010
YOU need to be well prepared when you set out on your property search.
Remember, that the competition to secure the rental property of your choice might be stiff, some areas are more popular than other and there may be no second chance for a first impression.
So be organised before you even begin your search. Here are some tips to help you find and lock onto the property of your choice:
Step 1 - Set your budget
Make sure you are very clear about how much you can afford to pay. Your rent shouldn't consume more than one third of your weekly income - if you earn $900 a week, your rent should not be higher than $300 per week.
Step 2 - Consider the location
How much can you save on travel costs if you live close to work?
Do you want to be within walking or cycling distance of shops, the beach, nightclubs, your friends? Not having a car with save you money that can go towards your rent.
Step 3 - Make a checklist
o What size property do you need?
o Will you share with others or do you need privacy?
o Do you want gas heating?
o Does it have a large off-peak hot water system ?
o Do you need a garage?
o Are there smoke detectors?
o Is there a laundry with washer and dryer (or space for them)
o Check security devices such as locks or bars on windows and doors
oIs there a phone line and high speed internet connection
o Are there sufficient power points in each room and working light fittings.
Step 4 - Be prepared at viewings
Have your supporting reference documents prepared before you view a property. These documents include: your driver's license or passport, copies of your latest pay slips and bank statement, a letter of recommendation from your employer, references from previous landlords or property agents and rent receipts, electricity or phone accounts in your name from previous addresses, character references.
Be on time to meet the property agent. Be well groomed to make a good impression. If you plan to share the property with friends or family, make sure they visit the property with you.
Be prepared to make a quick decision about a property and fill in an application on the spot.
Always be honest on your application form. Be persistent and keep in regular contact with the agent to find out how your application is progressing.
Step 5 - Know your rights
If your application is accepted, do not sign anything until you have checked the Tenancy Agreement contract.
Make sure you understand all its terms and conditions, especially about what costs might be incurred if you break your agreement early.
Visit the Office of Fair Trading website in your State to download information on Tenant's Rights and Bonds. You will generally have to pay your rent in advance and provide a bond of around 4 week's rent.
This will be lodged with the Rental Bonds office in your state and will be refunded when you leave unless there is damage to the property or monies outstanding.
Step 6 - Inspect the property
Before you move into the property, do an entry inspection with your landlord. Take a camera with you on this inspection. Keep a copy of these photos and the completed Inventory and Condition Report to check against on your departure.
Keep a record of any conversations you have with your real estate property management agent - dates and a brief outline of what was discussed. This can help in any future dispute or misunderstanding.
Market turmoil sparks rates cut talk - Credit markets are starting to contemplate the possibility of an interest rate cut by the Reserve Bank next month, amid rising fears of European debt market contagion.
May 07, 2010
While most bets are still on rising rates, this is the first time investors have looked for lower rates since August 2009, when the economy was still feeling the effects of the global financial crisis.
Credit Suisse data shows a 19 per cent chance of a rate cut when the RBA meets again next month. At the same time, most investors still expect interest rates to rise to 4.75 per cent over the next 12 months.
The change in sentiment comes after contagion fears in the wake of the Greek sovereign debt crisis escalated overnight, walloping global markets another time.
On Wall Street, stocks tumbled more than 3 per cent, leading to slumping share prices at the start of trade in Australia. For the week, the benchmark S&P/ASX200 index is down 7.5 per cent.
Macquarie interest rate strategist Rory Robertson is not predicting a rate cut yet, but he expects the Reserve Bank to keep rates unchanged for longer because of the turmoil.
"Now, with Europe moving towards chaos, global equity markets getting belted savagely, foreign exchange markets in uproar, local retail spending stalled and so too Chinese industrial production, at least for now, the RBA almost certainly will be on hold for the next few months at least, and perhaps for much longer," Mr Robertson said.
The switch in sentiment comes the same week the Reserve Bank lifted the official cash rate by 0.25 percentage points to 4.5 per cent, the sixth such rise since October, amid a strengthening local economy and expectations of rising terms of trade.
"Global financial markets are functioning much better than they were a year ago," the RBA said in making its decision on Tuesday.
"But sovereign risk concerns have escalated significantly in Europe over recent weeks.
"To date, there has been very little contagion outside Europe."
Westpac economist Matthew Hassan said a crisis had a tendency to take on a life of its own.
"That seems to be what is happening in Europe at the moment," he said.
"It's not just a debt issue. It has now potentially become a liquidity issue in markets more generally, with a spike in risk aversion," he said. "So when you're in the midst of it, you don't rule out any response."
Globally, interest rates in most of the advanced economies remain low, with central banks hesitant to raise them amid mixed signs of economic recovery.
However, Iceland's central bank cut its interest rate this week by 50 percentage points to 8.5 per cent, citing an appreciation in the local currency against the euro.
In the euro zone, official rates are at 1 per cent. In the United States the fed funds rate is 0.25 per cent.
Australia, by comparison, has one of the highest official interest rates in the world.
Practicable is what ATO preaches.Home buyers should move in after the purchase without delay to avoid incurring capital gains tax.The Australian Taxation Office is applying a strict interpretation to the rules that cover exemptions from capital gains tax
May 07, 2010
Watch out if you buy another house and are delayed before moving in. The Australian Taxation Office is applying a strict interpretation to the rules that cover exemptions from capital gains tax for the principal residence.
As everyone knows, the principal place of residence is exempt from capital gains tax on the sale of the house.
But, in many cases, home buyers rent out their properties before moving in - because of work commitments, retirement planning or financial need.
If the house is rented out, the exemption will not apply during rental periods. To qualify for the full exemption, the law says the taxpayer must take up residence as soon as practicable after purchase. That phrase, "as soon as practicable", has led to disputes between home owners and the Tax Office.
The director of taxation at chartered accountancy GMK Centric, Chris Wookey, says there has been plenty of confusion because the term "as soon as practicable" is open to interpretation.
A case heard by the Administrative Appeals Tribunal highlights a confusing and contentious part of the rules.
Lee Caller graduated from the New South Wales Police Academy in May 2001 and was stationed at Walgett in western NSW on a three-year posting. In December that year, Caller and his wife, Rachel, paid $105,000 for a house in Wauchope, in the state's north. Their plan was to move to Wauchope after the Walgett posting. They let the house out until they were able to move into it, in April 2004.
The Callers sold their Wauchope residence in September 2006 for $232,000. They did not report any of their capital gain in their tax returns for the year ending June 2007. In October the following year, the ATO issued notices of amended assessment to the Callers, including a taxable gain of $14,616 each.
The section of the Tax Act dealing with the exemption from CGT for the principal place of residence says a capital gain "is disregarded" if a dwelling was the main residence throughout the ownership period and if a dwelling becomes "your main residence by the time it was first practicable for you to move into it after you acquired your ownership interest in it".
What the Callers argued before the Administrative Appeals Tribunal was that April 2004 was the "first practicable" time they could have moved into the house because Lee had been stationed at Walgett until that time. They argued that they should receive a full exemption from CGT on the sale of the property. The AAT rejected their argument.
This line of argument has been pursued by other taxpayers in the AAT but none has been successful.
In a 2008 case, a home buyer agreed to a request by the sellers of the property that they be allowed to stay in the property and pay rent for six months while their new home was being built. In the end, the lease period was for two years. The taxpayer argued that the house should have been treated as his main residence for the two-year period because it was his intention to live in the house.
The taxpayer lost the case and the AAT ruled that "mere intention to occupy a dwelling as a principal residence, but without actually doing so, is insufficient to obtain the exemption".
In a 2006 case, a couple bought a unit in Adelaide but could not live in it until one of the partners had finished a job posting in another city. They let the property for years. The taxpayers lost this case, with the AAT ruling that moving into a dwelling "at the time it was first practicable" should not be read as "the time it was first convenient".
Wookey says he can see similar disputes arising: "People might be approaching their retirement. They find a place to buy for their retirement but they might want to wait a year or two before moving in. If they sell the house some years down the track, they might have completely forgotten that they are affected by the partial-exemption rules."
In the Callers' case, the deputy president of the AAT, Julian Block, said: "It may be that section 118 of the Tax Act could have been worded rather more precisely but it is clear that a period when the property is let out and during which rental is being derived cannot qualify [for the exemption]."
The ATO calculated the Callers' cost base on their Wauchope property was $115,205 - the $105,000 purchase price plus $4813 of stamp duty, $4932 of renovations and $460 of legal fees on the sale.
Subtracting $115,205 from the sale price of $232,000, the ATO came up with a capital gain of $116,795. It applied the CGT discount of 50 per cent and applied a partial exemption for the number of days the Callers had lived in the house. The CGT bill for each was $14,616.
Key points
Ongoing confusion about when capital gains tax (CGT) exemption applies on the principal residence.
Full exemption from CGT not allowed if home is rented without good reason.
Illness and injury appear to be the only reasonable causes for delay in taking up the new residence as soon as "practicable".
Central bank to keep rates on hold despite growth forecasts - THE central bank will keep interest rates on hold next month as it assesses global conditions, despite lifting its forecasts for inflation and economic growth, economists say
May 07, 2010
Economists say the Reserve Bank of Australia is likely to take at least a month to examine the effects of lifting the cash rate six times in the past eight months.
In its quarterly statement on monetary policy, released today, the central bank said gross domestic product (GDP) is expected grow by 3.75 per cent in the year to June 2011, up from the 3.5 per cent predicted in February.
Annual GDP growth is expected to remain at that pace until December 2012, when the bank forecasts it to touch four per cent.
The Bank also upwardly revised its inflation forecasts, with the headline consume price index (CPI) predicted to grow at 3.25 per cent in the year to June 2010, up from its previous forecast of three per cent.
The release comes after remarks on the Greek crisis by the head of the European Central Bank failed to reassure anxious investors.
National Australia Bank senior economist David deGaris noted the RBA has inflation at the "top end" of the two to three per cent band by 2012.
"(That) would suggest that the interest rate assumption that they've used to prepare those forecasts, broadly based on market expectations at the time of the statement, would probably not be durable in a policy sense," Mr deGaris said.
"In other words, the Reserve Bank probably would be not comfortable with the forecast it has with inflation running at the top end of the band, with growth accelerating towards that time period as well.
"Obviously under that sort of scenario they would be taking further action to bring inflation back down below that trend by 2012."
But he said with fears of contagion in Europe the global risks were moving on a "24 hour basis".
"So I think, having done a lot so far the Reserve Bank will sit on their hands at least for another month or so and see how this Greek situation develops."
If the situation develops it could take the edge off growth in Europe and have wider global ramifications.
"Like everyone, I think they'll be watching to see how it develops, but for the time being the central case is one of pretty strong growth overall for the economy for the next few years.
"There will be more rate hikes ahead, but the next batch are probably going to be delayed somewhat."
Nomura Australia chief economist Stephen Roberts said the RBA's upwardly revised inflation forecasts suggest that in time, Australia will face an inflation problem.
But he said the RBA is giving itself a few months before it will use its interest rate mechanism to deal with it.
"They have got some time to play with," he said,
"They will have to react to that higher inflation in 2012, but they're giving themselves a few months by the looks of it before they really start moving on that."
Mr Roberts said the central bank will also be keeping an eye on Europe's emerging debt crisis before making further decision on the direction of the cash rate.
In the statement, the RBA acknowledged that Europe's fiscal problems could threaten global economic growth.
"It is also possible that the fiscal problems in Europe could intensify, prompting a retreat from risk taking by investors and a sharp slowing in the world economy," the statement said.
The bank went on to say that, to date, the crisis has been largely confined to Europe.
But Mr Roberts said the inclusion of the former paragraph was an indication of new thinking at the RBA.
"That part hasn't been there before, they tend to say (only) that it's isolated to Europe and is not going to have a major impact elsewhere.
"They've got interest rates up to their average, there's a need to tighten if these (inflation) forecasts come to pass.
"But they'll be watching that risk factor to global growth for the next few months."
RBA predicts faster growth, prices hikes - THE Reserve Bank forecasts the national economy to grow at a faster than expected pace over the next two years, with prices also expected to rise faster than previous estimates.
May 07, 2010
The bank says the reduced fiscal stimulus, a possible surge in commodity prices and a construction boom could accelerate growth and inflation at an even faster than predicted pace.
In its quarterly statement on monetary policy, released today, the central bank said gross domestic product (GDP) is expected grow by 3.75 per cent in the year to June 2011, up from the 3.5 per cent predicted in February.
Annual GDP growth is expected to remain at that pace until December 2012, when the bank forecasts it to touch four per cent.
The Bank also upwardly revised its inflation forecasts, with the headline consume price index (CPI) predicted to grow at 3.25 per cent in the year to June 2010, up from its previous forecast of three per cent.
Inflation is then expected to moderate in the year to December 2010 and touch three per cent, but that forecast is above the Bank's previous estimate of 2.5 per cent.
"Overall, this forecast represents an upward revision since February, reflecting stronger than expected outcome for underlying inflation in the March quarter (of 2010), the higher terms of trade and the upwardly revised outlook for domestic activity," the bank said.
The RBA's stated mission is to keep inflation in a target band of two to three per cent on average over time.
But the RBA also said there are risks to its forecasts, with the statement spelling out a series of scenarios that could push up prices, as well as economic growth, in 2011.
On the domestic front, fading fiscal stimulus measures, like the first home buyers boost, could have a larger effect on demand than had been previously expected.
The bank also said mining companies could try to push ahead with planned projects more rapidly than expected, while non-residential construction might also exceed expectations.
"If this were to occur, capacity restraints, particularly in the construction sector, would likely emerge and wages would accelerate more quickly than currently expected," the statement said.
"Growth in household consumption would be stronger and there would be further increases on house prices.
"Overall, this scenario would result in growth and inflation both being higher than expected.''
The bank also said the federal government's recent hike of tobacco excise could push the CPI up higher than underlying inflation in the near term before it moderates ``further out''.
Internationally, there is risk of rising inflation is Asia.
That could prompt a tightening of financial policies across the region, including China, which could result in slowing economic activity and weaker demand for Australian produced steel and energy commodities, the statement said.
But the current estimated growth could also mean more pain for borrowers, with the forecasts factoring in more interest rate rises over the period to December 2012.
The Bank said its forecasts are based on the technical assumption of further interest rate rises, with the assumed path broadly in line with market expectations.
In the statement the Bank stressed that the assumption was technical and does not represent a commitment by the central bank's board to any particular path of policy.
The RBA has taken the cash rate higher six times since October 2009.
At its most recent meeting on Tuesday, the board decided to lift the cash rate to 4.5 per cent from 4.25 per cent.
The March quarter GDP figures are due from the Australian Bureau of Statistics on June 2, however the RBA statement only makes predictions on a half yearly basis.
The national economy grew by 2.7 per cent in the year to December 2009, recent official data showed.
Avoid rate-rise demise - Make sure you can cope when your debt repayments jump. Interest rates aren't going anywhere but up. And potentially fast.
May 06, 2010
How do we know?
The rapidly rising 10-year yield curve, which shows where rates are headed longer term, forecasts it. Strengthening job figures (up 8 per cent annually) coupled with booming property prices (more than 10 per cent higher in a year) argue for it. Surging commodity prices further cement it. And the currency investors who have pushed the Aussie to a five-month high against the greenback are betting on it.
Oh and the Reserve Bank has told us it's going to happen. Repeatedly.
As recently as last week, when the minutes of this month's RBA meeting were released, it could barely have been made more clear that inflationary pressures created by the above mean only one thing: we'll soon all be paying more on our debt.
So is your solvency at risk? The following mortgage safety check will tell you. Those who feel compelled to jump on the property ladder today take special note.
Do your borrowings cost less than one third of your pretax income to repay? This used to be where banks drew the line on lending but profiteering, pre-credit crunch, saw it blow right out. While they have tightened their criteria somewhat, it's up to you to ensure you're not in too deep.
Could you cope with 2 percentage points of rate rises? It's all well and good, based on current rates, to curb your borrowings but what about future rises? A new Fujitsu Australia/JPMorgan report warns people who recently entered the market could see half their salaries go on interest alone if rates return to pre-crisis levels. On a loan of $300,000, each rise equates to almost $50 a month - so two full points would cost an extra $400.
Does your loan stand at less than 80 per cent of your property's value? This provides a buffer if prices fall but, more relevantly, gives greater scope to cut your repayments by refinancing or reamortising. The former usually happens when you change lenders (more of that in a moment) but you can do the latter with your existing lender. It simply entails taking out a new loan and spreading repayments over a fresh 25 years. The more equity, the lower these will be.
Could you fight back against bad banks? If yours proves either uncompetitive (the interest rate differential between the best and worst loan is typically 1.4 percentage points or $3000 a year on $300,000) or unconscionable (say, using the crunch to hike rates willy nilly), know your exit options.
Deferred establishment fees can apply for up to the first five years and run to 3 per cent of the initial loan. What would it cost to leave and is it worth it? See page six of this section for today's best buys. For further tips on what's available outside the big four banks, see the latest issue of AFR Smart Investor .
Are you covered if things go wrong personally? Redundancy insurance is, unsurprisingly, a thing of the past so it's vital to have an emergency fund or mortgage overpayments (preferably housed in an offset account guaranteed to be accessible) of at least three months' salary.
You can, however, insure against accident or illness via tax-deductible income protection insurance. Opting for a waiting period commensurate with your ready cash can cut the cost.
If you answered yes to all five questions above, you are about as far from harm's way as you can be. There will be no rate-rise demise for you.
If not, however, you need to get yourself out of danger. And fast.
Big surge in number of new homes approved - At last there is good news for Sydney home buyers. Council approvals for new houses and apartments jumped to a six-year high in March with a seasonally-adjusted 3814 new dwellings given a tick
May 06, 2010
In what seems to be a delayed response to government stimulus and a sign that credit is easing, more than half the new dwellings were units or flats, a sector that has been in the doldrums since the global financial crisis.
Sydney is the centre of the resurgence with 1834 new homes approved in March, 1077 of them in high-rise apartments or flats.
Nationally March saw the biggest activity since October 2003, with a seasonally adjusted 16,597 new homes approved. Of those, 6200 were new flats.
''Reports of the demise of dwelling construction would seem to have been exaggerated,'' a Westpac economist, Matthew Hassan, said. ''However there's a chance the bulk of this rise is a one-off rather than a renewed leg-up.''
Mr Hassan said the jump was almost entirely driven by units, ''a notoriously volatile segment''.
''As such, the March rise might be followed by a fall in April, although credit data suggests underlying trends may be improving,'' he said.
An ANZ property economist, Ange Montalti, said the resilience of approvals in the face of successive rate rises showed builders were reacting to fundamentals. ''There is a housing shortage,'' he said. ''The population is growing strongly.
''The strong momentum in prices this past year will have given builders confidence that apartment developments can generate required rates of return.''
The NSW Treasurer, Eric Roozendaal, welcomed the jump, saying it showed the state ''leading the nation in the growth of residential building approvals, another sign the green shoots of recovery are growing in NSW''.
Aaron Gadiel, chief executive of the developer lobby group Urban Taskforce, said it was great NSW was ''getting away from the abysmal numbers of 2009, but the state still has a long way to go''.
A Housing Industry Association economist, Ben Phillips, forecast even stronger construction, notwithstanding the end of the first home buyer boost.
''Housing starts should be up 18 per cent this year on a very weak 2009. There's a shortfall of about 200,000 houses,'' he said.
The apparent resurgence in home building will be both welcomed and treated warily by the Reserve Bank.
On one hand more homes will reduce pressure on house prices and rents, weakening inflation.
The bank's governor, Glenn Stevens, told a business audience last year he would regard what happened to housing as a measure of his success, saying ''if all we end up with is higher prices and not many more dwellings it will be very disappointing, indeed quite disturbing''.
On the other hand rapid construction will drive up demand for materials and workers at a time when the economy is set to boom.
The Reserve Bank on Tuesday lifted its forecast for inflation to the upper end of its target band, indicating that what happened to inflation would guide its future decisions about interest rates.
State leads housing boom, confidence up -THE housing cavalry is riding to the rescue of Victoria. March saw another month of near-record housing approvals in the state
May 06, 2010
The Bureau of Statistics says 5288 new houses, flats and units were approved in March after seasonal adjustment, the second highest tally in 27 years of records. For the March quarter, 14,697 houses were approved, just short of the record set in the December quarter.
Together, the figures for the six months suggest that Victoria is on track to build almost 60,000 houses. The December quarter saw building start on a record 14,066 houses. If that is sustained, the housing shortfall will finally start to shrink.
That will at least slow the rapid growth in rental costs if not stop it. Depending on what happens to demand, it could also restrain or reverse the growth in housing prices.
Nationally, March had the most activity since October 2003, with a seasonally adjusted 16,597 new houses approved. Of those, 6200 were units and apartments, 35 per cent of them in Victoria.
The state continues to dominate private sector housing, accounting for 35 per cent of all approvals in the past six months, although it has only 25 per cent of the population. But so far it has snared only 15 per cent of the federal government's rapidly-growing social housing.
Melbourne had 4120 new houses approved in March. By a statistical quirk, that was exactly the same as the combined totals of Sydney (1834), Brisbane (1383) and Adelaide (903), which between them have almost double Melbourne's population.
The city's high growth in housing supply however has failed to restrain the growth in prices. In part this is because most of the new houses are on the urban fringe, whereas demand is most intense in inner and middle suburbs. In part it is also because the growth in demand from investors has overwhelmed the market.
But comparing this boom in approvals with the previous peak just before the introduction of the GST in 1999-2000, the difference in Victoria is the growth apartment approvals.
In the six months to March, councils approved 1340 new low-rise apartments of up to three storeys, a sharp rise from just 598 in the same months a decade earlier. Much of the new social housing financed by the government is in this form, but private sector developers also appear to turning more to this form of housing.
But most apartment building is still in high towers, with 3170 new apartments approved in buildings of four storeys or more, up from 2632 in the previous boom. Victoria in the past six months has accounted for almost half the nation's new high-rise apartments.
Mines bigger than yours... you can bank on it - THE Henry review has sparked a rare contest between the two biggest sectors of Australia's sharemarket - miners and banks - over which loses the biggest share of their swelling profits to the taxman.
May 06, 2010
Both sides are carefully choosing which figures they quote, as the business debate heats up over the planned 40 per cent resource rent tax (RRT).
When asked if the banks deserved similar treatment, Westpac chief executive Gail Kelly was quick to claim the banks' tax rate was already among the biggest.
''We are already the sector that pays the highest prospective tax rate,'' she said yesterday after handing down a record $2.98 billion first-half profit.
''The Henry report makes it very clear the financial services sector has one of the highest levels of tax rates at 27 per cent. At my own company we pay 29-30 per cent in tax.'' Indeed, the Henry review says miners pay an ''effective'' tax rate of just 17 per cent.
This figure is at complete odds with remarks from BHP Billiton chief executive Marius Kloppers, who this week claimed miners footed a far bigger bill.
''Over the last nine years the resources industry has paid an average tax rate of 43 per cent compared to banks and retailers paying an average of 30 per cent,'' Mr Kloppers wrote in an internal email.
So what to make of the competing claims?
A spokeswoman for BHP said its effective rate was much higher because the 17 per cent figure failed to take account of company tax and the petroleum resource rent tax.
Instead, the mining industry says it actually paid $21 billion in tax in 2008-09 if these extra levies are taken into account - 13 per cent more than most other industries.
For this reason, Minerals Council of Australia chief Mitch Hooke said miners were already ''punching above their weight'' and suggested it was really the banks making ''super profits''.
''Under the government's definition of a super profit - which is actually the definition of an unsustainable profit in the real world - Australia's banks are making super profits,'' Mr Hooke said. ''But they have been spared the 40 per cent impost because mining is apparently an easier target.''
The chief executive of the Australian Bankers Association, Steven Munchenberg, saw things differently. He agreed with Mrs Kelly that banks paid more tax than miners, given the hefty deductions mining companies enjoyed, and quickly rejected calls for a super-profit tax on banks. ''Australia's banks are among the biggest taxpayers in Australia,'' he said. ''We paid $8 billion in tax last year, at a time when many banks around the world were actually taking money from their governments.''
Whichever figures are quoted, the bottom line appears to be that Treasury bureaucrats are unconvinced the mining sector is sharing enough of its wealth around with the resources' owners: the Australian community. Some analysts also believe the federal government may water down the tax to quell the miners' fury.
The debate comes as some market analysts played down the extent of damage of the resource rent tax.with
First Home Buyer's Grant for new houses/apartments - THOUSANDS of first home buyers will get up to $4000 and tens of thousands of businesses will get tax cuts, as the state government tries to ride the global economic recovery and create another 30,000 jo
May 05, 2010
The surprise in yesterday's state budget is a change to the first home buyers bonus, which benefits people who purchase new homes but hits those who buy existing houses.
The big-spending pre-election budget, funded by a growing tax take, booming revenue from stamp duty on homes and a further dip into debt, seeks to fix political problems for the government by injecting billions of dollars into hospitals, police and public transport.
Regional Victoria is a big winner, with a new $473 million hospital for Bendigo, the purchase of land for a hospital in Geelong's southern suburbs, and upgrades of the Coleraine, Leongatha and Healesville hospitals.
With law and order shaping as a key election issue, the budget allocates $561 million to recruit and train an extra 1700 police over the next five years.
And as the public transport system struggles to cope with Melbourne's population boom, there is $800 million to buy 50 new trams, and $84 million to ensure 20 more railway stations are staffed from first train to last, seven days a week.
Treasury has dramatically improved its forecasts for the state economy, prompting Premier John Brumby and Treasurer John Lenders to claim Victoria has emerged from the global crisis in better shape than any other state and almost any comparable economy in the world.
''We put this state on the right track to survive the crisis, and we now have the right plans in place for Victoria's future,'' Mr Lenders told Parliament.
The state economy is now expected to grow 2.25 per cent this year - up from the 0.25 per cent forecast in last year's budget - and a strong 3.25 per cent next year.
Unemployment is forecast to peak at 5.5 per cent next year - compared to the 7.75 per cent feared in last year's budget - with about 100,000 jobs created this year and 30,000 next year.
Despite the increased spending, the budget is expected to remain in surplus in each of the next four years, rising from $872 million next year to nearly $1.5 billion in 2013-14.
Although net government debt will rise from about $8.7 billion, or 2.8 per cent of the state economy, to a peak of $15.8 billion (4.3 per cent of the economy) in three years, international credit ratings agencies last night gave the budget the thumbs-up and reaffirmed Victoria's triple-A rating.
But the state opposition said Labor had been caught out having to rely on a rise in debt to ''a level not seen since the disastrous days of the Cain-Kirner government''.
Opposition Leader Ted Baillieu said that after 11 years of neglect of key services such as water, public transport and hospitals, Labor had produced a ''cynical election budget''.
''It offers Victorians one guarantee: when they wake up tomorrow, nothing will have changed and basic services will still be getting worse, not better,'' he said.
Property industry leaders welcomed the extra help for first-time buyers of new houses, but criticised the government for failing to cut stamp duty on property sales.
From July 1, first-time buyers who purchase a new house in Melbourne will get a total of $20,000 in government grants, up $2000, and those buying a new home in regional and rural Victoria will get $26,500, up $4000. But the grant for first home buyers purchasing existing homes will be cut by $2000 to $7000.
The changes are designed to ease population pressures in Melbourne by encouraging people to move to regional and rural areas, and to encourage house building rather than increase prices by boosting demand for existing properties.
Industry leaders applauded $461 million in tax cuts over the next four years, designed to ensure businesses continue to put on staff as the federal government winds back the stimulus spending.
About 31,000 businesses will benefit from a $193 million cut in payroll tax - the sixth cut in seven years - and WorkCover insurances premiums will be cut by 3.5 per cent, saving employers about $240 million.
The Victorian Employers Chamber of Commerce and Industry said business had won ''a short-odds trifecta'' - tax cuts, a boost in infrastructure spending and a strong surplus.
But the Victorian Council of Social Service said government priorities were warped: it was increasing spending on police and prisons, ''while services that would make the community stronger are less of a priority''.
Experts warn interest rate peak still to come - Economists are forecasting more and possibly bigger interest rate rises to come after Tuesday's Reserve Bank decision, although not soon.
May 05, 2010
The RBA put rates up 0.25 per cent for the sixth time in eight months, but it has signalled it is now ready to pause.
The rise will add about $48 a month to mortgage repayments on a $300,000 loan with a 25-year term, with the big four banks already moving to pass on the rise in full.
The decision was influenced by the strength of the mining boom and a higher-than-expected inflation rate and came despite the sovereign debt woes in Europe.
RBA governor Glenn Stevens says the increase puts interest rates for most borrowers back at average levels, but many believe any pause will be short-lived.
Macquarie Bank interest rate strategist Rory Robertson says the Reserve Bank declared phase one of monthly tightening.
"It's now moved six times in seven meetings and has essentially said that lending rates, including mortgage rates, are about at average levels," Mr Robertson said.
"That was basically the purpose of the significant tightening we've seen since last October.
"I think sooner or later, probably within the next few months, the Reserve Bank will marshal new arguments about why policy doesn't need to be neutral-average-normal.
"It needs to be somewhat restrictive given the extent to which the economy has bounced from last year's disasters, the extent that house prices, commodity prices, share prices have all moved up and all suggest the economy is moving forward quite nicely."
Mr Robertson says Australia already has a template for tight monetary policy after mortgage rates were pushed to 9 per cent before the global financial crisis.
"When the economy was overheating the Reserve Bank was very worried about the up-shift in inflation to a 4 or 5 per cent rate," he said.
"The Reserve Bank did put the cash rate to 7.25 per cent and it did give a green light for mortgage rates to reach 9 per cent."
And before the landscape changed due to the global financial crisis, it was contemplating pushing interest rates even higher.
Expect the RBA to pause next month at the very least, but it may just be the pause that refreshes.
Commonwealth Bank chief economist Michael Blythe says after three rate rises in a row the RBA has hinted at pausing to assess what impact those moves are having.
"What comes through very clearly in [the] commentary again is the importance of that commodity price story and the way that's going to inject a lot of income into the economy at a time when it's already running close to full capacity," Mr Blythe said.
"That means increased inflation risks and it probably means a move into restrictive policy settings as we get towards the end of this year.
"[The] policy rate will be around about 5 per cent by late 2010 and will be pushing towards 6 per cent in 2011."
Mr Blythe does not think Australia will see mortgage rates up at the 9.5 or 10 per cent levels, but he says it will be uncomfortable nonetheless.
Deja vu
The economic conditions are similar to 2007 before the global financial crisis hit, when a mining boom was boosting the terms of trade, showering the nation with income and demand and inflation were being stoked by capacity constraints and a lack of skilled labour.
"Each month's jobs report is going to give us some sort of guide as to the pressure on the Reserve Bank to do more or not," Mr Robertson said.
"To the extent the unemployment rate continues to trend down, full-time employment continues to trend up, then the Reserve Bank will have a bias to tighten further."
The statement by Mr Stevens noted that headline and underlying inflation rates are about 3 per cent, much higher than earlier expected.
And the Reserve Bank is likely to revise up its inflation forecasts when it releases its quarterly statement on monetary policy on Friday.
"I think the Reserve Bank will pause at least one meeting. They've done three in a row so I think June probably [there] will be nothing done," Mr Robertson said.
"But as early as July the Reserve Bank may have marshalled the arguments as to why policy doesn't need to just be at a neutral setting - it needs to be somewhat restrictive.
"So I think the Reserve Bank from here is one careful step at a time, but there's a clear and growing bias for rates to go substantially higher."
That is provided the China bubble does not burst and the sovereign debt woes in Europe do not spread.
Economists predict rate pause in June - THE Reserve Bank has acknowledged its inflation forecasts were too low, prompting it to lift the cash rate by 25 basis point in May, economists say.
May 05, 2010
The increase in the cash rate to 4.5 per cent, the sixth rise in eight months, comes after the release of slightly higher than expected inflation data last week.
In its monetary policy decision the RBA said the extent of decline in inflation may not be "quite as much'' as earlier forecast.
The quarter of a percentage point rise increases repayments on an average mortgage of $300,000 by $48 a month.
Economists are now forecasting the central bank will pause in June.
In its statement the RBA said recent inflation data confirmed that it had declined from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.
Citigroup director Paul Brennan said there were two things driving the cash rate up.
"One, that they want to return to neutral given that the economy has been a lot stronger and is heading back to normal growth,'' Mr Brennan said.
"Secondly the thing that's a bit more worrying is that they have had to creep up their inflation forecasts in every quarterly statement they make, so it's quite disappointing.
"They have acknowledged that their inflation forecasts are again too low and therefore rates need to be pushed up.''
The statement also said as a result of the decision the board expects rates for most borrowers will be around average levels.
"This represents a significant adjustment from the very expansionary settings reached a year ago,'' the statement said.
"The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of two to three per cent over time.''
Mr Brennan said the move back towards average levels was "consistent with the last statement''.
"That is indicative of the view that they're probably going to pause, given that they're saying there has been a big adjustment.
"That's how I'd read that.''
The interest rate rise comes a day after the central bank's index of commodity prices posted its biggest monthly increase since the measure began in July 1982.
Manufacturing, building and infrastructure sectors expanded the fastest pace since 2002.
Data released on Monday showed house prices recorded the largest annual increase since 2002.
Yesterday the Australian Bureau of Statistics house price index rose 4.8 per cent in the March quarter and 20 per cent in the year to March.
Reserve Bank increases its official cash rate to 4.5 per cent - HOMEOWNERS will pay about $50 a month more on their mortgages after the Reserve Bank hiked its cash rate for the third month in a row.
May 05, 2010
The Reserve Bank's official cash rate is now 4.5 per cent.
The 25 basis point increase adds about $50 a month to a $300,000, 25-year home loan, according to research company Canstar Cannex.
The Commonwealth Bank was first to follow the Reserve Bank, lifting its standard variable rate by 25 basis points from 7.11 per cent to 7.36 per cent.
NAB also lifted interest rates on variable home loans 25 basis points to 7.24 per cent. Westpac and ANZ also raised rates in line with the RBA.
Economists had been tipping the rate rise, with the market pricing in a 69 per cent chance that the Reserve Bank board would hike its cash rate by 25 basis points.
Rates now back at "average levels"
The Reserve Bank governor Glenn Stevens said rates were now back at "average levels".
"With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more," Mr Stevens said in his statement to accompany the rates decision.
"The Board expects that, as a result of today's decision, rates for most borrowers will be around average levels.
"This represents a significant adjustment from the very expansionary settings reached a year ago."
Mr Stevens said that the Board was not worried about Greece's debt problems and that world growth is expected to be at about trend pace this year.
"Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks," he said.
"This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe."
Inflation declines from peak - RBA
Mr Stevens also noted that inflation had declined from its peak in 2008 but would remain in the upper half of the bank's target zone.
"Recent data on inflation confirms that it has declined from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.
"In both underlying and CPI terms, inflation over the most recent 12 months was around 3 per cent.
"Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.
Reserve Bank reaches "average"
Economists are now forecasting the central bank will pause in June.
4Cast Financial Markets economist Michael Turner said he did not expect the bank to lift the cash rate again until August or September this year.
"They're going to have a look and see how things go this year," he said.
"They wanted to get rates back to average and they've done that."
Consolidating debt could save a bundle but there are risks - FOR borrowers struggling with a range of debts such as credit cards, personal loans, car loans and store cards, consolidating them into a mortgage could save a fortune.
May 04, 2010
With interest rates on store cards as high as 30 per cent, credit cards at 15-20 per cent and personal loans averaging about 10 per cent, it seems obvious that refinancing these debts on to a mortgage rate of, say, 7 per cent, can save you a considerable amount of money.
And there's never been a more important time to do it, with interest rates on the rise and forecast to keep rising for another year or more.
Even Reserve Bank Governor Glenn Stevens says we are entering an age in which "some households would seek to contain and consolidate their debt'' instead of continuing to borrow, as interest rate rises begin to bite.
Recent data shows he is right.
Credit information agency Veda Advantage's latest Galaxy survey shows 64 per cent of people plan to reduce credit card debt in the coming six months, with almost half planning to pay the full amount.
"Households are becoming more conservative,'' Veda Advantage head of external relations Chris Gration says.
"Demand for all types of credit is falling as people take a more prudent view of their financial situation.''
However, Veda's statistics also uncovered 19 per cent of people are "severely stressed'', by which they mean they are struggling to make their next debt repayment, or "don't know how they were going to make it at all''.
For some of these stressed borrowers, debt consolidation could be the answer, helping to free up valuable cashflow.
How it works
Consolidation of debt works where a borrower has a range of high-interest debts, such as credit cards and store cards or even car loans, and wants to lump them together into one tidy repayment.
The idea is to consolidate all the debts into one loan with a lower interest rate to maximise the savings and the lowest rate tends to come with your mortgage.
But it needs to be approached with caution. It all depends on how you behave once you've consolidated that debt. It could be a stroke of genius, or it could be the worst thing you've done.
Aussie Home Loans founder John Symond says the key is to pay off the extra debt as soon as possible, "because not only will it accrue a lot of interest over the life of the mortgage costing you a fortune compared with shorter-term debts such as personal loans but make sure you keep up your mortgage repayments because your home is now at risk''.
Words of warning
Mr Symond says personal loans, with their shorter terms, can be a better vehicle for debt consolidation than mortgages.
"A personal loan of $25,000 taken over five years at an interest rate of 14.49 per cent would require a monthly payment of $602.76, with a total interest cost of $10,284.60,'' he says.
"While borrowing the same amount at the average 7 per cent variable home loan rate requires a much lower monthly repayment of $166.33 spread out over 30 years, the total interest cost could jump to $34,877.''
In other words, sticking extra debt on to your mortgage might be cheaper in the short term but in the longer term it can cost thousands of dollars extra.
Another advantage of personal loans is that they're unsecured that is, your home is not at risk if you can't keep up repayments.
As soon as you switch the debt to your home loan, it becomes a secured loan and in the worst-case scenario you could end up with your house being repossessed for what was once just a credit card debt.
Nicole Rich of the Consumer Action Law Centre says a major issue with the industry is misleading marketing.
"Firstly, people usually approach companies about debt consolidation after seeing some kind of marketing about it and the problem is a lot of that can be very misleading,'' she says.
"What a lot of companies do is instead of offering people consolidation loans, they actually negotiate a Part IX debt agreement, which is an alternative to bankruptcy where you pay your creditors a smaller amount each month.
That then stays on your credit record for seven years with obvious consequences if you want to get credit again.''
Another problem is that some borrowers take out consolidation loans that they can't afford, sometimes with interest rates that are higher than their debts but sold under the premise of ``convenience'' instead of lower cost, Ms Rich says.
"If there is a big saving compared with your current outgoings, it might be an option'' she says.
"But if you're in genuine hardship, you should contact your creditors where you should be able to negotiate lower repayments anyway, which is a better option than getting another loan, especially if it means lumping them in with your mortgage, which could ultimately put your home at risk.''
Rules are changing
Hardship arrangements work well right now but from next year when the Government brings in new laws called "comprehensive reporting'' for credit reference purposes, any hardship arrangements will start showing up on your payment history and will count against you for future credit applications.
Katherine Lane, principal solicitor of the Consumer Credit Legal Centre in New South Wales, says while consolidation loans may serve a purpose for some, they are not the answer.
"You cannot borrow your way out of debt,'' she says.
"Any action you take on consolidating loans has to be matched with a change in behaviour: Cut up credit cards, don't take another personal loan and live within your means.
"The Government is making it difficult for people to negotiate their way out of hardship by proposing to mark their credit records if they get into trouble
"So the best way forward, if not the most realistic, is for people to avoid trouble in the first place.''
Smart money is on another interest rate rise - HOME-owners are bracing for more mortgage pain today with experts predicting interest rates to rise by 0.25 per cent - the sixth increase in six months.
May 04, 2010
Economists say the Reserve Bank will today raise the cash rate on the back of rising inflation and the surge in property prices around the country.
A 0.25 per cent rise would lift rates to 4.5 per cent, adding about $48 a month to the average loan of $300,000.
Economists said rocketing house prices and concerns about rising inflation would probably cause the RBA to pull the trigger today.
But CommSec economist Savanth Sebastian said it would be a good time to hold off, given that the Federal Budget was to be handed down next week.
"They would then have a better idea of what sort of fiscal measures will be in place," he said.
Online bookmaker sportsbet.com.au reported a surge in betting that the RBA would increase rate.
"Two weeks ago, you could get $2.90 about a 25 basis points rise, now that's into $1.35," Sportsbet's Haydn Lane said.
The Australian Bureau of Statistics house price index showed the average house price across the nation's eight capital cities rose by 4.8 per cent in the March quarter.
This boosted the annual rate to 20 per cent on average, with Melbourne leading the way on 27.7 per cent. Sydney went up 21 per cent.
House price implosion claims ridiculous, says local economist - AUSTRALIAN house prices will not implode because our market is different to overseas markets and their rules don't apply here, a local economist says.
May 04, 2010
Commonwealth Bank senior economist Michael Workman said comments made by US financial commentator Edward Chancellor that Australia was in the midst of an unsustainable housing bubble wrongly assumed Australia is like US or the UK.
Mr Chancellor, a published author who is believed to have been among the first to predict the Global Financial Crisis, estimates Australian house prices are more than 50 per cent above their fair value - a once in 40-year event.
"If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably," Mr Chancellor told The Australian.
"It's the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse," he said.
But Mr Workman said patterns in the US and UK housing markets did not apply here.
"The story about house prices falling tends to be pushed pretty strongly from overseas groups in particular because they don't understand the growth outlook here and the under-supply of dwellings," he said.
"They tend to transpose what's been going on in the US and the UK to the Australian housing market and they are not applicable.
"The stories make a good headline but they just don't apply."
Mr Workman said Australia's unique situation of strong population growth, a housing shortage, low unemployment and historically low interest rates would keep house prices high.
Banking cartel and our "good luck"
Mr Chancellor also described Australia's banking system as a "cartel" and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.
He attributed Australia's "luck" to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.
"Those are the facts and you can't paper over them," he said.
"In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.
"The problem is the bubble and that hasn't gone away."
House prices linked to unemployment
But Mr Workman said it would take high unemployment and people defaulting on loans to puncture house prices - both of which were "unlikely".
Our jobless rate will inch toward 5 per cent - not the 10 per cent in the US and UK - and Australia has "an extremely low" rate of late debt payments, even when mortgage rates hit 9 per cent recently, he said.
"We just went through a period where interest rates were quite high here and that did slow the housing market down, it stablised it," Mr Workman said.
"But these large price falls people talk about really need a rise in unemployment to occur and at this stage the markets are heading in the other direction. And we'll still have an undersupply of dwellings in the next few years, not an oversupply."
Australian capital city house prices rise by 20 per cent in year to March - AUSTRALIAN capital city house prices have risen by 20 per cent over the year to March, latest government data shows.
May 04, 2010
The Australian capital city house price index, released today by the Australian Bureau of Statistics shows house prices rose by 4.8 per cent over the quarter alone, putting pressure on the Reserve Bank to further lift interest rates when it meets tomorrow.
However, some economists are cautioning against taking the ABS data at face value.
Westpac economists Andrew Hanlon and Elliot Clarke said in a note the ABS measure was "prone to overstating price swings" when there were shifts in the make-up of market activity.
"Our preferred measure, and the measure watched closely by the RBA, the RP Data-Rismark series reports house prices up 12.7 per cent over the year to the month of March," the economists said.
Today's data shows Melbourne house prices rose nearly 28 per cent, Sydney house prices increased 21 per cent and Darwin prices increased by more than 17 per cent.
All capital cities posted double-digit growth over the year to March.
Brisbane, Adelaide and Perth had more measured growth with 12.1 per cent, 10.8 per cent and 15 per cent growth respectively.
Hobart increased 14.1 per cent and Canberra house prices jumped 20.6 per cent.
The ABS said Sydney and Melbourne were the main contributors to the average price of the eight capital cities.
"The strongest growth in these two cities came from established houses with relatively high prices," the ABS said.
CommSec economist Savanth Sebastian told AAP there was nothing too surprising following five rate increases in the past seven months.
"Property prices are still seeing strong growth and it's important to realise that this isn't going to be solved by raising interest rates," he said.
Market to cool off - ANZ
ANZ economist David Cannington said while momentum has remained strong, he expects house price growth to "moderate" over the rest of 2010.
"This will be compounded by ongoing reductions in first home buyer demand and the recent policy back flip on Foreign Investment Review Board rules," he said in a note.
However he said the strong data proved the fundamentals of the housing market were tight, and demand continued to outpace supply.
"Solid market fundamentals and a positive economic outlook should keep house price growth in the black," Mr Cannington said.
Rates will rise tomorrow - economists
Westpac said price momentum in 2010 had been "resilient".
"Recent strong auction clearance rates suggest any cooling off in housing markets has been marginal, at least for those parts of the market that see properties sold via auction."
Mr Hanlon said there was concern over house price resilience in the face of rising interest rates.
"Rising interest rates will become a headwind as the year progresses," he said.
"The RBA hiked in March and again in April, taking the standard variable mortgage rate to 7.15 per cent."
Westpac expects the RBA to hike interest rates when it meets for its monthly board meeting tomorrow.
The Henry tax review - what it means for you. AUSTRALIAN workers will be better off to the tune of up to $108,000 at the end of their working lives after the Federal Government confirmed it would introduce a big new tax on mining companies.
May 03, 2010
Employers will be required to increase their superannuation contribution from 9 per cent to 12 per cent by 2019-20.
The changes, which are the Government's response to the Henry tax review, will be phased in over seven years starting in 2013, and will give employees who are aged 30 an extra $108,000 in super savings, the Government estimates.
The announcement is part of a "first wave" of tax reform which focuses on super, company tax and superannuation, which were recommendations in the review.
The Government has been criticised for proposing just four key changes to the taxation system, despite Treasury secretary Ken Henry making 138 recommendations in his long-awaited report.
Prime Mininister Kevin Mr Rudd said the four areas the Government was addressing were the core issues.
"You can do a mechanical count of the numbers of technical recommendations, and some of those you wouldn't touch with a barge pole," he said.
"But I've got to say the core ones to do with ... keeping our government finances strong, protecting the future of the Australian economy, ensuring working families and small business get their fair share ... I think this is a good start, but of course there's more to do."
Experts and commentators have called it a missed chance to fix the country's tax system.
One columnist was even more scathing. In his analysis of the reform, Herald Sun expert Terry McCrann wrote: "Kevin Rudd is running scared - clammy palms, hair bristling on the back of his neck, whole body shivering: scared, scared, scared."
Rather than release flagged changes on savings tax and simplifying tax returns, the Government has saved those changes to release later in the year, most likely to use in the run-up to this year's federal election.
The new measures will cost about $2.4 billion over the next four years, and are dependent on the mining tax being brought into effect.
The 40 per cent tax on mining company profits will be slightly softened by a raft of new rebates on exploration and Government investment in improving infrastructure. These tax changes are expected to add around $85 billion to the nation's pool of super savings.
Changes announced yesterday:
* Super contributions to rise to 12 per cent by 2020
* New tax takes 40 per cent of big miners' profits
* Company tax to be cut to 28 per cent in 2013/14
* Small business to benefit a year earlier
* "First wave" of reform only - more details to be released later
* Workers who earn under $37,000 will get up $500 a year from the Government, effectively cancelling out any tax these workers pay on their super contributions.
* Changes on savings tax, personal tax to be revealed "in coming months"
Henry review - what is it?
Ken Henry was asked to do a wide-ranging review on the nation's tax system in 2008, with the main aim of making it simpler.
It is the most comprehensive review of the tax system since the introduction of GST. Officially named "Australia's Future Tax System Review," the committee received around 1500 submissions from various groups around the country.
The 1000-page report was handed to Wayne Swan before Christmas. The treasurer promised to release its contents before the next Tuesday's federal Budget.
The Government has cherry-picked certain aspects it will turn into new laws, while keeping other changes up its sleeve leading into the federal election later this year and next week's Budget.
Despite speculation yesterday's announcement would include changes to boost savings by cutting tax on interest, the Government has chosen to announce wide-ranging super reform funded by taxing the profits of big mining companies.
The Government says it is likely to take other suggestions from the review, including making tax time simpler for most workers and cutting tax on savings interest, but those changes would represent "a second full term agenda".
So, what's in the Henry review for me?
The release of the Government's "first wave" of reform doesn't include the expected changes to tax on savings accounts or making tax returns easier.
But those changes are in the review, and Wayne Swan told a media pack yesterday that the Government is "strongly in favour" of the recommendations around making tax time easier for working Aussies.
Here are the main points the Henry review has recommended, which the Government is expected to take up in some form later this year - most likely as part of its election platform.
Easier tax returns
Widely touted before its release, the review outlines Australia's reliance on tax agents to complete workers' tax returns every year.
The review recommends workers instead receive a "default return" from the ATO, which would only need the taxpayer's tick of approval. In order for this to come into effect, the review recommends the scrapping of work deductions.
Basically, a deduction is money spent throughout the year on work-related expenses, which is then refunded by the Government when you submit your tax return. The Henry review proposes that most work-related deductions be scrapped, to be replaced by a standard rate "linked to the level of income from work".
"An automatic standard deduction should be introduced to simplify people's interactions with the tax system and facilitate much greater levels of pre-filling of tax returns," the review says.
A standard deduction would cut the need to keep receipts. However to ensure workers with a high amount of deductions are protected, you would still be able to claim "substantiated expenses".
The review also suggests a much-higher personal tax-free threshold of $25,000. This is how much you have to earn before you start paying tax.
Taxing income from savings
The review proposes a 40 per cent discount on all income from savings, as well as on all residential rental income and losses, and capital gains.
These recommendations were widely flagged prior to yesterday's announcement, with critics saying the current system doesn't give enough incentives for workers to put money in savings accounts.
Currently, interest earned on all savings accounts and term deposits is taxed at a worker's top marginal rate.
It is far less generous than the tax treatment of other investments such as shares and property, which the review says encourages investors to take on too much debt.
"The tax advantages from borrowing to invest in a rental property, also relevant for shares, leads to investors taking on too much debt and distorts the rental property market," the review says.
What the Government won't pick up
While the report was released yesterday, the Treasurer was quick to list certain parts of the review the Government definitely won't be implementing, in the "interests of business and community certainty".
So basically - these are the more out-there recommendations that the Government definitely won't be using.
* Requiring parents to work when their youngest child turns four
* Hit single-income families
* Restrict eligibility to rent assistance for families
* Abolish the luxury car tax
* Change alcohol tax
* Ask states to charge market rents to people in public housing
Massive retirement boost for all in Henry tax review - MILLIONS of Australians will get a big boost to their retirement nest egg with the lifting of compulsory employer super payments to 12 per cent, from the current 9 per cent.
May 03, 2010
Raising the Superannuation Guarantee will deliver an extra $108,000 in retirement for for today's average 30-year-old male worker and $78,000 for a female worker, the Government says.
The compulsory super boost is one of several changes announced yesterday in what Treasurer Wayne Swan described as the biggest reforms to superannuation in 20 years, but the changes do not follow the recommendations of the Henry Tax Review.
Employers will have to foot the bill for the increase, but Mr Swan said the rise would not start for three years to recognise "that employers and employees need to factor this into future wage negotiations".
The first rise, to 9.25 per cent, is not until 2013-14 and the full 12 per cent rate won't start until 2019-20.
Older and low income workers get extra benefits from the planned new super package. People earning less than $37,000 a year will effectively have the 15 per cent contributions tax on money going into their super scrapped, courtesy of a new $500 Government contribution.
The Superannuation Guarantee age limit will be raised from 70 to 75, benefiting about 33,000 older employees, while the Government has reversed a previous decision to tighten the contribution caps for those nearing retirement. Workers aged over 50 with superannuation balances below $500,000 will be able to make up to $50,000 in annual concessional super contributions from July 2012.
"As a result of these reforms 8.4 million Australians will receive an increase in their retirement incomes, including 3.5 million Australians on lower incomes who do not receive tax incentives for saving through superannuation," Mr Swan said.
Prime Minister Kevin Rudd said the changes would increase the national pool of superannuation savings by $85 billion over the decade ahead.
Australians currently have about $1200 billion ($1.2 trillion) in super and this has already been projected to rise to up to $3500 billion, or $3.5 trillion, by 2020.
The Henry Review recommended some radical changes to superannuation, including abolishing tax on all contributions to super and instead including employer contributions in workers' taxable incomes. It also recommended halving the tax rate on earnings within super funds to 7.5 per cent.
"We have chosen to build everybody up rather than rearrange the tax concessions," Mr Swan said.
Resource Super Profits Tax 'to share mining wealth' - ENSURING ordinary Australians get a share of the enormous wealth generated by the nation's resources is key to the first wave of changes from the Henry tax review.
May 03, 2010
The Federal Government has devised a Resource Super Profits Tax (RSPT) to give the public a share of resource profits more comparable to the early 2000s, before the last mining boom.
The new tax on mining companies is part of a reform package the Government claims will deliver an extra $450 per year into the pocket of the average full-time worker.
In detailing the plan, it says current arrangements do not give the public an adequate return on mining profits and investment, as royalties are unresponsive to changes in resource profits.
They also fail to deliver much in times of low resource prices.
But RSPT will capture a more stable share of the resource profits, as it will be a constant proportion of annual profits.
It will tax super profits made from non-renewable resources at 40 per cent from July 1, 2012.
Under the plan, the Government will give mining companies a refundable credit for royalties paid to state and territory governments to stop them paying "double'' tax.
Companies would then only pay the RSPT.
Much of the money raised from the RSPT will go back to the resources sector through a new resource exploration rebate, and investments in infrastructure.
The new resource exploration rebate will give companies a refundable tax offset for the cost of exploring for minerals and geothermal energy sources.
The rebate will cost about $1.1 billion in the two years from 2012/13.
Also announced is a new infrastructure fund, chiefly to benefit the resource-rich states, with new roads, rail and ports to ready for future mining booms.
The fund will begin with a $700 million investment in 2012/13 and will be added to annually.
The Commonwealth will negotiate with the states on what royalty rates to credit, as some are applied on a mine-by-mine basis.
State governments, meanwhile, would continue to take royalties from companies as usual.
In its response to the Henry review, the Government quoted modelling by Econtech, showing mining investment would rise 4.5 per cent, jobs by 7 per cent and mining production by 5.5 per cent with a RSPT scheme.
The Government says it will consult widely on the scheme's design.
Workers happy but miners furious about Government tax reform - THERE has been a mixed reaction to the Federal Government's "first wave" of Henry tax review-inspired reform.
May 03, 2010
The finance sector, unions and even a former federal treasurer have praised the move to increase the compulsory superannuation contribution employers have to pay from nine to 12 per cent by July 2019.
But the mining industry has reacted with fury - and predicted apocalypse for the resources sector - over the plan for a 40 per cent tax on so-called super profits from resources projects.
The Government said this tax would pay for the increased superannuation contributions by adding $85 billion to the nation's pool of superannuation savings over the next 10 years.
Business lobby groups have been more muted in their response, but say they are concerned about "nasties" in the package. They were, however, happy about a mooted cut to company tax rates from 30 per cent to 28 per cent by 2014/15, with a two-year advance for small business.
The overwhelming verdict from the experts has been that the Government has missed an opportunity to really reform the system.
And the political response has been predictable, with the Federal Opposition and the Greens saying the changes announced were not good enough.
Treasurer Wayne Swan has defended the decisions made by the Government and noted that true reform to the tax system will take "some years".
Super increase "brave"
Australians will benefit from the super changes, leading fund manager and superannuation provider AMP said.
AMP chief executive Craig Dunn said the Federal Government should be applauded for its forward looking approach to benefit future generations of Australians.
The financial services association was also happy with the super changes.
The changes mean those earning less than $40,000 are effectively doubling their super, Investment and Financial Services Association CEO John Brogden said.
"Our Christmas came early (yesterday)," Mr Brogden said.
"We were expecting some sort of sting in the tail somewhere ... but everybody wins in this."
The former NSW Liberal leader said the Government deserved due credit for its "stunning announcement".
"Just as it was pretty ballsy for (former prime minister) Paul Keating in 1992 to look to the future and do this, it's just as brave for the Government to do it now."
Unions were also pleased with the super changes.
"The pathway to a 12 per cent superannuation guarantee is a big win for Australian workers and a big win for Australian unions," ACTU secretary Jeff Lawrence said.
And the aforementioned ex-treasurer and prime minister, Mr Keating, said this would give Australia the world's best retirement savings plan.
"In an uncertain world, this can only strengthen Australia and make the outlook for its citizens much more secure," Mr Keating said.
Mr Keating, who introduced mandatory superannuation in 1992, used the opportunity to attack the Howard Government for having held back the system.
It wasted the chance to raise superannuation contributions to 15 per cent by 2002, he said.
"That single repeal measure cost the average worker $250,000 in accumulation over their working life," he said.
"(The) changes go to mitigating a significant part of that damage."
There was one group unhappy with the super increases: the Australian Chamber of Commerce and Industry.
CEO Peter Anderson said the increase was "unacceptable" and amounted to a broken promise from Labor.
Resource industry "dealt a big blow"
The mining lobby has called the new tax on resources profits a "tax grab" that could force miners overseas.
The Government's plan for a super profits from resources projects meant Australia's minerals industry would
become the highest taxed in the world, Minerals Council of Australia chief Mitch Hooke said.
"This is not taxation reform, this is a tax grab, and it means that we have an unprecedented double tax," Mr Hooke said.
Mr Hooke said mining projects currently on the investment horizon could be shelved or transferred overseas if the tax went ahead.
"Down the track there is a real risk that many of those taxation gains that the Government is banking on may prove illusory if the secondary round impacts are a deterrent to investment, a destruction of value and a move of investment offshore," he said.
The Western Australian-based Association of Mining and Exploration Companies (AMEC) said the resources tax will "bury" the industry.
AMEC described the Henry tax review proposal as a "revenue grab" that would have a "disastrous" impact on the mining sector.
"The introduction of a mining tax will have disastrous consequences on the operations and viability of many mining companies that are still reeling and gradually recovering from the impacts of the global financial crisis," AMEC chief executive Simon Bennison said.
Government delivers "business nasties"
The Australian Chamber of Commerce and Industry said the Government failed to deliver "bold reforms".
"And a package of this type comes with a number of nasties to the business community," CEO Peter Anderson said.
A "golden opportunity" to abolish the "job destroying" payroll tax was missed along with cuts to personal income tax, he said.
"The Government is hamstrung by the fact that it has to protect its revenue base, that's why this is not a bold reform agenda."
Reducing corporate tax rates to 28 per cent will make Australia more competitive in the Asian region, Mr Anderson said.
Meanwhile, the Australian Industry (Ai) Group said the Government's response to the Henry review has only scratched the surface of possible tax reforms.
Ai Group chief executive Heather Ridout said: "They've ruled out 25 (recommendations), they touched on four or five this afternoon. This is a start, but it's a pretty small start in what is a very, very big process."
Ms Ridout said Labor could have gone further on small business reform, and hoped it would also consider implementing alcohol, gambling, petrol and congestion taxes.
"I think (they have been) ignored because it's very hard to do, and hopefully it won't be ignored permanently," she said, adding the Henry review was about long-term revision.
Missed opportunity
Commentators were generally disappointed with the reforms announced by the Government.
David Koch called it a "whimpy effort' given all the work that went into the Henry tax review.
Herald Sun expert Terry McCrann was most scathing of the Government. He began his column today with this: "Kevin Rudd is running scared - clammy palms, hair bristling on the back of his neck, whole body shivering: scared, scared, scared."
Meanwhile, The Australian's Dennis Shanahan said the logic of the Henry tax review reforms have collided with the reality of a Labor government that is strapped for cash in an election year.
At Fairfax, economics editor Ross Gittens took the long view. He said that in the long run "pretty much all the nasty changes proposed in the Henry tax review will be implemented." But he warned it could "take up to 25 years to happen."
Not good enough - Federal Opposition, Greens
The Federal Opposition leader, Tony Abbott, called the Government's response to the review "flimsy".
"He's (Prime Minister Kevin Rudd) accepted just two and a half of 138 recommendations so, yet again, there's more talk than action," he said.
"Typically, the action involved is a tax grab, not tax reform. He's put higher taxes on easy targets but put off the hard decisions on cutting out-of-control Government spending."
He said the Government should have taken on more from the Henry review.
"The Government's response to the Henry review is a tax grab that squibs real reform such as lowering personal income tax rates for working families, addressing welfare traps and high effective marginal tax rates, abolishing inefficient taxes, simplifying the personal tax return system and addressing housing affordability."
Greens senator Christine Milne said the Government didn't deliver the root-and-branch reforms it promised.
"The tragedy here is that the tax review has run into an election year and we are not seeing the kind of reforms that we would need," she said.
Senator Milne said tax reforms should have had an environmental focus.
"There was an opportunity to shift the tax away from the good and to start taxing the bad," she said.
"We could have reduced tax on labour and productivity and increased taxes on pollution."
Senator Milne did praise the 40 per cent resource super profits tax for mining companies, of which one third collected would go towards a new Resource State Infrastructure Fund.
But she complained $3 billion of it would go back into railroads and ports, instead of projects the whole community could enjoy.
Henry tax plans addresses 'core issues' - Rudd says. PRIME Minister Kevin Rudd has defended his Government's response to the Henry tax review, saying it addresses the core issues facing the nation.
May 03, 2010
"This package of reforms we've embraced means that every worker, small business will be able to pay less tax and contribute more to national savings," he told Fairfax Radio Network today.
"This is a major, far-reaching and significant reform that prepares Australia for a more secure and stable economic future."
The Government has been criticised for proposing just four key changes to the taxation system, despite Treasury secretary Ken Henry making 138 recommendations in his long-awaited report.
But Mr Rudd said the four areas the government was addressing were the core issues.
"You can do a mechanical count of the numbers of technical recommendations, and some of those you wouldn't touch with a barge pole.
"But I've got to say the core ones to do with ... keeping our government finances strong, protecting the future of the Australian economy, ensuring working families and small business get their fair share ... I think this is a good start, but of course there's more to do."
Mr Rudd sidestepped questions about whether the proposals, announced on Sunday as the government made the Henry report public, amounted to electioneering.
Capital city house prices extend surge - Capital city home prices jumped in March on strong buyer demand, while prices for homes elsewhere in Australia came to a standstill.
Apr 30, 2010
An RP Data-Rismark report released today shows that national city dwelling values rose 1.4 per cent in March, matching February's increase. Prices on homes outside of capital cities recorded no growth in the month, down from 0.2 per cent in February.
"Capital city markets represent just 0.5 per cent of the national land mass but account of around 60 per cent of home sales," said RP Data's Tim Lawless. "The bulk of Australia's population growth is concentrated in the capital cities, in turn driving housing demand."
Over the year to March, capital cities home prices have risen 12.5 per cent, while in the rest of states, including regional centres, prices rose only 5.3 per cent, RP Data said.
Official interest rates, which have increased five times over the past months to currently 4.25 per cent, were also biting into the market's momentum, said Mr Lawless. Markets see a one-in-two chance of another 0.25 percentage point rate rise next week when the Reserve Bank board next meets, according to Credit Suisse.
"We expect capital growth rates to cool in 2010 as the cost of mortgage finance is normalised by the RBA," said Mr Lawless. "Over the longer term, home values should be expected to track disposable incomes."
RP Data's Cameron Kusher said the unevenness in price growth across Australia was evident when looking at non-capital regional centres as well.
In NSW's Hunter Valley prices rose 7.3 per cent for the year to February, the latest data available, while in Victoria's Geelong and the Surf Coast region prices rose 6 per cent over the same period.
On the Gold Coast prices rose 4.8 per cent, while on the Sunshine Coast they increased 9.7 per cent, over the year to February.
"We see evidence of a recovery in markets like the Gold Coast, the Sunshine Coast, Newcastle, Wollongong, those larger regional areas still close to capital cities ... even Geelong," Mr Kusher said. "But Geelong is certainly not recovering as well as Melbourne has bounced out of the GFC."
As interest rates continued to climb, the most price sensitive areas of the market would be the most likely to see falls in values, Mr Kusher said.
"Melbourne has gone crazy over the last months," he said.
Prices there have shot up 6 per cent in the March quarter to $452,000.
"But the outer areas with limited job creation and poor transport amenity are probably the areas most at risk of a slowdown," Mr Kusher said.
The home price performance gap is evident in the split between quarterly price gains in the most affordable suburbs, which increased about 2 per cent and the most expensive suburbs, which recorded 4 per cent quarterly growth, RP Data said.
In Sydney, dwelling values rose 5.1 per cent in the March quarter to $500,000, while in Perth values edged up 0.2 per cent to $480,000. In Brisbane they increased 2.4 per cent to $439,000.
ANZ property economist David Cannington said despite the current strong momentum in house prices he expects a marked deceleration of prices over the remainder of 2010.
"Interest rate hikes (will) drive a further deterioration in home purchase affordability," Mr Cannington said. "This will be compounded by ongoing reductions in first home buyer demand and the recent policy backflip on Foreign Investment Review Board rules governing non-resident purchases of Australia property."
Housing bubble to burst? History says 'yes' - Australia's housing bubble would defy worldwide trends and all historical evidence if it did not burst, a US investment fund has said.
Apr 30, 2010
Jeremy Grantham, co-founder of Boston-based GMO, said Australian home prices continued to rise because the Reserve Bank's rapid interest rate cuts during the financial crisis "protected" the nation's housing bubble.
"But if they (home prices in Australia and the UK) don't go back to ... the old trend line multiple of family income, which should drive house prices, it will be the first time in history that such a bubble is not broken," Mr Grantham said in a recent interview with the Financial Times.
"Now we have to see what happens when interest rates rise."
The RBA, after cutting rates to a 50-year low as it moved to spur economic demand, began lifting the official cash rates in October, its most recent move coming earlier this month when the cash rate went to 4.25 per cent.
A consensus of economists is tipping another 25-basis-point rate increase next week, according to Bloomberg. Credit markets are pricing in a 50-50 probability of such a move when the RBA board meets on Tuesday.
Australian home-price growth has shown signs of flagging in the most recent quarterly price data. The national median house price rose 3.1 per cent to a record $542,800 in the March quarter, after a 4.8 per cent increase in last three months of 2009, according to figures from Australian Property Monitors that were released yesterday.
The average loan-to-income size ratio was 3.5 times in 1998 but is now almost six times, based on mortgages today, according Fujitsu consulting data.
The nation's home prices have been supported by a growing population, a strong economy, a low unemployment rate and a chronic shortage of affordable housing, estimated by the government to be about 200,000 units this year.
In the interview, Mr Grantham also pointed to a bubble in the UK housing market.
House prices there, after dropping by almost 18 per cent in the year to February 2009, are now up 10.5 per cent in the year to April 2010, according to the Nationwide Housing Price Index.
Of the 34 bubbles GMO researched, including the US housing bubble and the dotcom stock bubble, 32 have returned to the trend that existed before the emergence of the bubble, Mr Grantham said.
GMO, a privately held global investment management firm, has $US107 billion under management.
New home sales edge higher despite rate rises - New home sales inched up in March amid rising interest rates and fears of more expensive loan repayments to come.
Apr 30, 2010
Nationwide, the volume of homes sales rose 0.9 per cent in March following a 5.2 per cent fall in February, according to data from the Housing Industry Association.
''Rising rates have run headlong into pre-existing supply side obstacles related to land supply, planning delays, and distorting levels of taxation and charges applying to new housing,'' HIA chief economist Harley Dale said.
The Reserve Bank has lifted interest rates five times since October to 4.25 per cent in order to contain domestic inflation and keep the economy on the path to sustainable growth.
Investors currently see a one-in-two chance of a rate rise when the RBA meets next week.
Private borrowings jump - Total credit provided to the private sector by financial intermediaries rose by 0.5 per cent in March, following a 0.4 per cent increase in February, the Reserve Bank of Australia said today.
Apr 30, 2010
Over the year to March, total credit rose by 2.1 per cent.
Housing credit rose by 0.7 per cent in March and increased by 8.5 per cent over the year, seasonally adjusted.
Credit in the housing sector rose in March due to growth in lending to both owner-occupiers and investors, the RBA said.
Other personal credit rose by 0.5 per cent in March and was up by 2.4 per cent over the year.
Business credit rose 0.1 per cent in March to be down by 6.9 per cent from a year earlier, the RBA said.
Cost of living increases, but will wages? - WE'RE paying more for power and fuel, but less for fruit, milk and men's undies, official data reveals.
Apr 29, 2010
The Consumer Price Index, released today by the Australian Bureau of Statistics, shows the changes in prices for every day household items, as well as bills, housing and pharmacy costs.
The index breaks items down to reveal how they're contributing to our overall cost of living.
So while inflation has risen 2.9 per cent over the year to March, items like petrol, electricity and insurance have increased significantly more than that.
Electricity costs have jumped by more than 18 per cent, water and sewerage has increased more than 14 per cent, while petrol is up more than 9 per cent.
Wages should follow
Experts say workers' pay rises should be a different story compared to last year when the economic downturn curbed or froze salaries.
Commsec economist Craig James said wages would increase, but due to worker productivity rather than changes in the cost of living.
Mr James said the jobs market was tightening with employers "out in force" looking for staff.
"This sort of environment is conducive to wage increases occurring," he told news.com.au.
The Australian Chamber of Commerce and Industry said while it was hard to predict what individual companies would do, today's inflation result would place pressure on them.
"ACCI is concerned that today's inflation figures could provoke unsustainable wage rise claims throughout the economy," chief executive Peter Anderson said.
"If wages chase prices, then prices go on to chase wages, it will become a self-defeating cycle."
In regards to transport, it costs more to catch the bus or train, with urban fares rising by more than 4 per cent in the year to March.
Despite hefty rises in household utilities, grocery bills may have provided some relief. The price of food has increased a mere 0.7 per cent over the year to March thanks to large falls in the price of fruit and milk, down 4.6 per cent and 3.2 per cent respectively.
However in the past three months to March, the cost of vegetables has skyrocketed, rising more than 10 per cent due to poor weather in growing regions.
Soft drinks, waters and juices have risen more than 3 per cent, while the price of takeaway meals and eating out rose 2.9 per cent.
School fees going up, clothes going down
The cost of education has risen more than 5 per cent over the year, with strong jumps in the cost of university school fees, high school and primary fees for the quarter.
One of the only groups to post a fall over the year was clothing. Women's clothes - not including underwear - fell 4.4 per cent, while kids clothing fell nearly 5 per cent.
A jump of 5.1 per cent in the cost of women's underwear over the year offset a fall of 2 per cent in the cost of men's underwear.
And our vices aren't getting any cheaper - the price of alcohol and cigarettes rose 3.5 per cent in the year to March.
House price growth slowing at last - data - AFTER a year of surging prices, the pace of growth is finally easing, with the country's median house price rising 3 per cent in the March quarter down from nearly 5 per cent growth in the previous three months
Apr 29, 2010
According to residential researcher Australian Property Monitors, five interest rate rises and the December expiry of the First-Home Owners Grant boost had eased price growth, but not before pushing Sydney's median house price to more than $600,000 for the first time.
In Melbourne -- the country's hottest market -- the median house price hit $549,980, up 6.8 per cent for the March quarter.
Melbourne's house prices jumped 27 per cent over the past 12 months, double that of Sydney, where house prices increased by 14.7 per cent.
Mark and Donna Bradley, who have just sold their Point Cook home for $30,000 more than they anticipated, are among Melbourne's real estate winners.
"We had it listed for three days before receiving a written offer, which we accepted," said 37-year-old Mr Bradley. He said the $565,000 sale price was $50,000 to $60,000 more than the house had been worth at the start of the year.
Brisbane was the only capital to record a fall, with house prices slipping 0.1 per cent in the March quarter, but up 9.1 per cent for the year to a median of $451,388.
In Perth, house prices rose 1.1 per cent for the quarter and 9.4 per cent for the year to a median of $519,526, according to APM. The rapid recovery of the top end of the residential market, which is less sensitive to interest rates, is dragging up median prices
AMP economist Matthew Bell said the price growth for houses in the most expensive half of the market was nearly double that of the more affordable suburbs.
In Melbourne, the top 50 per cent of suburbs showed price growth of 38 per cent for the year, compared with the bottom half at a still strong 21 per cent. Sydney's top half of suburbs grew at 21 per cent and the bottom half at 10 per cent, according to APM.
Apartment prices around the country grew, but not at the pace of houses, capital city figures varying between a fall of 4.5 per cent for Hobart and a rise of 13.7 per cent in Melbourne. Mr Bell said while overall price growth was positive in most markets, the market would slow this year.
Banks paying more to borrow money - Ralph Norris - BANKS are paying more to borrow money and the trend will continue, says Commonwealth Bank chief executive Ralph Norris.
Apr 29, 2010
While it is now easier for banks to borrow than it was at the height of the financial crisis, the days of cheap wholesale funding are gone, Mr Norris said.
"All of the banks have a significant portfolio of debt that has been borrowed at lower rates, prior to the start of the crisis, which has continued to roll over at higher rates," he told an American Chamber of Commerce lunch in Sydney.
"And what that means is that the average cost of debt that the banks have on their balance sheet continues to rise."
He said that before the crisis, banks had been able to borrow money at between 13 and 15 basis points above the swap rate.
"I don't think we're going to get back to those levels any time soon," Mr Norris said.
He said that while Australian banks had performed better than their US or European counterparts, with the big four banks all among only eight in the world that have AA ratings, the local industry "hasn't been immune to the crisis".
"However, it is widely recognised that we, as an industry, have weathered the worst of it and maintained one of the strongest banking industries in the world," he said.
Mr Norris said a decade of federal government surpluses, good banking regulation and Australia's close ties with Asia helped keep our banks healthy.
"I think it's fair to say we've taken a more conservative and cautious approach to our business," he said.
"We've remained well-capitalised, with little direct exposure to the problem securities sold in offshore markets and which led to the unwinding of those markets, particularly in the US and Europe."
Speaking to media after the speech, Mr Norris said the CBA had no direct exposure to Greece or Greek banks.
"Volatility in markets is something that has happened on a regular basis over the last two to three years and this is another incident," he said.
"So certainly it would have a potential impact on pricing and availability in the short term, but we don't see it impacting us at this point."
Mr Norris said the bank had completed its wholesale funding task for this year and was advanced-funded for the coming financial year.
Big Brother banks watching our lives - MAKING big cash withdrawals, having a flutter at the TAB or getting pregnant could make you uncreditworthy under tough new lending laws.
Apr 29, 2010
The rules, to take effect on July 1, will allow banks and brokers to analyse all spending habits of borrowers, not just a person's income and fixed outgoings.
The aim is to uncover any potential financial strains such as a growing family, hidden debts or even gambling and drugs problems.
"Qualifying for a mortgage is not just a matter of assessing what debts you have anymore," Dean Rushton, CEO of broker Loan Market Group, said.
"If bank statements show there's a lot of money being spent at the casino or TAB, then that's obviously going to ring alarm bells.
"Giving credit to somebody after having seen they have a gambling habit could be a difficult position to defend under the new laws."
Aussie Home Loans CEO Stephen Porges said the increased level of prying into consumer spending was "terrible".
Mr Porges said: "If a broker meets a couple and the woman looks large, it is now down to the broker to ask: 'Are you pregnant, or are you just fat?'
Clearly, having a baby will impact on their ability to repay their mortgage, and will have to be taken into account.
"But we are entering a very dangerous area here. It seems a gross invasion of privacy, yet it's what the regulations require."
The new National Consumer Credit Protection Act laws will apply to all forms of credit - mortgages, personal loans and credit cards.
Some banks are already clamping down to comply with the new regulations, insisting on more bank statements with credit applications and quizzing customers about large cash withdrawals.
Lenders will also have greater insight into our spending habits from next year with new legislation on credit scoring.
This will allow banks to see debt repayment histories on credit cards, personal loans and mortgages, penalising those who have been late making repayments by just one day.
Martin North, industry director at Fujitsu Australia, says Australia is heading for a system where consumers will soon be offered individual interest rates, varying according to their specific circumstances and spending habits.
"These laws are taking us to 'risk-based pricing', where people deemed more risky will be charged more, and those with spotless credit records and transparent spending habits will get the best deals," Mr North said.
"Getting a mortgage will become easier and cheaper for some, and more expensive and difficult for others.
Unfortunately, experience overseas has shown it's the poorer, more disadvantaged customers who pay the highest rates or are denied the credit they need."
A senior executive of a finance services company admitted to hiding his pregnant wife at home when recently applying for a new mortgage.
"It would have caused more hassle than it was worth if they (the bank) were practising responsible lending, even though I can afford the repayments on my own," he said.
Such subterfuge is not illegal, but it is expected to become commonplace as the public becomes aware of the stricter lending rules.
"Lenders and brokers have to show that they enquired, verified and assessed," said Katherine Lane, principal solicitor at the Consumer Credit Legal Centre NSW.
Penalties for banks or brokers who break the rules will be harsh, with up to two years in prison.
Housing shortfall locking out thousands-AUSTRALIA has 178,000 more potential home buyers than available properties,with Queensland and Western Australia accounting for almost half the total shortfall over the past decade,a government advisory body confirm
Apr 28, 2010
But NSW is the state having most trouble keeping up with demand, The Australian reports.
Slow planning processes and a sick building sector delivered barely one new house for every two new households that were prepared to buy last financial year.
The benchmark report by the National Housing Supply Council warns that the national housing supply gap will increase by 50,000 by June 30 next year, and the final figure may be much worse if one or more states fail to deliver on their modest targets.
On present trends, the total gap will reach 640,000 by 2029.
In a carefully worded criticism of the tax system, the report said the rules were skewed towards home buyers and mum and dad landlords at the expense of investors to build more medium-density housing for the future.
"Large-scale investors face tax disincentives to invest," the second annual NHSC report said.
"The council is not yet commenting on the changes to taxes and transfers that could enhance the efficiency of the housing market since that is within the scope of the Henry review of taxation."
The estimate of the previous supply gap to June 30, 2008, was revised up from 85,000 to 99,500 to take in better data and higher than expected immigration.
From this new baseline, a further 78,800 households were unable to satisfy their demand for housing in the past financial year - mainly because the global financial crisis placed a brake on new developments.
This brought the total gap to 178,400 by June 30 last year.
NSW accounted for almost 40 per cent of the national spike in 2008-09.
More critically, it was the only state that could not satisfy more than 50 per cent of the new demand, with 23,600 additional dwellings serving an extra 54,200 prospective buyers in the last financial year.
With new housing taking between six and 15 years from planning to delivery, the shortfall in NSW may last another decade.
The NSW supply response rate of 43.5 per cent in 2008-09 compared poorly with the 71.3 per cent result in Queensland, 68.6 per cent in Victoria and 59.1 per cent in Western Australia.
The report notes that the states and territories see scope for 176,000 additional dwellings a year this financial year and next.
"The council is concerned that if only a small proportion of these potential new dwellings do not proceed to completion - which is highly likely - new dwelling completions will not meet the increase in underlying demand."
The big losers are lower-income earners, who are shut out of the property market. Even if the market could correct for the shortfall, there will still be a gap at the bottom end that would require government intervention.
Tax review rate brake - BANKS will find it tougher to apply out-of-cycle interest rate rises on home loans if, as expected, the Henry review of the tax system urges the introduction of a tax break on savings.
Apr 28, 2010
A tax break on savings would be a big benefit for banks because it could generate more than $130 billion in additional deposits, potentially lowering their funding costs.
But any measure to increase deposits -- which could cost the government as much as $1 billion annually in lost revenue -- would come with a significant political catch, according to Royal Bank of Scotland economist Kieran Davies.
"As a quid pro quo, the government could presumably pressure the banks to reduce lending rates relative to cash rates," Mr Davies said.
Banks blamed higher funding costs for recent home loan rate rises that exceeded moves in the official cash rate. But these efforts to recoup costs have sparked a furious backlash from customers and politicians.
Some bank executives have privately expressed concern that the government might seek to extract a "social dividend" from the sector in an election year.
Details of the Henry tax review will be announced on Sunday, with Treasurer Wayne Swan recently describing the overhaul as providing long-term foundations for the tax system.
Others measures widely expected to be contained in the review are the introduction of a resource rent tax and the phased lowering of company tax rates.
Banks have been lobbying for a reduction of marginal tax rates on savings as a key measure to resolve the structural problem they face of lending more than they generate through deposits.
The Australian Bankers Association said yesterday that encouraging more savings in bank deposits could restore a reliable funding source for banks while encouraging a higher national savings rate.
Bank deposits now carry the highest effective marginal tax rates of all types of savings.
"A more equitable tax treatment of deposits will make the Australian economy less vulnerable to international financial shocks because of the reduced need for Australian banks to rely on foreign wholesale funding sources," said ABA chief executive Steven Munchenberg.
Macquarie Equities analyst Tom Quarmby believes the government could introduce a tax-preferred bank account, similar to Britain, where savers can place the equivalent of up to $8500 in low-tax accounts.
Mr Quarmby calculates this could provide an annual $130 billion increase in bank deposits, although the funds are likely to be drawn from other sectors such as superannuation, property or equities, which now have a relative tax advantage.
The ABA has argued that other measures, such as eliminating the 10 per cent withholding tax on foreign-raised deposits, would help strengthen lending competition.
Foreign-owned banks claim the tax acts as a disincentive to tap their international pool of deposits. Lenders including Dutch bank ING Direct have said the tax makes it uneconomic to access deposits sitting in other parts of the group.
Home owners, markets await inflation data - TODAY'S inflation figures could see the Reserve Bank snap into action next week and deliver borrowers their third interest rate rise of the year.
Apr 28, 2010
Economists believe a stronger-than-expected rise in the consumer price index could prompt another 25 basis point rate hike as the central bank tries to ensure a steady recovery.
Inflationary pressures are already building, with the latest producer price index rising 1 per cent in the March quarter -- its fastest pace in 15 months and ahead of market expectations for a 0.6 per cent gain.
Although the PPI - which measures prices paid for good and services at the final stage of production - does not directly correlate to consumer price inflation, economists said the surprise outcome sounded a warning for today's figures.
"At the margin it would be reasonable to think that perhaps we could see some upside risk to the CPI numbers," said ANZ senior economist Amber Rabinov.
"We think a (quarter-on-quarter) read of at least 0.8 per cent for core inflation would be required for the RBA to contemplate a rise in May."
ANZ is expecting core inflation to post a 0.6 per cent rise for the March quarter, just under market expectations of 0.7 per cent.
Financial market betting on a 25 basis point rate rise to 4.5 per cent edged up 5 per cent to 28 per cent yesterday, while the Australian dollar eased 0.5 per cent to US92.50.
The business inflation figures came as the latest National Australia Bank business survey indicated that the recovery was on track.
Business confidence and conditions fell slightly in the three-month period but remained relatively solid overall.
There were encouraging signs for investment with the survey finding that business capital spending plans over the next 12 months "shifted up slightly" in the March quarter to "moderately positive" levels.
"Overall . . . short and long-term expectations for business conditions remain robust and broadly in line with pre-GFC levels," said NAB chief economist Alan Oster.
"While every RBA meeting is potentially live, depending on data, we have pencilled in rate rises in May, August, September and December."
However, some businesses are still under pressure with the latest Dun & Bradstreet business-to-business trade payments figures showing many firms are taking longer to pay their bills.
The analysis of more than nine million current accounts receivable records by the credit agency found that payment terms in the March quarter rose to 54.1 days -- more than two weeks above the standard 30-day term.
Dun & Bradstreet chief executive Christine Christian said the economic recovery could falter if businesses failed to get their affairs in order.
"Cash flow and liquidity are vitally important during a period of economic recovery as firms require funds to take on new staff, increase their inventories and invest in their business to meet growing demand," she said.
"To meet this challenge and ensure the recovery continues to gain strength, Australian executives need to take prompt action to collect their bills and improve their cash position."
Economists tip moderate inflation rise - Official figures out today are tipped to show a widespread but moderate rise in inflation for the March quarter. The quarterly figures will be released by the Australian Bureau of Statistics later this morning.
Apr 28, 2010
The median forecast by market economists is for a rise of 0.8 per cent in the consumer price index, which would take the annual rate of headline inflation to 2.8 per cent.
The chief economist at BT financial group, Chris Caton, says the Reserve Bank will be looking for signs that underlying inflation is on the way down.
"A number, say 0.9, would pretty much seal the case for a rate rise," he said.
Mr Caton says if the figures show underlying inflation is on the way down, the Reserve Bank should keep interest rates on hold next month.
"My suspicion is that if all comes in as the market currently thinks, the Reserve Bank will opt to pass [on an interest rate rise] in May," he said.
"After all it has already raised rates in the past two months.
"But if there is any sign at all that inflation has a bit more life than thought then they would easily raise rates."
There have been five rate rises over the past seven months.
Mr Caton says inflation is likely to be spread across a range of sectors and include key seasonal influences.
"In the March quarter there are always seasonal influences coming from education and pharmaceuticals [and] food prices," he said.
"I think the broad picture will be that inflation will be fairly widespread but moderate."
Rising interest rates to hit renters hard - INTEREST rate rises during the next two years is going to hit tenants hard as the cost of escalating mortgage payments is passed on to tennants.
Apr 27, 2010
TENANTS can expect to pay out an extra $5 billion or more in the next two years as landlords push up rents to cover spiralling mortgage costs.
Property analyst Residex and the country's biggest real estate chain Ray White say the Reserve Bank's lifting of interest rates is flowing straight through to the rental market.
A shortage of available properties and increased population are adding to the rate pressure, with weekly rents expected to rise between $40 and $100 in the next two years.
"Every force in the marketplace will be driving rents higher,'' Ray White director Ben White says.
"The mortgages of rental property owners are becoming more expensive, so it's inevitable that this will result in rents going up,'' White says.
There are about 2 million rental properties in Australia and if rents increase an average of 7 per cent it will push them up by about $20 a week this year, according to Ray White. However, property analyst Residex paints a bleaker picture.
It expects rents to rise more rapidly, predicting Sydney will be hardest hit, with rents expected to be $108 a week higher in two years, while Melbourne rents are expected to be $71 a week more expensive by 2012.
Rents in the other states are all forecast to be higher by more than $40 a week within the next two years, Residex chief executive John Edwards says.
A rise of $50 a week is forecast in Hobart; $47 in Adelaide and $46 in ACT.
"It's a perfect storm because while rents are rising, tenants are suffering but in most cases the increases in rents won't be enough to cover the higher mortgage repayments,'' Mr Edwards says.
Although landlords can offset some losses against other income tax through negative gearing, they can only claim back an amount equivalent to their marginal tax rate.
And the expected rise in rents will increase the number of tenants in ``rental stress'' by about 50 per cent, according to Martin North, director at Fujitsu Consulting.
North expects the number of people who struggle to pay their rent to increase from 44,000 to 66,000.
Crackdown to help first-home buyers - THE federal government has admitted its new crackdown on foreign investors is an acknowledgement that Australian first-home buyers are being priced out of the market.
Apr 27, 2010
The tightening of foreign investment rules require temporary residents to be screened and get permission from the Foreign Investment Review Board to buy a property, sell their property when they leave Australia and build on vacant land within 24 months or sell.
There have been anecdotal claims of foreign investors - especially wealthy Chinese families - 'stockpiling' Australian houses and leaving them idle, and of outbidding young people at auctions.
Chinese buyers have been involved in near-record high purchases including an apartment in East Melbourne and a house in Sydney.
Treasury is investigating 50 suspicious cases in Melbourne with those caught facing fines and jail.
The laws will be backed by new punitive measures including: making it easier to fine vendors and real estate and confiscate capital gains; expanded data-matching to improve monitoring and increased enforcement; and a dob-in-style 1800 free hotline for people with suspicions.
The move, announced on Friday, is a reversal of the relaxation of foreign ownership rules 18 months ago.
Prime Minister Kevin Rudd said the changes would make it easier for Australians to get into the real estate market.
"We want to make sure that Australian working families are not being priced out of their own family homes,'' he said.
"We want to make sure that foreign investors are not going to force up prices for Australians seeking to buy their own home, buy their first home, and we think that's the right course of action.''
Federal Assistant Treasurer Nick Sherry said that while he was concerned about `stockpiling', he did not believe it had had a major impact on house prices.
He said the tougher rules were brought in because the compliance regime was too weak and Australia had a strong economy that was attractive to foreign investors.
"I don't accept that overseas purchases has, in itself, been a major factor. It may have been a contributing factor,'' he said.
"There is a considerable range of other factors that impact on housing prices: land shortages and the underlying strength of the Australian economy.''
Shadow treasurer Joe Hockey said the government was copying Howard government policy by requiring temporary residents to sell their houses when they leave the country.
"In part, the government is just returning to the old rule set up under the Howard government,'' he said.
Tough new rules for finance advisers - FINANCIAL advisers are to be banned from taking commissions on products they sell, as the Rudd government moves to protect consumers in the wake of a series of high-profile corporate collapses.
Apr 27, 2010
The root-and-branch overhaul of the financial services sector will also include a new law requiring financial advisers to put the interests of their clients ahead of their own pockets, or suffer penalties, The Australian reports.
The changes, announced last night by Financial Services Minister Chris Bowen, will trigger dramatic change in the sector and exceed the recommendations of last year's parliamentary inquiry into the collapse of Storm Financial.
While the superannuation and funds management sectors applauded the reforms as a victory for transparency and a boost for national savings, the Association of Financial Advisers warned they would eliminate choice.
"There's a hint of the nanny state coming in," AFA executive director Richard Klipin told The Australian last night.
And the Federal Opposition, attacking the changes as populist, said they would ravage the financial planning industry and disadvantage low-income earners, who would not be able to afford financial advice if it involved upfront fees.
Last year the parliamentary joint committee on corporations and financial services examined the current regulatory framework to respond to public anger about the collapse of financial companies such as Storm, Opus Prime and Westgate.
Thousands of investors lost their retirement nest eggs in the collapses, many of them blaming advisers receiving commissions.
The committee stopped short of recommending a ban on commissions.
But last night Mr Bowen rejected the kid-gloves approach, announcing a ban to take effect from July 2012 to allow the industry to prepare for the shift.
Mr Bowen said the nation's ageing population needed quality advice, unpolluted by self-interest.
"These reforms will see Australian investors receive financial advice that is in their best interests, rather than being directed to products as a result of incentives or commissions offered to the financial adviser," Mr Bowen said.
The decision means financial advisers will now have to rely on alternative billing methods such as flat fees, hourly rates or fees based on performance or outcomes.
Advisers will also have to provide their clients with an annual notice that will include the option to terminate the advice.
The Government will allow the continuation of percentage-based fees, also known as assets-under-management fees, but only on ungeared products. It will also require accountants offering financial advice to be licensed.
And the Government has asked corporate lawyer Richard St John to examine the creation of a statutory compensation scheme as a last resort for investors who lose money in corporate collapses.
Industry Superannuation Network spokesman David Whiteley, whose organisation has championed an end to commissions, said the decision was a victory for consumers and working people.
"They'll no longer be paying kickbacks and commissions to financial planners through retail funds," Mr Whiteley said.
"Our estimate would be that this could add about $150 billion to national savings over the next decade."
Mr Whiteley said that industry-based superannuation funds had outperformed retail funds by an average of 1.8 per cent a year over the past decade.
But because they paid no commissions, financial planners had no reason to direct clients to them, even though it was in their interests.
However, Mr Klipin said financial advisers worried about the loss of choice and potential unintended consequences in the plans.
"There is a lot of devil in the detail here," Mr Klipin said.
"We think they've taken a step too far. Obviously we'll continue to argue the toss as this goes through the process."
The Investment & Financial Services Association, which represents retail and wholesale funds management, superannuation and life insurance industries, backed the plans.
Chief executive officer John Brogden said IFSA announced last year it was moving to ban commissions.
"This is a massive leap forward in improving the credibility of financial advisers and the faith the community will have in them," Mr Brogden said.
"There is an enormous amount of good in this package for consumers."
Melbourne will be Australia's biggest city by 2037 - MELBOURNE will overtake Sydney as Australia's largest city within three decades, with a lack of housing in NSW driving migrants south.
Apr 27, 2010
The shift in economic fortunes will see Melbourne overtake Sydney's global city status in population, migration and economic growth by 2037, an economic report has forecast.
The report cites evidence of a "three-speed" economy in the past decade: the resources tearaways of Queensland and Western Australia leading the pack, the one-time rustbelt states of Victoria and South Australia growing strongly, and NSW slipping into the slow lane, The Australian reports.
The report, titled Going Nowhere, was compiled by forecaster BIS Shrapnel for the Urban Taskforce developers' lobby.
On current trends, the study finds that by 2020 NSW could enter a downward spiral as the nation faces the demographic challenges of an ageing population - poor housing affordability, lower immigration, less workers, a diminishing tax base and "a greater likelihood economic growth will decline alarmingly".
"Melbourne, with its long-term population growth of 1.3 per cent a year, will displace Sydney as Australia's largest city in 2037," Urban Taskforce chief Aaron Gadiel said.
BIS Shrapnel predicts Melbourne's population will be 5.7 million by 2037.
Another report, by Access Economics, forecasts that South Australia's population will grow by 71,000 to reach more than 1.7 million by 2013-14.
BIS Shrapnel lays the blame for the NSW economic and home-building malaise with Bob Carr, premier from 1995 to 2005, whose land policies and environmental preference for retarding population growth gave birth to the idea "Sydney is full".
The level of the shortfall is shown in figures released under Freedom of Information laws. The data showed Sydney stood to fall short of its housing targets by 27 per cent, delivering about 180,000 new homes by 2013 instead of the 245,000 NSW Government target, The Daily Telegraph reports.
Urban Taskforce chief Aaron Gadiel said the report showed a global city in decline.
The report says the five major problems with planning in NSW are high regulatory risk, high development levies, under-supply of development sites, lack of support for large projects, and landlord market power.
But NSW Premier Kristina Keneally denies that Sydney is lagging behind Melbourne.
"Sydney is Australia's only global city and there is no credible evidence to demonstrate that is going to change.
Ms Keneally said there were a number of factors influencing housing construction starts, not all within the government's control.
"Those that the government can influence we are pushing as hard as possible - things like slashing infrastructure charges and levies, accelerating planning processes," she said.
"There are other things the government can't influence, particularly the availability of finance and the decisions taken by individual land owners to make their land available for development.
"What we have done is use the tools at our disposal to make it as attractive as possible for construction and development to occur."
With the State Government handing down its report card on land supply later this week, a spokesman for Planning Minister Tony Kelly said NSW was set to meet the challenge to its status.
"Sydney is the nation's only international city, which means it is a super magnet for interstate and international migration and growth," he said.
Renters warned to brace for 7pc rise - A property forecaster says rents are likely to climb between 6 and 7 per cent this year, after stagnating last year.
Apr 23, 2010
The rental report by Australian Property Monitors (APM) shows average capital city rents increased by only 2 per cent last year but have already gone up 1.5 per cent in the first three months of this year.
APM economist Matthew Bell says it is not surprising that rent rises are returning to the average levels of the past five years, given the economic recovery.
"Long-term, we've seen house rents in the major capitals rise by between 6 and 7 per cent, and a bit higher for units," he said.
"Given the flat 2009, I think we'll get to those levels, if not higher.
"The first quarter of 2010 already shows that for most capitals we're well on the way to that 6 to 7 per cent annual growth rate."
Mr Bell also says there are more potential buyers being priced out of home ownership.
"This time last year, all through last year, ownership was quite a good alternative for a lot of renters and, given the recent strong price rises we've seen, that's not as much the case now," he said.
"There are some first home buyers where affordability is an issue, and investors are coming back into the market and snapping up some of those houses."
Sentiment strong despite rate rises - Consumer confidence slipped only 1 per cent this month, despite the survey being taking just after the Reserve Bank's fifth interest rate rise in seven months.
Apr 23, 2010
The Westpac - Melbourne Institute consumer sentiment index slipped from 117.3 in March to 116.1 in April.
Westpac's chief economist, Bill Evans, says it is a surprisingly good result given the rate rise this month.
"Despite a second consecutive increase in the standard variable mortgage rate of 0.25 per cent in April the Index has hardly moved," he noted in the report.
"In fact, it follows a 0.2 per cent increase in March in response to the 0.25 per cent increase in the standard variable mortgage rate which was announced earlier that month."
However, Mr Evans says bigger falls in confidence are likely if mortgage rates keep rising from the current average standard variable rate of 7.15 per cent.
"In the last tightening cycle the big responses to rate hikes started once the standard variable mortgage rate exceeded 7.3 per cent," he explained.
"When the standard variable mortgage rate was increased from 7.05 per cent to 7.3 per cent following the RBA's 25 basis point rate hike in March 2005, the index fell by 15.5 per cent from 123.1 to 104.0.
"Following the subsequent seven rate hikes between May 2006 and March 2008 the average fall in the index in response to a rate hike was 8.5 per cent."
RBC Capital Markets senior economist, Su-Lin Ong, says the strength of consumer confidence may give the Reserve Bank encouragement to raise rates again.
"As the RBA ponders the appropriate level of cash and the likely need to move to a more restrictive setting later this year, it will take comfort from the resilience in the various confidence measures," she wrote in an analysis of the confidence figures.
However, while the index showed a modest fall of 0.6 per cent in the category 'household finances compared to a year ago', it had its sharpest fall in nearly two years (of 8 per cent) in 'expected family finances over the next 12 months', suggesting consumers are wary of further rate rises.
CommSec's chief economist, Craig James, also says the confidence levels have not translated into retail sales, especially among recent home buyers.
"Generation Y is no doubt happy and spending. But faced with the prospect of higher loan repayments, Generation X needs to be tempted with discounts in order to part with their cash," he wrote in an analysis of the figures.
"Generation X consumers generally have higher incomes than their younger counterparts but if they aren't spending then retailers are feeling it."
Tough times ahead for Qld property market - A senior economist says north Queensland's property market could suffer in the next few months after the rise in interest rates and the Federal Government's decision to reduce the first home buyers grant.
Apr 23, 2010
Ben Phillips from the Housing Industry Association says the rising unemployment rate in the region is also a concern.
But he says he does not see interest rates reaching 10 per cent before the end of the year.
"Certainly we would expect interest rates will rise probably another half a per cent to a per cent throughout the course of this year," he said.
"It will take the standard variable interest rate up to around the eight per cent mark."
Interest rates nearing normal levels: RBA - The Reserve Bank has signalled its recent aggressive approach to interest rates may be nearing an end, saying official interest rates are not too far away from what policy-makers consider to be "normal" levels.
Apr 23, 2010
RBA assistant governor Guy Debelle has told a Senate inquiry into finance for small business, the economy has been recovering well and the Reserve Bank is trying to ensure the current pace of growth can be sustained.
Last week, the Reserve Bank raised the official cash rate to 4.25 per cent, marking its fifth rate rise since last October.
Dr Debelle says at that current setting, the cash rate is closer to average levels.
"We are deciding that the situation where we needed historically low interest rates is no longer necessary, so we're moving back to something around about average levels, which is not far away from where we are at the moment," he said.
When asked by the South Australian Senator Annette Hurley whether the Reserve Bank was trying to rein in demand by raising interest rates, Dr Debelle said that was not the case.
"We're not trying to depress demand, we're trying to make it grow at a sustainable pace," he said.
The central bank has previously said that normal or average rates would be somewhere in the vicinity of 4.25 to 4.75 per cent.
Dealing with the debt spectre: interest rates - WITH rising interest rates comes the question of whether you are carrying too much personal debt.
Apr 22, 2010
Endless surveys show Australians are facing increasing debt stress but, to paraphrase John O'Brien's Hanrahan, will we all be rooned? The answer is largely, no.
Earlier this month Veda Advantage's biannual Australian Debt Study revealed one in five Australians with debt were finding it difficult to make repayments or were unsure how they would make their next repayment, The Australian reports.
Another report by mortgage broker Loan Market found more than 40 per cent of Australians spent about half their monthly income repaying debts.
But it all needs to be put in perspective.
Saul Eslake, an economist at the Grattan Institute, says while the fears about defaulting on loans are exaggerated, Australians cannot go on borrowing the way they have for the past 20 years and there are signs many are reining in their borrowing.
Everything is relative. If you are earning $50,000 and are spending 50 per cent of your income on interest repayments then it can be argued you are vulnerable to rate increases and-or defaulting on your loan.
But if you are earning $200,000 it can be quite a different story.
Indeed, Shaun Cornelius, chief executive of Infochoice, says the percentage lenders apply to your net disposable income to calculate how much they will let you borrow ranges from 30 per cent for those on lower incomes to 50 per cent for those on higher incomes.
So if that is the rule of thumb, then lenders are using the wrong criteria or the shock horror element is exaggerated.
In the past banks may well have been willing to offer loans at levels not deemed prudent. Cornelius says he expects lenders to respect the practice of responsible lending and not offer more than is prudent.
Another yardstick that is used and applies when mortgage rates are what Martin North of Fujitsu calls a middle-of-the-road rate of 9 per cent is that your borrowing should not exceed 3.5 to four times your gross income.
But North also says it's not so much a percentage or a multiple that matters but your ability to repay a loan.
A report by Household Income and Labour Dynamics Australia and the Melbourne Institute of Allied Economic and Social Research in late 2008 found only 2 per cent of householders with owner-occupier mortgages fulfilled two criteria indicating increased vulnerability: spending more than 50 per cent of disposable incomes on mortgage repayment and a loan to value ratio of 90 per cent or more.
In its quarterly Financial Stability Review released in March, the Reserve Bank said: "Although the share of households fulfilling at least one of these criteria has risen in recent years, it was still the case that more than 90 per cent of owner-occupier households with mortgages had an LVR below 80 per cent and-or a debt servicing ratio below 30 per cent of income."
Good debt v bad debt
So while some Australians may be at breaking point in the face of rising rates, there are many more who have a buffer to cope with such eventualities. Either they allowed for a 2 per cent rise in interest rates if they took out a loan recently or maintained repayments when rates were low so they have consistently paid a higher rate.
And not all debt is bad debt. Bad debt is where you are paying interest on something that depreciates in value, such as buying a car or borrowing for a holiday; a good debt is where you borrow to make money through investment.
Credit card debt is about the worst bad debt given some providers are charging more than 20 per cent for a full rewards card. So any credit card debt could be deemed too much. Many Australians recognise that credit cards are expensive and this has been borne out with EFTPOS and debt cards growing in popularity.
According to Harry Senlitonga, senior analyst at Datamonitor, credit cards grew by 6 per cent last year while EFTPOS-debit cards jumped 13 per cent.
Senlitonga put it down to two factors. "People have become more conservative with their money and tightened their budgets while on the supply side the major banks have recently started offering debit cards," Senlitonga says.
If you are faced with too much credit card debt, then consolidate. As Cornelius says: "A personal loan from a credit union is 9 to 11 per cent. But even if you have a credit card make sure you have one with low rates of 10 to 12 per cent."
Protecting your credit card in cyberspace - THERE seems to be no limit to what you can buy online these days but there are also plenty of risks when you send your credit card details into cyberspace.
Apr 22, 2010
"There's no doubt that online shopping has its fair share of risks," says Choice spokeswoman Elise Davidson.
"It's hard to know when a company is trustworthy.
"You could pay for goods that never arrive and who knows what happens to the personal information you provide?"
"By checking an online shop's terms and conditions, privacy policy, complaints procedures and whether it has a secure checkout, you can minimise the risks of online shopping."
According to Davidson, before handing over credit-card details, consumers should do a thorough search for the company's name and "complaints", and check the Australian Securities and Investments Commission website at www.asic.gov.au for problems with the company.
And look for a business street address, phone number and Australian Business Number before making a purchase because if there are any problems, "the more information you have, the better off you'll be", she says.
Choice also warns of differing consumer laws in other countries, so if you buy from an international website and encounter difficulties, you may have to contact the consumer affairs organisation in that country.
It's also good practice to always check credit-card statements carefully. Only shop at websites that use a secure payment facility and never tell anyone your password or PIN.
Davidson says some consumers keep a separate credit card with a lower balance for shopping online, limiting any unauthorised spending that could take place.
The Australian Competition and Consumer Commission says that when people buy goods online from an Australian-based trader, their consumer rights are the same as if they made the purchase in a traditional shop.
The ACCC says people who shop online should print out any forms they have filled in and keep copies of any emails as a record of the offer they have accepted, so if there are any problems, they can prove the terms of the contract entered into with the business.
Credit card transactions jump in February - THE total value of credit and charge card transactions, including advances, rose by 6.05 per cent in February, Reserve Bank figures released show.
Apr 22, 2010
Australians spent $18.2 billion on their credit and charge cards, compared to $17.1 billion in January, according to the figures which are not seasonally adjusted.
Total credit and charge card balances outstanding increased by 2.1 per cent to $47.124 billion from $46.152 billion.
Balances outstanding rose by 5.18 per cent over the past 12 months.
The average credit card account balance increased by 1.9 per cent to $3250 in February from $3189 in January.
The average credit card account balance in February was 3.29 per cent higher than a year earlier.
Credit and charge card card repayments fell by 4.7 per cent to $17.716 billion in February from $18.593 billion in January.
Repayments in February were up by 5.5 per cent from a year before.
By value, credit card purchases increased by 6.1 per cent to $17.321 billion in February from $16.322 billion in January and rose by 7.1 per cent over the year to February.
The value of cash advances on credit and charge cards rose by 4.8 per cent to $896 million in February from $855 million in January and were down by 6.95 per cent from $963 million in February 2009.
The number of EFTPOS transactions, including both purchases and cash-outs, fell to 160.92 million worth $10.655 billion in February, from 173.179 million worth $11.404 billion in the previous month.
EFTPOS transactions rose by 9.96 per cent by value from 12 months earlier.
Tweaking super can boost eligibility for Centrelink benefits - YOU may find that by simply tweaking your superannuation you are entitled to some hefty Centrelink benefits when you least expect them.
Apr 22, 2010
Self-funded retirees still reeling from the recent global financial crisis should consider all their options to make sure they are maximising their cash flow as year end fast approaches.
Many asset values took a pounding during the financial crisis and this might mean you fall below the assets test in some cases.
A review of the way assets are allocated and whether they are held inside or outside a super fund might also throw up some unexpected benefits.
In the lead-up to the end of the financial year, advisers are encouraging retirees to check with Centrelink to find out whether they now qualify for a part age pension to boost their income.
Even if you can get just $1 of age pension, you will be entitled to a pensioner concession card and all the benefits and discounts that come with it.
If someone has reached, or is approaching, eligibility for the age pension and they have a younger spouse who is not yet eligible, there is a strategy to add up to a few thousand dollars to your pocket.
At the moment, men are eligible for the aged pension at 65 and women at 64. However, by 2023 the age will have increased to 67 for men and women.
From March 20, 2010, the maximum fortnightly age pension payment is $644.20 for a single retiree and $485.60 for each person in a couple, but an income and assets test will be used to work out how much you actually get.
AMP financial planner Tony Rigby says if a retiree cashed out a portion of their super and transferred it to their younger spouse's fund, it would help reduce their assessable assets and they may then qualify for a bigger age pension.
"I come across many elderly people who are missing out on money that they're entitled to because they don't understand how to maximise their age pension benefits,'' Mr Rigby says.
"Some retirees are missing out on full or part pensions that they could be eligible for and it means they could be losing thousands of dollars each year.''
"By missing out on the pension, retirees could also be missing out on a host of other benefits such as a pensioner concession card, low-income healthcare card and rebates on their rates and electricity bills.''
According to Mr Rigby, when most people reach retirement age, they simply transfer all their super into an allocated pension to obtain an income stream.
But a person's allocated pension is assessed by Centrelink's income and asset test and if it is more than $252,500, the age pension payments will be reduced accordingly.
"A far smarter option for retirees is (only) putting a portion of their superannuation into an allocated pension, so it is kept below the minimum threshold, and cashing out the remainder of their super and diverting it into the superannuation fund of their younger spouse,'' Mr Rigby says.
"This strategy is only effective if a retiree's spouse is below age pension age because their superannuation is not subject to Centrelink's asset and income test.
"And with the retiree's assets and income now below the assessable threshold, they could be eligible for a more generous pension. It's a significant bonus.''
Mr Rigby says the money a retiree diverts into their younger spouse's super could be made as a spousal contribution, which means they could also be eligible for a tax offset of up to $540.
"This is a one-off payment putting even more money in their wallet,'' he says.
"If made as a personal contribution, the younger spouse may also be eligible for the government co-contribution of up to $1000, so it's a win-win situation.''
Pension plus
Access to the aged pension offers benefits such as concessional rates for prescription medicines listed on the Pharmaceutical Benefits Scheme as well as state and territory-based concessions on services such as travel, council rates and utilities.
This can save a considerable amount on household expenses every year.
What are assets?
Assets include cash, super, investment properties, loans to family members, lifestyle assets such as boats or caravans, and assets held in private companies or trusts. The family home is not included in the list.
Income test
When determining whether a person will receive a government pension, Centrelink applies an income test in addition to the asset assessment.
David Kayser, senior wealth adviser at Barker Wealth Management, says most of the population is eligible for government family or retirement benefits at some point in their lives.
Family friendly
It's vital people are aware of their entitlements, especially families, Mr Kayser says.
"For example, when raising a family, the baby bonus is available to families who earn less than $75,000 in the six months following the birth of a child. Eligible families can receive a payment of $5185 per child, paid over 13 fortnights,'' he says.
Families could also be eligible for either Family Tax Benefit A or Family Tax Benefit B payments that assist parents with the costs of raising their children.
"Families with annual incomes under $44,165 are eligible for a maximum fortnightly payment of $156.94 per child although this rate varies depending on the number and age of children,'' Mr Kayser says.
The rate reduces when the family income reaches $58,090 and cuts out at $101,045.
Families with only one primary income earner could be eligible for Family Tax Benefit B if the income is less than $150,000.
There is also assistance with childcare costs if the household is receiving a family tax benefit.
"These amounts may be reduced based on Centrelink's income and assets tests,'' he says.
How much can you access?
Assets test for homeowners
If you are For full pension For part/allowance pension
Income up to.....less than
single $178,000....$645,500
partnered (combined) $252,500...$957,500
a couple but separated
due to illness (combined) $252,500...$1,187,500
one partner eligible $252,500...$957,500
Assets test for non-homeowners
If you are For full pension For part/allowance pension
Income up to ......less than
single $307,000......$774,500
partnered (combined) $381,500....$1,086,500
a couple but separated
due to illness (combined) $381,500.....$1,316,500
one partner eligible $381,500.....$1,086,500
If you qualify for an age pension, you may be entitled to other payments and benefits including:
* pensioner concession card * pension supplement
* remote area allowance * rent assistance
* services and programs
No room to move as cost of land surges - LAND prices are growing at their fastest pace since 2004, a new report says, raising fears that a housing shortage will push up prices and rents further.
Apr 21, 2010
The price of a typical block of undeveloped land jumped by 14 per cent last calendar year to a record $185,222, galloping ahead of inflation and construction costs, according to figures published yesterday by the Housing Industry Association and RP Data.
The report blamed the rise on lagging land supply, reflected by a fall in land sales in the December quarter. The number of land sales in the quarter was 4.6 per cent lower than the same period in 2008, it said, suggesting the rate of new home construction will start to sag this year as interest rates creep up.
In the previous September quarter, in contrast, land sales hit an annual growth rate of 26 per cent, raising hopes of a recovery in housing construction.
The HIA said the sharp slowing in sales did not bode well for Australia's attempt to make up for a shortage in housing, which could force up rents and inflame the nation's housing affordability woes.
The HIA's chief economist, Harley Dale, said the last housing boom had seen land prices surge faster than building costs and the economy-wide rate of inflation.
"Only six months into a new home building recovery this situation is happening all over again,'' he said. ''If this situation continues then the recovery will stall, the housing shortage will worsen, and there will be upward pressure on rents and on existing home values that could have been avoided." The report said the jump in land prices coupled with falling sales presented ''clear evidence'' that governments were failing to release enough land to meet demand for new housing.
But some councils dispute this argument, saying they have large amounts of zoned land up for sale but developers are not buying.
A spokesman for the NSW housing minister, Tony Kelly, said there were 30,000 lots that were ready and serviced in Sydney and it was up to developers to lodge applications and start building.
Sydney was the most expensive market for new land, with the median lot fetching $275,000, 10 per cent more than a year earlier.
The median block in Melbourne sold for $179,000, it said, and the number of land sales was falling sharply. Melbourne land sales in the six months to December were 55 per cent lower than a year earlier.
On a square metre basis, Perth land was the most expensive in the country at $521, a rise of more than 200 per cent since 2002. Sydney lots were close behind at $497 a square metre, a 20 per cent rise on 2002 levels.
Macquarie's Robertson sees easing in house price gains - Macquarie Group interest rate strategist Rory Robertson has stepped up criticism of debt-doom prophet Steve Keen while admitting home price gains will be ''dampened'' in coming months.
Apr 21, 2010
Mr Robertson complained that Dr Keen - the University of Western Sydney economics professor who five days ago began his trek to Mount Kosciuszko after losing a high-profile wager about the direction of Australia house prices - ''still is forecasting economic doomsdays to anyone who has time to waste.''
In a section of Mr Robertson's latest note to clients, Mr Robertson said ''anyone with their eyes open is aware that unusually low funding costs over the past 12-18 months powered a good part of the double-digit house-price gains that have excited so much comment and talk of 'bubbles'.''
Even so, those gains - including a 13 per cent jump in median home prices to the end of February - will become ``much harder to come by in the next year or two'' as interest rates have already risen and more official rate rises are in the pipeline, he said.
Mr Robertson and Dr Keen clashed over the future of house prices during the depth of the financial crisis, with the two making a widely publicised bet in November 2008. Dr Keen agreed to climb Mount Kosciuszko if prices fell less than 20 per cent from their peaks. Since then, a quicker-than-expected recovery in the global economy, lower borrowing costs, local subsidies for first-home owners and swelling urban populations have combined to send house prices sharply higher.
Mr Robertson said he had ''no strong view'' on the outlook for average house prices with Australia's strong population, jobs and economic growth combining with a lacklustre pace of housing construction. Further interest rate rises, though, would take some of the momentum out of the market.
''Indeed, another 2 percentage points worth of higher mortgage rates over the next couple of years wouldn't surprise,'' he said.
The Reserve Bank today released the minutes of its April monetary policy meeting when it decided to lift its key cash rate for the fifth time since October, indicating that the door remains open to another increase in May.
RBA flags plan to take rates higher - THE Reserve Bank board isn't done with us yet. The minutes of the board's April meeting, at which it pushed up its cash rate for a fifth successive time, show its members believed the rate would probably need to rise
Apr 21, 2010
Since October the Bank has raised its cash rate from 3 to 4.25 per cent, lifting the typical standard variable mortgage rate from 5.8 per cent to more than 7 per cent and adding $240 to the monthly cost of servicing a $300,000 mortgage.
The minutes indicate the bank has been surprised by sudden surges in coal, iron ore and gas prices, saying Australia's terms of trade are now likely to increase far faster than forecast in February, and to drive strong growth in nominal incomes.
While this would benefit Australia, the board says it would ''also pose challenges''.
The wording suggests the bank is sharply revising up its forecasts for economic growth and its assessment of how high rates need to climb. It also suggests Treasury is revising up its budget forecasts.
Unusually, the minutes explicitly cite the ''noticeably stronger than expected'' jump in the terms of trade as a key reason the board decided ''it would not be prudent to delay'' a rate rise.
They also express concern about housing prices continuing to climb despite a series of rate rises. On this point they partly blame the land usage policies of state and local governments, as well as a shortage of finance to developers, for a lack of expansion in the supply of new housing.
Although the central bank describes its April rate rise as ''a further step in the process of returning interest rates to more normal levels'', the minutes raise the prospect that the bank will soon feel compelled to push them beyond normal.
''The bank looks likely to upgrade its outlook for the economy in May,'' said NAB economist Rob Henderson. ''That means rates will need to be above normal.''
Commonwealth Bank economist John Peters said he would not be surprised if the cash rate climbed from its present 4.25 per cent to 6 per cent by the end of 2011.
''Rocketing iron ore and coal prices have given the Reserve an upbeat view of growth prospects,'' Mr Peters said. ''We still see the cash rate at 5 per cent by the end of the year, but beyond that the bank will move to a contractionary stance.''
A cash rate of 6 per cent would lift the standard variable mortgage rate to around 8.8 per cent, higher than the 8.57 per cent charged when the Coalition left office but below the peak of 9.36 per cent reached in late 2008.
It would add a further $340 to the monthly cost of repaying a $300,000 mortgage, bringing the total extra monthly impost since October to $580.
First-home buyers set to join the fray again - THE real estate surge that began on Sydney's fringe with first-home buyer acquisitions in 2008 and last year has waned, but BIS Shrapnel expects the first-timer numbers will start to recover in the second hal
Apr 21, 2010
The government-induced activity triggered sellers in western Sydney - Blacktown, Parramatta, Liverpool - to move a little further towards the city, which generated a strong upturn, especially in Canterbury-Bankstown, Ryde and the inner west.
''BIS Shrapnel calls this a liquidity process, as it is a wave from one part of the city to another. Upgraders were reliant on the record level of demand from first-home buyers but far fewer first-home buyers since November has inevitably meant a lower rate of turnover.
''This dampening influence will move through middle- and inner-ring suburbs over the first half of 2010,'' said Jason Anderson, the senior economist at BIS Shrapnel.
''It is clear that the slump in first-home buyer numbers is proving to be substantial, with loans for the three months to February showing an annualised drop of 31 per cent, following the end of the first-home buyer boost scheme.''
Signs of prices softening in the middle-ring suburbs had emerged in clearance rates for Canterbury-Bankstown, St George-Sutherland, and Auburn and Parramatta districts, he said.
These suburbs have tracked closer to 60 per cent clearances, lower than the 70 per cent average.
''The effect is likely to be more modest on the inner-ring suburbs,'' Mr Anderson said. ''By the middle of [the year] we expect that first-home buyer numbers will start to recover, and this will be supportive of improvement in turnover during the second half.
''The rental market remains very tight and there are still many potential first-home buyers who will seek to move out of the family home.''
The National Australia Bank has forecast a 10 per cent increase in property prices over the next year.
''The strength of income growth and further reductions in unemployment means that house prices rise further, notwithstanding a more aggressive Reserve Bank response,'' said Alan Oster, a NAB economist.
The bank has raised its growth forecast from a 5 per cent rise in its March forecast.
In February, the bank backed away from its earlier forecast of a 5 per cent decline in property prices this year.
''Although the first-home buyer boost was removed in December, and interest rates are on a clear upward trajectory, solid drivers of house prices remain in place,'' Mr Oster said.
Keep track of capital gains - Selling real estate can be profitable -- but it's wise to consider the tax implications
Apr 20, 2010
WE ARE a couple in our early 40s looking to sell our home and buy a bigger house. My taxable income in 2008-09 was $110,000 and my wife's income was $40,000. My wife purchased our inner-city family home in 1994 for $127,000 and it was initially rented for 8½ years. The house is in her name. We always intended to live in the house but took some time to renovate. In 2003 we moved in and have lived there for seven years. We expect the house might fetch $800,000 to $850,000. What are the capital gains tax implications for our family home? We are hoping we don't have to pay. J.M.
The fact that you didn't live in the property at first means that there will be CGT to pay when you sell it. The mere intention of making it your principal residence, while initially renting it, is insufficient.
The capital gain will be apportioned according to the time rented and owner-occupied. Thus, if you sell it in 2010, exactly (for example) 7½ years after moving in, and if the net gain after all costs of buying and selling, is, say, $700,000, then 8.5/16 or $372,000 (in round figures) represents the assessable capital gain and thus 50 per cent of this or $186,000 will be added to your wife's taxable income for 2009-10 since it is in her name alone. Additional tax would come to about $76,800.
She can reduce her tax by about $6000 to $7000 by not selling until the 2010-11 year and salary sacrificing 100 per cent of her salary into super (assuming she's an employee) for that financial year.
But that assumes that house prices will remain as strong as they are now until after July. This cannot be guaranteed and some are forecasting a coming weakness in the housing market.
Super fund v term deposit
I TURN 60 in May and have been retired since 2007. I have left my $600,000 super benefit in my employer's fund (IAG) until I turn 60 for tax benefits. I lost $85,000 of it in the global financial crisis but have clawed back $32,000 since and now have a balance of $547,000. I own my home, have no debts. My wife earns $900 a week and we have a 14-year-old son. Should I access my super as a pension or cash in the lot and bank it in a term deposit? D.P.
Your initial 14 per cent fall indicates you had probably left your money in the fund's balanced option. I note in August 2008, the fund (now the IAG & NRMA Superannuation Plan) began to use Mercer as its fund administrator and investment manager.
Although the high rates available with term deposits are attractive, I don't believe it is a good idea to take money out of super, because of the difficulty of getting it back in after the term deposit matures. I note that the Defence Force Credit Union is offering 6.25 per cent for a 12-month term deposit within its retirement savings account. Being a super fund, you can roll over into it and, later, back again, thus staying within the super system.
The other side of the coin is that, once the world economy is through its problems with government debt, there should be a period of growth when sharemarket returns will hopefully be quite good. Looking longer-term, it would be a pity to be locked into a fixed deposit when this occurs, possibly this year.
Pre-retirement options
I AM 57, earning $90,000 a year after a period of unemployment. I have $6000 in a first home saver account and $170,000 in superannuation. I salary sacrifice 16 per cent into super. I pay $1600 a month in rent and receive non-taxable income of $500 to $600 a month. I am paying off a $250,000 bank loan for a block of land at $1000 a fortnight: the balance is $220,000 over 20 years. Apart from a car, I have no other assets but I expect an inheritance of $100,000. I wonder if I have enough time left (I want to retire at 65) to pay out my loan and build a small house. What options do I have? M.T.
You've left things a little tight. I suggest your best option is to cease paying rent. Assuming your bank will give you a 20-year loan (to age 77), then your current rent payments of $1600 a month would allow you to pay off a $200,000 home loan, assuming an annual rate of 7.5 per cent and no indexation to your repayments (which would allow for a larger loan).
Alternatively, if you can get a 10-year loan (to age 67), your $1600 a month would allow for a $130,000 loan, again at 7.5 per cent a year.
One option would be to build a project home on your land for less than $200,000 and then pay off both loans over 10 to 20 years, with no greater outlays ($3760 a month) than at present. The major risk is the probability of higher interest rates but your inheritance could offset this.
Another option is to sell your land and buy a unit closer to the city. Your current outlay would allow a 10-year loan of $315,000, again assuming an annual rate of 7.5 per cent. Your non-taxable income sounds like an untaxed fringe benefit available to those in the hospital and charity industries. Don't forget these payments can be directed towards paying off a mortgage, always assuming the Henry Report does not come up with some nasty recommendations in that area!
Strategies to enter the property game - With housing becoming less affordable, the question of whether to rent or buy is an ongoing dilemma for many.
The biggest motive for people to buy their own home is to set themselves up financially for the future
Apr 20, 2010
About one-third of survey respondents saw more benefit in property investments than in the sharemarket.
But the survey also found that a further 2 percentage point rise in interest rates would see more than one-quarter of Australians who are looking to buy their first home in the next two years give up on the purchase.
Unfortunately, there is a link between people finding it harder to afford to buy property and higher rents, according to property research group Residex.
If demand for property falls because people can't afford it, there is less likelihood of strong capital growth. Without the prospect of capital growth, investors are reluctant to buy property. If there is a shortage in the number of houses or units available to rent, rents rise.
A financial planner with Strategy First Financial Planning, Patrick Anwandter, says anyone concerned about rising rents could try to negotiate a longer tenancy period.
"If you have been living in a place that really suits your needs - financial and personal - you can seek to lock in a tenancy for, say, four years, which can coincide with the accumulation of a deposit," he says.
Agreeing on rate increases could be a win-win situation. The tenant will have a stable rental period; the owner will have a stable tenant with no vacancies, known rental increases and a tenant who is more likely to treat the property as their home.
Rising rents in many capital cities and relatively low and competitive interest rates mean that now could be a good time to buy.
"If rents are between $600 to $1000 a week then, on those sorts of figures, you would be able to borrow up to $500,000," says the chief executive at Teachers Credit Union, Steve James. People who need to save a deposit could use a first home saver account to accelerate their saving.
These accounts are offered by several financial institutions. To qualify, a first home buyer must be aged between 18 and 65 and make personal after-tax contributions of at least $1000 a year over four financial years.
Savings are taxed at 15 per cent a year but the lender pays that, and the government will contribute 17 per cent on the first $5000 of the contributions that you make each year.
You can save up to $75,000 and when it comes time to take out the money to buy or build a first home it will be tax-free. "You can't touch the money and the government is helping with tax breaks and high interest rates," James says.
There are downsides, however. If you decide not to buy, your money can only be transferred to your superannuation fund, which you can't access until you retire.
Anwandter's advice for younger people is to build as big a deposit as possible. This could mean avoiding mortgage insurance and making fewer repayments.
Anwandter says one strategy for saving is to work out the type of house you want to buy and invest the difference between the rent you are paying and what you would have to pay on a mortgage.
Older people renting through circumstances such as a divorce could look at using superannuation to build up capital in a tax-favourable environment, which can then be drawn down in retirement and used to buy a property.
CASE STUDY
Mia ROSE always thought she would one day buy her own place. To make it happen in Sydney was like a "dream" for the community health promoter.
"I have been living in shared rental places since I left home at 18," the 32-year-old says. "It was the stress of strangers moving in every time someone moved out and two break-ins at the last house I was renting that finally triggered me to think I really have to move.
"To rent a one-bedroom place in the area where I wanted to live was really expensive, so I decided to find out from my bank, the Teachers Credit Union, what I could afford to buy and I found out they would lend me enough to buy something."
Mia says that to save a decent deposit on top of the first home-buyer grant, she had to make sacrifices but it was something she was prepared to do.
"It wasn't easy. I had to scrimp and save and to make what I thought was always a dream happen was great," she says.
Demand fuels housing boom - The governor of the Reserve Bank of Australia, Glenn Stevens, granted his first TV interview as governor this week to warn people that property prices were "getting quite high" and of the dangers of taking on too much mortgage
Apr 20, 2010
Speaking on Channel Seven's top-rating Sunrise program with David Koch, Stevens said: "I think it is a mistake to assume that a, you know, riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. You know, it isn't going to be that easy."
It was blunt talk for a central banker and the message was clear - people should pause for thought before embarking on a mortgage so big it would keep them in hock into old age.
Although he didn't say as much in those words, Stevens concentrated on the near-term prospects of more rate rises. "We cut interest rates to what we call emergency settings when we had an emergency," he said, referring to the global financial crisis. "Once the emergency has passed and things gradually look more normal, then it's not wise to leave interest rates right down at rock bottom any longer than we need."
Just in case anyone watching still missed the point, there was this: "And you shouldn't assume they'll stay low because that assumption will prove to be, you know, unfortunate."
Property prices are mostly beholden to demand. Annual migration is running at 300,000 a year. Since World War II, average annual migration has run at about 100,000 a year. It's a big jump but it is off a population of 22 million, which is twice the population of the mid-1960s. But even in growth-rate terms, it's the biggest migration program since the late 1960s and among the biggest in the world.
Significantly, the number of new arrivals needing somewhere to live is much larger than 300,000. That's because, unlike the 1960s, Australia now has a foreign student population of several hundreds of thousands on temporary visas.
Another factor that has the potential to put upward pressure on prices is the government's changes to foreign ownership rules. A raft of changes came into effect a year ago. The government insists on calling them merely "administrative streamlining". Developers can now sell all of their off-the-plan apartments to foreigners. Previously half were reserved for local buyers.
The biggest change concerns the holders of temporary visas. Under the old rules, foreign investors were restricted to buying off-the-plan apartments.
Under the new rules, those on temporary visas, which includes student visas where the term is at least 12 months, can purchase a property, including established property, and, after they return home, rent the property out for investment. Under the old rules, student-visa holders were limited to purchases of up to $300,000 on established dwellings and were required to sell the property on returning overseas.
This change is likely to widen the pool of property available to the parents of students studying in Australia.
As well as the huge amount of pent-up demand for housing, there's the under-supply. The managing director of BIS Shrapnel, Rob Mellor, says this is the worst imbalance between supply and demand he has seen in his 26 years following the property market.
In 2001-02, the number of new-dwelling commencements in NSW was about 47,000 and now it's running at about 24,000. Yet in Victoria, commencements are running at about 50,000, a record. The difference is startling given both state governments operate in the same economic climate with the same interest rates.
Mellor sheets the blame to the NSW government for not releasing enough fringe land (going back to the 1990s), poor infrastructure planning and high levies on developers.
Even with higher interest rates, there's no reason for thinking house prices will stop rising.
Floored by hot housing - The growing housing shortage can only help property prices despite rising interest rates.
Apr 20, 2010
One more flyer from a real estate agent and I'll have to put a Cape Cod on our letterbox.
They even seem to have multiplied since Reserve Bank governor Glenn Stevens popped up on Channel Seven's Sunrise warning that property was no yellow brick road, should it happen to be on the market. Or words to that effect.
Meanwhile, Channel Nine says it'll rebuild The Block, a show that was perhaps the defining moment of the last runaway property boom. The day it reappears will be proof the market has peaked.
Speaking of peaks, a University of Western Sydney associate professor, Steve Keen, has set out to climb Mount Kosciuszko, having lost a bet that property prices were going to crash.
Far from crashing, they took off. Oops.
An unrepentant Keen says: "This latest house price bubble began when the government doubled and even tripled the first home owner's grant. Along with the decision to allow open-slather purchases of Australian properties by overseas buyers, the Rudd government lit a fuse under house prices."
The weird thing is that each time the Reserve Bank has lifted interest rates since October, property values have risen. No wonder Stevens felt a few not-so-soothing words when everybody was half asleep might do the trick.
To set interest rates, the Reserve Bank pumps money in or out of the banking system by buying or selling government paper, known as open-market operations.
What Stevens is doing is known wryly in the bank as "open-mouth operations", or scaring the wits out of potential borrowers so in the end it doesn't have to raise rates.
So far, this doesn't seem to have been any more successful than the rate rises in cooling the property market.
Clearance rates at the first auctions following Easter were at record levels, volumes are high for this time of year and prices have continued to rise.
No surprise there, considering mortgage rates of 9 per cent and more (about 2 per cent, or eight rate rises, higher than now) didn't hurt the last property boom, which had turned into a bubble before the global financial crisis hit.
Besides, the Reserve's open mouth is saying different things.
Only a few days before Stevens' comments, his deputy, Philip Lowe, pointed out home loan approvals fell four months in a row. Make that five months, because February was down as well. Add tighter lending conditions by the banks as well as first-home buyers dropping out and, according to Lowe, "it is too early to tell whether these contrary signs indicate that some cooling in the property market is in prospect". Certainly if funding is drying up, you can't have a property boom.
The Commonwealth Bank, the biggest home lender, reports a pick-up in lending since March, which suggests that the financial drought might be breaking. Even so, those lost months must stop property prices rising some time soon.
Yet the latest figures also confirm the most bullish sign of all for property, which is that nobody is building new houses.
If fewer places are being built in what is generally acknowledged to be a chronic housing shortage, then the future would have to be very rosy for property prices.
Indeed, that very shortage could well explain why the Reserve is embarking on its open-mouth policy.
It can't raise interest rates too far because it would send developers to the wall and nothing would get built.
"If all we end up with is higher prices and not many more dwellings, then it will be very disappointing - indeed, quite disturbing," Stevens said in November.
I doubt he's disturbed but he must be disappointed. House prices rose an average 12 per cent last year.
By March, two rate rises later, they were rising faster still.
The only other country where prices are rising as fast is China but then there's a connection there.
What's new about this property boom is the demand from China, Hong Kong, India and other parts of Asia brought about partly by still-relatively-cheap finance but mostly by a change in the foreign investment rules the government slipped through in the middle of the global financial crisis.
Under the new rules, or Keen's "open slather", students on temporary visas can buy a property without having to gain approval from the Foreign Investment Review Board.
Their presence is obvious at auctions in areas near universities and tertiary colleges and newspaper reports are already appearing of how they are outbidding first-home buyers.
You can see what's coming next: "Instead of taking our jobs, they're taking our houses."
They're competing at the top end of the market as well, where they're up against returning expats, among others. Since statistics are no longer kept, nobody knows how much foreigners are buying.
But one thing's for sure. The rising dollar will make Australian property more expensive for foreign investors.
As it will the sharemarket.
Speaking of which, property has always been a safe haven after serious sharemarket corrections and it seems this time is no different. So which is looking more promising: property or shares?
The sharemarket has done a good job in getting investors back as well.
It rose three times as fast as property prices last year, suggesting it's the more likely candidate for a bubble.
The stronger economy is good for both and rising interest rates bad.
Both are susceptible to the whims of foreign investors, especially in the case of the sharemarket and Wall Street, which has yet to face the day of reckoning when the US central bank starts raising, or more accurately reintroduces, interest rates, which are officially at zero.
Neither, frankly, is cheap.
But there's one thing property has going for it that the sharemarket doesn't.
There's a shortage of supply, most obvious when you look at rents.
Yields on property are higher than they've been for a long time and they're still rising, which gives them one over the sharemarket, where dividends were cut.
By the way, the fastest-growing rental areas aren't where you'd guess. The best yields are in Darwin, then Canberra, while Melbourne is the lowest, according to rpdata.com.
Anyway, rents are up because of the falling numbers of first-home buyers, who are forced to rent instead, not to mention the impact of higher interest rates.
Hang on, isn't that proof that housing is becoming less affordable?
Less subsidised, yes, thanks to the end of the first home owner's boost.
But not less affordable. Despite higher interest rates and rising prices, housing is the most affordable it's been in six years, says the chief economist at CommSec, Craig James.
Although the median house price has risen 41 per cent since 2003, household disposable incomes have risen more - by 44 per cent.
Even so, the sharemarket looks a better bet for the next year or so than property.
Especially considering that the banks are limited by the amount of funds they can raise in still-jittery offshore markets.
They'll be keener on funding the mining boom than topping up their bursting home loan portfolios.
The slowdown in finance approvals must limit how high prices can go in the short term, especially at the bottom end of the market.
But looking two or three years out, it could be a different story.
Certainly the financing squeeze can only exacerbate the housing shortage.
More migrants are coming in but we're building fewer places for them to live in.
At the current rate of building approvals, it'll take a year to fill the backlog in Victoria and up to three years in NSW.
So where share prices will be governed more by demand, wherever it might come from, for property the swing-wing is supply.
When supply is constrained, it doesn't take much more demand for prices to soar.
Besides, real estate agents are better at spruiking their wares than stockbrokers.
Case study
Property prices in the past three months have gone through the roof, so to speak.
Amanda Gould, who is looking for another investment property, says she is being outbid by up to $40,000 at auctions.
And that's in Sydney, which is lagging behind Melbourne's price surge.
Amanda, a travel consultant at MP Travel, has become so adept at choosing properties she's even set up her own buyer's service.
She's experienced the best and worst of property.
Amanda bought her first unit when she was 18, only to be crushed by 18 per cent interest rates.
"I bought high but sold low," she says.
Still, a six-year stint overseas healed the wounds and she was back in the market "with more money behind me".
She's since turned over half a dozen properties and currently has two, getting finance from "my mentor", her mortgage broker, Catherine Lezer at Smartline.
She's not fazed by rising rates and can't see values dropping.
"The market is very high but it's not going to tail off. A lot of people who are renting and paying more are desperate to buy," she says.
And when you're negatively geared, rising interest rates are also a bigger tax deduction.
"I'm not really worried. I fixed around 8 per cent [two years ago] but rates then dropped so it wasn't the best thing to do. I might fix again if they get to 10 per cent but that would be a good while yet."
Amanda hunts out older places that need doing up within 10 kilometres of the city and in areas she knows.
"They have to be easy to get to before and after work when we're renovating. My husband Lance is very handy."
Top five financing tips
When buying an investment property, mortgage adviser Smartline has these five tips:
1. MORTGAGE INSURANCE ISN'T ALWAYS BAD
Lenders require mortgage insurance, which is expensive, to protect themselves when the loan to equity ratio is too high.
While there are no benefits to an owner-occupier, mortgage insurance can help an investor by reducing the amount of equity that must be put up.
You could buy two investment properties with a 10 per cent deposit and pay the insurance, rather than one with a 20 per cent deposit and no insurance.
2. USING A LINE OF CREDIT AS A WORKING ACCOUNT
If you are negative gearing, consider using the equity in your home as a line of credit. This becomes a working account for the investment loan, covering the shortfall in cash.
The downside is that you're eating up some of the equity in your home, so this only works if the investment property has good capital growth.
3. PLAN AHEAD IF UPGRADING
If you plan to make your home an investment property one day, only put in the minimum deposit initially and any remaining funds in an offset account.
"When you turn it into an investment property it still has a high level of debt on it for tax effectiveness and you have access to every available dollar in the offset account for the deposit on your new owner-occupier property," says the managing director of Smartline, Chris Acret.
4. NEVER PUT THE FAMILY HOME UP AS PRIMARY SECURITY
Don't use one property as collateral for a loan on another.
"Having the properties stand alone provides a greater level of asset protection if something were to happen to the investment property or if it were drastically to fall in value. However, if you do need to cross-collateralise, use the family home as secondary security," Acret says.
5. CHOOSE THE RIGHT LOAN
Basic loans are the cheapest but professional packages have extra benefits such as discounted interest rates with a high annual fee.
"Generally speaking, someone looking to have their family home and one investment property may be better off with a couple of basic loans while someone looking to acquire multiple investment properties may benefit from a professional package. Professional packages also tend to suit 'stand-alone' securities better."
The sharemarket has done a good job in getting investors back as well.
It rose three times as fast as property prices last year, suggesting it's the more likely candidate for a bubble.
The stronger economy is good for both and rising interest rates bad.
Both are susceptible to the whims of foreign investors, especially in the case of the sharemarket and Wall Street, which has yet to face the day of reckoning when the US central bank starts raising, or more accurately reintroduces, interest rates, which are officially at zero.
Neither, frankly, is cheap.
But there's one thing property has going for it that the sharemarket doesn't.
There's a shortage of supply, most obvious when you look at rents.
Yields on property are higher than they've been for a long time and they're still rising, which gives them one over the sharemarket, where dividends were cut.
By the way, the fastest-growing rental areas aren't where you'd guess. The best yields are in Darwin, then Canberra, while Melbourne is the lowest, according to rpdata.com.
Anyway, rents are up because of the falling numbers of first-home buyers, who are forced to rent instead, not to mention the impact of higher interest rates.
Hang on, isn't that proof that housing is becoming less affordable?
Less subsidised, yes, thanks to the end of the first home owner's boost.
But not less affordable. Despite higher interest rates and rising prices, housing is the most affordable it's been in six years, says the chief economist at CommSec, Craig James.
Although the median house price has risen 41 per cent since 2003, household disposable incomes have risen more - by 44 per cent.
Even so, the sharemarket looks a better bet for the next year or so than property.
Especially considering that the banks are limited by the amount of funds they can raise in still-jittery offshore markets.
They'll be keener on funding the mining boom than topping up their bursting home loan portfolios.
The slowdown in finance approvals must limit how high prices can go in the short term, especially at the bottom end of the market.
But looking two or three years out, it could be a different story.
Certainly the financing squeeze can only exacerbate the housing shortage.
More migrants are coming in but we're building fewer places for them to live in.
At the current rate of building approvals, it'll take a year to fill the backlog in Victoria and up to three years in NSW.
So where share prices will be governed more by demand, wherever it might come from, for property the swing-wing is supply.
When supply is constrained, it doesn't take much more demand for prices to soar.
Besides, real estate agents are better at spruiking their wares than stockbrokers.
Case study
Property prices in the past three months have gone through the roof, so to speak.
Amanda Gould, who is looking for another investment property, says she is being outbid by up to $40,000 at auctions.
And that's in Sydney, which is lagging behind Melbourne's price surge.
Amanda, a travel consultant at MP Travel, has become so adept at choosing properties she's even set up her own buyer's service.
She's experienced the best and worst of property.
Amanda bought her first unit when she was 18, only to be crushed by 18 per cent interest rates.
"I bought high but sold low," she says.
Still, a six-year stint overseas healed the wounds and she was back in the market "with more money behind me".
She's since turned over half a dozen properties and currently has two, getting finance from "my mentor", her mortgage broker, Catherine Lezer at Smartline.
She's not fazed by rising rates and can't see values dropping.
"The market is very high but it's not going to tail off. A lot of people who are renting and paying more are desperate to buy," she says.
And when you're negatively geared, rising interest rates are also a bigger tax deduction.
"I'm not really worried. I fixed around 8 per cent [two years ago] but rates then dropped so it wasn't the best thing to do. I might fix again if they get to 10 per cent but that would be a good while yet."
Amanda hunts out older places that need doing up within 10 kilometres of the city and in areas she knows.
"They have to be easy to get to before and after work when we're renovating. My husband Lance is very handy."
Top five financing tips
When buying an investment property, mortgage adviser Smartline has these five tips:
1. MORTGAGE INSURANCE ISN'T ALWAYS BAD
Lenders require mortgage insurance, which is expensive, to protect themselves when the loan to equity ratio is too high.
While there are no benefits to an owner-occupier, mortgage insurance can help an investor by reducing the amount of equity that must be put up.
You could buy two investment properties with a 10 per cent deposit and pay the insurance, rather than one with a 20 per cent deposit and no insurance.
2. USING A LINE OF CREDIT AS A WORKING ACCOUNT
If you are negative gearing, consider using the equity in your home as a line of credit. This becomes a working account for the investment loan, covering the shortfall in cash.
The downside is that you're eating up some of the equity in your home, so this only works if the investment property has good capital growth.
3. PLAN AHEAD IF UPGRADING
If you plan to make your home an investment property one day, only put in the minimum deposit initially and any remaining funds in an offset account.
"When you turn it into an investment property it still has a high level of debt on it for tax effectiveness and you have access to every available dollar in the offset account for the deposit on your new owner-occupier property," says the managing director of Smartline, Chris Acret.
4. NEVER PUT THE FAMILY HOME UP AS PRIMARY SECURITY
Don't use one property as collateral for a loan on another.
"Having the properties stand alone provides a greater level of asset protection if something were to happen to the investment property or if it were drastically to fall in value. However, if you do need to cross-collateralise, use the family home as secondary security," Acret says.
5. CHOOSE THE RIGHT LOAN
Basic loans are the cheapest but professional packages have extra benefits such as discounted interest rates with a high annual fee.
"Generally speaking, someone looking to have their family home and one investment property may be better off with a couple of basic loans while someone looking to acquire multiple investment properties may benefit from a professional package. Professional packages also tend to suit 'stand-alone' securities better."
Melbourne and Sydney lead the price surge - AUSTRALIA'S housing market might be booming, but the shape of that boom varies by town and state. For the past year, the sharpest growth in prices has been in Sydney and Melbourne.
Apr 19, 2010
Research by property monitoring companies and official figures suggest the price rises appear to be the result of exuberant demand amid a trickle of new housing supply.
A report released today by CommSec's chief economist, Craig James, highlights the dynamic at work. It places NSW at the bottom of the states in economic performance, in part because so few new homes are being built. "NSW is anchored firmly at the bottom of the table and there is a fair gap to bridge," he said.
"The stronger pace of population growth may serve to provide fresh momentum for the economy, but the risk is that workers will be drawn away to the resources states."
The number of new houses and apartments begun - ''dwelling starts'' - is almost 25 per cent lower than it has been for the past decade.
By comparison, both the value and number of new home loans were, for much of last year, running at the fastest pace on record. Both have tailed off in recent months as interest rates have risen and government support for the market diminished.
The situation in Victoria is in some respects even more dramatic. The home building market is performing better than in NSW, and dwelling starts are about 20 per cent higher than they were the year before. But the rise in house prices has been sharper and more sustained, fuelled by an aggressive auction market.
According to RP Data and Rismark, house and apartment prices in Melbourne rose 19.3 per cent in the year to the end of February, and 5.4 per cent in its last three months alone. The jump took the median price to $480,000.
Sydney's gains have been less pronounced, but are still outstripping every capital city except Melbourne. The median dwelling price has hit $519,000 after a 4.3 per cent jump for the quarter and a yearly rise of 12.3 per cent.
The result has been an uneven spread of property price increases across the country. A "rest-of-state" index developed by RP Data and Rismark shows the gap widening between home prices in capital cities and those elsewhere.
Between 2005 and 2008, as interest rate rises cooled the market, there was little difference in the pace of growth of housing values between capital cities and elsewhere.
But the surge in prices that started in late 2008 was concentrated in the capital cities. Prices there rose 12.7 per cent in the year to the end of February, but rose only 7 per cent in outer areas.
The past year has also seen the strong growth in mining-boom states of Queensland and Western Australia slow. Median prices rose 6.5 per cent in Brisbane and 7.5 per cent in Perth in the past 12 months: strong, but not as fast as the largest cities.
Home truths on the whys and wherefores of the property market - HOUSING is the biggest market in Australia and a house is the single largest purchase a person is likely to make in a lifetime. Yet there is no central database that records transactions and
Apr 19, 2010
This vacuum of reliable information is filled only by estimates and surveys from the slew of industry peak bodies and assorted real estate spruikers, all of whom are tainted by a vested interest in pushing the market higher.
Today, BusinessDay begins a week-long series on the nation's residential property market. The aim is to cover all the key issues, from the rise of foreign buyers and the issues surrounding valuation against other markets here and abroad, to the effect of government stimulus and policy on demand and supply, to state markets, cultural factors, economic fundamentals, prestige homes and the conduct of the mortgage market by the banks.
As with any market, the golden question is: is it going up or down?
In the wake of the global financial crisis the housing market in Australia has blown away its international peers with valuations rocketing by 12 to 14 per cent, depending on which estimate you believe.
One of the fundamental problems with most of this analysis is that it relies on a "median" calculation of prices. Relying on median rather than average methodology can distort the outcome. We will take a look at this subject later in the week.
Whereas housing markets in the United States and Britain lost 40 per cent of value from their 2007 peaks and are only now tentatively recovering, the Australian market appears only to have dipped slightly in 2008 (the pain was contained to the top end) before shooting up again in the past 12 months.
Why so? Clearly, Australia's emerging status as a proxy for the resounding growth of China, our fortuitous mineral wealth and consequent economic stability can account for much of this performance. So can our concentrated and relatively robust banking sector where balance sheets barely felt the ravages of their global peers.
But the banks have changed their attitude. Where they used to push 100 per cent loan-to-valuation ratios (LVRs) now they lend 80 per cent over the value of the asset before demanding a swag of fees (usually labelled lenders' mortgage insurance).
Their approach to risk has changed. The banks are more cautious; a 20 per cent deposit is required. Valuations are tighter, too.
Are we now at an inflection point in the great Australian property market? Loan approvals have fallen for five months in a row, while auction clearance rates are high and prices appear to be ticking ever higher. People are talking "bubble" . Can prices continue to rise while the rate of credit to the housing sector has been falling?
BusinessDay has brought together an expert team of finance writers, including the likes of Property Editor Jonathan Chancellor, Paddy Manning, Jacob Saulwick, Clancy Yeates, Jessica Irvine, Eric Johnston and Stuart Washington to deliver the most in-depth market coverage.
Westpac tips rate rise before pause - WESTPAC chief executive Gail Kelly expects another interest rate rise in the near term, before a pause.
Apr 19, 2010
"I expect that we will see possibly another interest rate rise over the next period of time, the foreseeable future, and then I think they (Reserve Bank) will pause for a while," Mrs Kelly told reporters after a Trans-Tasman Business Circle luncheon.
Mrs Kelly also said that Westpac was very comfortable with its growth options, with a focus on the markets in Australia and New Zealand.
"We have a very clear focused strategy on our core markets, which is Australia and New Zealand," she said.
"In the medium term, we feel comfortable with the growth options that we have in terms of growing all our customers' business across all of the things we have and competing through our multi-brand world."
Putting finances in shape can help land a loan - TOUGH lending conditions for homebuyers are expected to continue for at least another year but there are ways to make yourself more appealing to banks and other lenders.
Apr 19, 2010
Five interest rate rises since October have not helped borrowers but mortgage experts say most people can improve their loan prospects.
Strategies such as cancelling unnecessary credit cards, consolidating loans, shopping around and seeking specialist advice can boost your chances.
Managing director of Smartline Personal Mortgage Advisers, Chris Acret, says the "ability to repay" test used by lenders has been tightened in response to the global financial crisis but there is a huge difference in the amounts each lender will offer.
"These changes certainly don't mean that securing the right loan for your needs is an insurmountable task but it is certainly a lot more challenging and time-consuming."
According to a Smartline survey of 22 mortgage lenders, a single borrower earning $60,000 with a credit card debt of $5000 would be able to borrow $277,000 from the most frugal lender and $372,000 from the most expansive lender.
The global financial crisis is over but Aussie Home Loans chief executive Stephen Porges says credit markets are still tight for lenders to tap into, which in turn makes life harder for borrowers.
"Banks can afford to be much more selective in where they give their debt funding,'' Mr Porges says.
"People talk about credit markets opening up.
"Yes, they are, but they were closed (before). Opening up just means you have a crack in the window.''
Mr Porges expects the tough lending conditions to continue "for the foreseeable future''.
"I doubt it's going to improve in the next year, possibly two years,'' he says.
His key tip for borrowers is to make sure they have all their financial information a bank or broker might need.
"And don't fall for the 'how much can I borrow?' trap. That over-gears you when rates are still going up.''
Getting professional mortgage advice can pay off.
"Every bank is changing their criteria often and aggressively,'' Mr Porges says.
"You can be sitting at one bank for six weeks before they reject you, then you go to bank two for six weeks, then bank three for six weeks.''
Mr Acret says cancelling unused credit cards and reducing limits on others can help.
"When most lenders assess your ability to repay a mortgage, they assume that your credit card will be fully drawn up to its limit,'' he says.
Shopping around makes sense as lenders can be "very selective'' about the type of income they include in their repayment calculations.
"Almost every lender treats income derived from dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents differently,'' he says.
Experts bank on Reserve Bank rate rise - MONEY market traders and economists are betting on an official rate rise tomorrow when the Reserve Bank holds its monthly board meeting in Sydney. The central bank surprised most experts last month when it maintain
Mar 01, 2010
The RBA is moving early to raise rates to counter the inflationary effects of the recovering Australian and global economies.
Most economists predict economic growth will accelerate this year, fuelling expectations of more rate rises.
The central bank will make its rate decision before the release of key economic data on Wednesday, with the National Accounts likely to show Australia expanded by 0.9 per cent in the December quarter.
Federal Treasurer Wayne Swan said on his website yesterday the Government was confident the economy would strengthen this year.
"Whatever the numbers are on Wednesday, we're confident we can recover strongly," he said. "But we're far from complacent given some sectors of our economy are still vulnerable and we're seeing patchy outcomes in other advanced economies."
The treasurer would not comment on whether the RBA would lift official rates but hinted that it might be on the cards.
"Previous statements by RBA Governor Glenn Stevens have indicated that recent rate increases are part of the process of moving rates from emergency lows to more normal levels as economic activity normalises," he said.
"Any rate rise is of course very tough on family budgets, but it's also worth remembering that official interest rates are currently 350 basis points below their peak a year and a half ago.
"This means that a family with a $300,000 mortgage is paying around $600 a month less -- or $7100 annually -- in mortgage repayments."
Eleven of 16 economists AAP surveyed tipped the RBA would lift the cash rate a quarter of a percentage point.
"A strong labour market and very robust business expenditure are all adding up to a very good dynamic for the domestic economy, which we don't think the RBA will be comfortable in continuing to ignore," Commonwealth Bank economist James McIntyre said.
ANZ economist Shane Lee said the risks around inflation had led him to forecast a 25 basis point increase.
However, St George acting chief economist Justin Smirk predicted the RBA would stay on the sidelines in March. "We are seeing signs of the housing sector and the interest rate-sensitive sectors responding to higher rates and the removal of fiscal stimulus," he said.
Melbourne hits $1 billion property mark - MELBOURNE'S property market has smashed through the $1 billion mark for the first time as markets continued to show signs of strong recovery across Australia over the weekend.
Mar 01, 2010
The $1 billion barrier was broken during a record weekend for auction prices in Melbourne combined with soaring prices achieved for private sales during the week.
Across Australia, auction clearance rates in Sydney reached 75.3 per cent at the weekend, up 2.1 percentage points from the previous week, while Adelaide clearances were up 18.6 percentage points to 76.5 per cent.
Australian Property Monitors reports that total weekend auction revenue for Sydney, Melbourne, Brisbane and Adelaide was up $146 million on the same time last year.
The top-priced sale was a three-bedroom home in Melbourne's Toorak, which sold for $4.7m.
Experts predict there is no end in sight with property prices headed even higher, even on the back of interest rate rises.
Experts are tipping an official interest rate rise tomorrow when the Reserve Bank holds its monthly board meeting in Sydney tomorrow.
The central bank surprised most experts last month when it maintained the official cash rate at 3.75 per cent following an aggressive bout of monetary tightening at the end of 2009.
President of the Real Estate Institute of Australia, David Airey, said the increases in sale prices and total properties listed reflected the "surging confidence" in the housing sector.
Mr Airey said that after the financial crisis, Australians were more interested in investing in property than on the stockmarket.
"This latest data shows buyer confidence in the sector, and particularly the auction system, has significantly increased clearance rates under the hammer," Mr Airey said.
"In every capital we've got strong sales and that says that the buyers - despite the likelihood of higher interest rates - are still wanting to invest in property.
"Australians have taken the lessons learned through the economic downturn and have decided this time round to put their money in property . . . it's encouraging and it's good news for buyers and sellers alike."
Enzo Raimondo, chief executive of the Real Estate Institute of Victoria, said price and not the number of properties on the market was driving the $1 billion-a-week mark in Melbourne.
"We have never reached a billion-dollar figure in a week, especially coming off a very quite period," he said.
"The significance is that if it starts off like this it could be an indication the residential property market in Melbourne probably will be the same as in 2007 when we had some double-digit price growth."
There were close to 900 auctions with an 86 per cent clearance rate at the weekend, and 713 private sales in the past week.
"It's a moderate number of properties and it's not the highest auction weekend for numbers. It's purely price that has driven this billion-dollar figure," Mr Raimondo said.
Tim Fletcher, of Fletchers Real Estate, said it was possible that the median price of a home in Melbourne would hit $650,000 in a few months and $1 million within six years.
"We have too many buyers chasing too few properties, and unless something drastic is done about urban consolidation and freeing up more land on the fringes it's only going to get worse," he said.
Catherine Cashmore of JPP Buyers Advocates said the $1 billion boom was causing despair among buyers trying to get into the market.
"I have never come across such high anxiety in buyers. It's playing on buyers' minds because they are only seeing the property boom and they despair that they'll never be able to afford a home," she said.
Healthy start to 2010 for housing market - RP Data - AUSTRALIAN house prices have made a strong start this year, defying the threat of rising interest rates. Melbourne and Adelaide led the way, recording January increases of up to 4.3 per cent.
Mar 01, 2010
Nationally, house prices grew 1.8 per cent during the first month of the year, translating to an 11.8 per cent jump over the past 12 months, according to residential researcher RP Data-Rismark's home value index.
In Sydney, values increased 1.7 per cent to a median price of $494,500, Melbourne rose 4.3 per cent to $455,000, Brisbane 1.8 per cent to $440,000, Adelaide 3.2 per cent to $379,600, while Perth prices fell 0.6 per cent to $472,500.
Prices continued rising despite Reserve Bank rate rises in October, November and December, and additional increases from the banks that, combined, have lifted the average mortgage rate from 5.8 per cent to 6.65 per cent.
The latest figures come ahead of next week's Reserve Bank board meeting, with economists expecting interest rates to increase up to one percentage point this year.
RP Data noted price rises in December were lower, suggesting the pace of price growth was easing.
However, RP Data's head of research, Tim Lawless, said there was confidence in the housing market. "Buyers are for the time being outweighing sellers and new supply is being quickly consumed," Mr Lawless said.
"Auction volumes are higher than at the same time last year and the national weighted clearance rate last week was a very healthy 73 per cent."
Rising house prices have pushed down the return for investors, with the gross rental yield for houses nationally falling from 4.7 per cent in January last year to 4.2 per cent this year.
The rental yield for apartments dropped from 5.3 per cent to 4.9 per cent.
"With rental demand likely to be higher during 2010 due to continuing strong migration and fewer first-home buyers, we anticipate that rents, and consequently yields, will improve over the year," Mr Lawless said.
NAB computers cause home loan delays - NATIONAL Australia Bank's campaign for new home loan customers has been short-circuited by delays on processing applications from mortgage brokers.
Mar 01, 2010
A memo obtained by the Herald Sun shows NAB's processing systems have buckled under the weight of increased demand for its variable rate mortgages in the past month.
Leading broker group AFG last week warned its member brokers not to rely on NAB for urgent mortgage applications because its mortgage centre was running at full capacity.
In a memo entitled "Urgent message: Re NAB/HomeSide" sent by AFG relationship manager Krystle Bischkopf last Wednesday, AFG brokers were advised to consider other lenders such as ANZ and St George because of the processing delays at NAB.
"Please be advised that we are receiving quite a number of escalations from brokers who are having issues with turnaround times with NAB, and we were not having many good results," Ms Bischkopf told brokers in the memo.
"We have been advised that they are almost at full capacity.
"If you have a deal which is urgent, ie a purchase, please consider one of the other lenders before placing the deal."
The memo then estimated how long it took banks to process loan applications via brokers. The memo claimed Westpac had the fastest turnaround time at 24 hours. St George was the next best (up to 2 working days), followed by CBA (up to 3 days) and ANZ (4 days).
AFG is one the country's largest mortgage origination groups with more than 2500 affiliated brokers.
AFG chief operating officer Mark Hewitt told BusinessDaily NAB had been upfront about the processing problems.
"They have been very open and transparent about it," he said.
"They have told us that for customers requiring urgent loan approvals that our brokers should look elsewhere because they are suffering processing problems."
NAB spokeswoman Luisa Ford acknowledged NAB had experienced processing issues but said more staff had been hired to help ease the extra workloads caused by higher demand from brokers.
"We do not dispute that we have had a technology issue. We've been extremely up-front about that," she said.
"It is important to note we immediately took all sorts of precautions to ensure our brokers' expectations were managed and that we could continue delivering to meet demand."
NAB moved aggressively in early December to boost its share of the home loan market by re-pricing its standard variable rate mortgage to 6.49 per cent -- the cheapest among the four major banks.
It also markets mortgages under the HomeSide brand through brokers such as AFG and Mortgage Choice.
Homeside's variable mortgage is 6.02 per cent and demand for the product soared this year after Westpac withdrew its RAMS product from the broker market.
Ms Ford said NAB had kept mortgage brokers informed about anticipated turnaround times since late January and always displayed current information on turnaround times on its website.
"A technology issue was identified in January. We took steps to minimise any impacts to brokers and as a result have kept up with demand and our processing times are being maintained within industry standards," she said.
" In the first two weeks of February we experienced an 80 per cent increase in applications for HomeSide compared to three months ago -- demonstrating that brokers are still seeing the value of recommending NAB to their customers."
ANZ's new head of retail banking, Phil Chronican, last month conceded his bank had also experienced problems processing loan applications from brokers.
"The system is not yet where I want it to be, but we will certainly be there within a month or two," he said.
Data published by the Australian Prudential Regulation Authority showed NAB in January increased its home lending portfolio by $600 million to $141.1 billion.
Westpac including its St George subsidiary had the fastest rate of growth, boosting the size of its mortgage book by $3 billion to almost $250 billion.
Don't get out of your depth - Property investors who are hoping for easy money and first-timers keen to get a foothold on the property ladder will have to weigh the numbers carefully. Get advice from Touch of Finance before acting. Call 9357 9354
Feb 23, 2010
Interest rates are rising and, in what should be a warning, more home-owners, particularly recent first-timers, are coming under increasing mortgage stress. Of the 251,000 households in which owners became first-time buyers in the past 18 months, almost 40 per cent -- or 101,000 -- are experiencing some form of mortgage stress, with 30,000 of those experiencing "severe" mortgage stress, according to Fujitsu's Mortgage Stress Report for January.
The managing director of Fujitsu Consulting, Martin North, says first-timers have to be especially careful. He says they need to do a "robust" budget and know what their incomings and outgoings will be after they take out mortgage repayments. "Fewer than half the people we surveyed for the Mortgage Stress Report did not have a robust budget to start with," North says. "They did not really know what they could afford."
A senior analyst at Canstar Cannex, Harry Senlitonga, says first-home buyers need to restrict their borrowing. "Many first-home buyers have never experienced a time when prices have fallen," he says. Some commentators think there is the potential for a property bubble and buyers do not want to end up with negative equity in their home -- where they owe more than the house is worth, he says.
Sydney property prices rose 11.4 per cent and Melbourne prices by 15.6 per cent last year, according to RP Data. Sydney's median house price is almost $600,000, while the median price for units is $430,000.
Melbourne's median house price is almost $500,000 and almost $411,000 for units. Sydney and Melbourne houses are now among the most unaffordable in the world.
Lured by government incentives and interest rates that were at 50-year lows, first-time buyers made up almost 30 per cent of all buyers in the first half of last year -- up from about half that figure a year earlier.
In the second half of the year, Sydney and Melbourne prices were pushed up by upgraders and investors. There were particularly big price rises in wealthier suburbs, especially in Sydney, which had suffered the biggest price falls in 2008. Unlike Sydney, Melbourne's prices have been rising strongly for the past few years.
WHAT'S NEXT?
The chief economist at CommSec, Craig James, says price rises will probably be more subdued this year because of rising interest rates and an increasing supply of dwellings. He is expecting prices to record "more normal" growth this year of about 8 per cent.
A Melbourne-based research analyst at BIS Shrapnel, Angie Zigomanis, agrees price rises will be more subdued this year. "You have got fewer first-home buyers in the market and rising interest rates, which will probably cap the size of people's mortgages," he says. He is expecting price rises of between 5 per cent and 7 per cent this year.
Looking further out, James says the fundamentals for housing remain positive. The fact population growth is "super strong" and supply has not been keeping up with demand will help underpin house-price growth, he says.
The significant advantages of property in terms of tax and investment are not likely to change. Home owners pay no capital gains tax on their principal place of residence, while investors are allowed to negatively gear. This means if the interest on the mortgage and other legitimate expenses is greater than the rent they receive, the shortfall can be used to reduce the income from their salary, on which income tax is paid.
Potential property owners and investors should not think property prices rise in a straight line. Capital-city prices are, in fact, distinctly cyclical, says RP Data research director Tim Lawless.
Sydney's price surge of last year, for example, followed four years of average annualised growth of about 1.8 per cent.
"You tend to find that markets go through cycles and that's the reason you need to be doing your research when buying property," he says. It is all about timing. "You generally make your money when you buy and not when you sell," he says.
UNAFFORDABLE
Savvy buyers not only buy well; they are careful about the finances involved.
Interest rates, though still low, are rising to more normal levels and affordability, especially in Sydney and Melbourne, remains particularly low. A report by Demographia released last month shows Sydney is one of the least affordable cities in the English-speaking world. Sydney was placed second to Vancouver as having the most expensive real estate relative to wages. Melbourne and Adelaide were not far behind.
"The median-income household would be required to pay more than 50 per cent of its income to service a new mortgage on a median-priced house in Sydney or Melbourne," the report says.
However, the doomsayers who forecast a crash in property prices have been marginalised. Unemployment did not rise by as much as official forecasts during the GFC and the big increases in prices in Sydney and Melbourne last year surprised even the optimists.
Investors looking to buy this year will be counting on capital gains to benefit as rental yields are low. According to RP Data, Sydney houses are providing a gross rental yield of 4.2 per cent and Sydney units 5.1 per cent. Melbourne houses are yielding 3.7 per cent -- the lowest in the country -- and Melbourne units are yielding 4.3 per cent, the second-lowest in the country. And these are gross yields, before the high costs of property ownership are deducted.
"Yields go down whenever price growth outpaces rental growth," Zigomanis says. "It's one of the things that investors have to decide. Will they trade off their rental yield for potential capital growth." He says Melbourne's particularly low yields reflect the very strong prices of last year.
Lawless says Melbourne's price rise of 15.6 per cent was driven by an "exceptionally strong first-home-buyer market". Last year, houses within a reasonable distance of the city and good transport connections could be found for less than $450,000.
Zigomanis also points to population growth and solid economic conditions as additional factors behind Melbourne's strong price rises.
MARGIN OF COMFORT
With higher interest rates on the way, investors and first-home buyers would do well to build a margin of safety into their calculation of how much they should borrow, says the chief executive of financial comparison site Infochoice.com.au, Shaun Cornelius.
He says there is the potential for inexperienced first-time buyers to tell themselves that because the lender will lend so much, they will easily be able to make the repayments.
Many of those first-home buyers with young families who bought in the second half of last year are struggling with higher interest rates. The Fujitsu Mortgage Stress Report shows mortgage stress increasing.
Mild mortgage stress, according to Fujitsu Consulting, is making the repayments but having to cut back on spending in other areas, or borrowing more through other loans and credit cards. Severe mortgage stress is those who are behind on their repayments and are trying to sell or refinance or are being forced to foreclose. Fujitsu expects the cash rate - and, therefore, mortgage rates - to increase by another 0.75 percentage points by the end of the year. If that occurs, it says the percentage of first-buyer households reporting some degree of mortgage stress will increase from 40 per cent to 47 per cent.
The rule of thumb for lenders is that they generally keep the repayments at under 30 per cent of a household's gross (pre-tax) income.
Fujitsu works out mortgage stress by asking a series of questions to borrowers to ascertain their circumstances.
Before the global financial crisis, some lenders would lend 100 per cent of the purchase price but most lenders now require a deposit of at least 5 per cent and some require at least 10 per cent. Some small lenders are still saying to first-timers: "Just turn up with the government grant and it will be fine," Fujitsu's North says.
The bigger the deposit the better, not the least because borrowing more than 80 per cent usually means having to take out lender's mortgage insurance. This protects the lender if the borrower defaults on their loan and the outstanding value of the loan is greater than what the lender receives from the sale of the property. The higher the percentage of the purchase price being borrowed and the bigger the loan, the higher will be the premium paid by the borrower for the insurance.
For example, someone with a 5 per cent deposit on a $300,000 house who borrows the remainder will probably pay at least $5000 for the lender's mortgage insurance. The same person with a 10 per cent deposit will pay about $3000.
North also says exit fees are routinely charged to borrowers for repaying a mortgage early - usually within the first five years - and they can be very high. And watch out when using a mortgage broker. North says brokers are not necessarily working for borrowers, who should treat their advice with caution.
House prices are rising; mortgage stress is up.
Economist magazine says prices are 50 per cent too high.
Calculate the impact of higher rates on repayments.
Are your job and marriage stable?
Investors would do well to seek information on vacancy rates in the areas they are thinking of buying in.
Vacancy rates are expressed as a percentage. If a suburb has a vacancy rate of 10 per cent, for example, it means that one in 10 properties for rent in the suburb is vacant. A high vacancy rate may indicate difficulty in renting out a property, that the rental yield may be low and that rental growth may be slow. The managing director of SQM Research, Louis Christopher, says the suburbs with the lowest vacancy rates are those in Sydney's west: Bonnyrigg (0.5 per cent), Sefton (0.4 per cent) and Abbotsbury (0.4 per cent). The three highest vacancy rates in Sydney are Scotland Island (12.1 per cent), Galston (11.8 per cent) and Gordon (8.3 per cent).
In Melbourne, the three suburbs with the lowest vacancy rates are Northcote (0.9 per cent), Bayswater (1.2 per cent) and Boronia (1.4 per cent). The three Melbourne suburbs with the highest vacancy rates are Burwood (9.5 per cent), Kew East (9.4 per cent) and Truganina (8.2 per cent).
When looking at the full list of vacancy rates across Sydney and Melbourne, Christopher says a pattern emerges. "There is a tendency for those suburbs at the more affordable end of the rental market to be recording low vacancy rates, while wealthier suburbs in the inner suburbs are showing higher vacancy rates."
It backs the argument that says investors generally get better results, over the longer term, with units than with houses because units generally produce higher rents in relation to the purchase price. Demand from tenants is thought to be generally stronger for units and their maintenance and upkeep are usually easier and cheaper.
SQM has a free online search service where users can view monthly changes in vacancy rates by suburb or region at sqmresearch.com.au.
Ten ways to check on your credit - WE all have a credit record that collects data about us, but few of us know what it says or what is allowed to be shown. Here are 10 things you should know about the system, and what is going to change when new laws come
Feb 23, 2010
1 There's no blacklist
At the moment, your credit record simply details "bad" behaviour such as defaults, bankruptcies and court judgments. Different companies assess you in different ways, so somebody may get refused credit by one company, but accepted by somebody else.
2 Positive reporting
Currently, credit agencies collect only negative information such as defaults and bankruptcies but under comprehensive reporting, credit agencies will be able to collect extra information, including repayment histories.
"So even if you've had trouble in the past, you will be able to work off much of the impact of any earlier misdemeanours," says Christine Christian, chief executive of agency Dun & Bradstreet.
3 Don't be late
Comprehensive reporting will capture more bad behaviour. Late payments on credit cards or utility bills, even if just a few days late, will be noted.
4 High limits hurt
It's the outstanding limit on your credit card, not the balance, that counts. "This can be particularly damaging when applying for a mortgage because having a $10,000 limit even with nothing owing can reduce the amount you can borrow by tens of thousands of dollars," says Mortgage Choice broker John Manciameli.
5 Offences aren't equal
Dun & Bradstreet says there is a sliding scale for offences. For example, a default from five years ago is less damaging than a default in recent months.
6 A long recovery
Defaults stay on your record for up to five years and bankruptcies for up to seven. A default a late payment of 60 days or more can severely impact your ability to get credit.
7 Shopping around
If you go from shop to shop and allow the assistant to check if you would qualify for credit, this is logged. Most lenders interpret these as refusals, even if you didn't buy anything.
8 Small defaults count
Even a default worth just a few dollars on a mobile phone bill could result in the refusal of a mortgage application later on.
9 Divorce debt
If you have joint accounts, even in divorce you will be equally liable for the debts and your credit file damaged. "You need to be very wary before entering into a joint agreement over which you have little control," Christian says.
10 Checking is easy
Check your credit record regularly to ensure it is accurate. Big agencies such as Dun & Bradstreet or Veda Advantage offer free access to your file in about 10 days.
Growth set to drive rate rises: BIS - The Australian economy is on the verge of another boom later this decade as company investments bear fruit, a leading economic forecaster says. For fixing your home loan Call Touch of Finance on 9357 9354
Feb 23, 2010
However, BIS Shrapnel says interest rates will rise by at least another two percentage points to brake the upswing expected over the next three to four years.
BIS Shrapnel's Long Term Forecasts, February 2010, report said the economy could handle the initial upswing but cost pressures would re-emerge as economic growth increased.
"We are now well and truly into recovery from what turned out to be a modest downturn - and not a recession as other forecasters predicted at this time last year," BIS Shrapel senior economist Richard Robinson said in the report.
"But it's now time to look forward not backward. We're into a rebuild phase, rather than a rebound."
Gross domestic product will rise 2.7 per cent in the 12 months through June 2010, 3 per cent in fiscal 2011 and 3.8 per cent the following two years, the forecaster said today.
A surge in house construction and government investment in infrastructure such as schools and roads will help stoke economic growth, BIS Shrapnel predicts. Inflationary pressures, leading to higher interest rates, will increase in three to four years as a mining expansion intensifies.
"We are now well and truly into recovery from what turned out to be a modest downturn," Mr Robinson said. "Investment, and primarily the construction side of it, is the primary driver of growth in the economy."
"Growth will pick up speed over the next two years and build into a boom later this decade," the BIS Shrapnel report said.
Australia's economy grew by 0.6 per cent in the year to June 2009, official data showed.
The Reserve Bank of Australia (RBA) has forecast the local economy to expand by an annual 2.5 per cent to June 2010, and growing by 3.5 per cent in the year to June 2011.
Investment in the construction sectors, both public and private, were the primary driver of economic growth, Mr Robinson said.
"The next phase of investment will underwrite growth in the economy but the timing and logic of each construction cycle is different, with varying knock-on effects to different sectors and across the states, he said.
Mr Robinson said the government had to ensure investment in capital works continued as more building of infrastructure was required.
"The cutbacks to infrastructure and education spending over the decade to the mid-2000s caused severe bottlenecks, capacity constraints and lowered productivity growth," he said.
"We fear that the really worthwhile public infrastructure - that is, the capital works that underwrites long-run productivity and the economy's growth potential - will be again cut now, ultimately realising the same problems that occurred pre-GFC (global financial crisis).
"With this likely to happen, then the government's 2 per cent productivity target just looks like a vain hope."
As the local economy experienced a shallow downturn, capacity constraints and inflationary pressures would take less time to re-emerge and hence higher rates, in time, Mr Robinson said.
The RBA uses monetary policy, or interest rates, to contain inflation with its target band of 2 to 3 per cent.
"We will then see the Reserve Bank hike rates from neutral to contractionary, meaning a cash rate over six per cent and the housing variable toward nine per cent before the next episode is over," he said.
Australia's cash rate is currently 3.75 per cent, following 25 basis points moves in October, November and December last year.
Repayments on an average mortgage of $300,000 would increase by around $450 a month if the standard variable rate rose to nine per cent from current rates of around 6.7 per cent.
Government delays debate on land tax law changes - The Property Council, the Shopping Centre Council, AgForce, Chamber of Commerce and Industry Queensland, and the Urban Development Institute are against the amendments to the Valuation Bill.
Feb 23, 2010
The Opposition is planning to vote against the changes, but Natural Resources Minister Stephen Robertson says they will not be debated this week.
He says that is to give the Property Council a chance to make its case.
"We don't agree with what they're saying in terms of the impact, but we're prepared to listen and take on board what they've got to say if they back it up with absolute facts," he said.
"To do that they need to open up books and that's something they haven't been prepared to do before."
"What they have always been prepared to do is conduct a very public scare campaign - scaring mums and dads and farmers as to what these proposed changes mean.
"The secret to resolving this issue rests with the Property Council opening their books, otherwise this is just another political campaign by another lobby group."
Mr Robertson says the land tax changes will not have any impact on primary producers.
He says the Government is proposing to maintain the existing valuation system as it applies to very large metropolitan shopping centres.
"Protecting existing revenue stream worth over a billion dollars to both local government and the State Government - unless we are able to protect those existing strings of land tax and rates throughout Queensland, then it certainly would have an impact on primary producers," he said.
AgForce 'worried'
Rural lobby group AgForce says it has written to Premier Anna Bligh and relevant ministers to withdraw amendments to the Valuation of Land Act immediately.
AgForce chief executive officer Robert Walker says the proposed valuation changes are not limited to large commercial properties.
Mr Walker says AgForce is worried about how the changes will affect primary producers and the calculation of leasehold rents.
"They are only going to undertake valuations on a three- or five-year cycle in most shires throughout Queensland," he said.
"But in the interim years, they reserve the right to increase the valuations as they see fit and it's an arbitrary figure they are going to increase and by - no recourse or no appeal process whatsoever.
"This is Government increasing tax and rates by subdiffusion and it's extremely disappointing.
"We have concerns the Act - as it is written - has massive implications on how the valuation is actually arrived at on, not only commercial properties but on rural leasehold properties as well," he said.
"That can massively increase our members leasehold rents.
"We also have concern about the way that the Government has introduced this legislation - it was introduced with no consultation with any industry groups."
RBA Governor Glenn Stevens says economy set to prosper - THE economy is well positioned to prosper due to its proximity to a strong Asia region, as it sets course on a new upswing in growth, the Reserve Bank Governor Glenn Stevens says.
Feb 22, 2010
Mr Stevens also said further adjustments to monetary policy will be needed to ensure inflation remains consistent with the RBA's two to three per cent target band.
"If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent with the target over the medium term,'' he told a House of Representatives Economics Committee hearing in Canberra.
"This is a normal experience in an economic expansion: as economic activity normalises interest rates do the same.
"Though of course it is the interest rates borrowers actually pay, and that savers receive, that are important rather than the cash rate per se.
"The board sets the cash rate with that in mind.''
The RBA sees gross domestic product (GDP) expanding by about 3.25 per cent in 2010 and about three per cent in 2011 and 2012, on top of real growth of two per cent in 2009.
It sees underlying inflation, its preferred measure of inflation as it removes volatile items from its calculations, moderating to about two per cent in 2010 from about three per cent in the second half of 2009.
"It is normal, given the lags in these processes, for inflation to keep declining for a while after the economy begins to firm,'' Mr Stevens said.
The RBA uses monetary policy, or interest rates, to keep inflation within its target band, and as the expansion continued there would be inflationary risks.
"But it also means that there is less scope for robust demand growth without inflation starting to rise again down the track,'' he said.
"Monetary policy must therefore be careful not to overstay a very expansionary setting.''
Mr Stevens said the central bank got on the offensive by raising the cash interest rate three times last year.
"The RBA was in front of the game after the rate hikes in late 2009,'' he said.
The RBA increased the rate to 3.75 per cent by December and then surprised financial markets by keeping it steady in February.
However, Mr Stevens flagged the prospect of further hikes, albeit not at so fast a pace.
"I don't think we're in emergency anymore,'' he said.
"We're closer to normal settings.''
Policy makers had to act during the global financial crisis to sustain confidence and to support the economy and financial system through demanding conditions, Mr Stevens said.
"By and large those efforts were successful,'' he said.
"Now we must turn our attention to the challenges of managing an economic expansion.
"Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage, as they should.''
Household credit costs and availability were adequate, while housing prices had risen "quite smartly'' over the past year.
"That said, it seems unlikely that we will return to the easy credit conditions of three years ago,'' he said.
"The world has changed, for a while at least.''
But Mr Stevens said while the economy's performance was better than expected, it had left the nation with less spare capacity compared to the typical case after a recession.
The unemployment rate was low - it was 5.3 per cent in January - and while the labour market had proved flexible during the global economic downturn, there was less scope for robust demand growth.
RBA boss flags interest rate rises - The only way is up! THE Reserve Bank of Australia (RBA) has again warned homeowners they face higher interest rates this year, possibly by as much as 100 basis points.
Feb 22, 2010
But as yet there is no clear view among economists whether the central bank will raise the official cash rate, or extend this month's unexpected pause, at its March board meeting.
Facing his six-monthly questioning from the federal House of Representatives economic committee in Canberra today, Glenn Stevens reiterated that if economic conditions evolved as the central bank expected, further adjustments to monetary policy would probably be needed.
"This is a normal experience in an economic expansion: as economic activity normalises interest rates do the same," he said.
But he says it's the interest rates borrowers actually pay on mortgages and business loans that are important, rather than the cash rate which is geared to borrowing between banks.
"The board sets the cash rate with that in mind," he said.
The central bank raised the official cash rate three times in as many months late last year, but most lenders raised their borrowing rates by more than the RBA's 75 basis point increase.
But, he said, even allowing for these margin changes, borrowing rates were still below average by between 50 and 100 basis points.
He said the economy was well positioned to prosper due to its proximity to a strong Asian region.
"For a time, the challenge was to sustain confidence, and to support the economy and financial system, through some exceptionally demanding circumstances," Mr Stevens said.
"By and large those efforts were successful. Now we must turn our attention to the challenges of managing an economic expansion."
The central bank expects economic growth to be "a bit over three per cent" in 2010 and about three per cent in 2011 and 2012.
The economy expanded by 0.2 per cent in the September quarter for an annual rate of 0.5 per cent in the year.
The national accounts for the December quarter are released on March 3, the day after the RBA's next board meeting.
He said unemployment has peaked at less than six per cent, much lower than the central bank or others had forecast.
The government had predicted a peak of 6.75 per cent this year.
"Only a few years ago, unemployment rates like this would have been a good outcome in strong times, let alone in time of economic weakness."
He said inflation had been falling, and may keep declining for a while even as the economy began to firm.
But he dismissed the claim by opposition frontbencher Barnaby Joyce that Australia risked defaulting on its debt if the Government kept spending.
"There has never been an event of sovereign default by Australia," Mr Stevens said.
"I very much doubt there ever will be."
ANZ economist Alex Joiner said there was a relatively strong chance of an interest rate rise at the RBA's March board meeting given the strength of economic data since February.
"That said, the statement today gave no indication that the RBA would stray from its wait and see approach in the short term," Dr Joiner said.
"The RBA has had two opportunities recently to shift the market expectations of cash rate hikes in the short term and has not done so."
Want a 100pc mortgage? Not likely - NQUIRIES for 100 per cent home loans have surged 250 per cent since the Federal Government's more generous first home owners grant ceased at the end of last year.
Feb 22, 2010
Loan Market chief operating officer Dean Rushton says there is still a huge amount of demand from people wanting to enter the housing market despite the end of the government's expanded grant.
But those looking for a 100 per cent loan will find it difficult.
"Tighter lending restrictions which require genuine savings contributions of around five per cent towards the property purchase means most are unlikely to get past first base," Mr Ruston said.
"The major lenders have no appetite for this type of lending and there is little room to move for applicants who do not fit the box."
He said early last year banks reduced their maximum loan to valuation ratios (LVRs) to as low as 85 per cent in response to the global financial crisis, making it much more difficult for first-time buyers.
Buyers had been able to use the boosted First Home Owners Grant as a contribution to their deposit but this had become more difficult since the concession returned to its original level of $7000 in January.
Mr Rushton said family equity options, where parents or another immediate family member can help with loan servicing and security support, were still available to help first home buyers entering the market.
"Unfortunately, a lot of people have lost the knack of saving money, which makes it difficult if you want to find the finance to get into the residential property market at the moment," he said.
"The situation is unlikely to change in the near future."
Ten ways to cut your bank fees - BANK fees quietly and insidiously plunder your savings, often without your knowledge.
Australians on average lose $1000 a year to bank fees and it grows about 8 per cent a year. Often we pay those fees because of laziness
Feb 22, 2010
We don't know about you, but we'd rather keep that $1000 for ourselves than help the bank make another record profit. Change your banking habits, cut those bank fees and enjoy the rewards.
The sooner you get cracking on this issue the better.
Assess your banking arrangements
The first step is probably the hardest and that's understanding your banking and credit card habits. With a day-to-day account, how many transactions do you make, are they electronic, do you need a cheque book or are you happy with internet banking?
The key is to choose the accounts which suit your habits at the lowest cost. Often you can find appropriate products within your current bank so the first step should be your branch's information section.
Explain your situation to the customer service person and see what they can offer. If it's not much, start shopping around other banks.
The same with a credit card. If you never seem to pay off the balance on the due date, choose a card with a low interest rate and no interest-free days. If you regularly pay the balance off on time, interest-free days are an advantage.
Make sure you check out the deals offered by your financial institution. Many of them offer discounted fees for pensioners, students, a range of professions and even members of sports associations.
If you have a couple of products with your bank, such as a credit card, home loan or managed investment, you are an important customer.
Ask where they can cut your fees to keep you happy.
Some banks also offer their shareholders lower fees on home loans.
Only use your bank's ATMs to avoid costs
Plan ahead and visit one of your bank's ATMs for free before you run out of cash.
New rules mean we have a much better idea of how much we are charged to use another bank's ATM.
From now on when you use an ATM that's not your bank's, a message will come up on the screen telling you how much you will be charged by the ATM's owner.
This should be around $2 at an independent ATM or a rival lender's.
On top of that $2, your bank may also charge you a so-called "foreign" fee for using a different ATM. This fee varies from bank to bank.
It's important to note this fee is per transaction. Just say you want to withdraw cash and check your balance at an ATM that doesn't belong to your bank, you could be charged up to $2.50 for each action $5 in total.
If there are only "foreign" ATMs around, withdraw a larger amount and make it last longer. A $2 fee on a $100 withdrawal is a 2 per cent slug, but on a $500 withdrawal it's just 0.4 per cent.
An alternative to this is to withdraw small amounts fee-free via Eftpos when you're out shopping.
Don't overdraw
Some lenders charge up to $50 every time you don't have enough cash in your account to cover a cheque or direct debit payment.
Overdrawing your account may seem a better option than not paying your rent or electricity bill, but the penalties are high.
Get organised and don't ever put yourself in that position.
If you are hit with a $50 overdrawn fee, complain to the bank and mutter about it being illegal under contract law to make a profit on these types of penalties. British consumers had a big win over the banks on this issue.
Our banks don't want it tested here, and our experience is that they'll cut the penalty if you complain.
Consolidate accounts
With some accounts charging regular fees of up to $10 a month, it makes sense to consolidate your accounts.
There's also the extra withdrawal fees, Eftpos fees and other transaction charges.
If you have several transaction accounts, find out who gives the best deal, transfer your money and close the rest. The same goes for credit cards.
Read the fine print on loans
Research all fees before taking out a new loan. Is there an application fee? What's the penalty if you make late repayments? Do they charge a monthly administration fee?
Keep track of the fees because some lenders have been sneakily increasing annual mortgage fees.
Avoid your branch
Suburban branches cost a lot to run, so banks charge for the privilege of using them.
Some banks make you pay up to $5 for withdrawing money over the counter and up to $2.50 for depositing money at a branch. Internet banking is the cheapest way to make transactions.
Rates to rise further, but Reserve in no hurry - The Reserve Bank board minutes from February indicate further interest rate rises are on the way, but with more pauses likely between increases. Call Touch of Finance to fix your rate now! 9357 9354
Feb 17, 2010
Analysts widely watch the RBA's commentary about its meetings to find any hints about its next moves.
In February, the Reserve's hint is to expect further rate rises, but not another string of increases in a row, such as at the end of 2009, when the bank raised interest rates for an unprecedented three months in succession.
"Members expected that, if economic conditions continued to improve as expected, further increases in the cash rate were likely to be necessary," the minutes noted.
"But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the board a degree of flexibility in its subsequent decisions.
"This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred. Such a course would also allow time to monitor events overseas."
Stephen Walters, an economist at JP Morgan, says the minutes even raise the possibility that the Reserve Bank might not raise rates again for several months.
"The main message today is that the RBA is in no rush to hike again. Further hikes are coming, that remains clear, but the risk now is that the pause the RBA has embarked on could be longer than we currently expect," he wrote in a note analysing the minutes.
"We are sticking with our call for the next hike to come in April but, on today's evidence, the next hike even could come as late as mid-year."
Wait and see
Some of the economic information released in December, January and early February had been mixed, which prompted board members to hold-off on a rate rise until they could see if there is a softening trend developing in the data, or if the declines were one-off monthly falls.
"The labour market had strengthened materially but, on the other hand, reports about household spending in December and January had been quite mixed," explained the board minutes.
"There were some tentative signs that parts of the housing market were seeing the effect of the decline in assistance to first home-buyers and higher interest rates."
The Reserve Bank is also keeping an eye on international developments around the sovereign debt issues centred on Greece, and several other European nations.
Knowing that traders and analysts were almost universally expecting an interest rate rise, the RBA also determined to soften the surprise of keeping rates on hold by repeating previous statements that interest rates will still need to rise further if the economy keeps improving.
"Members noted that many market participants expected a further increase in the cash rate at this meeting. They concluded that, on balance, the stronger case was to leave the cash rate unchanged for the time being," the minutes read.
"This decision would be accompanied by communication that, if economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term."
However, again repeating comments made previously by RBA officials, the board members noted that independent interest rate increases by the major banks had strengthened the effect of the previous official cash rate rises.
The board says that means monetary policy is no longer "exceptionally accommodative" - Australian interest rates are no longer at economic 'emergency' levels.
"Members noted that the three increases in the cash rate late in 2009, together with the widening in the margins between the cash rate and many lending rates, had meant a material adjustment to the stance of monetary policy," the board observed.
"Members judged that monetary conditions were no longer exceptionally accommodative, though the structure of interest rates was still somewhat below average."
In plain speak, interest rates are still a bit below where they would be if the economy was back to normal, but not very far below given that banks have been adding their own rate rises to the official ones.
That means official interest rates are unlikely to rise too far, too fast in the near future, as the RBA waits to see if things really are back to normal.
Borrowers benefit from competition - A SECOND-tier mortgage lender is cutting interest rates - with a promise of more to come - in a sign that borrowers will benefit from a return to competition in the home finance market.
Feb 17, 2010
AMP will drop its basic mortgage rate for new business by 10 percentage points to 6.24 per cent, and is "hopeful we will be further able to to reduce our rates".
The reduction is a small one, but it is a strong indication that the global financial crisis did not wipe out smaller lenders and give the four big banks a near monopoly of mortgages.
The Federal Government wants to ramp up competition for the business of home buyers mid-year by introducing laws which would make it easier to switch lenders.
The legislation, now in the Senate, would limit mortgage exit fees, making it easier for a borrower to change loans, and give greater consumer protection to mortgage holders.
The 6.24 per cent AMP rate still is higher than most bank interest charges but AMP says its loans have flexibility the big lenders can't provide, such as an offset account.
AMP's managing director Craig Dunn has credited the Federal Government's guarantees of cash supplies for small lenders for the survival of the second-tier market.
"This reduction in interest rates has only been possible because of the improvement to the securitisation markets flowing on from the Government's support," Mr Dunn wrote to Treasurer Wayne Swan on February 8.
He said: "We are also hopeful that we will be further able to reduce our rates in the coming months, as we gear up our operations in light of ongoing improvements in the securitisation market."
The international financial collapse threatened to limit the loan options for home buyers as the shortage of cash put banks in a stronger position to pick up business while smaller lenders struggled to find money to lend.
In 2008 and late 2009 the Government injected $8 billion into AAA-rated Residential Mortgage-backed Securities (RMBS) to support the mortgage market.
This helped give certainty to smaller lenders and allow them to continue to lend, and top fend off a market takeover by the Big Four banks.
"As Australia recovers from the global recession and official interest rates move from their emergency 1967 levels, the Government will do whatever we can to boost competition in the banking system," Treasurer Swan said yesterday.
"For example, we've also introduced tough new consumer protection laws due to come into force this year.
"These new laws will be the toughest laws governing consumer credit Australia has ever seen, with wide-ranging powers to overrule unfair terms in credit contracts, including mortgages."
RBA happy to sit back and watch - THE Reserve Bank left the interest rates unchanged in February so it could assess the impact of earlier rate rises from both itself and the big banks on the domestic economy.
Feb 17, 2010
The central bank board surprised financial markets by leaving the overnight cash rate steady at 3.75 per cent earlier this month.
"In considering the level of interest rates, members noted that the three increases in the cash rate late in 2009, together with the widening in the margins between the cash rate and many lending rates, had meant a material adjustment to the stance of monetary policy," minutes from the board meeting released today said.
"Members judged that monetary conditions were no longer exceptionally accommodative, though the structure of interest rates was still somewhat below average."
The RBA had lifted the cash rate by 25 basis points at each of its meetings in October, November and December to its current 3.75 per cent.
The board noted the decision to leave the cash rate unchanged was "finely balanced" - as it also was at the December meeting - but its members expected further rate increases if the economy continued to improve as predicted.
"But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the board a degree of flexibility in its subsequent decisions," it said.
"This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred.
"Such a course would also allow time to monitor events overseas."
The bank said most market participants had expected the cash rate to rise this month, but board members had decided the "stronger case" was to leave the cash rate unchanged.
Market economists had widely expected a quarter of a percentage point rise to 4.0 per cent on February 2.
"This decision would be accompanied by communication that, if economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term," the minutes said.
The RBA uses monetary policy, or interest rates, to keep inflation within a target range of two to three per cent over the economic cycle.
Headline consumer price inflation (CPI) was 0.5 per cent in the December quarter for an annual rate of 2.1 per cent, recent official data show.
Underlying inflation, the RBA's preferred measures as it removes volatile items, was 0.6 per cent in the December quarter, while the annual rate was 3.4 per cent - still above the bank's target range.
"Members noted that the forecasts were for further declines in the year-ended rate of underlying inflation, though the expected trough in inflation had been revised up slightly," the RBA said.
In its quarterly statement on monetary policy released on February 5, the RBA forecast underlying inflation to fall within its inflation target in the first half of 2010.
Colonial terminates $850m mortgage fund - ONE of the nation's biggest mortgage funds, the frozen $850 million Colonial First State Mortgage Income Fund, will be terminated because it is unable to make interest payments to thousands of investors.
Feb 17, 2010
Colonial, the Commonwealth Bank's funds management arm, said it would wind down the fund because potential bad debts meant it would be unable to pay interest for 18 months, and because it was still unable to meet capital redemption requests.
The MIF is the first major fund to announce it will be wound down. The surprise move by Colonial is expected to put yet more pressure on the mortgage and property funds sector.
About $25 billion held by more than 150,000 investors was frozen in late 2008 after a federal government move to guarantee bank deposits sparked a run on the funds.
Colonial First State chief executive Brian Bissaker said the fund had identified "a number of small mortgages", totalling about $50m, that the group believed could become bad debts.
"We have completed a review of the fund and we have concluded that it is in the best interests of investors in the whole to terminate the fund and begin the process of returning funds," Mr Bissaker told The Australian.
"Redemptions were suspended in October 2008 and since then requests have consistently exceeded the cash available for payment. Investors want their money back.
"We have had people wanting to redeem investments and we haven't had sufficient cash to meet those requests, so this is really looking at the best interests of investors."
Colonial said investors in the MIF, which invested about 80 per cent of its capital by lending to businesses, would be repaid over about four years as those loans matured.
Interest was not expected to be paid over the coming 18 months because of the loss provisions, but investors' underlying capital was not expected to be eroded, the group said.
The fund, one of the less risky in the sector, is understood to hold money on behalf of up to 10,000 investors.
Zenith Investment Partners senior investment analyst Doug Higgins said the move by Colonial was expected to cause yet more redemption requests in other mortgage funds, particularly lower-quality funds.
"This is going to make life even harder for everybody else," Mr Higgins said.
"From a fallout point of view it will make people very nervous."
Mr Higgins said Colonial, one of the nation's biggest fund managers, might have moved early to minimise brand damage.
"Because of Colonial's size, it's not a major problem for them to lose out on the management income from the MIF, but many smaller funds would be less willing to wind down their funds, which often represent their major source of income."
Mr Higgins said larger funds, such as those managed by AXA and Challenger Financial Services, had relatively low loan default rates, but many smaller funds could come under pressure.
Challenger, the biggest player in the mortgage funds sector, said it had no plans to wind the fund up and that it offered investors quarterly redemptions of up to 5 per cent of their total holdings. In December, Colonial reopened the MIF to redemptions, but last month froze the fund because of concerns over doubtful debts.
IMF questions inflation targeting for rates - The IMF's chief economist has questioned whether inflation should remain the key driver of interest rate policy in the new financial environment.
Feb 16, 2010
In modern economics, stable and low inflation is the primary, if not only, goal of central banks around the world.
For example, Australia's Reserve Bank has an inflation target of 2 to 3 per cent for guidance on when to raise or lower the official interest rate.
But the global financial crisis has the potential to rewrite the rule book.
In a discussion paper aptly titled "Rethinking Macroeconomic Policy", the International Monetary Fund (IMF) has sparked a big debate for central bankers and those who question or analyse their decisions.
"The great moderation lulled microeconomists and policy makers alike in the belief that we know how to conduct macroeconomic policy. The crisis clearly forces us to question that assessment," the paper noted.
The paper makes the point that these days inflation targeting might not be the only tool for managing economies.
Saul Eslake, former ANZ chief economist, and now program director at the Gratten Institute, says the paper is timely in creating debate given the uncertainties left by the global financial crisis.
"I think the time is right for a re-evaluation of the thinking that informed policy making in the years leading up to the crisis and that debate ought to include whether the objectives of central banks remain appropriate, and whether there ought to be broader consideration given to not only other objectives but to other means of achieving those objectives over time," he said.
However, Saul Eslake emphasises that the IMF is not suggesting abandoning inflation targeting altogether.
"The paper from the IMF explicitly suggests there is no justification for abandoning an inflation target," he added.
"It doesn't really suggest either that inflation targets should be lifted. It does ask the question, are the net costs of inflation much higher at say 4 per cent than at 2 per cent, which is where most central banks are seeking to target.
"It then goes on to ask the important question, is it more difficult to anchor expectations at 4 per cent rather than at 2 per cent and I think the answer to that question would almost certainly be yes."
Saul Eslake says the paper's major criticism of policy leading into the financial crisis was that it did not allow sufficient scope to stimulate the economy when the financial system almost collapsed.
"The more fundamental point which the paper does seem to be making is that it would be desirable from the point of view of managing any future crisis, whether financial or not, if governments and central banks had far more room to move," he said.
"One of the policy problems for central banks going into this crisis was that, with interest rates relatively low in most Western countries, the scope to cut them quickly in order to provide relief was far less than would have been desirable.
"And on the fiscal policy front, the fact that governments went into the crisis having, in most cases, high levels of debt meant that their options were also limited."
The IMF's suggestions have already succeeded in firing up debate among economists, and not everyone is positive there will be tangible outcomes.
"I think their report, while it is highlighting some key lessons, it is not holistic. That means some countries might follow this policy, some countries may not follow this policy and hence you create in effect [an] unfair competitive environment," said Fariborz Moshirian, a professor of finance at the University of New South Wales.
He says the IMF is not being realistic about what central banks can achieve.
"My criticism of the report is they are not looking at other aspects of the economy including, for instance, trade. Trade imbalances which are causing countries to go into budget deficit, and some countries to have trade surpluses which will lead to asset wobbles in some other country," Professor Moshirian added.
"They are not looking at coordination of fiscal policies amongst nations when they talk about the real debt to GDP ratio, the challenge we are facing for instance in Europe."
Women 'financially unhealthier than men' - ALMOST a third of Australian women and a quarter of men are classed as financially unfit, despite improvements in the economy, a survey shows.
Feb 16, 2010
Nearly 28 per cent of those surveyed had an over-reliance on debt, little or no regular savings, no insurance coverage and high housing costs relative to income, the second annual Bankwest Financial Fitness Index revealed.
The survey showed the benefits of the economic recovery have yet to be felt by many Australians, with six per cent more people now classified in the most serious category of financially unfit, up from 22 per cent last year during the financial crisis. Just over one-third of Generation Y continued to struggle with their finances over the year, with 34 per cent declared financially unfit, according to the index.
"Despite the market rebound and signs we've shrugged off the worst of the global financial crisis, our research shows even more Australians are doing it tough and struggling to manage their finances," Bankwest spokesperson Adrian Bradley said.
"While there has been a recovery, the market and super funds, a major form of wealth for many Australians, are still well down from the pre-GFC (global financial crisis) highs of November 2007."
A majority of Australians, 69 per cent, said 2009 had been a difficult year for them financially, the online survey of 833 Australians across all states, territories and age groups found.
About half of those surveyed reported borderline financial fitness, which included moderate savings, some insurance, average housing costs and moderate debt levels.
Just 22 per cent were classed as financially fit, with regular savings, a range of insurance, low housing costs and high asset levels relative to debt and income.
The resource-rich state of Western Australia is home to the greatest proportion of those financially fit citizens, with 36 per cent of residents fitting into the category.
Meanwhile, Queenslanders are the least financially fit, with 18 per cent placed in the category.
Retirees aged over 64 were financially the fittest generation, with 35 per cent being financially fit and only 15 per cent classified as financially unfit.
Some 30 per cent of Generation X were "unfit," while the rate of financially unfit baby baby boomers increased by 10 per cent in the past year.
The stars begin to align for Kinghorn - The RAMS Home Loans founder may be positioning himself for a comeback
Feb 16, 2010
John Kinghorn did not climb the BRW Rich List by walking away when there was money to be made.
Renowned and, in some quarters, reviled for the timing of his exits on two businesses he founded, Allco Finance and RAMS Home Loans, his astonishing personal wealth has taken a battering.
BRW estimated last year that his fortune had slumped by a third to $374 million. But the stars are aligning on what would mark an extraordinary comeback.
Will the man who sold the RAMS business to pocket $650 million weeks before the credit bubble burst in 2007 wind down RHG Limited, the rump of the mortgage lending business, and walk away?
Or will the 68-year-old wade back into the public sphere in pursuit of redemption - and a buck?
''I'd have thought it would be attractive to wind this thing up and get out of the public spotlight and enjoy your hundreds of millions from selling this thing to the public,'' says Greg Hoffman, a research director at Intelligent Investor, and failed candidate for the RHG board last year. ''That doesn't seem to be what he wants to do. Whether it's pride, that he wants to show that he's not a failure.''
Justin Braitling, funds manager at Australian Leaders Fund, which holds just less than 5 per cent of RHG, suspects Kinghorn is positioning himself for another crack. ''I think he takes a lot of personal responsibility for what's happened, and if the opportunity [was] there I'm sure he'd love to get back in the game.''
Within weeks of listing in July 2007 RAMS imploded after its business model was ruined in the credit crunch because it was unable to roll over short-term financing. Westpac swooped on the RAMS brand and distribution network, leaving RHG Limited to work off an ever-diminishing mortgage book.
Kinghorn and its co-founder Greg Jones became spectacularly wealthy, pocketing $650 million and $45 million respectively, becoming synonymous with a float The New York Times derided as ''maybe the worst IPO of the decade''.
RHG's prospects appeared grim. It agreed not to compete with Westpac for three years, meaning it could not write new business. Not that it could - the credit markets were closed. RHG's shares fell from $2.50 to as low as 5c.
Kinghorn, who retained 20 per cent of the business in the float and remained chairman, saw the value of his remaining stake slump and became the lightning rod for investor ire. He watched as another of the businesses he founded, Allco, creaked under its debt pile then collapsed, while personally throwing millions at Allco to help a friend and fellow RHG director, David Coe. Allco did not make it.
But over time, as credit markets eased, lending standards tightened and competition in the banks fell away, RHG has done anything but wither. Its margins have fattened. Its share price has stabilised. Kinghorn was even able to secure early repayment from RHG on a $28.5 million loan. The value of his own stake has recovered to more than $20 million.
Two tantalising scenarios are emerging - each underlining Kinghorn's timing and ability to secure a highly profitable exit.
NOT much panned out as expected as RHG worked through the loan book, says another shareholder, Karl Siegling of Cadence Capital.
''In a normal environment you've got an $8 billion book you're not making much margin on with mortgages paid back every 4.5 years, so you've got a loan book you think should run off,'' Siegling says. ''But really in these unusual and strange times what's ... happened is the margins have expanded and we're for the first time seeing that as a result of the profit upgrade they've put through. The book is not running off as quickly as expected - borrowers are struggling to find alternative financing.''
RHG's margins are so healthy it has been accused of gouging, and is routinely quoted as among the most expensive variable home loan in the market. Hefty exit penalty fees and refinancing costs draw rebukes in online chat forums.
Intelligent Investor's Hoffman says: ''RHG is trying to maximise the value of those mortgages, which means holding those rates as high as possible, and they're really stinging customers, particularly if you're a low-doc borrower. Because lending standards have tightened, you don't have many alternatives ... so you're kind of stuck.''
When Hoffman ran the numbers on RHG last year he calculated it would soon have more than $300 million in cash on its balance sheet. He lobbied for a board seat to remove Kinghorn's friend David Coe, the controversial former Allco boss. He failed, but his attempts delivered clarity on a capital return, drawing an assurance from Kinghorn to return capital to shareholders by next year.
Hoffman also learnt something about Kinghorn: ''If David Coe can't get thrown off the board, then I think that shows he [Kinghorn] does control the company, even though he has 20 per cent of the company.''
And decision time is coming. Should Kinghorn decide conditions are not right and he has no stomach to relaunch the business, he is positioning himself for a profitable exit through a well-flagged capital return. He already holds a stake of 10 per cent. He gave his other 10 per cent stake to his son Geoffrey at the end of the 2008 financial year when the share price was well below the listing price, potentially delivering himself a tax loss on the stake.
Now the company has announced a share buyback with expectations the Kinghorns will not take part, increasing the family stake and control. Significantly, that will also increase the Kinghorn slice of a capital return payout to about one-quarter of the total capital return pool estimated already to be above $300 million. John Kinghorn did not respond to requests for comment.
ON THE other side of the coin, an equally intriguing scenario is playing out.
In RHG's favour, margins have been improving, credit markets are easing and competition has collapsed during the credit crisis. The non-compete agreement with Westpac expires later this year.
At its last AGM, John Kinghorn indicated that RHG was considering going back into business. While many may ponder why, the prospect has the shareholders Justin Braitling and Karl Siegling crunching the numbers.
With a share price about 60c, the business is now valued as being in run-off, with no future prospects.
''On our numbers, by June this year RHG should have about 95c of net tangible assets per share, and the bulk of that net is cash,'' Siegling says. But if RHG goes back into the business of writing loans, no future earnings have been factored into its share price with the potential of another revaluation.
The lack of competition in the residential mortgage market is another attraction for resuming writing loans. Westpac's takeover of St George and the RAMS network, and the Commonwealth Bank's buyout of BankWest have concentrated lending to an extent of questions over the government providing assistance for second-tier lenders.
''Perhaps the really interesting thing that has developed even since they had the AGM is that the four major banks have been increasing margins and you've got a government trying to have a viable second tier of mortgage providers or distributors, and they might look to RHG as a credible second tier provider to go back into business,'' Siegling says.
Any attempt by Kinghorn for a relaunched RHG to apply for the federal government's $6 billion sponsored securitisation package through the Australian Office of Financial Management would probably draw taxpayer ire.
But Greg Hoffman sees the attraction of aligning shareholder interests with the likes of Kinghorn. ''They obviously are prepared to back themselves into another venture. They're people of enormous self confidence.''
WHILE THE stars are aligning for Kinghorn, it will not be until later this year when the non-compete with Westpac expires and market funding conditions can be better gauged that RHG's future will become clear.
''The opportunity is looking more attractive day by day,'' Braitling says. But a key issue remains - the question mark over Kinghorn's preference for running a freshly re-launched public company as opposed to running it as a private entity. After the disaster of the RAMS float, one thing appears certain, Greg Hoffman says.
''I think he knows in his heart of hearts that he could never raise money from the public, or it would be very difficult for him to raise money from the public again.''
Walking warning on 'crazy' house prices - One of the most outspoken sceptics of Australian property prices has launched a new effort to raise awareness of "crazy" housing prices and policies.
Feb 16, 2010
In an effort to turn the lemons of losing a bet about a local housing bubble into the lemonade of winning more followers, University of Western Sydney associate professor of economics Steve Keen has unveiled keenwalk.com.au.
The site will highlight the 224 kilometre journey on foot from Parliament House in Canberra to Mount Kosciuszko in the Snowy Mountains he is making in April, after losing a wager with Macquarie Bank analyst Rory Robertson that home prices would fall 40 per cent from peak to trough in a year.
Professor Keen will wear a t-shirt with the words, "I was hopelessly wrong on house prices. Ask me how."
Last year, capital city house prices rose by 12.1 per cent, hitting a new high, as demand from first-home buyers sparked a revival at the lower end of the market, while Australia's strong economy bolstered the top end.
Undaunted, Professor Keen is asking members of the public who "agree that Australia's housing prices and policies are crazy" to join him for 15 kilometre stretches of the walk, expected to take him eight days in total. The site will also raise money for the Swags for Homeless charity, which distributes weatherproof swags to Australia's 16,000 homeless.
"I'm happy to walk from Parliament House to Mt Kosciuszko if I can draw attention to the absurdity of basing economic policy on making housing more unaffordable," said Professor Keen.
He also reminded Mr Robertson that the second part of the bet - whether Australian home prices would drop 40 per cent over 10 to 15 years - "is still alive and well."
"Rory may yet have to follow in my footsteps," he said.
Mr Robertson said in November that if Australian house prices ever fell by 40 per cent from any peak in his lifetime, he would follow in Professor Keen's footsteps.
Professor Keen said the main reason home prices surged in 2009 was the government's first home owners' grant boost, which has created a caste of "sacrificial lambs of Australia's so far successful evasion of the GFC".
He pointed to a recent Fujitsu Consulting study which predicted that 40 per cent of the 250,000 first time buyers who entered the market in the last year and a half are experiencing some degree of mortgage stress, with that share expected to rise to 47 per cent by December.
Fujitsu describes mild mortgage stress as borrowers reprioritising their bills or borrowing more from other sources in order to maintain their home loan repayments. In more severe mortgage stress, borrowers are forced to refinance loans or sell their homes.
Inflation goals all wrong - IMF call to lift target to 4pc - THE International Monetary Fund has called for the overthrow of inflation targeting as the central goal of economic management, and urged that inflation be allowed to rise to 4 per cent to give
Feb 15, 2010
THE International Monetary Fund has called for the overthrow of inflation targeting as the central goal of economic management, and urged that inflation be allowed to rise to 4 per cent to give governments a better ability to manage downturns.
In a radical paper calling for far-reaching economic reform, the fund says too much reliance has been placed on interest rates to control the economy, and budget spending and direct regulation of banks should play a greater role.
The IMF says cash hand-outs, such as those distributed by the Rudd government in the wake of the financial crisis, should be made automatically when unemployment rises.
The fund's chief economist, Olivier Blanchard, said that although economic policymakers did not cause the global financial crisis, they were "lulled into a false sense of security by the apparent success of economic policy ahead of the crisis".
"As the crisis slowly recedes, it's time for a reassessment of what we know about how to conduct macroeconomic policy," Mr Blanchard said.
The IMF's recommendations come as the Business Council of Australia urges harsh spending cuts, including a tightening of means testing on family and pension benefits and the cancellation of stimulus spending, to speed the budget's return to surplus.
Kevin Rudd yesterday blamed the global financial crisis for his government's failure to fulfil its election promises. "In dealing with the challenges of the global recession, obviously some changes had to be made because of the impact on government finances," the Prime Minister said.
"I accept that, and take full responsibility for it."
The IMF's recommendations up-end 15 years of economic orthodoxy, and will spark fierce debate among policymakers and central bankers around the world.
Germany's central bank, in particular, will be hostile to raising the European inflation target from 2 per cent, while Reserve Bank governor Glenn Stevens is likely to argue before the House of Representatives economics committee on Friday that lifting the inflation target would bring much higher interest rates.
The RBA's target of keeping inflation to between 2 per cent and 3 per cent on average is more liberal than the 2 per cent ceiling of most central banks.
However, Mr Blanchard said a rate of 4 per cent would give central banks more latitude to cut rates at a time of crisis.
The IMF said higher inflation targets should be accompanied by indexation of personal income tax brackets.
The fund said that although the aggressive budget stimulus packages implemented around the world had been justified by the severity of the crisis, they were less suitable for "normal" economic fluctuations.
However, the IMF said there was a case for automatic measures, such as tax credits or cash hand-outs to low-income people, that would be triggered by rising unemployment.
The BCA, which released its budget submission yesterday, said the rapid recovery of the economy meant that greater effort should be put into returning the budget to surplus.
The government's goal of keeping spending growth to no more than 2 per cent after allowing for inflation was good policy, but it should be implemented immediately rather than waiting for growth to return to normal, the council said.
Government's switched on energy move - ALL Australian homes will soon have to undergo a mandatory energy-efficiency assessment costing up to $1500 per property.
Feb 15, 2010
The assessment has to be done before any property can be sold or rented under new laws to tackle carbon emissions.
The mandatory assessment - being drafted into law by the federal and state governments - will rate homes by an energy efficiency star system, similar to the ratings given to fridges and washing machines.
It will apply to all commercial properties from later this year and to all residential properties from May 2011, Adelaide Now reports.
A spokesman for State Energy Minister Pat Conlon said the ratings would inform prospective owners or tenants of a building's energy use, so they could factor it in to their buying or rental decision.
The spokesman said details of the "Mandatory Disclosure" scheme - including who would carry out the assessments and how much they would cost - were yet to be decided.
Energy efficiency expert Arthur Grammatopoulos, of Helica Architecture, said rating properties could cost up to $1500 per house.
"I think this is a positive move for the industry but the question has to be asked, will there be enough experts to cope with demand when the law is introduced?" he said.
A similar scheme with a six-star rating has been operating in the Australian Capital Territory's property market for several years.
Queensland's State Government introduced a mandatory Sustainability Declaration form on January 1, requiring homeowners to declare their property's green credentials to prospective buyers or risk a $2000 fine.
Mandatory disclosure has been criticised by property experts as an unwarranted expense that will not influence purchasing decisions or cut household pollution.
The Real Estate Institute of SA said governments were playing environmentally "popular politics" by introducing a law that they say will simply add to the cost of selling and renting a home.
"I think they are patronising people who are making the biggest purchase decision of their life by thinking a rating system will influence that decision," REISA chief executive Greg Troughton said.
"It's already hard enough to buy and sell a home and this is just another financial impost that also has the potential to delay the sale of a property."
While Mr Troughton said vendors would bear the cost of having their home rated by a licensed expert, independent SA MLC and former Valuer-General John Darley said landlords would look to pass the cost on to tenants.
"This will be an extra cost to working families who have to rent because they can't afford a mortgage," he said.
"And we need this like a hole in the head unless the governments can convince us there is a definite benefit, like a reduction in household pollution."
The Council of Australian Government's National Strategy on Energy Efficiency says Mandatory Disclosure will "help households and businesses prepare for the introduction of the Carbon Pollution Reduction Scheme".
Investors win as rents set to rise - WITH demand for rental properties set to soar this year, experts are urging investors and renters to get in now ahead of an expected price rise.
Feb 15, 2010
Property investors are gearing up for a bumper year as big rent increases and strong capital gains are expected to offer double-whammy returns during 2010.
Demand for rental properties, from both investors and tenants, is expected to surge during the next few months as people attempt to lock in properties before prices rise even further.
Latest research from Resi Mortgage Corporation has found the number of people intending to become property investors has almost doubled during the past year.
Strong price growth for exisiting housing, particularly in established suburbs, has led many would-be investors to act sooner rather than later, Resi consumer advocate Lisa Montgomery says.
Anticipated rent increases, because of high demand from renters, is also encouraging people to act promptly so they can take advantage of the expected higher returns.
"It certainly is good times ahead for landlords,'' Ms Montgomery says.
"People are noticing that yields are high and property has returned to being the 'new black' to invest in. Confidence is out there.''
Research company Australian Property Monitors has forecast rent increases of up to 11 per cent in 2010 after little or no growth during most of 2009.
In Melbourne, it expects house rents to rise 5.6 per cent and units to lift 7.5 per cent.
"An improving employment outlook means, overall, renters will be more willing and able to afford rental increases,'' APM economist Matthew Bell says.
Ongoing housing shortages are expected to worsen as first-home owners opt out of buying and remain as renters.
Immigration continues to increase and more people are turning to bricks and mortar as an investment after being stung by the share market.
"On the supply side of things, there simply aren't enough new properties being built for investment purposes to meet this increased demand,'' Mr Bell says.
However, he says many rent rises will also be needed to recoup extra costs such as higher interest rates and land tax, not just additional profits for landlords.
Property investment specialist Jock Bing from Portfolio Management Services says the demand for rental accommodation is expected to worsen during the next couple of months as the academic year gets under way.
"Some rental returns had a slight hiccup early in 2009,'' Mr Bing says.
"However, with the general short supply, rents have firmed again but not excessively and there is still more room to move.
"The supply and demand gap is only expected to widen further during 2010.''
Credit card spending up - A record $21.1 billion worth of purchases was put on credit cards in December. Reserve Bank figures show the amount is 5.6 per cent higher than in December 2008.
Feb 15, 2010
The average outstanding balance on credit cards grew 3.3 per cent to $3,251 last December.
But the chief economist at Commsec, Craig James, says people are becoming more savvy about how they use their credit cards to avoid bank fees.
"Nowadays people are electing to pay off their credit cards before the due date and certainly they're shunning things like getting cash out with their credit cards," he said.
Westpac to offer Islamic banking - WESTPAC is poised to bolster its exposure to the fast-growing Islamic finance market by offering a commodity trading facility intended for overseas investors operating under the principles of Islamic law.
Feb 12, 2010
Islamic finance prohibits the earning of interest. Instead, there is a focus on profit sharing based on the buying and selling of tangible assets such as property.
The move by Westpac, which targets Islamic institutions, coincides with a new emphasis by the Australian government on Islamic financing.
Trade Minister Simon Crean will today launch a study outlining opportunities for the nation's financial services sector to tap investment and banking markets that comply with Islamic law.
This comes on the heels of a recommendation last month by a government-backed finance taskforce that called for tax rules to be overhauled to ensure that Islamic financing products were given equal treatment.
The Australian Financial Centre Forum, which released a broader report into the nation's finance sector, highlighted Islamic financing as a potential funding source for the nation's banks.
The global market for Islamic financial services, which has grown rapidly in recent years backed by surging oil prices, is estimated to be worth close to $1 trillion.
The issue of sukuk - the Islamic alternative to conventional bonds - is in excess of $50 billion a year.
''Accessing this market could increase the diversity of the sources of capital available to Australian businesses and consumers,'' the Australian Financial Centre Forum said in its report.
Mr Crean said Islamic financing represented a key plank in the government's strategy to make Australia a financial hub in the Asia-Pacific region.
"Continued growth in major Asian economies will create a need for resources-related services and infrastructure, which are ideal assets for forms of Islamic financing," Mr Crean said.
All the major Australian banks now provide Islamic-style banking products for retail investors.
Unemployment rate falls to 5.3pc with 52,700 new jobs created in January - THE Australian economy continues to power along with another shock drop in the unemployment rate.
Feb 12, 2010
The seasonally adjusted jobless rate fell by 0.2 percentage points as 52,700 new jobs - mainly part-time - were created in January, the Australian Bureau of Statistics said today.
This is the largest rise in employment since December 2006.
The unexpected drop in the jobless rate will raise the risk of a further official interest rate rise in March, economists said.
The market has been continually surprised by the strength of the Australian jobs market during the past few months with about 61,200 full-time jobs and 91,600 part-time jobs created since September.
The market forecast was for the unemployment rate to increase slightly to 5.6 per cent with an extra 15,000 jobs created in January.
Australia's unemployment rate has continued to remain lower than that of other major developed economies.
"The rise in employment was driven by a rise in part-time employment, up 36,900 persons to 3.314 million together with a rise in full-time employment, up 15,900 persons to 7.652 million," the bureau said.
"For the third consecutive month, the ABS reported the number of people unemployed had decreased, down 22,300 persons to 612,000 in January."
Employment Minister Julia Gillard said the figure showed the "strength and resilience" of both employers and employees during the economic downturn.
"Unemployment does tend to lag other economic indicators, which means you can continue to see unemployment to grow even as other economic indicators recover," Ms Gillard said.
Employers want 'more bodies'
TD Securities Senior Strategist Annette Beacher said that employers continue to advertise for staff as opposed to extending the hours of existing workers.
"I tend to look at the job ad surveys and they tell you that employers are advertising and looking for employees," Ms Beacher said.
"Obviously, they want more bodies in their shops, factories and offices."
She added "that businesses (whether big or small) are clearly choosing to hire more workers, rather than use the existing workforce to meet demand.
"This is great news for newly hired employees, but bad for productivity statistics, and hence bad for inflation."
Ms Beacher said she was leaning towards the Reserve Bank hiking its rate next month.
But she warned that the jobs data would make the Reserve Bank board's next rate decision a "finely balanced debate".
"There are somewhat conflicting signals sent by rapidly tightening last year followed by a potentially too-long pause," she said.
"I personally think they should hike rates...if they pause again it will have been too long since the last rate increase and will send a message to the market that they are done and could lead to more...wage inflation expectation."
ANZ Senior Economist Julie Toth said the strong jobs data means it is "highly likely that a March rate hike is all but a done deal".
"Indeed, there may be some discussion of the need to raise rates by 50 basis points, although this is an unlikely proposition given the vast uncertainties still plaguing many large economies around the world," Ms Toth said.
"That said, the Reserve Bank cash rate needs to be 50-100 basis points higher and today's figure suggests that this needs to happen sooner rather than later."
Jobs growth 'unsustainable'
The level of job creation in the economy cannot continue, said Dr Nigel Stapledon, Associate Head of Economics at the Australian School of Business.
"What seems clear is that the present state of the Australian economy is strong, and one rapidly moving back to full employment," Dr Stapledon said.
"Full employment is about 5 per cent and the January figure of 5.3 per cent, down from 5.8 per cent just two months ago, is closing in on that.
"Employment growth in the last three to four months has been running at about a 4 per cent annual pace which cannot and will not be sustained."
"The employment news is great news for school leavers entering the job market, but nonetheless adds to the pressure on the Reserve Bank to further lift interest rates and on the Federal Government to moderate its fiscal stimulus."
In its latest Statement of Monetary Policy the Reserve Bank was bullish about the Australian jobs market, saying that unemployment had peaked last year.
"Employment grew strongly over the final months of 2009 and average hours worked also increased after having fallen earlier in the year," it said.
"Given these developments and a pick-up in hiring intentions by firms, it now looks likely that the unemployment rate has peaked at around 5.75 per cent, a much better outcome than thought likely early last year."
What's in store for the 2010 property market? - the property price numbers for the 2009 calendar year are out and notwithstanding an unusual level of the "our-data-is-better-than-your-data" chest-beating from one provider
Feb 12, 2010
Well, the property price numbers for the 2009 calendar year are out and notwithstanding an unusual level of the "our-data-is-better-than-your-data" chest-beating from one provider, the numbers were remarkably consistent across the country and pointed to 2009 being one of the strongest years on record for national house price growth.
According to APM's report, house prices rose by 12.1% and unit prices rose by 9.8%. Melbourne and Darwin led the way with house prices up 18.5% and 13.5% annually, with Sydney, Canberra and Hobart not far behind. Brisbane, Perth and Adelaide were the underperformers in 2009 with house price growth less than the national average.
What's most extraordinary about this result is that it's unlikely you could have found anyone in the first half of 2009 (who wasn't trying to sell real estate) predicting anything but price falls, let along growth above 10%. The fact that the biggest 12-month fall in house prices that Australia experienced during the financial crises was -5% confounded those predicting house price crashes of greater magnitude than those seen in the U.S. or U.K..
Indeed, even when it became clear that slashing of mortgage rates and the First Home Owner Boost had done a great job of stimulating the First Home Buyer sector between October 2008 and June 2009, there were still widespread predictions that the removal of the Boost would lead to a collapse in prices at the affordable end of the market.
Of course, the Boost began it's expiry on September 31 and finished for good on December 31, and while price growth in the bottom end of the market has slowed or is flat in some areas, there's no real expectation of widespread price falls, let alone catastrophic ones.
In contrast, the top end of the market experienced a strengthening market as 2009 developed. With the market for the more expensive houses hitting rock bottom in January/February 2009, along with the share-market, the recovery since then has been remarkable. In fact, it was so strong that in most cities in Australia, the top end of the market has now recovered all the losses experienced in 2008 and early 2009 and moved to historic highs.
What's ahead for 2010? Well, while it's hard to see quarterly growth rates above 4% continuing, it's also hard to see annual growth slowing by a significant amount in an economy that is already coming down from it's unemployment high, is experiencing historically strong population growth and simply isn't building enough new properties to keep up with demand. According to the HIA/Commonwealth Bank Housing Affordability report, affordability, while rising, is still well above the levels experienced for most of the past decade.
I expect that the first home buyer market and the more affordable areas in each city will underperform the more expensive regions as the removal of the Boost and interest rate increases start to bite. There's also been some recent concerns raised that rising rates will put pressure on those First Home Buyers that overextended themselves in the euphoria of getting an extra $7000 from the government. If that plays out, there may be some extra supply coming onto the market that might put a dampener on prices.
The top end of the market is a bit harder to pick. Given many affluent areas are now back above pre-GFC levels, will we continue to see the very high rates of growth experienced in the latter part of 2009? Probably not, as a certain amount of bargain hunting would have helped prices, and that will taper off now. That said, investor activity seems to be on the increase and there's still a lot of money around in upgrader's pockets due to selling into a very strong first-home buyer market before September.
Overall though, it's hard to see national house prices rising by much less than the 9%-10% range in 2010. I note also that last week NAB Economics moved their forecast for 2010 property prices from a -5% fall, to a +5% rise, a rather large change of heart within a 3 month period. Predictions for 2010? We can always come back in a year and see how we all went.
Build homes the agreed path - THERE is one thing our panel agrees on: Australia is not building enough new homes. And if there's one path they propose to make housing more affordable, it's simply: build more homes.
Feb 12, 2010
Australian housing in recent years has become among the most expensive in the world. On one measure, the median Melbourne price rose by $100,000 in 2009 to more than $500,000.
Population growth is at record levels, yet until recently, new home building was close to historic lows.
So one of our questions to the panel was whether Australia should be trying to bring house prices down, and if so, how?
Our panel was not of one mind. Some pointed to state government policies they believe inhibit housing supply. Others pointed to tax breaks that reward investors for buying up existing homes. Some said interest rates should control housing supply, while some saw no problem anyway.
Peter Jones of Master Builders Australia urged reform of ''inefficient state and local government practices'' as the way to lift the supply of new homes from about 130,000 now to about 200,000 per annum.
''Master Builders for some time has been calling on all governments to embrace a package of reforms including reform of developer charges, improved land release, better planning approval processes and the replacement of stamp duties with less distorting taxes,'' Mr Jones said.
ANZ acting chief economist Warren Hogan listed an even wider range of factors that contribute to housing shortages, and hence high prices. They include ''excessive developer levies, rising regulatory costs (energy/water/fire ratings), access to finance, resistance to medium and high-density infill (NIMBYism), inadequate transport infrastructure, skilled labour shortages and rising interest rates''.
Mr Hogan was almost alone in citing difficulties in obtaining finance, which many unit developers see as their biggest problem.
He also raised the issue of immigration, warning that without a ''concerted public policy effort'', to lift Australia's population to 35 million by 2049 could make housing shortages ''intractable''.
Steve Keen, the University of Western Sydney economist who lost a bet with Macquarie's Rory Robertson that house prices would fall 40 per cent, argued that government policy was really to keep house prices high, not to make housing affordable.
''Australia should stop trying to push house prices up,'' Professor Keen said. He cited the exemption of the family home from capital gains tax, the 50 per cent tax break for capital gains, negative gearing and the first home buyer's grant.
''If these price-fixing interventions were removed, much of the force sustaining the bubble would be removed with them,'' he said. ''The unwinding of the massive overleveraging of the household sector would do the rest.''
Sure and steady in volatile times - Conservative investing in dividend-paying companies will soften the blow of negative returns
Feb 11, 2010
Fund managers know and understand the benefits of capital preservation. They know negative returns are best avoided because of how difficult it can be to just get back to square one.
But ordinary investors probably don't appreciate the maths and the sort of high returns required to recover from losses. For example, a loss of 10 per cent requires a return of 11.1 per cent to get back to square one. A 20 per cent loss requires a return of 25 per cent and a 70 per cent loss requires a return of 233 per cent.
So big losses are likely to take a long time to recoup, which is why investing with an eye to avoiding losses in the first place is so important in growing an investment portfolio.
That is particularly pertinent to the sharemarket because shares quite regularly lose 5 per cent or 10 per cent of their value and, occasionally, much more. From the bull market peak of November 2007 to the bear market trough of March 2009, Australian share prices fell by more than 50 per cent. While the Australian sharemarket has risen by about 45 per cent from the trough, it remains more than 30 per cent off its all-time high of November 2007.
However, the mathematics of capital losses say that for Australian share prices to return to record levels, share prices need to rise by almost 50 per cent from here. And that could take years, says the head of investment market research at fund manager Perpetual, Matthew Sherwood.
Sherwood cautions investors who, tempted by the easy gains, are considering throwing caution to the wind and going headlong into the sharemarket hoping to quickly recover earlier losses.
He says most of the easy gains on the back of the economic recovery have probably already been made.
"The best thing to do is to invest conservatively and reduce the risk in what is going to continue to be a volatile environment," Sherwood says.
Investing conservatively means selecting good, dividend-paying companies. A portfolio of income-paying shares helps take some of the sting out of the tail of the capital losses, he says. As economic conditions improve, so do dividends.
Fund managers tend to favour companies that pay consistently high dividends because of the fact that it helps smooth out the volatility of share prices for the investors in their funds.
Even when a company's share price is falling, it usually keeps paying dividends to investors. "Since 1882 the Australian sharemarket, on average, has returned about 12 per cent a year and half of that has come from dividends," Sherwood says.
The importance of dividends to Australian investors is not only that more of the total return from Australian shares is made up of dividends than is the case with overseas shares but that the dividends are favourably taxed in the hands of investors through our dividend imputation system.
The point for investors is simple. The best way for investors to get ahead is by having a well-diversified portfolio of consistently performing investments. That is likely to be a much more profitable route for investors in the long-term than holding a portfolio of investments whose returns are highly volatile and do not pay much by way of dividends.
Successful fund managers, such as Perpetual and Investors Mutual, have an investment philosophy that focuses on capital preservation and on investing in income-paying investments with the aim of delivering consistent total returns of regular income and capital growth.
Such an approach means the fund manager is unlikely to appear at the very top of performance league tables in any year but instead will provide the unit holders in their share funds with higher returns in the long run. Individual investors would do well to follow their lead.
The smoother ride provided by a lower-returning, income-paying investment will also help ensure investors stay invested.
Faced with significant losses, investors are more likely to take fright, sell their shares and put their money into cash, which in the long-term is the lowest-returning asset class of all.
Sticking with a portfolio that produces consistent returns has another advantage in that investors do not feel pressured to seek out the next big thing in the hope of making spectacular returns.
Trading not only takes up much more time, "churning" a portfolio also increases both transactions costs and taxes, particularly if the share is held for less than a year.
Lessons from rates hold - LAST Tuesday I felt near-relief that, since leaving as the ANZ's chief economist, I no longer needed to stake my credibility on predicting if or by how much the Reserve Bank board would change its official cash rate.
Feb 11, 2010
Had I still been on that treadmill, I would have forecast that the RBA would probably lift its cash rate again, even though the case for doing so wasn't as compelling as it had seemed before the last three board meetings of 2009.
And since the RBA board decided to leave interest rates unchanged, I would have been wrong, with the only consolation being that I would have had plenty of company.
Not only did all of my former colleagues who are still on that treadmill have the same opinion, but even those behind a betting agency were so convinced that interest rates would go up again that they declined to take bets on the outcome.
Throughout my career as an economist I've always felt that I learnt more from my (many) forecasting mistakes than from when I got it right. In that vein, what can economists and others learn from having been so wrong on this occasion?
First, the RBA's decision reminds us that it is acutely aware that the Australian economy is much more sensitive to interest rate movements than it used to be when levels of household indebtedness were much lower.
In its statement announcing the decision to lift the cash rate by a quarter of a percentage point in early December, and again in the quarterly Statement on Monetary Policy released on Friday, the bank used the word ''material'' to summarise how it saw the cumulative impact of the three quarter-point increases in the cash rate since October.
Those who have been following the RBA's actions for a long time will recall that before the mid-1990s three-quarters of a percentage point would not have been considered an unusually large movement in a single month (and, of course, more recently, the bank cut its cash rate by three-quarters of a percentage point or more on four occasions between October 2008 and February 2009).
Second, the bank's decision to leave official interest rates unchanged reminds us that it pays explicit attention to the decisions that lenders make about the rates charged to borrowers.
No one pays the official cash rate; the interest rates that matter most are the ones households and businesses pay, such as the standard variable mortgage rate and business lending rates. In explaining the decision last week to leave official interest rates unchanged, the bank referred to the fact that ''most loan rates have risen by close to a percentage point'' since the beginning of October.
That is, the interest rates borrowers are paying have risen since the end of September by as much as they would have done if the RBA had raised the cash rate by a full percentage point and lenders had done no more than match that. From the standpoint of those with mortgages or business loans, precisely how the interest rates they are paying reached their present level is of little moment.
A third conclusion arising from the outcome of last week's RBA board meeting is that the bank does not respond as mechanically to the flow of economic data as market economists and financial markets participants often seem to assume. It's true that most of the data released between December's meeting and last week's was on the strong side of market expectations. However, it wasn't that much stronger: the bank raised its forecast for GDP growth over the year to the June quarter by only a quarter of a percentage point, and its forecast for growth over the year to the December quarter not at all.
Moreover, this month's meeting occurred before the release of the building approvals and retail sales data, which are usually released at the end of the preceding month (although the bank would probably have been aware of the softness in December retail sales, confirmed two days after the board meeting, from its extensive business liaison program).
Hence, having already increased interest rates ''materially'' since the beginning of October, the board appears to have concluded, not unreasonably, that it could afford to allow more time to assess the impact of those increases.
The final important point to be gleaned from the RBA's pronouncements last week is that, notwithstanding this month's reprieve, interest rates will probably rise further over the months ahead. To the extent that the bank is willing to give any hints as to its likely moves, they are usually found in the final sentence of the introduction to these statements.
There, last Friday, were the following words: ''If economic conditions gradually strengthen as expected, it is likely that monetary policy will need to be adjusted further over time'' to ensure that inflation remains consistent with the bank's 2-3 per cent target for inflation over the medium term. The same words were also in the concluding sentence of the post-meeting press release.
According to the forecasts contained in last Friday's detailed statement, the RBA expects the economy's growth rate to pick up to above 3 per cent during the second half of this year, and to reach its trend rate of 3.5 per cent during the 2010-11 financial year. It also expects ''underlying inflation'' to bottom out at 2.5 per cent during this period.
Bearing in mind that monetary policy works with a lag, this suggests that monetary policy settings should have returned to ''neutral'' - that is, no longer imparting stimulus to the economy - during the winter months of this year.
Before the onset of the financial crisis, ''neutral'' monetary policy settings were regarded, both by the RBA and financial market participants, as consistent with a cash rate in the range of 5-6 per cent.
However, since the onset of the financial crisis, the margin between the cash rate and the rates borrowers pay has widened by between about 1.25 and 2.25 percentage points.
Hence, other things being equal, ''neutral'' monetary policy settings are likely to be consistent with a cash rate in the range of 4-5 per cent.
That, in turn, suggests that - on the proviso that things do turn out broadly in line with the RBA's most recent set of forecasts - interest rates may only rise by another half to three-quarters of a percentage point over the next six months or so.
Home loan size hits record as volume shrinks - The average Australian home loan ended last year at a record high even as rising interest rates prompted the number of mortgages being taken out to shrink for a third consecutive month.
Feb 11, 2010
The average loan size for first-home buyers rose $6,200 to $290,100 in December, while the average loan size for all owner-occupied housing rose $3,100 to $283,000, the Australian Bureau of Statistics reported. Both averages hit fresh highs.
While the loans swelled in size, there were fewer taken out, with the total falling 5.5 per cent in December, following a downwardly revised 6.1 per cent fall in November, the ABS said. Analysts expected a 5 per cent fall in the volume of home loans in December.
Slumping loans volumes amid rising home prices signal that factors other than interest rates are buoying house prices, RBC Capital Markets economist Su-Lin Ong said.
Australian Property Monitors said last month median house prices rose 12.1 per cent in the year to December to a median house price of $525,500, and predicted capital city house prices will rise another 8-11 per cent in 2010. APM is owned by Fairfax, publisher of this site.
Ms Ong said Australia's lack of housing supply and multi-decade highs of population growth driven by strong immigration lend support to home prices. ''So it does make things difficult for the RBA.''
RBA Governor Glenn Stevens said yesterday that central banks should be pro-active in efforts to prevent asset bubbles forming.
The Reserve Bank lifted interest rates by 25 basis points for a third successive month in December, as it sought to dial back some of the monetary stimulus put in place during the financial crisis. The effect of higher rates also extended to consumer confidence, which has fallen for a third month in the past four, according a Westpac/Melbourne Institute survey out today.
''The combination of three rate hikes is starting to take their toll on the appetite for borrowing for housing,'' Ms Ong said, adding that the expectation of further hikes is also keeping borrowers away.
The December home loan numbers validates the RBA's decision this month to keep rates steady, Ms Ong said, and there's a good chance the central bank will continue to sit on the sidelines longer.
Investors, first-home buyers
The value of loans dropped 4.7 per cent in December to $21.9 billion following a downwardly revised 4 per cent drop in November.
Investment lending, though, rose 1.9 per cent to almost $6.4 billion after a downwardly revised 1.7 per cent gain in the previous month.
The share of loans for first-home buyers continued to slide in December, falling to 21 per cent from the all-time high of 28.5 per cent in May 2009.
The federal government expanded it First Home Owners Buyers grant in October 2008, as part of its response to the financial crisis. The RBA also began cleaving rates.
The First Home Owners Buyers grant boost stayed in place in its full amount until last September. From October to December, it was continued in a reduced form before it was rolled back to its original $7000 level.
NSW leads retreat
New South Wales owner-occupier home loans dropped by 6.7 per cent in volume terms in December, seasonally adjusted, while Victoria's slumped 4.9 per cent.
Homes loans in Queensland fell by 5.6 per cent, while South Australia's shrank 6.4 per cent. Western Australia's loans eased 2.7 per cent, while in Tasmania's they were 4.3 per cent lower.
The Australian Capital Territory bucked the trend with home loan numbers rising 0.5 per cent for the month
Credit ranking worth the research - AUSTRALIANS may be among the best in the world when it comes to being financially savvy and shopping around for the best deals, whether it be for credit cards, homes loans or a term deposit.
Feb 10, 2010
AUSTRALIANS may be among the best in the world when it comes to being financially savvy and shopping around for the best deals, whether it be for credit cards, homes loans or a term deposit.
But one black spot that is alarming industry experts is consumers' lack of knowledge about their credit profiles.
One staggering statistic comes from credit bureau firm Dun and Bradstreet, which shows nearly 86 per cent of women in Australia don't know what their credit profile looks like, reports The Australian.
"The results are quite telling,'' Dun and Bradstreet chief executive Christine Christian says.
"And what they do say is that Australia lags behind the rest of the world here.''
Ms Christian says Australian consumers have been poorly educated when it comes to understanding their credit profile and the consequence is credit choices that can have a long-lasting negative impact.
Consumers, she says, are generally unaware how their credit report works and have almost no idea about how to get a copy, even though it is legally available to every consumer.
Rival credit bureau firm Veda Advantage reports similarly poor inquiry numbers. Veda holds about 14.5 million Australians' credit files.
The firm estimates it gets about 242,000 inquiries (equal to 1.5 per cent) a year from consumers wanting to access their files.
To put that into perspective, Veda says that in Britain the inquiry level is closer to 2.9 per cent, and in the US it's about 8.2 per cent.
Ms Christian says the poor inquiry levels are in part due to the present negative-only reporting system in Australia, which only records negative data on an individual.
"Sometimes the first time anyone knows they have a poor credit history is when they go and apply for new credit, only to be declined,'' she says.
It's only after they seek more information around the decision by the lender, she says, that the consumer finds out a phone bill they did not pay when they were 18 has come back to haunt them.
A default on a payment for as little as $100 can stay on your credit history files for up to five years.
Such a stain on your record, Ms Christian says, prevents you from obtaining finance from mainstream credit providers, forcing consumers on to alternative sources, such as sub-prime lenders that charge much higher interest rates.
The repercussions arising from a bankruptcy are much tougher: consumers are blacklisted by lenders for seven years. A credit profile report also records the number of credit applications a consumer has made.
A high number of applications can reflect negatively on your creditworthiness, regardless of whether the applications are successful.
There are two reasons for obtaining your credit file, Veda's head of external relations Chris Gration says. One is to check its accuracy and the other to prevent identity fraud.
"Regularly viewing a credit report is an important part of understanding how your lenders, current and future, will view you,'' Ms Christian says.
"If you are informed, you are empowered."
Later this year, new credit reforms are due to be introduced which are set to make it harder for consumers to get a home loan or personal loan if they have a bad credit history.
Under the new National Consumer Credit Protection legislation due to come into effect on July 1, consumers can expect greater scrutiny and visibility of their credit records, specifically whether they pay your bills on time.
There are only two credit bureaus in Australia, Dun and Bradstreet and Veda Advantage. All consumers have access to their credit profiles through their websites.
Costs of buying land to build on rising - THE dream of building a home has become dearer for Australians as land prices have risen to a new high, a survey says.
Feb 10, 2010
The Housing Industry Association (HIA)-RP Data residential land report found the weighted median price of a vacant housing block rose by 5.7 per cent in the September quarter to $181,158, from the previous quarter.
HIA chief economist Harley Dale said new home starts would rise in 2010 but the improvement in the industry may not continue next year.
The survey found the number of residential land sales rose 33 per cent in the September quarter of 2009 compared to the corresponding period in 2008.
"The million dollar question is whether a new home building recovery can be sustained beyond this year," Dr Dale said.
"If land is not released in a timely manner in sufficient quantity, then land prices will continue surging and the answer will be a resounding no."
Sydney remains the dearest market, with a median price of $290,000, the report found.
NSW Richmond Tweed area was the most expensive regional market, with a median price of $255,000, while the Murray Lands region in South Australia was the cheapest, with a median price of $69,500.
RP Data national research director Tim Lawless said rising interest rates would hinder first home buyers from entering the property market, while demand from investors should continue to increase in 2010.
"Increasing interest rates along with the removal of the first home buyers grant boost are expected to result in demand from the first home buyer sector diminishing significantly during 2010, after reaching historical highs during 2009," Mr Lawless said.
The value of investor housing loans has risen by 9.6 per cent since its recent trough in July 2009, Mr Lawless said.
Australians' love for property continues to regain momentum after the national house price index rose 4.4 per cent in the September quarter, official data showed earlier in the week.
Subsequently, the house price index rose 5.2 per cent in the December quarter.
It's all in the name for selling your home - TO say you live in Ropes Crossing rather than Blacktown, Glenmore Park over Penrith or Glen Alpine instead of Campbelltown adds thousands to your home's value.
Feb 10, 2010
Latest sales figures reveal suburbs ending with waters, park, point, hills or heights can be worth more than three times as much as their neighbouring suburbs.
Sylvania Waters (median $1.5 million) is worth three times as much as surrounding Sutherland (median $500,000). Pleasure Point (median $900,000) is more than double the rest of Liverpool (median $400,000), according to RP Data 2009 figures.
In Sydney's west the median price for popular estate Glenmore Park throughout 2009 was $410,000 compared with Penrith's median of $340,000. Glen Alpine recorded a median of $490,000, compared with Campbelltown LGA's median of $390,000 and new suburb Ropes Crossing had a median of $420,000 compared to Blacktown's $350,000.
University of Western Sydney Urban Research Centre Professor Peter Phibbs said suburb names were a marketing hook, advertising a aspect such as views, beaches or gardens.
"They like a snappier name. With it, you are differentiating yourself from the surrounding suburbs, you are trying to differentiate from a reputation which might not be earned," he said.
University of Newcastle urban development associate Professor Pauline McGuirk said the name game began during the industrial revolution when trains were built and the middle class could move out of the city to places with views, or that overlooked water.
"Where people live brings social status. Historically, the most salubrious suburbs had views, fresh air and were away from pollution," she said.
New suburbs like Jordan Springs and Oran Park are following suit.
Delfin Lend Lease Ropes Crossing project director Natalie Jones said the names became more significant when creating a community and most often played on the heritage of the site.
Big four under microscope over interest rates - THE competition regulator is believed to be keeping a watch on the major banks after NAB "telegraphed" its pricing intentions on home loans ahead of the RBA decision.
Feb 10, 2010
ince revelations last year over potential price co-ordination among petrol retailers, the ACCC has widened its monitoring to other industries.
NAB signalled publicly at the weekend that it would price its variable rate home loan in line with the Reserve Bank's rate decision.
While NAB's up-front commitment was welcomed by borrowers on Monday, the move could have triggered a full-blown ACCC investigation had one of its rivals followed suit.
The Trade Practices Act prohibits the telegraphing of pricing intentions between market rivals.
But, because of loopholes in the wording of key provisions, the ACCC has been hamstrung in the action it can take. In the US, NAB's action would likely have attracted a big legal penalty.
After issuing the price signal, NAB won a few days of positive media coverage at the expense of CBA, Westpac and ANZ.
As it turned out, all the banks followed the RBA by keeping their mortgage rates on hold, but NAB's rivals all ran the risk of being charged with price collusion had they made this known before the RBA announcement.
NAB's behaviour is even more significant in light of it being the price leader in the home loan market among the four major banks. As the price leader, NAB's signals to market rivals are likely to carry more influence in what we are told is a hotly contested sector.
Superannuation funds on rebound - THE value of Australia's superannuation funds rose in 2009 following a rebound on world financial markets, lifting it to fifth place in a global pension assets rankings list.
Feb 05, 2010
The value of Australian super assets rose about 9 per cent, or $88 billion, to a total $1.115 trillion at the end of 2009.
Australia rose to fifth place from sixth in the group's 13-country global rankings, to be behind the US, Japan, the UK and Canada.
Global pension assets across the 13 markets rose by 15 per cent to more than $25.82 trillion, after falling 21 per cent in 2008.
Towers Watson Australia senior investment consultant Martin Goss said while the improvement was welcome, the global economic downturn of 2008 and early 2009 had highlighted the issue of how to deal with serious disruptions during times of highly changeable market conditions.
"While the recovery of markets will be welcomed, it is hoped that it will not stifle recognition of these as major issues for governments and companies to address,'' Mr Goss said.
"I fear that without exceptional leadership we will have another tough decade in the pension and investment world.''
While growth in Australian superannuation assets in 2009 was slightly below its 10-year run rate of 10 per cent a year, only Brazil, Hong Kong and South Africa had higher growth rates in pension assets for the 1999-2009 period.
Financial Planning Association chief executive Jo-Anne Bloch said Australians need encouragement to boost their retirement savings.
"We have an ever-increasing and ageing population which will make more demands on the public purse,'' she said.
"The Treasurer has concluded that we all need to start preparing for this sooner than later.''
Key to picking the right managed fund - MANAGED funds can be a good investment option for people without the time or confidence to invest directly into assets. Get a free advice by calling Touch of Finance on 03 9357 9354
Feb 05, 2010
But with more than 11,000 funds available to Australians, how do you choose the right one for you?
Managed funds pool people's money together to invest in asset classes including shares, property, commodities, and infrastructure.
For a small amount say $2000 people can gain exposure to a range of assets they could not afford to access on their own.
AMP financial planner Mark Borg says the usual investing principles apply: Diversification, knowing your investment timeframe and understanding how your money is being invested.
"Managed funds are made up of people. You are employing someone to manage your money," Mr Borg says.
"It's a financial planner's job to be fully aware of the people and practices behind the funds.''
He says investors should also be aware that managed funds can freeze your money and refuse redemptions, as has happened with mortgage funds during the recent global financial crisis.
Research group Morningstar says 439 Australian managed funds were launched last year.
Communications chief Phillip Gray says fees and charges are a key issue.
"The spread of fees and charges for Australian share funds, for example, ranges from less than 1 per cent a year for index-tracking funds to nearly 4 per cent for the more adventurous, 'boutique' options," Mr Gray says.
"While you can't control how investment markets behave, you can control how much you're paying in costs to get exposure to markets.''
Three new players to offer cheap loans - A NEW generation of lenders are set to challenge the major banks, with three players flagging big moves on discount home loans.
Feb 05, 2010
Leading wholesale mortgage funder Resimac is to launch a new retail lending business next week that will trade as Hemisphere Financial Solutions.
Resimac has been piloting Hemisphere since late November and has decided to proceed with the venture as its first direct lending business to home borrowers.
The head of independent market research firm Mozo, Rohan Gamble, said the home loan sector was on the cusp of a new wave of competition.
"We're seeing new players come in to the market with serious backing behind them," he said.
Hemisphere is marketing a standard variable mortgage at 6.19 per cent through its website and some mortgage brokers.
That is more than 0.3 per cent cheaper than National Australia Bank at 6.49 per cent and 0.57 per cent better than industry laggard Westpac.
While Resimac has a relatively low profile among borrowers, it has been a major player in the Australian mortgage industry since 1985 as a wholesale funder for a string of second-tier home lenders.
Resimac director of products Frank Knez said the company had been developing the Hemisphere business for more than a year.
"This is our first foray in taking a retail brand direct to the public and we are going to put a lot of effort into building the brand on the web and in magazines and newspapers," he said.
"We want to position Hemisphere in the market as good on customer service -- this is not just about price."
Resimac's push into direct lending looms as one of the serious threats to the stranglehold of the four major banks on the home lending market.
The big banks - NAB, Westpac, ANZ and Commonwealth - accounted for 95 per cent of all new home lending in December and have boosted profitability on mortgages since the global financial crisis paralysed funding to non-bank lenders.
However, easing credit markets in the second half of last year have revived hopes that more lenders such as Hemisphere will emerge to undercut the loan pricing of the banks.
Mortgage originators such as Aussie Home Loans, RAMS and Wizard which led price competition in the 1990s are now either wholly or partly owned by the major banks.
Another non-bank player set to make a splash this year is one of the co-founders of Wizard, Paul Ryan.
Mr Ryan is the principal of Opportune Home Loans, which is now ramping up lending through a rapidly-growing franchised network. Opportune is marketing a standard variable home loan to owner-occupiers at 6.24 per cent.
"We want to be the next generation of Aussie, RAMS and Wizard," he said.
"We're expecting to double our lending to $500 million this year."
Yet another start-up is New Loan, a direct lending arm of listed financial services group First Folio.
New Loan is offering a variable rate mortgage, primarily to investment borrowers, at 5.89 per cent.
First Folio's managing director Mark Forsyth said New Loan had obtained funding lines through ING's wholesale arm and Bendigo Bank.
Surprise rise in building approvals - There has been an unexpected rise in the number of homes approved for construction, signalling new home building is in recovery mode.
Feb 05, 2010
Figures from the Bureau of Statistics show there was a seasonally adjusted 2.2 per cent rise in home building approvals in December compared to the month before.
A markets economist with the National Australia Bank, David de Garis, says it is a very strong result.
"The implication of that is that dwelling construction activity is going to be quite a substantial spur to GDP growth in the first half of this calendar year," he said.
But retail sales fell in December by 0.7 per cent after flagging department store sales.
He says the decline may suggest interest rate increases are discouraging consumers from spending, but it is still early days.
"I'd caution about reading too much into that," he said.
"We're going to need to see the January figures to get a more complete picture of that. It may be a snippet of evidence that consumers have pulled back a little bit.
"I guess you'd expect that given the three interest rate rises we've had."
Reserve Bank springs rates surprise - FOR a rather dour fellow, RBA chief Glenn Stevens certainly knows how to throw a surprise party.
Feb 03, 2010
From hiking smack in the middle of an election campaign; to the first cut before Lehman collapsed; to the three 100-pointers -- helping deliver 375 points of cuts over four successive meetings; to the first hike last October; to the "unprecedented three-in-a-row"; to yesterday's pause: it's just been one `surprise' after another.
In fact none of them was or indeed should have been a surprise. OK, most of them shouldn't have been, and certainly not yesterday's.
I'd accept unexpected -- by the economentariat; and certainly, most of those decisions were bold. But properly judged they were also unexceptional and the most unexceptional was yesterday's.
As I've been writing and saying since the CPI numbers surfaced last week, the decision really was a line ball one between pausing and delivering another 25-point hike.
The economentariat's perception that another hike was a done deal was spectacularly, group UNthinkingly wrong.
The much more important point about understanding that it really was 50-50 - Stevens could almost have tossed a coin - is to understand that either a hike or the pause would have had the same substantive basis for the decision.
Pausing does not mean the RBA sees the world differently than if it had delivered the 'expected' - 'even more unprecedented' - fourth hike in a row.
Just as crucially, therefore, that it does not point to a different pathway for future decisions. That's to say, more specifically, that we will now get fewer rate hikes over the rest of the year than `everyone' expected at 2.29pm yesterday.
With one specific and obvious exception.
If the RBA had hiked yesterday, we would almost certainly have got the pause at the next meeting in four weeks.
Right now that decision is back in the melting pot. We might get the rate hike we coulda got yesterday; so we'd be back to the same place then.
But if we don't, it does not mean we'll stay (at least) one rate hike behind for the rest of the year.
It all depends. Which broadly is why the RBA opted to pause yesterday.
It had delivered 75 points of rate increases - against a backdrop where nobody, nobody else was hiking. With the banks taking that up to 85-95 points in total.
The surprising thing is that anyone would be surprised that it would take time-out to assess the impact. And even more, to assess what had developed in both the local and global economies since it decided to start hiking.
Further, it's not as if we we weren't told. Stevens's deputy Ric Battellino made a seminal speech in December, noting that because of those discretionary increases by the banks - not just the ones delivered that month, but overall since the GFC hit - the RBA had much less to do to get effective rates back to `normal'.
All this was seemingly dismissed or forgotten. Why? Because of those CPI numbers which were almost universally misread by the economentariat. Misread, in how the RBA would read them, in the context of its succession of rate rises.
Without getting bogged down again in the detail, the critical number was the way the underlying quarterly inflation rate had finally broken below 0.8 per cent. That's to say, below the 3 per cent annualised RBA inflation `ceiling'.
Sure one number doesn't guarantee inflation victory. And if we were heading into a guaranteed, strong, conventional global upturn, it would be an uncomfortable starting point for the inflation cycle.
But it was slowing inflation into continuing global uncertainty. And just as the RBA was prepared to start hiking, even with still-rising unemployment, it was prepared to pause before inflation had clearly bottomed.
The key thing to understand to try to anticipate future rate moves is that the uncertainty cuts both ways..
We could get a strong pick-up in the US -- accompanied by too-loose for too-long monetary policy there yet again -- and China continuing to go gangbusters. The RBA would hike aggressively into that developing scenario.
We could get China slowing and the US either sustaining a limp upturn or experiencing a double dip. We would see perhaps only one further hike from the RBA.
That's why some of the commentary after yesterday's `surprise' wasn't just silly but dangerously misleading. That the RBA wants policy to remain stimulatory; that's it's never raised more than five times in any 12-month period (like it had never three-in-a-row).
We live in unusual times and we have an RBA governor who 'surprises' because he responds to them.
Source: Herald Sun business commentator Terry McCrann
Housing plot sales point to pick-up - Sales of raw residential land in Australia surged in the September quarter last year, an industry report showed today, suggesting home construction is set to rise sharply this year.
Feb 03, 2010
The Housing Industry Association and property information group rpdata.com said sales of bare land rose 33 per cent in the three months to September from a year ago.
The median price of land rose 5.7 per cent to $181,158 per lot. Sydney stayed the most expensive residential land market in Australia with a median price of $290,000.
HIA chief economist, Harley Dale, said the figures confirm that there will be a lift in new home starts in 2010.
Approvals to build new homes surged over the second half of 2009 as low mortgage rates, first-time buyers grants and rapid population growth drove demand after a long period of under-building.
The resulting lift in home construction is expected to make a healthy contribution to economic growth this year, a marked contrast to 2009 when the sector dragged badly.
House price rises to weather rate hikes: report - Rising interest rates haven't quashed expectations for home price growth in 2010, even as houses prices in December fell, data released today shows.
Feb 03, 2010
A report released by RP Data-Rismark showed nationwide home prices dropped 0.3 per cent in December alone, following a 1.1 per cent rise in November.
"We are projecting that the housing market will cool as mortgage rates normalise back to 7-8 per cent levels," said Rismark managing director Christopher Joye.
"This implies that capital growth rates will fall back to single-digit levels consistent with expected change in the incomes of prospective buyers."
Would-be home buyers are bracing for more headwinds when the Reserve Bank board meets on Tuesday, with a fourth consecutive rate rise expected. That would bring the cash rate to 4 per cent, a move likely to be replicated - if not more - by commercial lenders.
A 25-basis point increase in variable rates would add about $45 to the average monthly cost on a typical $300,000 home loan.
For all 2009, house prices climbed 11.5 per cent, RP Data-Rismark said.
Yesterday, Australian Property Monitors, using a different methodology, reported a 12.1% rise in this year to December, and 4.8 per cent gain in the final three months of the year. APM is owned by Fairfax, publisher of this site.
APM estimates house prices will rise 8-11 per cent this year.
Payments struggle
As home prices and interest rates rise, evidence is surfacing that more homebuyers are struggling to make mortgage payments, according to a separate report.
Data from the Mortgage and Finance Association of Australia /Bankwest Home Finance Index, released today, shows that 15.9 per cent of respondents in late November were struggling to make home repayments, up from 11.7 per cent in May.
The November figure is still less than the 25.7 per cent reporting the same in April 2008, when the interest rate was 7.25 per cent.
Nonetheless, the public is feeling confident with 73 per cent of those polled in November saying they expect home prices to rise, up from 23 per cent in May.
"Confidence in the housing market is not only pre-GFC - it's back where it was during the height of the housing boom," said MFAA chief Phil Naylor.
Before the crisis hit, 69 per cent polled in November 2007 foresaw higher home prices.
In the latest survey, Western Australia, home to the nation's commodities boom, reported the biggest percentage of worried mortgage holders, or 25 per cent. While in New South Wales, about 20.6 per cent were worried.
Home prices have been bolstered by the chronic shortage of available homes and the strength of the Australian economy, which skated past the global recession.
The shortage is expected to reise to 200,000 homes this year by research firm BIS Shrapnel, Bloomberg reported today.
Luxury home sales propel real estate record - A revival in sales of luxury homes has helped drive nationwide house prices to their biggest annual gain in six years, with all but Perth among the capital cities to end 2009 at record highs.
Feb 03, 2010
After posting a 4.8 per cent gain in the December quarter, average prices nationwide clocked up an average increase of 12.1 per cent in 2009, Australian Property Monitors said.
"While the First Home Buyer sector kept the overall market afloat through the end of 2008 and the first quarter of 2009, it's been the activity at the top end of the market that has driven the extraordinary overall result for 2009," said APM economist Matthew Bell.
"Activity in the more expensive suburbs has been driven by the surprisingly resilient jobs market experienced in late 2009 and a strongly rising share market," Mr Bell said. APM is owned by Fairfax Media, publisher of this site.
Melbourne houses recorded the highest annual growth rate among the state capitals, leaping 18.5 per cent to exceed the half-million dollar mark for the first time. Big gains for suburbs led by East Melbourne, Black Rock and Malvern, as well as north-suburban Dallas, helped the city notch up a 6.4 per cent increase in the December quarter alone, to leave the median price at $517,756 by year's end.
Sydney house prices jumped by 12.1 per cent for the year, to an average of $595,745. For the final three months of 2009, they advanced 5.3 per cent, with suburbs such as Sylvania Waters, Taren Point, Palm Beach and Malabar the top gainers.
Median house prices in the December quarter in Sydney, Brisbane, and Adelaide overtook highs previously reached prior to the global financial crisis, Mr Bell said.
"The price growth seen in the more expensive suburbs in 2009 has largely been a recovery of the price falls that occurred since late 2007 and early 2008," he said.
Brisbane houses rose 7.7 per cent in the year and 3 per cent in the quarter, APM said.
In Canberra, the annual increase was 10.6 per cent, while the quarter increase was 4.3 per cent.
Prices to moderate
Perth's houses rose 8.7 per cent in price for the year, catapulting their median price back over the half-a-million dollar level they were last at in March 2008. They rose to a median of $512,178, with a 3.1 per cent quarterly rise at the end of last year.
Those gains left the median Perth house price just shy of the $515,452 high reached in the December 2007 quarter, APM data shows.
Mr Bell said that rising interest rates and the end of the First Home Owner grant boost in December will probably slow activity in the market. He told Reuters that prices may rise 8 to 10 per cent in 2010, as homeowners upgrade their residences.
"It would've been a lot of people who sold into the relatively strong first-time home buyer market and maybe move into the next price bracket. So I think upgraders and investors will become a bigger part of the market as 2010 goes on," Mr Bell said.
The Reserve Bank lifted rates an unprecedented three consecutive months at the end of 2009 to a 3.75 per cent level. It's expected to raise rates again - to 4 per cent - when its board meets next week.
"The recovery of top-end prices to pre-GFC levels means that median price growth is likely to moderate across all sectors of the market in the first half of 2010", Mr Bell said.
Affordability
The market may be rising but gains are far from even, said Nomura International economist Stephen Roberts.
''Property prices are the hardest things to measure consistently from one quarter to the next,'' he said. ''One issue with the way house prices moved through 2009 is that you have different parts of the market starting to move.''
At the beginning of 2009, homes at the bottom of the market were in greater demand, spurred by the First Home Owners Grant boost, while sales of higher priced homes sagged.
Now that the grant boost has been removed and interest rates are rising, the momentum has switched to higher priced real estate, which is pushing up the overall figures in the home price data, Mr Roberts said.
Wealthier suburbs have helped by the recovery on the global equities market, generating more confidence among buyers, as well as a flood of international investors in recent months.
Mr Roberts warned that if home prices rise too far above wages and incomes ``you can actually divide the population into those who still can afford housing and those who can't.''
''So it can lead to greater divisions in society when you have house prices that move too far.
A separate report released from Demographia over the weekend highlighted the declining affordability of Australian real estate.
The anti-planning group's Sixth International Housing Affordability Survey showed the median income household in Australia would need to pay more than half of its income to service a new mortgage on a median priced Sydney or Melbourne home.
That compares with less than 20 per cent in the land-locked American metro areas of Dallas-Fort Worth and Atlanta.
"The severe unaffordability of Sydney and Melbourne is, in fact, a problem of national proportions," the report said.
"In all of Australia's major markets, a median income household with a new loan on a median-priced house would have housing expenses that are higher than the national standard for 'mortgage stress,"' it said.
Additionally, about one-third of renters face higher housing costs because the price of land is driven higher, the group said.
Other recent measures also point to deteriorating housing affordability.
The Housing Industry Association affordability index dropped 3.3 per cent in the September quarter, after a 5 per cent drop in June.
Official Statement: Statement by Glenn Stevens, Governor: Monetary Policy Decision... At its meeting today, the Board decided to leave the cash rate unchanged at 3.75 per cent.
Feb 02, 2010
The global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011. The expansion is still likely to be modest in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity. In Asia, where financial sectors are not impaired, recovery has been much quicker to date, though the Chinese authorities are now seeking to reduce the degree of stimulus to their economy. Global financial markets are functioning much better than they were a year ago. Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness. Concerns regarding some sovereigns have increased.
In Australia, economic conditions have been stronger than expected, after a mild downturn a year ago. The effects of the fiscal stimulus on consumer demand have now faded, but household finances are being supported by strong labour market outcomes and a recovery in net worth. Public infrastructure spending is now boosting demand, as is an upturn in housing construction. Investment in the resources sector is strong. The rate of unemployment appears to have peaked at a much lower level than earlier expected.
Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private-sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand. CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating. Inflation is expected to be consistent with the target in 2010.
Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year. Business credit, in contrast, has continued to fall, as companies have sought to reduce leverage, and lenders have imposed tighter lending standards and in some cases sought to scale back their balance sheets. The decline in credit has been concentrated among large firms, which generally have had good access to equity capital and, more recently, to debt markets; credit conditions remain difficult for many smaller businesses.
With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.
Interest rates to most borrowers nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.
What spooked Stevens? The mystery about today's Reserve Bank decision is just what has frightened the governor.
Feb 02, 2010
Except for two brief lines recording that the cash rate remains steady, the rest of the official statement makes the case for the rise the markets were expecting.
The only reason given for delaying the next increase was that the RBA wasn't sure of the impact of banks lifting their rates by about one percentage point more than the official increases.
"Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being," said governor Glenn Stevens.
And that sounds like utter nonsense, a long way short of the carefully reasoned explanations the RBA has been giving the markets over the past couple of years.
As the deputy governor said in a speech in December, the impact of the banks going further than the cash rate rises is to lift monetary policy to the bottom of the "neutral" zone. No surprise about that.
If the governor meant he doesn't know yet what impact barely neutral monetary policy has on the economy, he could try reading the rest of his own statement to form the conclusion: not much at all.
On the up and up
According to his good self, the labor market is strong and unemployment has peaked, there's an upturn in housing construction, public infrastructure is boosting demand, money is cheaper than normal and household net worth is recovering, that is, house and share prices are on the up and up.
Indeed, "credit for housing has been expanding at a solid pace and dwelling prices have risen significantly over the past year," says Stevens.
There's a rather bald statement that the RBA thinks inflation will be "consistent with the target" this year, which would mean an underlying inflation rate of between 2 and 3 per cent, but there's no justification for that hope that inflation is falling. To the contrary, the governor says: "CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating."
Er, yes, governor. That's what a strong labor market, skills shortages, cheap money and sharply rising house prices will tend to do - take away the fear that prevented businesses and workers increasing prices when everyone was talking about a recession. After the sharp surge in housing prices over 2009, various "experts" are tipping they will "moderate" to about 10 per cent this year. There's nothing moderate about that at all.
Sovereign worries
It suddenly looks like the RBA no longer wants to be ahead of the game, but is waiting for worse inflationary news to justify its next rate rise. And Stevens does promise further rate rises if the economy continues to grow, as he predicts, to trend strength this year.
The only mentioned threat to that was concern about some sovereign debt increasing, a reference to Greece and Dubai. Which raises the possibility that the RBA might be more worried about several heavily indebted nations that it is prepared to spell out.
When the stated reason doesn't hold up, one is left to wonder. When the RBA had been so strong in its warnings about house prices taking off and now seems nonchalant about it happening, something seems to be missing.
Or maybe the RBA just likes to prove it is not to be considered too predictable. When everyone 's sure rates will rise, it teaches them a lesson by sitting pat for a month.
Nah, that would be too silly a reason, even sillier than "we don't know what impact putting up interest rates has" while still promising to put up rates.
We can only hope the full minutes of the meeting will make more sense when they're released in a fortnight.
Big banks keep rates steady - Three of the big four banks say they will hold standard variable interest rates on mortgages steady after the Reserve Bank left the official cash rate at 3.75 per cent.
Feb 02, 2010
The central bank left the official interest rate unchanged today, defying financial market expectations of a 25 basis point hike.
Last year some banks moved interest rates outside of RBA interest rate moves.
But today, National Australia Bank, Westpac and Commonwealth Bank said they would leave interest rates steady.
''Our rates are always under review but (there is) no change at this stage,'' Commonwealth Bank spokeswoman Nicole Ismay said.
''(There will be) no change on rates based on today's decision,'' Westpac spokeswoman Jane Counsel said.
On Sunday, NAB said the bank would not increase its standard variable interest rate on home loans by more than any RBA rate hike.
NAB spokeswoman Luisa Ford said today there would be no changes to interest rates on any bank product.
Comment was being sought from ANZ Banking Group (ANZ).
Standard variable rates on mortgages at the big four banks currently stand at 6.49 per cent at NAB, 6.61 per cent at CBA, 6.66 per cent for ANZ, and 6.76 per cent at Westpac.
RBA governor Glenn Stevens cited the recent extra rate increases tacked on by commercial banks as a reason for leaving rates on hold this month.
"Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point,'' Mr Stevens in a statement accompanying the rates decision. "Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.''
Rates on hold - Borrowers have been given a reprieve, with the Reserve Bank surprising pundits by leaving interest rates on hold - for now.
Feb 02, 2010
The central bank cited excessive hikes by major banks as one of the reasons for holding back. The market had been strongly tipping a quarter-percentage point rise - and the RBA's statement today suggests more rate rises in future.
The RBA left its key cash rate unchanged at 3.75 per cent after its monthly board meeting. The outcome snaps a run of three consecutive monthly increases that began in October, and added as much as $185 to a typical $300,000 home loan.
Most big banks said they would follow the RBA's lead, and leave their rates unchanged.
The dollar dived more than one US cent when the rates verdict was announced, falling to about 88.08 US cents in recent trading. Stocks, though, held on to gains, to be about 1.6 per cent higher in late trade.
JPMorgan chief economist Stephen Walters said it was "a big surprise'' that the RBA left rates unchanged, with China's efforts to slow its economy part of the reason for staying put.
"I think they're taking a tactical move to wait and see what's going to happen over the next few months, and what the impact of the earlier rate hikes will be," he told Reuters.
Even with today's pause, though, analysts expect the central bank will soon resume its series of rate rises as the economy recovers from last year's trough.
But the market is now pricing in a more-bearable rise of 77 basis points by this time next year. Before today's announcement, 103 basis points, just over a percentage point, was the expectation.
RBA governor Glenn Stevens cited the recent extra rate increases tacked on by commercial banks as a reason for leaving rates on hold this month.
"Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point,'' Mr Stevens in a statement accompanying the rates decision. "Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.''
In December, three of the big four banks raised their variable lending rates by 35-45 basis points, more than the RBA's 25-point increase. NAB was the only one of the big four to match the RBA's increase.
The federal government welcomed the Reserve Bank's decision to leave rates unchanged. "Today's decision means a family with a $300,000 mortgage are still paying around $600 less than they were paying 18 months ago," Treasurer Wayne Swan told parliament.
Temporary pause
Still, Mr Stevens made it clear that he expects further rate increases to come.
"Interest rates to most borrowers nonetheless remain lower than average,'' he said. "If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.''
Warren Hogan, head of Australian economics at ANZ, said the pause is likely to be temporary.
"I don't think this fundamentally changes the outlook for interest rates, which is for them to move higher,'' Mr Hogan told Reuters. "We still think they'll get to 4.75 (per cent by the end of the year). I think they'll go (for an increase) next month.''
Global view
Mr Stevens was generally upbeat about the economy's prospects, noting conditions ''have been stronger than expected, after a mild downturn a year ago.''
While the effects of government cash handouts ''have now faded,'' household finances are being supported by a recovery in the jobs market and net worth, he said.
Shoring up growth in the economy are public spending on infrastructure, investment in the resources sector and an upturn in housing construction, the RBA said.
Significantly, Mr Steven said ''inflation is expected to be consistent with the target in 2010,'' with a strong dollar among the factors helping to keep a lid on prices.
At home, the general picture remains positive, although ''credit conditions remain difficult for many smaller businesses,'' he said.
Abroad, the picture is more mixed, with the pace of expansion likely to be ''modest'' in many economies as they repair damage from the global financial crisis.
In Asia, home to many of Australia's major export markets, the recovery has been much quicker. Indeed, China is now looking to reduce the level of its stimulus, Mr Stevens noted.
Australia was the only rich economy to avoid shrinking last year, with more than 135,000 jobs added in the final four months of last year. House prices - an issue that the RBA watches closely - are also accelerating, with national costs jumping 5.2 per cent in the final three months of 2009, the fastest pace since 2003.
Still, not all the readings are bullish, including today Nab's survey which showed a drop in confidence. ANZ survey of job advertisements, out yesterday, also reported a drop last month.
TD/MI inflation gauge rose 0.8pc in January - PRICES for goods and services rose at the fastest pace in six months during January, with the central bank expected to lift interest rates tomorrow in a bid to curb inflationary pressures.
Feb 01, 2010
The TD Securities/Melbourne Institute monthly inflation gauge showed that prices rose by 0.8 per cent in January, following a 0.3 per cent increase in December, for an annual rise of 2.6 per cent.
The monthly increase was the fastest pace since July 2009.
Contributing most to the overall change in January were seasonal price rises for holiday, travel and accommodation, utilities, and education, the report said.
These rises were offset partly by falls in prices for fruit and vegetables, furniture and furnishings, books, newspapers and magazines.
TD Securities senior strategist Annette Beacher, says prices appear to be rising at a faster pace as headline inflation has risen for three straight months, and the indicator's trimmed measure rose 0.5 per cent in January, the highest monthly increase in six months.
"Combined with the news last week that core inflation in the December quarter of 2009 was far stickier than the RBA (Reserve Bank of Australia) expected the annual rate barely easing from 3.5 per cent to 3.4 per cent compared with RBA expectations of 3.25 per cent - the RBA board tomorrow can comfortably recommend another 25 basis point rate rise to 4.0 per cent," Ms Beacher said.
"In the light of recent confirmation that the unemployment rate has in fact been falling since July 2009, there is an opportunity to ramp up the hawkish rhetoric via referring to shrinking spare capacity, to assist in dampening future inflationary expectations."
In annualised terms, the trimmed mean rose by 0.5 per cent in January, following a rise of 0.1 per cent in December.
In the 12 months to January, the trimmed mean rose by 2.4 per cent, also around the mid-point of the central bank's two to three per cent target range for inflation.
Professor Don Harding, from La Trobe University's department of economics and finance, said the net balance of prices rises over price falls stayed muted in January with prices rising in 23 spending groups and falling in 22 groups.
Domestic goods and services were experiencing more price pressures as a stronger dollar limited increases in the costs of tradable products, whose prices were determined largely on the world market.
"More generally it is the non-tradable sector that is exhibiting large price rises while the tradable sector is exhibiting price declines, reflecting the strength of the Australian dollar," Professor Harding said.
"This suggests that the pattern observed in the inflation and price pressure statistics is being influenced by a combination of tradable goods deflation and non-traded goods and services inflation, with the latter being the stronger effect and being driven by overly strong domestic demand."
Living the dream as a landlord - BECOMING a landlord is the aim of many, but you need to know what you're doing. It sounds easy but becoming a landlord is not an instant one-way street to riches.
Feb 01, 2010
BECOMING a landlord is the aim of many, but you need to know what you're doing.
Property investing is the subject of countless books and seminars in which so-called experts talk about the easy millions to be made.
It sounds easy but becoming a landlord is not an instant one-way street to riches.
It's to be approached with your eyes open and your wallet shut until you are sure about what you are doing. Here are some key questions to ask.
Have I got a big enough deposit?
Requirements for deposits have increased.
While landlords could get 100 per cent deposits this time last year, the maximum loan-to-value ratios (LVRs) have been cut gradually from 100 per cent to 95 per cent and now to 90 per cent.
In other words, you will need a deposit of at least 10 per cent.
How much rent do I need to earn?
There is no set level of rental income that is relative to the mortgage interest but banks will look at your income and outgoings, including repayments on other mortgages, and assess whether you can afford to cover the interest in the event there is no rent income.
"Most banks will assume four weeks a year when the property is empty," says Mortgage Choice broker John Manciameli.
How long should I invest for?
Investing in property is a long-term game. You can't rely on prices holding up or rising in the very short term and the longer you can afford to commit for the better.
What if I have tenant problems?
Many issues can arise with tenants, from late payment of rent to treating the property badly or malicious damage.
Residential tenancies authorities in each state offer plenty of information.
You should take out landlord insurance. It is available from most of the major insurers and covers risks such as arrears and damage.
What if I am self-employed?
If you will have problems verifying your income and need to do a low-doc loan, you will need to stump up a 20 per cent deposit.
But if you can come up with two years' worth of business statements, bank statements and trading history, you will qualify for a normal LVR of 90-95 per cent.
Where are the best areas to buy?
Location, as any landlord will tell you, is key. But in a country with such a shortage of properties on the market, vacancy rates are historically low.
The old tips about buying within half-an-hour or so of the city centre, near shops, public transport and other local amenities hold true.
"Many banks do not like lending in certain areas, particularly regional locations, so they may insist on a higher LVR or won't lend at all,'' Mr Manciameli says.
"Others don't like high-rise blocks.''
How shall I decorate the place?
Try not to impose your own taste on the property. Make it as neutral as possible, with white tiles and neutral colours rather than wacky reds. Avoid swirly patterns on curtains simple blinds are popular.
What are the tax advantages?
Negative gearing, the most famous tax break on Australian property investment, is widely misunderstood.
It works like this: if your rent falls short of covering your mortgage interest, you can claim the losses against your taxable income.
However, you don't get refunded all of the losses, only a proportion equal to your marginal tax rate. If you pay 46 per cent tax and you have a $100 shortfall every month, you get back $46 a month against your mortgage interest.
If you pay tax at 30 per cent, you can reclaim $30. Higher earners benefit from negative gearing the most.
Are apartments different to houses?
Yes. If you buy a strata property, you need to check whether the body corporate is competent and cashed up.
"That means checking the building's repair history and looking at how much money is in the sinking fund,'' says James Garnsey, a director of wealth management firm Yellow Brick Road.
"Is there enough to cover major repairs?''
Repairs and maintenance of the property are shared among the owners but major works can still cost each of them a substantial amount.
Manufacturing ticks up, employment slumps - Australia's manufacturing industry has started 2010 on a positive note, driven by a rise in new orders and exports.
Feb 01, 2010
The Performance of Manufacturing Index by the Australian Industry Group and PricewaterhouseCoopers has increased by 2.5 points to 51 in January.
That is just above the 50 point level which indicates expansion.
There was renewed demand in the housing and resources sectors, especially for businesses involved in construction materials, transport equipment, and petrol and coal products.
But the chief executive of the Australian Industry Group, Heather Ridout says there were still some areas of weakness, with employment falling for the first time in three months.
"While manufacturing made a relatively encouraging start to the year, the performance of key components remained patchy, with a rise in new orders broadly offset by a heavy run down in stocks and a decline in employment," Mrs Ridout said in a statement.
The largest falls in employment within the manufacturing sector were in food and beverages, textiles and clothing and footwear.
Mrs Ridout says manufacturing is still a long way from recovery.
"With output in the sector having fallen by 7.8 per cent in the year to September 2009, and with around 80,000 jobs lost from the sector in 2009, a sustained upswing in manufacturing activity is needed to fill the large chunk taken out of the sector by the global economic downturn."
The index also shows that while export levels were up in January, the high Australian dollar continues to restrict growth.
The global head of Industrial Manufacturing with Pricewaterhouse Coopers, Graeme Billings says, despite continued improvement in the broader economy, manufacturers are finding revenue growth to be a major challenge.
"In January profit margins were squeezed further by a decline in selling prices and a slight acceleration in input costs and wages growth," Mr Billings has said in a statement.
"In recent months, the rate of capacity utilisation in the manufacturing sector has lifted to be more or less in line with the long-run average, and it is therefore vital that manufacturers seek new ways in which to boost their productivity levels."
January inflation jump raises rate rise chances - An unofficial measure of inflation has recorded its biggest monthly increase in a year, further strengthening the case for another interest rate rise tomorrow.
Feb 01, 2010
The TD Securities - Melbourne Institute Inflation Gauge rose by 0.8 per cent last month, with the annual inflation rate rising to 2.6 per cent.
The steep rise in January was driven by increases in the cost of travel, accommodation, utilities and education.
TD Securities says the survey results, combined with last week's slightly higher than expected official inflation result for the December quarter, builds a strong case for the Reserve Bank to raise interest rates again at tomorrow's board meeting.
"It certainly almost guarantees a 25 basis point increase tomorrow to [an official cash rate of] 4 per cent," she told the ABC's business editor Peter Ryan.
"At this stage however, we're not looking for another follow up in March, unless we see maybe another very strong employment report or similar numbers like today which show that all the pressures are on the upside."
Handouts for first-home buyers - Be it a grant, a boost or a concession, there is helpful cash available to realise the great Australian dream.
Jan 29, 2010
The First Home Owners Boost, which was introduced in October 2008, came to an end on December 31 but there is still assistance for first-home buyers. The $7000 First Home Owners Grant (FHOG) remains in place and most of the states and territories have additional benefits.
If you are buying or building your first home you can still apply for grants of $10,000 or more and transfer duty concessions worth thousands of dollars.
The FHOG is administered by state and territory governments and has been available since 2000. The Boost meant that for contracts made between October 14, 2008, and September 30, 2009, first-home buyers purchasing established homes would receive a total grant of $14,000 and buyers of a newly constructed home would receive a grant of $21,000. The Boost was wound back progressively, so that for contracts made between October 1, 2009, and December 31, 2009, first-home buyers purchasing established homes would receive $10,500 and buyers of a newly built home would receive $14,000.
On January 1 the Boost was cut out altogether. Grants reverted to the old FHOG scheme plus any additional state or territory supplements.
FHOG works the same way in each state and territory and applies to houses, townhouses and apartments. Supplementary schemes have rules that vary from state to state.
NSW
In November 2008, the NSW Government introduced a $3000 supplement to go with the Boost, available for first-home buyers purchasing a newly constructed home.
First-home buyers in NSW could receive a benefit of up to $24,000.
The supplement remains in place until June 30 and, combined with the $7000 FHOG, first-home buyers purchasing a newly constructed home can apply for a total benefit of $10,000.
After June 30 the only grant available will be the $7000 FHOG - available for buyers of established and newly constructed houses.
There has been a cap on the FHOG since January 1 this year. The home purchase must be for less than $750,000.
The NSW Office of State Revenue also offers a scheme called First Home Plus. First-home buyers can apply for an exemption on transfer duty on homes valued up to $500,000 and concessions on duty for homes valued between $500,000 and $600,000. The duty on a $500,000 home is $17,990. The NSW Government paid $1.7 billion of first-home benefits last year.
Leading Index forecasts solid economic growth - Economic growth is likely to return to pre-crisis levels over the next three to nine months, according to a forward looking report.
Jan 29, 2010
The Westpac - Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months ahead, has risen to its highest annualised growth rate since November 2007.
The index was at 7.6 per cent in November, well above its long-term trend of 3 per cent.
"We continue to be surprised by the pace of recovery in the growth rate of the Leading Index," wrote Westpac's chief economist, Bill Evans, in the report.
"Over the last six months, growth has accelerated from -3.2 per cent in June to the current 7.6 per cent. As discussed in previous reports this rapid turnaround represents the fastest reversal in the growth rate of the Leading Index since the economy bounced out of recession in the mid 1970s."
Bill Evans says this result, combined with strong current economic data, means another 0.25 percentage point interest rate rise is likely next week, and he expects two further increases by mid-year.
The evidence from the Leading Index; the Westpac Melbourne Institute Index of Consumer Sentiment; the labour market; and recent trends in retail sales indicates that the [Reserve] Bank will be keen to move monetary settings back to a level where interest rates are no longer stimulatory for the economy," he added.
"A recent speech from an RBA official indicated that such a level for their overnight cash rate might be expected to be around 4.5 per cent compared to the current 3.75 per cent."
Inflation? 2.1 per cent? That's not inflation - Read more of the financial analysis of the week
Jan 29, 2010
The latest inflation figures remind me of that classic scene in the comic flick from '86, Crocodile Dundee, when Paul Hogan is accosted by a trio of punks, one brandishing a switchblade. "That's not a knife," he says, pulling out his humungous bowie. "That's a knife."
Australia needs a latter day Dundee to counter some of the bluff and bluster over the inflation rate. When the ABS released the figures, up popped the dismal scientists to declare the annual inflation rate of 2.1 per cent "a concern". Up lobbed the Opposition's Joe Hockey who declared the the "high" underlying inflation rate - a tad over 3 per cent - was a damning indictment.
Step in our Dundee, a knockabout bloke with a bit of economic history: "That's not inflation," he'd say with a wry grin, and whip out the consumer price index release from the March quarter 1973. "That's inflation."
The bigger picture gets lost in the monthly game of guess whether rates are going up that the professional pundits and speculators engage, egged on by journalists who love a simple narrative.
Fact: At 2.1 per cent, the inflation rate is low. It's right at the bottom end of the 2 to 3 per cent target the RBA aims for. No cause for concern, no cause for alarm, and in the broad sweep of history, a negligible rise. Under Prime Minister Gough Whitlam, in the first three months of 1973, the CPI peaked at 17.6 per cent. In the September quarter 1982, when one John Howard was Treasurer, the inflation rate as measured by the consumer price index hit 12.3 per cent.
Gone are the damaging wage-price spirals of yesteryear, when prices soared and workers staged damaging strikes to secure catch-up wage rises, prompting bosses to once again lift prices.
The lift in the inflation rate today is actually a good sign. It shows that demand is returning to the economy after a year in which only a fiscal lifeline from the Government and the biggest rate cuts in the RBA's history kept a deep recession at bay.
The Reserve Bank tends to be guided by a couple of measures of underlying inflation -- they strip out the effect of volatile price movements to give a sense of the trend. It's true, as the Opposition's man Joe Hockey asserts, that the measures the RBA looks to are higher than the central bank would like. But there still not terribly high, and in the December quarter, these measures posted their lowest increases in three years.
Does that mean it's easy days for people with families to feed and bills to pay? Far from it. If you're struggling to make ends meet and scratching your head at this talk of low inflation, there's a good reason. The long term trend has been for essential goods to get more expensive and discretionary, or luxury, goods get cheaper. So over recent years the necessities of life - electricity, water, council rates and charges, transport costs and some basic foodstuffs -- have risen above the average rate of price rises measured by the consumer price index, and outstripped wages growth. But when it comes to the things we enjoy but don't necessarily have to have, the reverse applies. Computers, TVs, cameras and other electronic gadgets for example have been getting better and cheaper. So there's a bias in the pattern of price rises: it favours the well to do. Those who can only afford the basics are getting slugged; those with a lot of disposable income to spend on the cornucipia of consumer pleases on offer are reaping the rewards. But even a lot of these people may still be bemused by the talk of low inflation, because it won't necessarily feel like the cost of living is rising at a modest pace. You notice prices you pay often, like groceries and utility bills, and soon forget the big purchases you make every few years.
But the point is: on a macro-economic level, once you balance it all out, inflation is low. So if inflation's not so bad, why are Glenn Stevens and his colleagues at 65 Martin Place determined to push up interest rates? Because monetary policy is targetting inflation not now, but a year to 18 months down the track. They reckon that because the unemployment rate has apparently peaked below 6 per cent, far lower than expected, the falls in wages and the shrinking of work hours that's kept a lid on spending won't last. They reckon that businesses will be dusting off investment plans they put on hold, ramping up production and ordering new stock after running down their inventories because of the economic uncertainty.
But they will do so gradually because there are still some doubts about how strong the economy will be as the boost from the Government's cash handouts and capital works programs wanes. There are doubts too about the sustainability of the global economic recovery.
And no one should be surprised. If you haven't woken up the fact that rates are on their way up by now, you'd have to be Rip Van Winkle. Only the gullible would think they could stay at these very low levels. As K-Rudd and the Swanster remind us ad nauseum, "adjustments" to monetary policy (ie. higher interest rates) are the price we pay for avoiding the fate of Europe and the United States: the worst recession in eighty years.
Nor should those who worry about the soaring cost of housing want rates to stay low. It may seem like a paradox at first blush but the price of low interest rates in Australia tends to be unaffordable housing. The low rates lead to higher house prices, because when rates are low, people tend to borrow more to get the home. And in some cities, the cost of home has skyrocketed from three to four times the average yearly wage to eight to nine times.
Australians turn to credit to stay afloat - There is growing evidence that many Australians are going into deeper credit card debt just to cover day-to-day expenses. Consolidate your debts by calling Touch of Finance now! 03 9357 9354
Jan 29, 2010
A survey by the credit reference agency Dun and Bradstreet shows four in 10 Australians are resorting to credit cards to stay afloat, with 18 to 34-year-olds faring worse than at the height of the credit crisis.
The trend is adding to the financial pain already facing households as the Reserve Bank is widely tipped to raise interest rates for the fourth consecutive time next week.
Dun and Bradstreet's chief executive Christine Christian told AM that some households are using credit cards to cover necessities such as groceries.
"Given the pressure the global credit crisis placed on families' finances over the previous 12 to 24 months, it's not surprising to see that certain demographics are now struggling under the weight of their spending," Ms Christian said.
"However this trend is cause for some concern, particularly as funding costs are set to continue rising throughout the year.
"Further increases in the cost of credit for those groups already under pressure could trigger an irreversible spiral into serious debt troubles."
According to the survey, younger Australians intend to use credit cards for a significant purchase in the months ahead regardless of their concern about Christmas spending.
Ms Christian said 46 per cent of younger people surveyed intend to fund their purchase on a credit card and 33 per cent are considering an interest-free deal.
"The groups with the greatest intent to spend are also the groups that are demonstrating signs of financial stress," she said.
"This indicates that default risk will remain prominent for credit providers in the months ahead.
"Interest-free deals and credit cards are effective finance products if they are used correctly.
"However, they can be a trap for consumers if they find themselves unable to pay back the funds when the interest-free period expires."
The Reserve Bank holds its first meeting of the year next Tuesday, with most economists convinced that the cash rate will rise 25 basis points to 4 per cent.
Boost in credit card debt trap victims - A CREDIT card binge among Australians late last year has led to a 25 per cent leap in work for debt collectors. Consolidate your loans with low interest rates by calling Touch of Finance now! 9357 9354
Jan 28, 2010
And the debt trap is set to worsen, with a new credit expectations survey revealing four in 10 Australians will rely on the plastic to pay essential bills this quarter.
Debt collection agency Prushka said many householders had overspent in the lead-up to Christmas.
The latest Reserve Bank figures show consumers spent more than $20 billion on credit and charge cards in November, pushing the average credit card account balance to $3,196.
Prushka chief executive officer Roger Mendelson said with credit cards already maxed out, back-to-school expenses mounting and interest rates on the rise, many householders were now entering "highly dangerous" financial territory.
"Every year, this is the most dangerous time for household debt, but this year I was just really surprised at the increase in overdue accounts referred to us," he said.
"It's up more than 25 per cent and that excludes large, one-off referrals. This, to me, is a sign that householders are struggling more than usual and businesses are taking a tougher line on householders carrying debt as they too struggle with cash-flow pressure."
In further evidence of the growing reliance on debt, a Dun and Bradstreet survey has found 43 per cent of Australians expect to use credit cards to pay for otherwise unaffordable expenses in the March quarter.
Dun and Bradstreet chief executive officer Christine Christian said those most likely to rely on credit were young adults and families with children.
In the case of 18 to 34-year-olds, 56 per cent expected to use credit cards to pay some of their bills, up 11 per cent on the previous quarterly survey, while early half of all families with children thought they'd be paying bills with credit cards - up eight per cent.
Those two groups were demonstrating signs of being under financial stress, Ms Christian said.
"Further increases in the cost of credit for those groups already under pressure could trigger an irreversible spiral into serious debt troubles."
Queensland Council of Social Service president Karyn Walsh said welfare groups were already seeing the supporting evidence.
"It's not surprising, given people are being caught in situations where they are facing rent increases, electricity increases, transport increases.
"There have been so many unexpected increases that people have to readjust their living."
Inflation rise makes rate rise certainty, says Kevin Rudd - PRIME Minister Kevin Rudd has admitted record low rates are certain to rise after figures release today show the annual inflation rate to December was 2.1 per cent.
Jan 28, 2010
The inflation rate has economists tipping a fourth consecutive interest rate rise when the Reserve Bank meets next Tuesday.
Figures from the Australian Bureau of Statistics reveal headline inflation rose 0.5 per cent in the three months to December, for an annual rate of 2.1 per cent.
This was slightly ahead of the market's expectations for a 0.4 per cent quarterly rise and a 2 per cent annual pace.
Mr Rudd said interest rates would obviously rise again.
"The treasurer (Wayne Swan) is absolutely right in putting a shot right across the bow of the banks in terms of taking unnecessary gouges in terms of putting up interest rates,'' Mr Rudd told the DMG radio network.
He said interest rates had dropped in the wake of the global financial crisis, but the government's stimulus strategy had helped keep the economy going.
"Australia was the only advanced economy in 2009 not to go into recession,'' he said.
"We're the only advanced economy to have grown in 2008-09 (and) the second lowest unemployment.
"That's come of the back of strong action by ourselves through our national stimulus strategy, school modernisation plan and through the banks, to bring down interest rates as radically and quickly as they did.
"But obviously there's going to be upward adjustment.'
JP Morgan economist Helen Kevans said borrowers should prepare for another rate rise.
"We haven't wavered on our call for another rate hike in February,'' she told the Herald Sun.
"There were no huge surprises in the numbers. We did see a much stronger than expected rise in tradeables inflation which I think the RBA will be concerned about given that reflects domestic price pressures and the strength of the domestic economy.''
The Reserve Bank meets next Tuesday to discuss whether to raise official interest rates for the fourth time in a row from 3.75 per cent.
The latest inflation data comes as The International Monetary Fund predicted Australia's economy will grow at 2.5 per cent this year, up from the 2 per cent originally forecast last October.
Economics forecasters Access Economics is also predicting a "mild'' recovery for Australia's economy.
Its Business Outlook, published today, it says rising rents and electricity prices will feed into inflation and prompt the RBA to hike official interest rates by up to 5.5 per cent.
The Australian dollar jumped to US 90.13 cents from US89.96 cents after the data was released.
Mortgage respite in sight for homeowners - BANKS will not pass on the full increases in interest rates this year in a reversal which would save home loan customers a combined $150 million a month.
Jan 28, 2010
Australia's top macroeconomist Chris Richardson yesterday said that increasing competition for new customers and lower funding costs would cause major lenders to absorb about 30 basis points of Reserve Bank increases during the second half of 2010.
Futures markets predict the Reserve will raise official interest rates by 1 per cent this year, beginning with a 25 basis point increase in February or March.
If lenders passed on only 70 basis points in 2010, as Mr Richardson expected, homeowners repaying a $300,000 mortgage would save more than $60 a month.
And with an estimated 80 per cent of Australians' $900 billion worth of home loans being at variable rates, the overall benefit would be about $150 million a month.
Should banks begin to undercut the Reserve it would bring to an end a near three-year assault on borrowers, a time in which the margin between variable home loan rates and official interest rates has risen from just 1.8 per cent to as much as 3 per cent.
"That's going to go into reverse," Mr Richardson, director of Canberra-based Access Economics, said. "We are probably looking at 30 basis points in 2010 and another 30 or 40 points in 2011."
Leading market economist AMP Capital Investors chief Shane Oliver agreed.
"Banks will be raising rates less than the RBA by year's end," he said.
Mr Richardson's forecast that lenders would undercut by a further 40 basis points in 2011 would potentially save typical home loan customers an additional $80 a month, bringing the total saving to $140 a month.
That would be great news for new homeowners such as Strathmore Meurer and Sarah Emms. The St George customers, who bought a Petersham house, have already been hit by repayment increases of $300 a month.
"It would make a real difference to our budget," Ms Emms said, as she watched 15-month-old son Louis play yesterday. "Rate rises are already having an effect on our plans to have another baby."
Mr Richardson anticipated a race between banks to be the first to go lower.
Westpac requires higher deposit for first-home loans - FIRST-HOME buyers will have to stump up at least $37,500 as a deposit to get an average home loan from Westpac - or $12,500 more than before - under lending policy changes that came into force.
Jan 28, 2010
Westpac advised its managers and mortgage loan brokers that new customers will not secure a loan unless they can meet a loan-to-valuation ratio of 87 per cent, instead of the former 92 per cent.
That means on an average home loan of $250,000, new borrowers will need to have the much bigger deposit as well as be able to meet a monthly repayment of $1726 on a 25-year loan.
Westpac spokesperson Jane Counsel said changes to the bank's first-home lending policies would only apply to new customers.
"(The changes to our lending rules) are consistent with Westpac's strategic focus to build a multi-product relationship with customers ... so we need to be able to reward existing customers," Ms Counsel said.
"We want to continue to support first-home buyers ... all we're saying if that if you're a new bank customer, we'll require you to have a larger deposit."
Infochoice CEO Shaun Cornelius said the move by Westpac would reduce competition in the marketplace.
"Westpac are effectively signalling that they're not interested in growing their home loan customer base," he said.
"So Westpac pulling back and becoming less competitive will reduce the range of appealing home loan products on the market, hurting consumers."
Mr Cornelius said prospective first-home buyers should shop around for the best mortgage products and not just rely on brokers.
ANZ, Commonwealth Bank and NAB today said they had no immediate plans to change their first-home lending policies.
In December, Westpac lifted its variable home loan rates - by 45 basis points after a 25-point official rate rise - to a market-leading 6.76 per cent on a standard home loan, amid an outcry from potential borrowers and the Federal Government.
The rules are tougher at Rams, Westpac's brokers who write more than 20 per cent of the bank's home loans. A spokesman confirmed yesterday that a loan through Rams must meet a loan-to-valuation ratio of 85 per cent instead of the former 90 per cent.
Tougher again are low-doc loans, where the loan-to-valuation ratio must be no more than 80 per cent instead of the former 82 per cent.
Homes selling in secret - THOUSANDS of homes are selling in secret, without a marketing campaign, online advertising or even a "for sale" sign on the front lawn.
Jan 21, 2010
Affordable homes in Sydney are being sold moments after being publicly listed because real estate agents are giving hungry buyers in their own databases a sneak peek before properties officially hit the market.
At the top end of town, private vendors reluctant to list multi-million dollar mansions publicly are going through silent networks to attract only genuine buyers.
Although the practice has long been routine for luxury homes, negotiating an off-market sale is becoming more popular in Sydney's beachside suburbs, inner-west, east and North Shore, agents believe.
Potential purchasers are turning to buyers' agents who, for either a fee of $13,000 to $21,000 or 1.8 per cent of the sale price, evaluate a property's suitability, then bid at auction or negotiate the best deal.
Real Estate Buyers Association president Byron Rose said silent listings had surged during the global financial crisis, when wary sellers did not want to create a perception that they had money troubles.
"In a certain price range, it's quite common. When you reach the $3 million to $4 million mark, up to 60 per cent of sales are off-market,'' Mr Rose said.
"When people advertise in a downturn, they think there's a financial problem with the people selling, but that's not always the case.''
NSW Real Estate Institute president Wayne Stewart urged purchasers to get on agents' databases for property previews in a surging market of ``instant buyers''.
"Agencies have extensive databases, updated daily. Buyers come in through this marketplace and snap houses up before they hit the market officially,'' Mr Stewart said.
PK Property The Buyers Agents managing director Peter Kelaher said he was seeing more buyers frustrated by the lack of stock.
"A buyers' agent can find silent listings that are not on the net or in the paper,'' Mr Kelaher said.
"People silently list if they just want the real buyers coming through without the hoo-ha.''
FindersKeepers consultant Gina Machado is dealing with a surge of upgraders seeking properties from Drummoyne to Artarmon.
Insurance can help cover your bet on the house - WITH three interest rate rises behind us and more forecast for later this year, more homeowners are considering insurance to help them meet their repayments if they fall into financial difficulty.
Jan 21, 2010
Resi Mortgage Corporation head of consumer advocacy Lisa Montgomery says many people are unaware of the types of insurance policies that can help pay the mortgage if you lose your job or can't work because you are ill or injured.
"When you're getting a mortgage you are usually very stressed and just focused on getting that loan approved and the whole moving process,'' Ms Montgomery says.
"Insurance is something that most people decide to leave until later but many never get around to it. That could be an expensive mistake especially with repayments on the rise.''
The types of insurance that property owners and investors should understand include:
1. Income protection insurance, which will pay out a proportion of your income, usually up to about 75 per cent of your last job's salary, if illness or injury prevents you from working.
However, it is a complex area if you take the wrong one you may very well find that it will not pay out when you need it.
2. Lenders mortgage insurance, a requirement by lenders where people do not have a deposit of more than 20 per cent for the property.
LMI covers the lender for the shortfall of the price of the property if the borrower defaults on their loan.
3. Mortgage protection insurance, which can be confused with lenders mortgage insurance potentially a costly mistake.
Mortgage protection is a hybrid of income protection insurance and life insurance.
If you're ill or die, the policy pays out, but choose your policy carefully according to your personal circumstances.
For example, there is little point taking out any life cover if you are single with no dependents.
In these cases, most people would be happy for their property to be sold and any proceeds added to their estate.
4. Landlords insurance, which is a handy policy to have if your tenants default on their rent or damage your property.
Some will also pay the rent while repairs are carried out if the tenants damaged the property. Shop around online to see what policy suits you best.
Non-profit super shows best returns- SUPER funds run by the banks and the big wealth managers have been dealt a fresh blow by figures showing that the top 10 funds in the past decade were all non-profit.Get free advice from Touch of Finance for your Super
Jan 21, 2010
Between 2000 and last year, funds operated by unions and employers on behalf of members posted the best annual returns, which were as high as 7.07 per cent, SuperRatings said yesterday.
Retail funds - those run for profit by financial institutions - were nowhere to be seen on the league table, which ranked a typical ''balanced'' fund with money spread across different asset classes.
The Australian Institute of Superannuation Trustees, which represents the $450 billion non-profit sector, said the strong showing was because its funds did not pay fees or commissions to financial advisers.
SuperRatings also said non-profit funds had outperformed retail funds over the past five years, providing average annual returns of up to 6.8 per cent.
''With super, it's long-term performance that really matters and the not-for-profit funds are clear leaders over the past five and 10-year periods,'' the chief executive of AIST, Fiona Reynolds, said.
The figures add further weight to separate league tables prepared by the Australian Prudential Regulation Authority last year. These also favoured non-profit funds, and said retail funds - including those operated by AMP, Commonwealth Bank and Westpac - performed below the industry average of 8 per cent between 2004 and 2008.
For-profit fund managers say these league tables fail to take into account the different levels of risk offered by retail funds.
Typical membership of retail funds is older, as it often includes people who did not have compulsory super for much of their working life and have been advised to join a fund. The for-profit sector also says retail funds often provide extra perks, such as financial advice.
When tax hits close to home - The strategy: To avoid getting hit by capital gains tax on my family home.
Jan 21, 2010
But I thought the family home was CGT exempt? As a general rule it is but there are exceptions that can result in part of the gain made when you sell your home being taxable. Many home owners aren't aware of these exceptions and could be unwittingly setting themselves up for an unexpected tax bill when they sell their home.
What are the exceptions? The thing to remember about the CGT exemption is that it applies where your home has been used solely as your principal place of residence.
So if you've used your home for other purposes - such as running a business, renting out the spare room or renting the whole place out while you're living somewhere else - it could fall into the CGT net. But not always.
The rules are actually fairly reasonable and you should be able to avoid or minimise tax by knowing how they work.
Let's look at the working from home thing first. The CGT rules say you may be up for tax if you used any part of your home to produce income AND would be allowed to deduct the interest on your home loan because of that income-producing activity.
If part of your home is set aside to be used exclusively as a place of business, for example, you may be able to claim costs like interest in your tax return but would be liable for CGT on a proportion of your capital gain. But if you merely have a home office where you work from time to time, or if you do paid child-minding at home, you generally couldn't claim the interest and don't have to worry about CGT.
The Tax Office has a ruling on the difference between a place of business and a home office - TR 93/D17 - if you are in doubt.
If you rent part of your home while you are still living there, CGT will again need to be paid on a proportion of your gain when you sell, depending on what proportion of your home was rented out and for how long. But if you leave and rent the whole place out you may be able to avoid CGT under the six-year rule.
How does that work? According to HLB Mann Judd partner Andrew Buchan, if you move out of your home temporarily it will continue to be regarded as your principal place of residence indefinitely if it is not used to produce income.
If you rent it out, the CGT exemption continues to apply for six years from the initial rental date. But if you rent it out for longer, CGT becomes payable after that.
What if I own two homes? Can I get the exemption on both of them? The general rule is that you can only claim the CGT exemption on one home. However, Buchan says if you purchase a new home and keep your old one, both can be claimed as your main residence for up to six months.
After that, the one you're not living in will be liable for CGT.
What if I inherit a home? If the person who left you the home bought it before September 19, 1985, Buchan says it is CGT-free if you sell it within two years of the original owner's death - regardless of what it has been used for. After two years, it is CGT-free so long as it has been the main residence of either the deceased person's spouse or beneficiary.
If the home was originally bought after this date, Buchan says it is still CGT-free for two years from death so long as it was the deceased's main residence when he or she died. After two years the home needs to have been the deceased's main residence upon death AND the main residence of the deceased's spouse or beneficiary for the entire period from death to its sale to be exempt from CGT.
First home buyers enable upgrader dreams - A property research firm says, while first home buyers underpinned strength in the market at the start of last year, people upgrading to more expensive homes drove growth towards the end of 2009.
Jan 20, 2010
RP Data figures show during the first quarter of last year, sales of dwellings fetching $1 million dollars or more accounted for 3.3 per cent of national house sales.
Cameron Kusher from RP Data says that by the third quarter those sales had increased to 5.1 per cent.
"As at the end of November, we've seen that it's actually the higher priced properties which have actually seen the greatest growth," he said.
He says this is largely driven by people who sold to first home buyers trading up to better properties.
"So initially, certainly the first home buyers really did fuel the market at that lower end but then there was a knock-on effect, because obviously people have to sell to those first home buyers and then they upgrade to slightly more expensive property and there you go it keeps going and going and going."
He also says upgraders and investors became more confident as the year progressed, particularly as first home buyers bid prices up against each other.
"There was a lot of upgrading activity going on because that first home buyer market was so active and there was such strong competition and vendors probably really were getting quite good prices," he added.
"They were taking the opportunity to sell their home and buy something a little bit more expensive, and perhaps a little bit closer to town or more in line with what they'd probably want to live in long-term."
Petrol near five-month high: economist - A leading economist says petrol prices are hovering near five-month highs, but are likely to ease slightly in the next fortnight.
Jan 20, 2010
Savanth Sebastian, an economist at Commsec, says the national average petrol price is now at more than $1.27 per litre.
"Australian petrol prices have surged in the first three weeks of the new year. It's risen by about 6 cents per litre over the last three weeks which is actually the biggest increase that we've seen in prices for 11 months," he said.
However, Mr Sebastian says there may be a slight reprieve for motorists in the weeks ahead.
"Unfortunately we've seen that, as the global economy has recovered, the global oil price has tracked higher," he said.
"However there is some good news around the corner for motorists. Over the past five trading sessions, the global oil price has actually fallen. And that should actually translate to around a 2 cents a litre saving over the next fortnight."
Cheaper mortgages are out there - Get the best rates on the Market by calling Touch of Finance on 03 9357 9354 and book an appointment. Our professional service is free!
Jan 20, 2010
Experts say customers should be prepared to look beyond the big banks.
Westpac's decision to raise its standard variable interest rate by 0.45 percentage points when the offical rise in the cash rate was 0.25 percentage points is a public relations disaster. The rate hike, almost twice that of the Reserve Bank, has outraged the Government and will outrage its home-loan customers, especially those who have only just taken out a mortgage with the bank.
Prime Minister Kevin Rudd said last week that the bank had done the "wrong thing" through its rate hike and urged customers to take their business elsewhere if they were concerned.
"Customers out there should be looking at where else they can do their banking," he said.
NAB lifted its mortgage rate by 0.25 percentage points, ANZ by 0.35 percentage points and CBA by 0.37 percentage points. Of the big four, NAB now has the lowest rate of 6.49 per cent, with Westpac the most expensive at 6.76 per cent.
"We have had a lot of feedback from people who have recently taken out Westpac loans that are reconsidering and we expect to see a fair amount of switching from Westpac to NAB," says the chief executive of financial comparison site Infochoice.com.au, Shaun Cornelius.
"Consumers are letting the big banks get away with too much."
There is almost a full percentage point difference between the big-bank rates and the smaller players and the gap is widening, he says.
For a while now, the banks' mortgage rates have decoupled from changes in the cash rate. When the cash rates were being cut the banks handed on less to their mortgage customers. Economists say further rate rises will be needed next year and beyond to keep inflation in check as the economy improves. The cash rate is now 3.75 per cent.
The chief economist at AMP Capital Investors, Shane Oliver, expects the cash rate to increase to 4.75 per cent or 5 per cent by the end of next year as the economic recovery gathers pace. He says that while the Reserve Bank will continue to raise the cash rate, it will do so only gradually. He says the additional increases in bank lending rates may even stop the Reserve Bank from more aggressive rises.
Oliver is sceptical about the banks' claims that the rises reflect the increase in funding costs. The banks are paying higher interest rates on their deposit accounts but Oliver doubts that the cost-of-funding argument can fully justify the increases in mortgage rates.
Before the global financial crisis, the big banks were charging mortgage holders about 1.8 percentage points more than the cash rate.
Oliver says that margin is now approaching 3 percentage points.
Cornelius also doubts whether the increases are fully justified. He says the reason for the super-charged mortgage rate hikes are more likely to be that the highly profitable banks are not under enough pressure from their customers. It is up to consumers, if they are not getting a good deal from their bank, to move to a cheaper lender, he says.
The standard variable mortgage rate of the big four banks is 6.63 per cent, on average. That could could rise close to 8 per cent by the end of 2010 if the banks continue to increase their rates by more than the increases in the cash rate before peaking in late 2011.
Cornelius says mortgage holders should factor in increases in mortgage rates of at least 2 percentage points to be on the safe side.
The rate rises should be kept in perspective. Normal standard variable rates are about 8 per cent and rates are increasing from a decades-low cash rate.
Cornelius says it is too late to take out a fixed-rate mortgage. The best time to fix was at the beginning of this year when three-year fixed rates were about 5.5 per cent. Three-year fixed rates are now about 7.5 per cent as money markets have already factored in higher cash rates.
Cornelius says consumers should stick with variable rates but shop around for a better rate, while being aware that if they move they may be hit by an exit fee. The exit penalty typically applies if a mortgage is terminated within five years. The penalty can be levied as a flat fee or a percentage of the loan value. They are sometimes tiered so that the earlier the termination, the higher the penalty. But the savings by switching lenders, even if a penalty is incurred, are potentially large, Cornelius says.
Possible inflation heats up Australian Reserve Bank interest rate rise - THE prospect of rising inflation raises the possibility of back-to-back interest rate rises from the Reserve Bank, economists say.
Jan 20, 2010
ANZ's Alex Joiner, Commsec's Savanth Sebastian and Helen Kevans of JP Morgan believe rate rises in February and March are now possible.
Official inflation figures are due out next week, but a private inflation gauge published yesterday suggests prices are again on the rise.
TD Securities and the Melbourne Institute said their monthly measure of annual inflation rose by 0.3 per cent to 2.6 per cent in December, driven by the surging price of fruit and vegetables, petrol and holidays.
"Inflation pressures are firmly on the upside," said TD Securities senior strategist Annette Beacher.
She said underlying inflation could be as high as 2.75 per cent by the end of the year, with price pressure to come from rising services, housing and educational construction costs.
While Ms Beacher expects a 25 basis points rise to 4 per cent from the RBA when it meets on February 2, she said TD Securities was still expecting a pause in March.
The inflation data comes hot on the heels of better-than-expected jobs data last week that raises the possibility Australia's commodities-driven economic growth may lead to a skills shortage.
Economists said the prospect also increased the chance of a second rate rise in March.
"We do think it's a significant risk," JP Morgan's Ms Kevans said. "We're going to have a fairly significant inflation problem."
ANZ's Dr Joiner said a second hike might be needed.
"There's going to be one in the first quarter - but is there going to be two?" he said. "The RBA doesn't want to see inflation going up - they want to pre-empt inflation and push it down into the target band."
Mr Savanth said Commsec had held the view that a March rise was likely since last year.
"Our view seems to be more validated when you consider the labour market data and the inflation data released today," he said.
Money market betting put the chances of a 25 basis point rate hike in February at 69 per cent last night.
The TD Securities-Melbourne Institute report showed seasonal increases in holiday, travel, accommodation, fruit and vegetable and petrol prices were partly offset by falls in such things as rental accommodation and financial services.
Ms Beacher said the inflation data came on top of an eight-month low in unemployment of 5.5 per cent, reported last week, and a 1.4 per cent surge in retail trade in November.
"Unemployment is barely above what we call neutral, at 5 per cent," she said. "TD as a house has certainly been surprised.
"We were certainly expecting a bigger backwash from the global recession, but so far fiscal and monetary policy is working."
ANZ's Dr Joiner said economic data supported a rate rise.
"We haven't had the recession, so prices haven't gone down as much as forecast," he said.
"What will clinch it for us is the CPI data on January 27."
He said the high Australian dollar - which was trading last night at US92.24 - was helping to keep inflation on imports in check.
But price rises in "non-tradeables" - goods produced and consumed in Australia - were still high, he said.
What's next for rates? Based on anecdotal evidence the Australian Bureau of Statistics wouldn't sneeze on: Australia's starting 2010 with a little inflationary surge that will soon have the Reserve Bank more worried than it has thus far let on.
Jan 19, 2010
There are people returning to work and finding haircuts and cups of coffee are a little more expensive than they were before the holiday break.
Head hunters and more mundane recruiters are hitting the phones, chasing workers they wouldn't give the time of day to a few months ago. From construction to finance, the jobs surge didn't end last month - and that's without mentioning the skills-strapped resources industry.
The two major questions that follow from that are: what does the Reserve Bank think a "neutral" cash rate is in 2010?; and what is Australia's NAIRU - it's non-accelerating inflation rate of unemployment?
Yesterday's confirmation of labour market strength makes a return to neutral monetary policy a given. It used to be thought that a neutral cash rate was about 5 per cent, but the banks boosting lending rates by more than the RBA's official increases has lowered that a touch. And with higher personal debt loads, it's arguable that the RBA doesn't have to do as much to achieve its desired impact on purses and wallets.
So, pick another number. Maybe neutral now is more like 4.5 per cent, just three more consecutive monthly rate rises of 25 points and we'd be there.
And, as the RBA has reminded us, just because it hasn't done something before, it doesn't mean it won't do it.
Also remember that the unemployment rate is supposed to be a lagging indicator, in which case the extraordinary straight-line employment growth since June is all the more amazing, even while being the sort of performance that naturally has any graph watcher thinking that there must be some sort of pause at some stage.
Whether or when the RBA moves beyond neutral though depends on what our NAIRU might be - and that becomes a more painful question for those on the fringes of our labor market.
Given the way the Reserve Bank was increasing rates before the GFC, it looks like it believes Australia's NAIRU begins with a 4. That's when the RBA will starting thinking about a cash rate of more than 5.
With unemployment fears removed and consumers spending, prices and wages pressures are on the up - and that was something the RBA has been saying wouldn't happen this year.
Inflation creeps up to nine-month high -Inflation ticked up in December, stoking expectations of another rate rise when the Reserve Bank meets next month, according to a private survey. Thinking of fixing your mortgage? Call Touch of Finance on 0393579354
Jan 19, 2010
The TD Securities-Melbourne Institute inflation gauge rose by 0.3 per cent last month, equalling the 0.3 per cent increase in November. December's increase was triggered by seasonal price increases for holiday travel and accommodation, petrol and fruit.
December's annual rate rose to 2.6 per cent - the highest in nine months.
''After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure,'' said TD Securities senior strategist Annette Beacher.
Ms Beacher said the quickening pace of price rises justifies the RBA's trio of consecutive 25 basis point rate rises, starting in October. The moves took the interest rate to 3.75 per cent, adding about $140 a month to the average repayment on a $300,000 mortgage.
''We expect an additional 25 basis point increase in the cash rate to 4 per cent at the February 2 RBA Board meeting, and a pause in March, scaling back the pace of the RBA returning to cash rate to more neutral levels,'' she said.
Currently, Credit Suisse markets are pricing in a 70 per cent chance of a 25 basis point increase at the RBA's February 2 meeting. Such an increase would lift the interest rate to 4 per cent.
Over the past year, Australia's economy has enjoyed stronger-than-anticipated demand for staff, while retail sales growth has held up despite interest rate rises and the end of the Government's cash stimulus.
Last week, the official unemployment rate fell to 5.5 per cent, from 5.7 per cent, surprising analysts who expected the labour market to weaken slightly. The buoyant jobs market data has encouraged more analysts to predict the jobless rate may have peaked, and that borrowers should brace for more rate rises.
Markets expect the official interest rate to be 5 per cent in 12 months' time, implying five rate rises over that time.
Build homes the agreed path - THERE is one thing our panel agrees on: Australia is not building enough new homes. And if there's one path they propose to make housing more affordable, it's simply: build more homes.
Jan 19, 2010
Australian housing in recent years has become among the most expensive in the world. On one measure, the median Melbourne price rose by $100,000 in 2009 to more than $500,000.
Population growth is at record levels, yet until recently, new home building was close to historic lows.
So one of our questions to the panel was whether Australia should be trying to bring house prices down, and if so, how?
Our panel was not of one mind. Some pointed to state government policies they believe inhibit housing supply. Others pointed to tax breaks that reward investors for buying up existing homes. Some said interest rates should control housing supply, while some saw no problem anyway.
Peter Jones of Master Builders Australia urged reform of ''inefficient state and local government practices'' as the way to lift the supply of new homes from about 130,000 now to about 200,000 per annum.
''Master Builders for some time has been calling on all governments to embrace a package of reforms including reform of developer charges, improved land release, better planning approval processes and the replacement of stamp duties with less distorting taxes,'' Mr Jones said.
ANZ acting chief economist Warren Hogan listed an even wider range of factors that contribute to housing shortages, and hence high prices. They include ''excessive developer levies, rising regulatory costs (energy/water/fire ratings), access to finance, resistance to medium and high-density infill (NIMBYism), inadequate transport infrastructure, skilled labour shortages and rising interest rates''.
Mr Hogan was almost alone in citing difficulties in obtaining finance, which many unit developers see as their biggest problem.
He also raised the issue of immigration, warning that without a ''concerted public policy effort'', to lift Australia's population to 35 million by 2049 could make housing shortages ''intractable''.
Steve Keen, the University of Western Sydney economist who lost a bet with Macquarie's Rory Robertson that house prices would fall 40 per cent, argued that government policy was really to keep house prices high, not to make housing affordable.
''Australia should stop trying to push house prices up,'' Professor Keen said. He cited the exemption of the family home from capital gains tax, the 50 per cent tax break for capital gains, negative gearing and the first home buyer's grant.
''If these price-fixing interventions were removed, much of the force sustaining the bubble would be removed with them,'' he said. ''The unwinding of the massive overleveraging of the household sector would do the rest.''
Indicators point to rates going up again - the December quarter CPI, now expected to come in at just 0.1 per cent and 1.7 per cent for the year to December, will scarcely figure in RBA's calculations.
Jan 19, 2010
IF THE Reserve Bank board paid attention only to Australia's official inflation rate due for release next week, it'd put up its feet and leave interest rates alone.
But the December quarter CPI, now expected to come in at just 0.1 per cent and 1.7 per cent for the year to December, will scarcely figure in its calculations.
''It's the base, the starting point, but the board's job is to be forward looking,'' said La Trobe University professor Don Harding, who has come up with the 1.7 per cent forecast for the Melbourne Institute.
''The board will look at it, see there's not much inflation in the system, say that's nice to know, but then say the labour market is getting tight, retail sales are looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up.''
The TD Securities-Melbourne Institute inflation gauge, compiled using the same price-sampling methods as the Bureau of Statistics index, is usually in step with the bureau's.
The institute says it's accurate to five one-hundredths of 1 per cent.
Which puts Professor Harding in an odd position. He believes he knows what the official rate will be Wednesday next week - he believes it will look benign, but believes the Reserve will crank up rates again anyway.
The detail of next week's result is likely to look particularly encouraging. Of the 90 price groups surveyed by the institute last month, an impressive 48 stayed steady, 23 increased and 19 actually fell, hardly a sign of widespread inflation. About half the prices measured hadn't moved in six months; two-thirds hadn't moved in three months.
''By December, we almost unwound all of the sustained increase in inflation pressure that had been evident in the Australian economy for several years,'' Professor Harding concludes in his report.
Other analysts managed to read an uptick in inflation into Professor Harding's report.
''After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure,'' TD Securities economist Annette Beacher said.
CommSec economist Savanth Sebastian said: ''Price pressures, though mild, are once again rising.''
Australia's most recent official annual inflation rate for the September quarter was 1.3 per cent.
A jump to 1.7 per cent when the December quarter figures are released would see the rate remain below the Reserve's 2-3 per cent target band.
Rent set to soar - Renters should prepare to pay more this year, as landlords pass on the costs of interest rate rises and tax increases to tenants, a research group says.
Jan 13, 2010
Expectations of steeper rent charges follow a flat quarter of rental growth for houses on Eastern states, according to Australian Property Monitors.
The median weekly asking rents for houses in Melbourne, Sydney, Brisbane and Hobart were unchanged in the December quarter, the property research group said.
But December "is likely to be the last quarter of flat rental growth," APM economist Matthew Bell said.
"Melbourne rents should resume their long-term upward trend and are expected to rise by to 5 per cent to 7 per cent, in line with their long term growth rate,'' Mr Bell said.
"Sydney rents are likely to increase by at least double the 2009 rate of 2.2 per cent to approach the $500 per week level for houses.''
Property markets in Brisbane and Perth would play "catch up" with Sydney and Melbourne, APM predicted, with median house rent in Perth forecast to hit $400, a jump of 11 per cent. APM is owned by Fairfax, publisher of this site.
"Brisbane rents, coming off the same base of $360 as Perth, are also likely to approach $400 with an expected growth rate closer to 8 per cent," Mr Bell said.
The Reserve Bank raised the official cash rate three months in a row at the end of 2009, taking the rate to 3.75 per cent.
But more rate hikes are expected from the RBA, with another rise tipped by markets next month.
"An improving employment outlook means that overall, renters will be more willing and able to afford rental increases," Mr Bell said.
The unemployment rate sank to 5.7 per cent in November, leading economists to speculate that the worst is over in the job market.
Also, the end of the First Home Owner Boost in December has removed a key incentive aimed at helping turn renters to owners.
House prices continue to climb, putting ownership out of reach for more people, Mr Bell said, with little relief seen on the horizon.
Home loan data released yesterday by the Australian Bureau of Statistics showed that investment in housing rose only 2.1 per cent in November, while total new home loans fell by 5.6 per cent in the month.
Christmas shopping spree may spell interest rate rise - SHOPPERS' love of a bargain may mean another interest rate hike is just around the corner following a Christmas spending spree. Learn the best fixed rates by calling Touch of Finance on 03 9357 9354
Jan 12, 2010
Retail trade figures for November, released yesterday, showed a 7 per cent rise over the year, and that big discounting by the major retailers drew consumers into an early Christmas spree, but significantly affected smaller outlets, where sales fell for the month.
The data led one economist to claim Australia was the only Western economy to produce such a strong retail recovery, reports the Courier-Mail.
The rise in sales combines with renewed consumer confidence, a strong stock market and currency, rising house prices and a belief that unemployment is slowing.
The sales figures showed people were splashing out on clothes, electrical goods, beer and wine, all of which may have been influenced by the warm weather.
CommSec economist Craig James said Australian shoppers loved bargains.
"The spike in retail sales has narrowed the odds of the Reserve Bank lifting interest rates again in February, but the RBA will take into account that smaller retailers are still doing it tough and that the lift in sales in November followed a five-month period where spending went backwards," Mr James said.
But some retailers believe the figures may show that people simply bought Christmas presents early because of discounting, and that the December result will be weak.
National Retailers Association chief executive Gary Black said the figures were a surprise.
He said the feedback that he received from the industry in the days before Christmas was of the worst December in 25 years.
Mr Black feared that because the RBA would not get the December retail figures before it met on February 2, it might lift interest rates without knowing the real and much bleaker Christmas story.
"It's clear to me that the November figures don't reflect the impact of the two interest rate rises," Mr Black said.
The Commonwealth Bank's Michael Blythe said he still expected the RBA to lift the cash rate to 4.25 per cent early this year and to 5 per cent by year's end.
BT Financial's Chris Caton said a rate rise in February was marginally more likely, but there was still plenty of time for that assessment to change, with job figures to be released next week.
Get credit where credit's due - FOR too long, banks and other lenders have judged your credit risk based on failed applications and defaults, but that is changing.
Jan 11, 2010
Positive credit reporting is coming, and if you are a good bill payer, you should be able to use it to your advantage.
Many Australians don't understand how their credit report is compiled and are unaware of the information credit providers use to make their lending decisions.
At present, your credit report will list all loan applications but not whether they were approved, any defaults of more than 90 days and bankruptcies.
Essentially all the bad stuff. The good stuff won't be counted until 2011.
Financial planner Joel Palmer of Palmer Portfolios says every time you apply for finance or default on a payment, the details are recorded in a database that is accessed by all financial institutions.
"If you apply for 27 credit cards in two months, or miss a few too many payments, you'll end up with a black mark against your name and find it next to impossible to obtain new finance,'' he says.
"Positive credit reporting forces banks and credit card companies to report our good qualities, not just the bad.
"Let's say you've had a home loan for 15 years, never missed a payment, and always had your credit card under control.
"If Australia had a positive credit reporting system, you would then show up on the database as an extremely good credit risk.
"The major benefit for you is that banks will then be falling over themselves to lend you money.''
Credit reporting agency Dun & Bradstreet's chief executive, Christine Christian, says positive credit reporting is used in the US and other developed countries.
"People think paying an overdue debt will remove the listing from their credit report: This is untrue. Negative records such as collection accounts, late payments and bankruptcies stay on your credit report for up to seven years, even if you pay them off,'' she says.
Ms Christian says people wrongly think low-value or non-bank debts are less important than big ticket items such as a home mortgage.
"The size of the debt and its source is irrelevant all negative payment behaviours will be listed on your credit report,'' she says.
Anyone can access a free copy of their credit report through a credit reporting bureau.
Housing boom spreads - THE housing recovery has finally gone national. Housing starts soared almost 10 per cent in the September quarter, as federal and state stimulus measures encouraged growth.
Dec 17, 2009
But while home building is now on the rebound in all states, Victoria is the driver. One in every three houses and units started this year came in Victoria.
While home building in other states is just starting to recover, Victorian activity is at a five-year high with 11,263 home starts in the September quarter.
The Victorian Government's first home buyers' scheme has strongly favoured construction. Until October, federal and state grants ran to $36,000 for a new house in regional areas.
Melbourne also has an abundance of residentially zoned land, and its population is growing by almost 2000 a week.
But Victoria is now also building almost a third of the nation's new units and apartments, a sector usually dominated by NSW and Queensland. Nationally, unit starts rose by 9 per cent in the September quarter - but from the lowest level since the 1991 recession.
David Sinn, property partner at Freehills, says banks have not relaxed their tough line against lending to developers. Finance is given only if 85 per cent of apartments have been sold before construction, and developers still have to put up at least 30 per cent of the cost.
But Mr Sinn said the demand for Melbourne real estate is making it easier for developers to meet these conditions.
''There is such high demand for residential stock, and that includes apartments,'' he said. ''Even if you take first home buyers' grants out of the equation, apartments are becoming the affordable entry point for people.''
Interest rates already back to 'normal' - A senior Reserve Bank official says interest rates are already effectively higher than during the last downturn in 2001. Learn what this means for you from Touch of Finance
Dec 17, 2009
RBA deputy governor Ric Battellino says the increasing cost of wholesale funding and strong competition for deposits have pushed up commercial interest rates relative to the official cash rate.
"The cash rate is currently 3.75 per cent. This is still 50 basis points below the previous cyclical low of 4.25 per cent in 2001," he observed in his speech at Australasian Finance and Banking Conference.
"On the surface this might suggest that the cash rate is still unusually low. However, with other interest rates in the economy having risen by at least 100 basis points relative to the cash rate over the past couple of years, they are now above their previous cyclical lows."
He says that makes the effective level of interest rates much higher than the official rate target, and he clearly implies that the RBA's three consecutive interest rate rises have now taken interest rates back above 'emergency lows'.
"Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range," Mr Battellino commented.
Rate rise pause?
With most economists rating official cash rates of around 5 or 5.5 per cent as 'neutral', Mr Battellino also implied that the RBA may not have to raise rates much further to achieve a setting that neither slows nor stimulates the economy.
"Another way to think about this is that the current level of deposit rates, housing loan rates and business loan rates would have been consistent, before the crisis, with a cash rate of at least 4.75 per cent," he said.
That means another 25-75 basis points worth of official rate increases could take rates to a 'neutral' setting, where the Reserve Bank may be content to wait and see if another boom develops, or if growth simply hovers around long-term trend levels.
More independent rate rises by the major banks could further widen the gap between the official cash rate and effective commercial interest rates, leaving the Reserve Bank even less work to do.
"Other things equal, if interest rates in the economy are rising relative to the cash rate, there is less need for the cash rate to rise," Mr Battellino noted.
He concluded by saying the RBA would keep a close watch on economic activity and inflation to judge the success of its rate rises so far.
Today's speech elaborated on minutes from the December Reserve Bank meeting, released yesterday, where the board members said they saw the three cash rate rises since October "as materially shifting the stance of policy to a less accommodative setting."
So it seems a bit of extra pain for home owners with a mortgage in December, courtesy of both the RBA and the banks' extra rate rises, may mean a little less pain in the new year.
NAB makes surprise bid for AXA - Australian fund manager AXA Asia Pacific has accepted a $4.61 billion takeover offer for its Australian and New Zealand assets from National Australia Bank, sidelining an AMP offer that was sweetened on Monday this week.
Dec 17, 2009
The offer was revealed this morning ahead of NAB's annual general meeting in Melbourne, with NAB chief executive Cameron Clyne saying the acquisition would cement NAB's leadership in wealth management and business banking.
Mr Clyne said the independent directors of AXA would recommend its shareholders accept the offer, which would be paid in cash or cash and NAB shares.
The ability to win over the independent directors of AXA sidesteps the offer from AMP and European funds manager AXA SA, which had offered $12.8 billion for the entire business including its Asian assets.
The proposal depends on AXA SA, which currently owns 53 per cent of AXA Asia Pacific, agreeing to the offer. NAB's offer would value the entire business at a higher price of $13.3 billion.
Unusually, the bid was revealed in a teleconference with Mr Clyne before an announcement was made to the Australian Stock Exchange.
NAB group executive wealth, Steve Tucker, said the deal was ''transformational'' for National Australia Bank.
''This is a transformatinal opportunity for NAB wealth, it establishes us as a clear market leader in both wealth management and financial protection,'' he said.
He said it would give NAB a leading market share in Australian retail superannuation, Australian retail managed funds and individual insurance products.
The acquisition was predicted to be largely neutral in terms of its impact on earnings per share in the four-year integration stage, with integration cost predicted to be $400 million.
Mr Tucker said there it would be targeting cost savings as a result of the tie-up of $210 million pre-tax by the fifth year, and a revenue increase of $50 million by year five.
Chief financial officer Mark Joiner said it would be funded in part by a $1.5 billion renounceable rights offer in NAB shares, although this would depend on the amount paid in cash.
AXA Asia Pacific shares soared when they were released from a trading halt late in the morning, jumping 70 cents, or 12.4 per cent, to $6.35, while AMP shares, which started trading with a slight delay this morning, shot up 31 cents, or 5.1 per cent, to $6.41. NAB shares remain suspended and last traded at $27.95
Home building sector rebounds - THE home building sector appears to have made a turn for the better, after building starts rose for the first time in five quarters as fiscal stimulus measures boosted the demand for new dwellings.
Dec 16, 2009
Australian dwelling commencements in the September quarter rose by a seasonally adjusted 9.4 per cent to 34,082 units, from an upwardly revised 31,154 units in the June quarter, the Australian Bureau of Statistics said yesterday.
The rise was above the market forecast of 6 per cent and it was the first quarterly increase in home building starts since the June quarter, 2008.
National Australia Bank senior economist David de Garis said while the growth in dwelling commencements in the quarter was coming off a low base, Federal Government stimulus measures and low interest rates at the time had given the sector some impetus.
"Private commencements rose 8.1 per cent while public housing commencements jumped 44.5 per cent, with the up-lift in public housing activity benefiting from fiscal largesse, just as the boost to the first home owner's grant and low mortgage rates kick-started new private housing demand," he said.
"Dwelling investment activity is now becoming a positive contributor to growth, starting with the September quarter then accumulating further in coming periods."
In October 2008, the Federal Government tripled the first home owner's grant to $21,000 for new dwellings until September 30 this year, ahead of a phasing out of the boost out by January 1, 2010.
The Reserve Bank of Australia lowered the overnight cash rate by 4.25 percentage points to 3 per cent, a 49-year low, between September 2008 and April 2009.
Citigroup senior economist Joshua Williamson said the building sector would continue to improve as 2010 approached. The ABS estimates the trend in building approvals has been rising since its low point last January.
GDP figures point to a happy Christmas - Re the September quarter national accounts, if there's a surprise or a problem in there somewhere, I've missed it. Find out what it means to you from Touch of Finance
Dec 16, 2009
Yes, the headline GDP growth figure printed a little lower than the market economists had been tipping - 0.2 per cent instead of the 0.4 per cent. This primarily shows market economists are about as good at predicting GDP figures as unemployment rates. It has no bearing on the prospects for Australia's economic growth.
For what it's worth, the trend series are somewhat more reliable than the seasonally adjusted figurings anyway - and the trend growth was 0.5 per cent from the June quarter.
Most obviously, the September quarter national accounts are a slice of economic history, telling us how the economy was going three or four months ago. The bits of the accounts that reduced the headline figure - net exports and private investment - were already known so there can be no surprise there at all.
And the outlook for those two sectors remains reasonably well known. The business confidence and ABS private capital expenditure surveys indicate business is coming to the party in 2010 while the strength of Asia's emerging markets and our currency swings determine how exports fare. The RBA board minutes released yesterday were, as usual, ahead of the herd:
''Business surveys released over the past month had been strong, suggesting that business conditions were continuing to improve and that capacity utilisation had risen form the relatively low levels seen earlier in the year.''
Moving on
Two weeks ago the RBA had already moved on from the September accounts, just noting that the available data suggested a rise in GDP for the quarter.
And rise it did, a formidable achievement in 2009. From the point of view of history, there was further justification for the government stimulus package as our economy would not have grown without the 6.2 per cent increase in public investment and the 0.7 per cent rise in household expenditure.
Since the September quarter finished, we've had two months of good jobs growth, strong business and consumer confidence surveys and the sort of quietly confident rumblings from the central bank that suggest the economy is travelling very nicely indeed.
For that matter, what some have read as a hint that the RBA is going to pause in its gradual removal of emergency monetary stimulus, I'd see more as Martin Place simply keeping its options open and powder dry.
Does anyone really think the Reserve Bank is silly enough to be forecasting two months out what it might or might not want to do in February?
Nah, they leave that sort of nonsense to the poor old market economists. And if you think the RBA board will spend much time talking about the September quarter accounts when they meet on the first Tuesday of February, you haven't been paying any attention at all.
So tell me again what the disappointment was with today's figures? Nothing that I can see that should interfere with the promised Santa rally.
Rates hope after growth slows - Update Australia's economic growth slowed in the September quarter, a result that is likely to see the Reserve Bank's current round of interest rate hikes put on hold
Dec 16, 2009
The country's gross domestic product rose 0.2 per cent in the July-September period, compared with the 0.6 per cent expansion pace in the previous three months. Economists had tipped the September quarter GDP growth pace to come in at 0.4 per cent. (Read Michael Pascoe's view here).
On an annual basis, the economy expanded 0.5 per cent, slower than the 0.7 per cent economists had tipped, and the 0.6 per cent year-on-year rate recorded for the June quarter.
"I'm still tossing in my mind whether the RBA will hike again in February or wait until March. At the moment I'm leaning towards March,'' said Stephen Roberts, an economist with Nomura. ''We are going to see more hikes, but they might be more spaced out."
Even with the slowdown, Australia remains one of the few developed economies to have dodged two consecutive quarters of contraction - a measure widely used to describe a recession. The modest growth for the most recent quarter, though, may underpin the Government's case that it remains too early to ease back on its stimulus spending.
''Conditions are improving but I think the accounts today provide a cautionary reminder that there is some way to go before our growth momentum becomes self sustaining,'' Treasurer Wayne Swan told reporters in Canberra. ''We see reasons for confidence but no reason for complacency.''
Rates in 'normal range'
The RBA released the minutes of its December board meeting yesterday stating that its decision to lift rates for a third straight month, this time to 3.75 per cent, had been "finely balanced''.
Ric Battellino, deputy governor of the RBA, today said monetary policy is now ''back in the normal range,'' in part because commercial banks had hiked their lending rates even more than the central bank.
Analysts interpreted the wording of the RBA's minutes to indicate the RBA may pause in its series of rate rises - a result more likely now that Australia's growth has slowed to its second slowest pace since June 2003. Only the December quarter's negative-0.7 per cent figure is worse over the six-year period.
Before today's national accounts figures from the Australian Bureau of Statistics, investors were rating the risk of another interest rate rise at the RBA's next board meeting in February as a 59 per cent chance, according to Credit Suisse, an investment bank. After the release of the ABS figures, the chances dropped to about one-in-three.
The Australian dollar sank after the release of the GDP figures, dropping more than a half of a US cent to below 90 US cents in recent trading. Stocks also pared gains to be virtually flat for the day in early afternoon trading, before falling about 0.3 per cent.
Trade drags
Trade was the main drag on the economy, with imports alone lopping 1.1 percentage points from growth, while exports shaved 0.5 percentage points.
"The big detractor was net exports, mainly due to imports of capital goods. But exports are expected to pick up as the global economy recovers,'' said Shane Lee, senior economist with ANZ Bank.
"We see growth at 3.1 percent for 2010 which is around trend growth. The key question is whether growth is sustainable if interest rates keep rising. We see the cash rate at 4.75 per cent by the end of 2010, with the RBA pausing in February and going in March," he said.
Helping to counter the negative contribution from trade were gains in public investment on infrastructure - adding 0.3 percentage points of growth - as the Federal Government's stimulus spending kicked in. Private investment, though, fell, slicing 0.2 percentage points off growth.
Household spending also rose, adding 0.4 percentage points to growth, while spending on dwellings added 0.3 percentage points.
''Treasury estimates that fiscal stimulus added 0.4 of a percentage point to GDP growth in the September quarter,'' Treasurer Swan said.
''Without the stimulus the economy would have contracted in the September quarter by about 0.2 per cent,'' he said.
The biggest positive contribution came from an increase in inventories held by businesses, adding 0.8 percentage points to quarterly growth, as firms stocked up in anticipation of the economy's recovery taking hold.
Using the ABS's seasonally adjusted, chain volume (real) terms for the quarter, farm GDP fell by 3.3 per cent in the quarter and by 17.6 per cent over the year to September as many regions still battled drought conditions. Non-farm GDP, though, was up by 0.3 per cent in the quarter and 0.9 per cent through the year.
The seasonally adjusted GDP implicit price deflator was flat in the quarter, compared to a fall of 2.2 per cent in the June quarter, to be down 3.0 per cent over the year.
RBA warns banks: more jumbo rate rises not justified - The Reserve Bank has put Australia's major banks on notice that any further jumbo-sized rate increases are not justified by their increasing costs.
Dec 16, 2009
Speaking in Sydney, the deputy governor of the Reserve, Ric Battellino, today also indicated that mortgage holders were in for some relief next year with interest rates getting close to neutral.
Mr Battellino's speech was on the topic of bank funding costs. He said that banks had recovered from their hit taken during the financial crisis, and were now earning margins on loans about 0.2 percentage points above pre-crisis levels.
But Mr Battellino defended previous bank rate rises, saying that, if they had not lifted rates in excess of official increases, banks would now be running losses, not profits.
Bank costs have risen due to the global crisis and because banks were competing hard for deposits, Mr Battellino told the Australasian Finance & Banking Conference.
''We estimate that if banks had not adjusted their lending interest rates to reflect their higher cost of funds over the past couple of years, they would now be incurring losses,'' he said. ''That would have threatened their ability to keep raising funds and, in turn, their capacity to lend.''
However, that situation had now changed.
''With the economy and business climate now improving, the economic justification for wider margins on loans is becoming less compelling, so it would be reasonable to assume that, in a competitive banking sector, we should see margins level out soon. Over the past couple of months, there have been some signs that this is starting to occur,'' Mr Battellino said.
The speech is likely to temper expectations in financial markets that the Reserve will start the new year with another rapid bout of rate rises.
Even after three rate rises in three months, the current cash rate of 3.75 per cent still sticks out as unusually low by historical standards.
But Mr Battellino argued that analysis ignored the fact that banks had lifted home loan and business rates well above the Reserve's mark.
This meant that the cash rate of 3.75 per cent was equivalent to 4.75 per cent had banks not lifted mortgage and business rates independently, he said.
''Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range,'' Mr Battellino said.
Interest rates 'too low', say RBA December minutes - THE Reserve Bank raised the interest rate for an unprecedented third straight month in early December because rates were "too low for an economy that had resumed expanding"
Dec 16, 2009
But the decision had been "finely balanced'', as members weighed up developments in the domestic and international economy and the potential blow to confidence the rate rise may have had.
The RBA lifted the cash rate by 25 basis points to 3.75 per cent on December 1 after two similar moves in October and November.
"Members agreed that the level of the cash rate set when the outlook appeared to be much weaker would be too low for an economy that had resumed expanding, with a smaller amount of spare capacity than had earlier been expected," the minutes of the December board meeting said.
"That adjustment would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions.
"The question for members was whether it was more appropriate to take a further step at this meeting or to hold the cash rate steady pending a further evaluation of developments at the February meeting," the minutes said
"They (the board) weighed the potential for adverse effects on confidence of a further adjustment at this time, the continuing uncertainty over the international outlook given conditions in the major economies, and the high level of the exchange rate.
"Members saw the arguments as finely balanced, but concluded that the stance of monetary policy would best reflect the circumstances facing the economy over the period ahead if there were an increase in the cash rate of 25 basis points at this meeting.''
The RBA board looked at a range of economic indicators pointing to an expanding domestic economy and strengthening private demand, particularly in the resource sector, even as Government stimulus was being withdrawn.
RBA forecasts suggested growth in the private sector would be close to trend in 2010, the minutes said.
The board said economic data released in November pointed to a rise in the nation's September quarter gross domestic product (GDP), while labour market conditions were expected to continue to improve.
Late last week, Australian Bureau of Statistics data showed that, in October, the unemployment rate fell by 0.1 per cent to 5.7 per cent.
The minutes also showed the RBA expects inflation to moderate further in the near term, but they noted it was not expected to fall as far in the near term than had been expected at the start of 2009.
"Both (consumer price index) and underlying inflation were expected to be consistent with the target in 2010,'' the minutes said.
The central bank's stated aim is to keep inflation within a target band of two to three per cent, on average, over time.
Westpac says low home loan rates 'unfair' to business - WESTPAC has justified its recent increase to home loan rates, saying that it would do no-one favours to offer rates that were unsustainable.
Dec 16, 2009
Australia's second largest home loan lender also says it already absorbed some of the rising costs of funding.
"We absorbed some of the external cost increases, rather than pass them on to borrowers at the expense, of course, of shareholders," chairman Ted Evans said at the bank's annual general meeting.
"With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy.
"We would do no favours to anyone by offering mortgages at rates that we know to be unsustainable."
Mr Evans said it would not be fair for home loan borrowers to pay lower rates while business borrowers faced higher interest charges.
"Nor is it fair to other borrowers, such as small business owners, or even large project developers, to have their interest rates increased so that mortgage rates can be subsidised," he said.
"Nor is it fair to those who save to have deposit rates held down so that mortgage borrowers can be subsidised."
In a properly functioning financial system with strong banks, institutions must adjust rates in line with market pressures, and Westpac did that on December 1, Mr Evans said.
"Competition in the markets will ensure that power is not abused, and as has been demonstrated again in recent weeks, such competition is alive and well in Australia," he said.
NAB increased its home loan rate by 25 basis points this month to end up with the lowest rate among the big four, and called on Westpac customers to consider switching banks.
It pays to insure your income - Almost three times as many people insure their cars as insure their most important asset - their income. Get special Insurance rates from Touch of Finance, Compare and Save!
Dec 15, 2009
It is no secret Australians are among the most underinsured people in the developed world.
While many find the insurance maze too difficult to comprehend, generally there is a "she'll be right attitude" when it comes to the need to financially protect against something most people hope will never happen.
The reality is that accidents do happen and unless someone has insurance - or large savings - it can be very difficult to cope financially. Many people have some form of life insurance through their superannuation fund but even then it is worth asking whether it's enough.
Most Australians don't value their most important asset - their ability to earn an income. A senior policy manager at the Investment and Financial Services Association (IFSA), Emma Grainge, says that over a lifetime most people will earn a small fortune.
"Lifewise research shows that an average 25-year-old male has a lifetime earning potential of over $4 million. It makes sense to protect it in the same way you do your car or home," she says. "It is important that people understand the risks they face every day and the impact they may have on their ability to earn an income - the Lifewise website aims to do just that."
Income protection insurance provides a replacement income of up to 75 per cent of current income. If you crunch the numbers on the Lifewise calculator (lifewise.com.au), based on a number of assumptions, a 35-year-old male earning $70,000 may be able to obtain income protection cover of $4300 a month for $2.50 a day.
Unlike trauma insurance, income protection does not specify a list of accepted conditions so generally greater coverage is provided, particularly for temporary illnesses such as back injury and stress-related illnesses.
HOW MUCH IS ENOUGH?
Most income protection policies will provide you with cover for up to 75 per cent of your gross income. This is typically enough to cover costs of living. You can reduce your premiums by taking out a lower level of cover.
THE MAIN QUESTIONS TO ANSWER ARE:
How much money will my family need to pay off all debts, such as mortgage, credit cards or personal loans? In the event of death, how much money will my family need to meet immediate expenses, such as funeral expenses and unpaid medical bills? How much money will my family need after my death to maintain their standard of living in the long run?
WHICH PROVIDER?
Two major considerations are the structure in which to hold the insurance and whether you want a stepped or level premium, says the head of product for MLC Insurance, Sean McCormack. "Once you know the answer to those two questions you need to work out the level of cover you need. Generally it is 75 per cent of gross earnings paid to age 65," he says.
McCormack says income protection insurance can be held inside or outside of the superannuation fund. Insurance held inside superannuation is tax effective, more affordable and more likely to stay in place for longer, he says.
"If you are in a company and part of a corporate superannuation scheme you can generally access income protection insurance or salary continuance at a corporate rate," he says.
"Having the premium automatically deducted means you are likely to keep on paying it rather than look at it as another bill that has to be paid." But one thing to be aware of if you do buy insurance through your superannuation is that because the premiums are deducted from your super contributions, unless you increase the amount you invest, they will reduce the amount you are saving towards your retirement.
You need to also be sure that a super policy will pay out for longer than two years and bear in mind that premiums for income protection insurance held outside of super are tax deductible.
STEPPED OR LEVEL?
With stepped premiums, the premium is calculated on your age. The younger you are, the cheaper the cost will be, but it will rise as you get older.
With level premiums, the premium is calculated on an average premium, so you might pay more when you are younger but less when you get older. Online insurance comparer Rate Detective calculates that level premium cover can save someone up to 50 per cent of the total amount of insurance cover paid over a lifetime.
It says that as most people need insurance between ages 40 and 55, the cost of insurance can sometimes be too expensive to keep.
"By taking level cover your insurance premium will stay the same, so in your later years when you need the cover the most, you will still be able to afford it," it says. MLC's McCormack likens a level premium to a fixed-rate mortgage, where you know exactly what the payments are going to be, and a stepped premium to a variable-rate mortgage, where you know the rate is only going up.
"A big mistake people make is they take out insurance at a stepped premium because it is initially cheaper but after five to six years, when the premium has gone up, they drop it," McCormack says.
WHAT DOES IT COST?
The eventual premium you will pay depends on a number of factors, including your age, whether you are in a high-risk occupation, the salary you want to insure, what level of protection you want and how long you want to be paid for.
One rule of thumb is that income protection costs about one week's salary a year or 2 per cent of your annual salary. For most taxpayers, premiums are tax deductible. The waiting period and the benefit period are two important factors. The waiting period refers to how long you can be off work before you require the income to start.
Generally the waiting periods range from two weeks to two years. The benefit period is the maximum length of time following the waiting period that the policy will pay the benefit for. These can either be for a set period, such as two or five years, or until a certain age, generally 65. If you are able to return to work then the monthly benefit will cease at that time.
CASE STUDY
Like most people, Robert Innes thought he was indestructible. The self-employed accountant and father of two was prepared to take on almost everything that was dealt at him. He had occupied senior accounting positions and, as a tennis coach, was fit and had taken very few sick days in his working life.
"I was the person everyone could rely on," Robert says. "A person who loved life." That was until 2007, when his 14-year-old daughter, Morgan, was killed when a Sydney Ferries HarbourCat collided with the pleasure cruiser she was on. With the Coroners' inquest still going on, Robert is reliving the "catastrophe that befelled our family". "I maybe sleep two nights out of seven. I've gone from being a very driven person to someone with no goals. The only thing that keeps me going is my son, Curtis, and my wife, Kim," Robert says.
Robert puts part of his own survival down to a fellow tennis player and long-time friend who happened to be an insurance broker. For years he insisted Robert be fully insured just in case.
"Without income protection our family would probably have broken up -- the pressures are just enormous," Robert says. "I don't think anyone understands the depression that happens when a child is killed. "When people think about trauma and accident and sickness and disability, you don't comprehend you can be sick to the point where you can't work. The thought of ever getting sick was just beyond me and while you have insurance you never expect to have to use it."
Under his income-protection insurance, Robert is entitled to 75 per cent of his previous income until age 65. A voluntary supporter of Lifewise -- a national education campaign about personal insurance -- Robert doesn't advocate insurance for everyone but he does believe people should make an informed choice about whether to have it.
Invest in the future - Rental yields are improving and banks are offering innovative loan options. Get the best loan that suits you from Touch of Finance
Dec 15, 2009
Investors are back in the property market and shopping for finance. Australian Bureau of Statistics figures show finance commitments taken up by property investors hit a low in January but there has since been a strong recovery, with monthly finance commitments for investors in recent months running at more than 40 per cent above that low.
There has been plenty of encouragement for potential property investors. House-price data from groups such as RP Data-Rismark shows gains in all capital cities, while forecasters such as BIS Shrapnel are predicting prices will continue to rise over the next couple of years.
According to RP Data-Rismark, the average price of a home rose by 5.9 per cent across the country in the seven months to the end of July. The researcher says the growth in the market is widespread, taking in expensive suburbs as well as first-home buyer territory.
BIS Shrapnel expects prices to keep going up but to move slowly until unemployment peaks early in the 2010/11 financial year. It forecasts a return to double-digit growth in residential property prices in the 2011/12 financial year.
The group is forecasting Sydney house prices will increase by a total of 19 per cent over the three years to June 2012. Melbourne and Adelaide house prices will increase at the same rate over that period.
Canberra will grow by 17 per cent, Brisbane by 16 per cent, Gold Coast 14 per cent, Perth by 12 per cent and Darwin by 11 per cent.
In a market review published earlier this month, McGrath Real Estate chief executive John McGrath says: "I believe this is the beginning of a long housing growth period to match the economic recovery. Property as an asset class has been less impacted by the global financial crisis compared to equities and the safety of bricks and mortar has definitely proven a winner in the minds of property investors.
"The likelihood of rate rises in the short term, along with the upcoming expiry of the first home owners boost, will take some of the sting out of the sub-$600,000 market but this should be balanced by an increase in investor interest.
"The upper-end recovery is well under way and will continue as the economy stabilises.
"Rental yields remain high at an average of 5.3 per cent for apartments and 4.4 per cent for houses. I expect rents to increase by around 5 per cent during calendar 2010."
With current borrowing rates close to rental yields, borrowers have the option of using a positive or negative gearing strategy to finance property investment. However, all expectations are that rates will start to rise early next year, if not before.
A popular option with investors is a line of credit, which allows them to draw on an agreed limit and use the funds for a variety of purposes. Some line-of-credit loans allow borrowers to create a sub-account for easier management of their investments. The accompanying InfoChoice table shows there are competitive offerings in that segment of the market.
While there has not been much product development during the global financial crisis, ANZ has added a new investor finance option called Portfolio, which is a facility that allows property investors to manage a number of sub-accounts under one umbrella. The facility provides access to the bank's Equity Manager line of credit and other loans.
It also allows borrowers to open as many as 12 sub-accounts under a global limit, with different payment conditions (fixed, variable, interest only) and in different borrower names (such as a spouse or business partner).
According to ANZ's market research, more than half of people who invest in residential property have two or more properties.
The tax position
Negative gearing comes about when the interest paid on funds borrowed to finance an investment exceeds the income from the investment. The excess of interest over income produces a tax loss, which can be offset against other income.
The interest cost reduces taxable income. If the investor has a negatively geared rental property, the tax position is calculated as taxable salary plus rental income less the interest deduction.
According to Taxpayers Australia's Taxpayers' Guide, there is no limit to deductions allowed on interest on borrowings as long as the investment is classified as a passive investment, a category that includes property, shares and financial instruments.
In theory, investors can go for broke and use gearing to create large tax losses. In practice, the decision whether to use negative or positive gearing depends on investors' cash flow position -- whether they have plenty of income from other sources and can make use of the tax losses or they need the income from the investment property to live on.
A principal of Hudson Gore Financial Services in Sydney, Paul Hudson, says he always insists investors going into a negative-gearing strategy have some spare cash flow. If cash is tight, negative gearing is not for them.
The availability of redraw and line-of-credit facilities has complicated the deductibility issue a little. If the borrower uses the redraw facility to finance the purchase of an asset that is not income-producing (such as a car), that part of the interest cannot be claimed.
Taxpayers Australia says a common mistake is to overstate claims for interest on loans when part of the loan has been used for non-income producing purposes.
If the purpose of the redraw was to fund repairs to a rental property, then the extra interest could be claimed as a deduction.
Some rental property deductions, not related to the borrowing, that investors sometimes fail to claim are travel expenses involved in inspecting the property (one you own, not one you are considering), and costs involved in collecting rent, showing prospective tenants through the property and dealing with the agent.
Taxpayers Australia says investors often make the mistake of claiming the full cost incurred in travelling to inspect rental property when part of the purpose of the travel is to have a holiday.
Another common mistake is claiming deductions for a rental property during periods when friends are using the property free of charge. Deductions are not allowed during periods of free occupation.
Time for some fancy footwork - Credit card providers have special tactics to extract maximum profits from consumers.
Dec 15, 2009
Growing consumer confidence at a time of rising interest rates could prove an unfortunate mix if Australians resume their love affair with credit.
There has been a lot of talk about the growth of debit cards (the plastic that uses your own money) at the expense of credit cards in the past year amid the global financial crisis.
But analysts say debit cards, while increasingly popular, are being used for smaller transactions and credit cards still dominate in dollar terms. Reserve Bank statistics released last week show credit card debt is actually higher than a year ago. According to the RBA, there were 14.4 million credit and charge cards out there in August and we used them for $18.9 billion in purchases and cash advances.
That left us with a total balance of $44.9 billion, or an average of $3131 each. Of that, $32.5 billion - or 72 per cent - was accruing interest because it wasn't paid off in full by the due date.
In the same month a year ago - just before the collapse of Lehman Brothers triggered a full-scale crisis - we had 14.1 million cards and had accumulated $17.8 billion in purchases and cash advances. The total card balance was $44 billion - or an average of $3127 - of which 71 per cent was accruing interest.
"To date, credit card spending hasn't declined and that's what sets Australia apart from most countries," says Mike Ebstein, principal of MWE Consulting and a former senior manager of ANZ Bank's credit cards business. "The growth has slowed but [spending] has still grown."
Still, there's evidence card holders have been taking their debt more seriously - in nine of the past 12 months, we paid off more than we spent, according to RBA data.
The head of external relations for credit reporting group Veda Advantage, Chris Gration, says its research showed a big shift towards saving late last year but that trend had reversed a little in the follow-up debt study it released earlier this month.
Certainly, this month's Westpac-Melbourne Institute Index of Consumer Sentiment is more upbeat. The main index is up 1.7 per cent, even after the Reserve Bank's decision to lift its official cash rate by 0.25 of a percentage point.
The chief economist at Westpac, Bill Evans, isn't sure the good mood will feed through to actual spending, however. While the "expectations" part of the index is at its highest since the survey began in 1975, the survey found sentiment about "current" conditions remains well below its peak.
"Being optimistic about the future but still somewhat constrained financially may mean consumers remain more cautious," Evans says.
If you're an optimist and you're thinking about hitting the plastic again, here's 10 things you should know about your credit card:
Credit card rates move in mysterious ways
The chief executive at InfoChoice, Shaun Cornelius, says that on the way up card rates generally increase by more than the RBA's official rate and on the way down they decrease by less than the RBA rate.
When rates rose in early 2008, the RBA moved 0.5 of a percentage point higher in two bites but low-rate cards snuck up 0.55 of a point and standard cards about 1 percentage point.
Over the past year, the RBA shaved a whopping 4.25 percentage points off the cash rate but low-rate cards fell a measly 0.25 of a percentage point and standard cards just 1.60 percentage points, according to InfoChoice.
After last month's official rate rise - which many cards followed - the RBA's cash rate is 3.5 percentage points below where it was in January 2008 but standard credit card rates are only 0.65 of a percentage point lower and low-rate cards are actually 0.2 of a percentage point higher than they were.
Financial markets believe the RBA is now on the path to restoring its cash rate to about 5 per cent.
"If the RBA increases rates by 2 per cent in the next 12 months we could see low-rate cards going from 11.95 per cent to around 14.95 per cent," Cornelius says.
InfoChoice says there has been a dramatic increase in the gap between the RBA cash rate and the average low-rate card - the sort of card you should be using if you don't pay your balance in full each month - from 5 per cent in early 2008 to a margin of 9 per cent now.
"As the economy improves and rates increase, we'd like to see this margin reduce back to around 5 per cent," Cornelius says.
"The extra 4 per cent margin the banks have extracted could be costing Australians as much as $1 billion in extra interest."
One card can have
different interest rates
InfoChoice also warns that credit card providers are increasingly inclined to charge different rates on the one card, with very high rates applying to cash advances. While the rate that's advertised will be the normal rate for straight purchases, a significantly higher rate may be charged for cash - 29.49 per cent in the case of GE's Money GO MasterCard.
In the accompanying table of lowest-rate cards, BankWest is No. 2 with an attractive purchase rate of 9.99 per cent but the rate more than doubles to 20.49 per cent for cash advances.
And, remember, while a standard card may offer an interest-free period, it usually won't apply to cash advances. In most cases you'll pay interest on an advance from the time you take the cash. There may also be a "withdrawal" fee.
Be aware, too, that paying a bill using BPay can be regarded as a cash advance rather than a purchase.
Balance transfers can have
a sting in the tail
If you're concerned about rates, transferring your existing debt to a card that has a low, even zero per cent, introductory rate might be tempting.
But the senior finance writer at Choice, Alan Dooley, says in his new book, Recession-Proof Your Finances (Choice Books, $26.95), that there are traps for the unwary.
For instance, it might be stipulated that any new purchases - as opposed to the debt you've transferred - will attract interest at a high, standard rate, not the discount rate. Also, any repayments may be applied last to the more expensive part of your debt.
Late-payment fees apply even during the six-month interest-free period, Dooley says.
Late payments are costly
Dooley says many card providers use "sly" tactics to extract maximum interest from people who pay their bill late, or not in full.
Apart from straight-out late-payment fees - perhaps $30 - they may cancel your interest-free days on new purchases if you don't pay your previous balance in full by the due date.
"When you pay some of the bill on time [but not the full bill] they'll charge daily interest backdated to when the original purchase was made or when it hit your account," Dooley says.
The minimum repayment has
little to do with clearing debt
Minimum repayment levels vary from card to card, ranging from 1.5 per cent to 5 per cent a month but most commonly 2 per cent.
According to the Australian Securities and Investments Commission credit card calculator (at fido.gov.au), if you pay just the minimum 2 per cent each month on a $10,000 credit card debt - and don't spend any more - it will take 62 years and 8 months to clear the debt, at the cost of $32,457 in interest.
Make your minimum $250 instead of $200, though, and you'll pay the card off in five years and four months.
Surcharges can mount up,
particularly online
Merchants can apply a surcharge to cover the fees they're charged by card providers but must declare this upfront.
However, Choice says airlines in particular are slugging people with hefty credit card booking fees "at levels higher than can be justified". Qantas charges $7.70 for credit card payment for a domestic or New Zealand flight and $25 for all other international tickets, while Tiger imposes a credit card "convenience fee" of $6 a passenger.
Choice says the practice hits cheaper fares and internet specials disproportionately because it's a flat fee, not a percentage. Use a debit card to avoid these fees.
Cancelling credit cards doesn't necessarily improve your credit report.
It's true that having fewer cards can make you more creditworthy but Veda Advantage says it depends on how you go about cancelling existing cards.
If you pay off a card using your own money before cancelling it, that will help your credit score at the bank you had the card with, though it won't necessarily show up on your full credit report, Veda's general manager, Russell Evans, says.
"However, if you borrow money to pay off your credit card debt, your credit score won't improve and your credit report is likely to show the [loan] inquiry - making it harder to get [more] credit."
If you don't sign your card,
you're not protected
In the US, some card holders have started to promote the idea that if you don't sign your card no one can forge your signature. But a spokeswoman for the local arm of Visa International says you have an obligation to sign your card because the signature is a form of verification. "If the card holder doesn't sign the signature panel, they won't be protected in the case of unauthorised use of the card," she says. A MasterCard spokesman says merchants would consider an unsigned card invalid.
There's no such thing as
a minimum purchase
Occasionally, stores will display a sign saying that credit cards won't be accepted for purchases below a certain amount. But Visa and MasterCard say it's a violation of their rules to specify a minimum transaction amount.
Talk to the store manager and, if necessary, go to your card issuer. Amex says the merchant has some leeway but the majority "understand that they'll lose sales with these restrictions".
Read the fine print on purchase warranties and travel insurance
It's a misconception that using a credit card automatically bestows a purchase warranty. Warranties aren't a standard feature on all cards; they are more likely to be linked to premium cards.
MasterCard says if you've paid for a product but you haven't received it or it's faulty, yes, you should ask your card provider whether you are eligible for a refund - making sure you act within the specified timeframe for disputes.
But the head of cards and retail alliances at HSBC Bank Australia, Keith Lewis, says that when it comes to full purchase protection insurance or extended warranties, "the cover provided differs between card types as well as issuers, so it's important to check the specific terms and conditions that apply to your card".
The same goes for travel insurance. The Financial Ombudsman Service says that it's crucial to obtain a copy of the
policy wording and read it carefully to see that it meets your particular needs - such as covering existing medical conditions.
You also need to determine you have done everything to ensure the cover is activated. For instance, you may need to pay all or a specified amount of your travel costs with your card to qualify.
KEY POINTS
Consumer confidence is building and credit card debt is higher.
But official rates are tipped to rise a further 2 percentage points.
And credit card rate rises usually outstrip official rates.
Card providers held back much of last year's rate cuts.
Banks in battle for deposit cash - THERE is some fierce competition going on between lenders in the deposit market and consumers are the big winners.
Dec 15, 2009
An industry-wide shift has caused lenders to price deposits well above the Reserve Bank's cash rate in a bid to secure retail funding instead of costly wholesale capital.
Australia's $1.3 trillion deposit market became a relatively cheap funding source for the banks as the cost of wholesale funding spiked during the credit crisis.
Consumers with savings are usually happy to have relationships with multiple banks, so check websites such as ratecity.com.au, infochoice.com.au and canstarcannex.com.au to find the best deal.
Analysis of the regulator's monthly banking statistics shows NAB controls $77.8 billion in household deposits, ANZ $55.7 billion, CBA $50.3 billion and Westpac $44.7 billion at the end of October 2009.
With $25,000 in a term-deposit account for 12 months, UBank backed by NAB is offering 6.81 per cent, paid annually, while both Queensland Teachers' Credit Union and Westpac are offering a rate of 6.8 per cent.
The frequency of the interest payments becomes more and more significant with longer term deposits.
Tony Meredith, executive manager of deposits at Suncorp, says for the 60 per cent of Australians who don't have a mortgage, there's never been a better time to be a saver.
"Term deposits give people a guaranteed rate with their cash on deposit," he says.
"The more the RBA keeps raising the cash rate, then more increases to rates will come but by locking in at 6.8 per cent now you can get a big differential over the cash rate instead of waiting to see if they move again in February."
RateCity chief executive Damian Smith says for the first time, online savings accounts are offering interest rates above the standard variable mortgage rate.
"It has never happened before as far as we can tell," he says. "The banks views this as a fair way of getting affordable funding and they have a chance of getting them into other products where they can make more money off customers."
UBank has been the most aggressive, offering 5.46 per cent for its online savings, compared with the historical pioneer in this area, ING Direct, at 4.25 per cent.
"For UBank, it is a deliberate tactic to get market share and they have the big advantage of having the backing of NAB," Smith says.
Queensland Teachers' Credit Union chief executive Mike Murphy says term deposits and online savings account rates may rise after the new year if the Reserve Bank raises the cash rate again.
Small lenders to make a resurgence - SMALLER lenders are expected to make a comeback in the mortgage market in 2010, providing increased competition to the major banks, according to a leading mortage brokerage.
Dec 14, 2009
Loan Market Group executive chairman Sam White said more competition in the mortgage market would be of enormous benefit to homeowners with interest rates on the rise.
"Our prediction is in 2010 we'll start to see more competition come into the Australian mortgage market and that will be great news for all people who are looking at buying a home," Mr White said.
"There are a number of challenges facing the market and foremost is the concentration of power with the big four banks. But I think we will start to see more competition coming through next year."
Loan Market Group chief operating officer Dean Rushton said home owners were obviously concerned about where the Reserve Bank planned to take official rates, and they were also worried about some of the major banks refusing to guarantee future rate rises won't exceed those implemented by the central bank.
Mr Rushton said the major banks were likely to continue to do this due to increasing funding costs.
He said in the current economic climate it was beneficial for home owners to have a "health check" conducted on their mortgage.
"A mortgage broker is well placed to review an individual home loan and determine whether any changes are needed," he said.
Mr Rushton said another strategy for mortgage holders was to negotiate a lower variable rate now on an existing home loan with their lender.
"You still can negotiate a mortgage rate that is anything from 0.70 per cent lower or more for large size loans."
Lenders get clingy to keep customers-Many borrowers are now shopping around for a better deal and many will find their current lender is not so keen to make it easy for them to switch. In Touch of Finance we do the shopping for you
Dec 14, 2009
Kevin Sherman, managing director of a direct lender, which is funded by ING Bank, says he's seen many refinance deals delayed because the current lender does all they can to stall and disrupt the process of moving.
"For many borrowers, their current loan is no longer competitive and, as such, there is a huge incentive for them to switch lenders," he says.
"When shopping around borrowers should be aware of common marketing approaches employed by many lenders to disguise the true cost of a home loan as well as techniques employed by their current lender to delay the process."
Sherman says many lenders try not to action the discharge request form when received from the customer, but to instead put the customer into a retention program.
"They can wait up to two weeks to contact them and when they do, its only to try and convince them to stay," he says.
"This can hold up settlement and keep them in an expensive home loan for longer.
"Phone your current lender once the discharge form has been submitted. Request that they discharge your mortgage immediately and take you out of any retention programs."
Many lenders have multiple phone numbers, fax numbers and online forms. "If you use any incorrectly, you may never get resolution for your issue," Sherman says.
"One of the Big Four banks has multiple fax numbers for existing customers - one for discharges specifically and one for everything else. Faxing the discharge form to the wrong fax number essentially means the discharge request is ignored." The solution is to walk into your nearest branch and physically hand in the papers.
"No one can ignore you if you're standing in front of them. Also, phone regularly for updates just to be sure," Sherman says.
He says some brokers and lenders may gloss over the fees involved in applying for a loan, resulting in the customer not being fully aware of the costs.
"It's only after an application has been approved that many people discover that fees such as valuation and documentation costs may apply and by then it's too late to avoid them."
Sherman also warns people not to believe the lie that once formal approval has been given on a loan, the borrowers are committed to proceed.
Consumer confidence in Australia falls modestly after three interest rate rises - AN index of consumer sentiment in Australia fell 3.8 per cent in December from November, a surprisingly modest decline given rising interest rates, an economist said.
Dec 11, 2009
The index fell to 113.8 points in December in seasonally adjusted terms from 118.3 points in November, compilers Westpac and the Melbourne Institute said.
In annual terms, the consumer sentiment index rose 23.7 per cent in December in seasonally adjusted terms. In trend terms, the index fell 1.5 per cent in December, contributing to a 30.2 per cent annual increase.
"This is a surprisingly modest fall in the index given recent developments on interest rates," said Westpac chief economist Bill Evans.
The fall comes after three consecutive increases in interest rates by the Reserve Bank of Australia. The central bank raised its cash rate target to 3.75 per cent from 3.0 per cent between October and December.
The pain being felt in the mortgage belt has been worsened after major banks announced last week they would raise interest rates by more than the RBA's hikes. The banks cited rising wholesale funding costs for the increases.
The standard variable mortgage rate has now increased to between 6.5 per cent and 6.75 per cent, compared with around 5.75 per cent as recently as September, Mr Evans said. Over that period, consumer sentiment has fallen by 4.7 per cent from its near record highs.
"A closer inspection of the components of the index shows that those folks holding a mortgage have responded much more negatively to the rate increases than those who are not holding a mortgage," Mr Evans said.
Confidence among those with a mortgage fell by 8.9 per cent while confidence of those who are renting actually increased, by 1.6 per cent, while those wholly owning their homes registered a fall of 4.1 per cent, according to the data.
Reserve Bank of Australia governor Glenn Stevens hinted last night that the widening of bank lending margins, if sustained over time, could limit interest rate increases by the central bank
"Policy will take into account these changes in margins," he said. RBA policy makers next meet in February.
Also today, the number of housing-finance approvals in Australia fell a seasonally adjusted 1.4 per cent in October from September, the Australian Bureau of Statistics said.
JP Morgan economist Helen Kevans said the drop in housing finance reflected the scaling back of government grants for first home buyers at the end of September.
Weakness in housing finance may persist as interest rates rise and government stimulus efforts are further reduced over time, she said.
With house prices climbing in recent months, "RBA officials probably will welcome a softening in demand for housing finance," she added.
In other official reports, Australia's trade deficit widened sharply in October on the back of a 3 per cent fall in exports.
The seasonally adjusted balance on trade in goods and services widened to a deficit of $2.38 billion in October from a deficit of $1.85bn in September, the ABS said.
Trade Minister Simon Crean said: "This is another reminder that Australia is not immune from the global economic downturn. But Australia has still weathered the economic storm better than almost any other advanced economy."
CEOs warn on jobs squeeze - THE fastest jobs growth in three years has signalled the peak in unemployment and sparked concerns among chief executives that Australia will again be facing acute labour shortages with competition from government stimulus spen
Dec 11, 2009
The jobless rate fell to 5.7 per cent in November while 100,000 new jobs, most of them full-time, had been generated in the past three months.
The strength of the jobs market means the Reserve Bank is set to lift interest rates by a further 0.25 percentage points at its next meeting in February. The prospect of unemployment falling below 5 per cent next year could force interest rates higher, particularly if wages start rising.
The ANU's Warwick McKibbin, who sits on the Reserve Bank board, repeated his warning that the government's stimulus spending was too large.
"It is a good idea to have a fiscal package in co-ordination with the world, but there was no point going above what the world was doing because all it was going to do was drive up the exchange rate and crowd out exports," Professor McKibbin told a Westpac forum.
The chairman of Woodside and the National Australia Bank, Michael Chaney, was among several senior executives to warn yesterday that this was a danger, particularly with demand from resource projects.
"There is a fair chance we will have the same shortage of labour in Western Australia this year as we did before the global financial crisis, which presents a lot of positives and negatives and needs to be managed carefully," he said.
"Tradespeople will be sucked up from the south into the north and there will be a lot of pressure on wages and salaries."
Addressing the Business Economists annual forum earlier this week, Treasury's chief economist, David Gruen, said there could be some localised pressure on skills from the government's stimulus spending, but there would still be idle resources through next year.
"We're looking at some slack in the economy for the next 18 months. This year, we've only had 0.6 per cent (GDP) growth. The trend rate is around 3 per cent so we have still got a gap to fill in."
The government is sticking to its forecast that unemployment will keep rising by a further 100,000 people to 6.75 per cent, with Employment Minister Julia Gillard yesterday saying the outlook would be much worse without the stimulus spending.
"The government will continue to invest in jobs and skills training to ensure that as the world emerges from the global recession Australia is well placed to meet the challenges," she said.
While the government justified the continued spending by pointing to the latest Treasury forecast of jobless numbers, economists believe the unemployment rate is now headed lower.
RBS senior economist Felicity Emmett said the labour market was in "fully fledged recovery".
"It seems increasingly likely that the jobless rate has peaked below 6 per cent, significantly lower than forecast . . . when job advertisements collapsed."
Unemployment is falling rapidly among men, dropping from 6.2 to 5.8 per cent since July. Men bore the brunt of the downturn, with their unemployment rate rising twice as far as women's.
Ms Emmett said the Reserve Bank would conclude from the fall in unemployment that there was a lot less spare capacity in the economy than earlier thought.
The government will be spending about $10 billion on schools projects and other infrastructure in the first half of next year and about $6bn in the second half.
Tony Abbott said the good performance in Australia's labour market was due to the reforms of the Howard government rather than the Rudd government's stimulus spending.
"It's actually the Howard government's saving, not the Rudd government's spending, which has got us through the global financial crisis," the Opposition Leader said. Opposition Treasury spokesman Joe Hockey said the government's spending could mean more jobless. "If the Rudd government continues to spend the amount of money that it is spending at the moment, it will put pressure on interest rates and that may well increase the unemployment rate."
All the jobs growth in November was full-time, while 71 per cent of the jobs created in the past three months were full-time positions.
The revival has been strongest in Victoria where the number of jobless has fallen from 6.2 per cent in August to 5.4 per cent. NSW's unemployment rate of 6 per cent has remained fairly stable while Queensland was slightly above the October level at 6.1 per cent.
The number of jobless in South Australia rose from 5.3 to 5.5 per cent, and in Western Australia from 5 to 5.2 per cent. Tasmania was steady at 5.4 per cent.
A beautiful set of numbers - really.. Paul Keating's "beautiful set of numbers" has achieved cliché status, but when the cliché fits: today's labor force statistics are a beautiful set of numbers.
Dec 11, 2009
Keating's phrase has certainly kicked on but what's generally forgotten is that he coined it in 1990 in reference to the 1989 December quarter accounts - numbers that were a last hurrah as Australia dropped into a miserable two-year recession.
Thus today's indication of employment strength is considerably more deserving than the original set. May they not be jinxed by association.
And, yet again, the official figures have shown the commentariat have no feeling for what's been happening in the workforce - when it comes to unemployment, the consensus view's forecasting ability is about as good as a credit rating agency's.
The two key ABS graphs tell the real story: employment has rebounded strongly, unemployment is topping out. Further commentary on the numbers is made superfluous.
There has been much better guidance than the tipsters in the confidence of the wording used by the Reserve Bank governor in announcing last week's interest rate rise: the Australian economy is recovering very nicely indeed. My guess is that the RBA already had a pretty good sniff of the NAB's business conditions survey when they made their interest rate decision and is generally ahead of the ABS game on what the economy is up to. Market economists are left to play catch-up.
Catching up now is a wonderful demonstration of the gap between the real Australian economy and financial markets. Today's healthy rise in Australian employment, especially full-time employment, comes as the global financial markets suffer a few GFC aftershocks and a little dose of reality about the woeful outlook for much of the developed world.
Is it really any surprise that Dubai is in trouble, that Greece has had its credit rating reduced, Iceland is a basket case and Ireland not much better? Will it be any further surprise when other "developed" nations receive a downgrade from Moody's/S&P/Fitch? Indeed, why hasn't the UK already dropped a notch?
(One might wonder on that score if the agencies will be nobbled for the perceived greater good, the way they were in dealing with key entities during the worst of last year's crisis.)
After all the efforts to talk up the US economy, the reality is the US will be saddled with double-digit unemployment for years to come as it is forced to deal with a de-leveraging problem that so far has only been papered over.
Normal growth to return
Our markets react with the herd to the developed world's fits and starts, but the Australian economy is set for relatively normal growth in 2010 that will eventually filter through to corporate profitability and share prices.
What today's growth in jobs and aggregate hours worked underlines is both the success of our fiscal and monetary stimulus and our place in the emerging markets' economy, not the developed world's.
While Europe and North America contemplate a decade of limited policy options thanks to mountains of debt and high unemployment, Australia is showing signs of frivolousness - postal workers threatening industrial action despite wage rises of 8 per cent over two years, the ratbag West Australian end of the union movement flexing Pilbara muscle over six-figure salaries, $2.9 billion being waved around for a soccer tournament that claims a dubious $1.64 billion of "goodwill", sundry boards continuing to throw excessive amounts at the CEOs they hire, the New South Wales Government and so on.
These are all the pursuits of a very lucky country indeed. Never mind the shocks of the Old World - it is the growth of the new that continues to fuel and employ us.
Economists hail 'extraordinary' job surge - Australia's unemployment rate has fallen to 5.7 per cent, after the creation of 31,200 jobs in November.
Dec 11, 2009
Even better news was that full-time jobs made up most of the increase, with the Bureau of Statistics survey showing 30,800 full-time positions created, seasonally adjusted.
The rise in full-time employment also pushed the ABS measure of hours worked 0.9 per cent higher, after previous weakness when employers were cutting workers' hours rather than jobs.
Economists were, on average, expecting only 5,000 jobs to have been created during November, after an increase of more than 24,000 the previous month.
The consensus forecast was for the jobless rate to creep higher from 5.8 to 5.9 per cent, with expectations of a rising population outpacing job creation.
Unemployment peak
The result shocked economists, with even the two most optimistic analysts only forecasting the creation of 20,000 jobs.
"They really are extraordinarily good numbers. A big rise in the total number of jobs, they're all full-time jobs as well, and they're really spread right around Australia," Macquarie's senior economist, Brian Redican, told ABC News.
"I probably think the unemployment rate will peak below 6 per cent, so we probably already have seen the peak for the unemployment rate now."
The Australian dollar surged about half a US cent on the news to 91.63 US cents, as currency traders upped their expectations of further interest rate rises in response to this latest sign of economic recovery.
Adam Carr, a senior economist at ICAP, agrees the prospects for another rate hike in February have been strengthened by the fall in unemployment.
"In terms of the implications for the policy, I would say, despite commercial banks lifting rates in excess of the RBA, today's magnificent employment results keep February very much alive," he told Reuters.
"Still a long way to travel, but the RBA certainly won't be ruling out another 25 basis point hike in the February meeting."
State by state
The two largest states led the rise in employment, with Victoria responsible for the strongest jobs growth of about 24,000 positions and an even stronger rise in full-time work.
Its unemployment rate has fallen from a peak of 6.2 per cent in August to 5.4 per cent in November, while New South Wales also recorded a fall in unemployment from 6.1 per cent in October to 6 per cent in November.
New South Wales has now handed the dubious mantle of the highest state unemployment rate to Queensland (6.1 per cent), although the rate of joblessness also crept up slightly in South Australia and Western Australia last month.
Unemployment remained steady in Tasmania and in the ACT, while the Northern Territory recorded a small fall in the jobless rate.
Thorny issue for borrowers - During the next 12 months interest rates will continue to rise, so now is the time to get your mortgage in order.
Dec 10, 2009
Borrowers should prepare themselves for more interest rate rises in 2010. Most economists are predicting that the official cash rate - which went up to 3.75 per cent last week - will rise to 5 per cent and maybe higher during the course of the coming year. It is time to make sure the household finances are in order.
An interest rate analyst for Citigroup, Josh Williamson, says the Reserve Bank's expectation is that Australian economic growth will return to its long-term average growth rate of 3 per cent or more next year and, in such circumstances, the RBA will move rates back to what it considers a "neutral" setting of 5 per cent or more.
Citi is forecasting that the Australian economy will grow 3.3 per cent next year, rising to a growth rate of 3.4 per cent in 2011. It forecasts that the Reserve Bank's official cash rate will be 4.25 per cent by the end of the March quarter next year and is on track to reach 5.5 per cent by the end of the year.
Lenders will match those changes to official cash rates and may increase rates further to recoup some of their higher funding costs, as Westpac did last week.
Rates have gone up 0.75 of a per cent since October. For a borrower with a $250,000 loan that represents an increase in monthly payments of about $120 a month and for a borrower with a $500,000 loan the increase is about $230. If rates go up another 1 per cent, those repayments will increase another $159 and $320 respectively.
According to the latest Reserve Bank statement on monetary policy, households have done a good job in the past year of strengthening their balance sheets. They have used government handouts to reduce debt and increase savings, putting them in a good position to cope with rising interest rates.
The RBA says many households with mortgages have reduced their level of debt by maintaining the level of their repayments when interest rates declined. "The faster pay-down of mortgage debt reduces the risk of borrowers getting into financial difficulty," it says.
The joint head of lending at Centric Lending Services, Sheyne Walsh, says borrowers should be building a buffer by making extra payments on the loan or putting some extra money into a savings account. They can draw on that buffer if things get tight.
Walsh recommends that borrowers calculate the level at which interest rates would start to have an impact on the household budget and then work out a plan for moving from variable to fixed if rates look like getting to that level.
Very few borrowers have chosen fixed-rate home loans in recent months, despite the Reserve Bank's move in October to start increasing the official cash rate from its emergency setting. Borrowers came to the same conclusion as many interest-rate commentators that the gap between fixed and variable rates was so wide that a move to a fixed rate would end up costing more.
Only 2.6 per cent of the home loans written by Mortgage Choice brokers in October were on fixed rates, down from 4.6 per cent in September.
"The majority of Australians are choosing to ride out the rate rises," the corporate affairs manager at Mortgage Choice, Kristy Sheppard, says.
According to the Mortgage Choice data, the most popular type of mortgage is a basic variable rate loan, which made up 45.6 per cent of home loans written by the company's brokers in October. Standard variable loans made up 31.9 per cent of the total, special variable (with introductory rates) made up 14.6 per cent and line of credit 5 per cent.
The preference for basic over standard variable rates is understandable, given the desire to keep mortgage interest costs low and pay off as much principal as possible. But it is a little surprising, given recent research argues that standard variables discounted as part of a home loan package are a better option.
In August Canstar Cannex reported package discounts of between 0.5 per cent and 0.7 of a per cent, combined with savings on monthly transaction fees and annual credit card fees, were a good deal.
The chief executive of Mortgage Choice, Michael Russell, says the home loan market is getting competitive again, after being dominated by the big banks for more than a year.
Lenders that are getting a bigger share of Mortgage Choice settlements are mostly second-tier banks, including St George, Bankwest, Suncorp, ING Direct and AMP Banking. "Those groups have been aggressive around pricing," Russell says.
Mortgage Choice has put some new lenders on its panel this year including Liberty Financial. Russell says Liberty is offering what it calls near-prime loans. "With the tightening of lending criteria, some banks won't lend to people who have a credit file entry for a late power or telco bill payment," he says. "Liberty is calling those borrowers near-prime."
Sales near $1b mark - SALES of commercial property in Melbourne's CBD are approaching $1 billion this year - more than double the level of Sydney - mainly due to active private investors.
Dec 10, 2009
Office sales in Melbourne for buildings valued at more than $10 million have reached about $998 million, compared with Sydney's $444 million, according to Jones Lang LaSalle.
The company's Victorian managing director, Andrew Wood, said sales were particularly strong for properties in the $30 million to $50 million bracket.
Among the buildings sold by JLL were 303 Collins Street for $56 million, with annual income of $5.7 million and yield of 10.17 per cent; 100 Leicester Street, Carlton ($29.1 million); 120 Harbour Esplanade ($33 million), with income of $2.9 million and 8.6 per cent yield; and 350 Collins Street ($52.3 million), with income of $5.1 million and a 9.8 per cent yield.
CBRE had the biggest office sale for the year - $166.5 million for 15 William Street. Colliers International sold 215 Spring Street for $59 million while Knight Frank sold 522 Flinders Lane for $38 million.
Mr Wood said several factors were contributing to Melbourne's high turnover. ''Many institutional funds are holding the major trophy assets and most of these are in Sydney,'' he said. Private buyers had been seeking the $50-$60 million category, which was one of Melbourne's strengths.
''Private investors, including many off-shore groups, have been active in a time when institutions are out of the market,'' he said. Melbourne had 125,500 square metres of new office space in two big developments come on stream in the September quarter - the ANZ headquarters in Docklands and Southern Cross 2 in Bourke Street. But the vacancy rate only increased to 6.6 per cent from 5.9 per cent in the second quarter.
Mr Wood said vacancy rates remained well below record 20 per cent levels in the early 1990s, with limited risk of over-supply.
JLL's director of commercial leasing in Victoria, Stuart Colquhoun, said relatively stable rents were expected to continue for the next six months as the backfill supply entered the market. ''Overall, most tenants remain cautious, and are slow at making decisions unless confronted with competition,'' he said.
Low rates popular but negligent - THE Reserve Bank has now increased its official cash rate three times, in consecutive months, to 3.75 per cent.
Dec 10, 2009
Although still very low by historical standards - apart from the nine months between February and November this year, it is the lowest cash rate since 1967 - the Reserve Bank nonetheless views the cumulative increase in interest rates since October as ''material''.
That the Reserve Bank has been willing to increase interest rates ''materially'' over the past three months underscores just how well the economy has weathered what I increasingly think is best understood as the ''North Atlantic'' (as opposed to global) financial crisis, compared with other advanced economies and relative to what was widely expected to have happened here as recently as six months ago.
And yet it is precisely this point that is most often missed in the reaction of some business groups and politicians to the Reserve Bank's moves, which seem to be based on the premise that almost every increase in interest rates is a bad thing, irrespective of the context in which it occurs.
There are only two ways that interest rates could have remained at the levels to which they were lowered by April this year. One would have been if the economy actually had fared as badly as had been widely expected at that time - that is, if we actually had experienced consecutive quarters of negative real GDP growth, and if the unemployment rate actually had risen above 6 per cent and was on track towards the budget-time forecast of a peak of 8.5 per cent.
The fact that these forecasts turned out to be wrong reflects, in part, the success of the measures adopted by the Government and the Reserve Bank to cushion the impact of the global recession and the sharp downturns in Australian business and consumer confidence as the North Atlantic financial crisis entered its darkest phase, following the collapse of Lehman Brothers in mid-September last year.
Yet the reaction of some business groups and politicians to the recent increases in rates almost suggests that they would have preferred that the economy had experienced a deeper or more persistent downturn, or that the Government (in particular) had done less to counter it, merely to allow interest rates to remain at their post-April levels. This is, as I've argued in these columns before, to elevate interest rates from being a tool of economic policy to an objective of it.
The other possible way in which interest rates could have remained at the lows attained earlier this year would have been if the Reserve Bank had chosen to keep them there in the face of all the evidence suggesting that there was no longer any need to do so. There's no doubt that this would have been popular but it would also have been highly dangerous from all but the most short-term of perspectives.
One of the main causes of the North Atlantic financial crisis was that central banks in the big North Atlantic economies left interest rates too low for too long after the milder-than-expected recessions that they experienced in the early years of this decade, after the ''tech wreck'' of 2000 and the terrorist attacks of September 2001.
To have kept Australian interest rates at ''emergency levels'' after the most recent emergency had passed would have been to expose Australia to the same risks in the years ahead. It would have been the equivalent of continuing to take paracetamol long after the pain had ceased to persist.
Where interest rates are heading to from here remains a matter of considerable uncertainty, although the Reserve Bank's own statements suggest that, over time, monetary policy settings are likely to continue moving gradually towards ''neutral'', that is, to a point where they are neither stimulating nor restraining growth in economic activity.
In the past, before the onset of the financial crisis, the Reserve Bank had traditionally regarded an official cash rate of between 5 and 6 per cent as being consistent with ''neutral'' monetary policy.
However, since the onset of the financial crisis, the margin or ''spread'' between the Reserve Bank's official cash rate and the interest rates that borrowers are paying has widened, by about 1.25 percentage points in the case of mortgage rates and by almost 2.25 percentage points in the case of small business overdraft rates.
These spreads seem unlikely to narrow soon - as last week's decision by three of the four big banks to increase their mortgage rates by more than the increase in the official cash rate demonstrates - given the lessening of competition in the lending market that has occurred since the onset of the financial crisis, the desire of regulators and the banks themselves to lessen their reliance on ''wholesale'' funding (hence the need to raise more expensive deposits), and the likely impact of new capital and liquidity regulations that local banks, in company with banks around the world, will face in the aftermath of the financial crisis.
Hence, whereas an official cash rate in the range of 5-6 per cent would (before the onset of the financial crisis) have implied a standard variable mortgage rate of 6.75-7.75 per cent, and a small business overdraft rate of about 9-10 per cent, in the post-crisis world, a cash rate in the same range would imply mortgage rates of about 8-9 per cent and small business overdraft rates of about 11.5-12.5 per cent.
Other things being equal, therefore, the level of the official cash rate at which monetary policy is neither stimulating nor restraining growth in economic activity is almost certainly now somewhat lower than it was before the onset of the financial crisis in mid-2007.
''Other things'' may of course not be equal: there is an argument that suggests that, to the extent that the Australian economy's potential growth rate has been boosted by our stepped-up rate of population growth and by the huge increase in capital investment associated with the mining boom, the level of interest rates consistent with ''neutral'' monetary policy could be higher than it would be otherwise.
However, the ''bottom line'' is that ''neutral'' for monetary policy is now more likely to imply an official cash rate in the 4-5 per cent range. And with the official cash rate now quite close to the lower end of that range, the Reserve Bank is likely to move more gradually in the first half of next year.
Job seekers to gain upper hand despite unemployment - OB hunters could be back in the driver's seat next year despite predictions that unemployment will continue to rise until mid-2010, according to one of Australia's largest recruitment firms.
Dec 10, 2009
Hays managing director Nigel Heap has warned employers that their workers are restless and that areas of skills shortage are starting to appear.
"Financial and commercial analysts, estimators, business development managers and technical IT specialists are some examples," Mr Heap said.
ANZ figures out this week showed newspaper job ads were up 8.3 per cent in November and internet job ads were up five per cent.
Yet economists expect Australia's unemployment rate of 5.8 per cent to rise when official figures are released today.
The Australian Business Economists (ABE) annual forecasting survey expects the unemployment rate to peak at 6.2 per cent in 2010, shy of the Government's 6.75 per cent prediction.
Mr Heap is confident that the job market will stage a turn around in 2010 giving candidates much greater options to move up in their organisation or out to another job.
His list of "hot" issues for 2010 are:
Growth in new jobs
"Employers tell us they sense new optimism in the market. They are thinking of long-term strategies to strengthen their business and this includes planning for recruitment during 2010."
Restless workers will move
"Following a particularly tough year, we will see a significant increase in the number of employed people changing jobs as their confidence grows,' Mr Heap said. He said many job shoppers will be 'passive job seekers' - those in jobs quietly looking out for a new opportunity."
Return of the skills shortage
"As we emerge from the economic downturn, the challenge for talent will once again rear its head. Already there are shortages of particular skills. Financial and Commercial Analysts, Estimators, Business Development Managers and technical IT specialists are some examples."
Good and bad employers sorted
"Employees were front-row spectators to their company's GFC response. During the downturn, the 'good' employers maintained their focus on their employees' career development and staff relations. These companies are well-placed to attract the top talent in 2010."
Strong temp market will continue
This risk-free solution for clearing backlogs or helping with project work will remain popular with employers during 2010.
Mr Heap said temping or contracting does offer some advantages for candidates too such as a variety of assignments and organisations "while adding skills and experience to your CV."
Return of candidate bargaining power
"Companies tightened the purse strings in 2009," Mr Heap said.
Many employers leveraged their sudden power in the job market by raising the bar on what skills and qualifications they wanted as well as hiring talented people on salaries lower than would be the case in the good times.
"As recruiting activity picks up, these changes need to be remedied," he said.
Employers need to communicate with staff
"The renewed focus on open and honest communication between management and employees is a positive change of 2009 that we hope will remain," Mr Heap said.
"Employees still want to be reassured that their company is performing. They have become genuinely interested in the senior management team and their decisions."
Forced career change permanent for some
Mr Heap said that redundancies and the tight labour market meant many people took jobs they wouldn't normally consider.
He said the feedback from the market is that some workers are embracing a life of less work pressure and "do not intend to return to their old job now the market is picking up and vacancies are again available." Mr Heap expects this to continue in 2010.
Generation Y still hungry for more
"Prior to the GFC, Generation Y had only known a job market where there was a skills shortage," Mr Heap.
"The GFC was a reality check for this generation, and they have become more flexible (about the sort of work they will take). We expect to see an increase in turnover rates as this generation of candidates look for a new role to achieve their career development."
Future bank mergers 'a difficult ask' - The head of the competition watchdog has all but ruled out further mergers between major and regional banks in the wake of the global financial downturn.
Dec 09, 2009
The Australian Competition and Consumer Commission (ACCC) chairman, Graeme Samuel, says the banking and finance market in Australia has changed significantly in the past year, and there is less competition.
Mr Samuel has told ABC1's Inside Business program any proposed mergers would be examined very critically, based on the existing and likely future competition.
"I think you would have to say that it would be a difficult ask to see any more of the regional banks moving into the fold of the major trading banks in light of the global financial crisis," he said.
"There's even a question that you might ask, that if Westpac were to seek to acquire St George today rather than prior to the global financial crisis, whether we'd have the same view as what we had back then."
Three of the four big banks have raised their home loan rates by more than the Reserve Bank's quarter of a percentage point increase last week.
The Sunday Telegraph has published analysis today claiming the Big Four banks take an extra $3,000 a year from average homeowners and credit card users because of the global financial crisis.
Mr Samuel argues that banks have been left with fewer competitors as foreign banks exit institutional lending and non-bank lenders leave the residential mortgages market.
"So there's less competition. Does that result in higher interest rates? Well, generally when you've got less competition, you'll have higher prices being charged."
But he says the only way the ACCC can act is to block mergers that are potentially anti-competive.
"One should never say never ... what we have said is we will examine these very critically in the context of both competition in the banking market today but more importantly the likely prognosis for competition into the forseeable future," he said.
The Federal Opposition says the Government should do more to increase competition among banks, so they keep their mortgage rates in line with the official interest rate rise.
Housing spokesman Scott Morrison says the Government should follow the lead of Canada and guarantee mortgages rather than the banks.
"What that does is create a level playing field for all of the providers of home loan finance," he said.
"As a result it meant the smaller banks were able to stay in the market which kept competition up and at the end of the day interest rates have also stayed lower. So there are policy alternatives. The government's way is not the only way."
Bank customers set to pay more: RBA - The head of the Reserve Bank has warned Australians will pay more to borrow money because of new rules being imposed in response to the global financial crisis.
Dec 09, 2009
In a speech squarely aimed at global regulators, Glenn Stevens criticised some of the key controls being planned for banks around the world.
And he questioned whether banks in countries such as Australia should be punished for the problems caused by banks overseas.
The audience was local, the target global. His message: don't fetter all banks because of the excesses of a few.
"The most egregious behaviour was mainly that of 30 or 40 large internationally active banks, none of them Australian," he said.
"But there are thousands of other banks in the world whose risk appetite didn't get out of control, that have remained solvent and that didn't need an injection of public capital to survive.
"So it will be sensible to ensure as far as we can, that the proposed measures act effectively to constrain the worst excesses of the group that were the problem without unnecessarily shackling all the other banks."
And Mr Stevens warned the tougher the regulation, the more costly banking will become, and ultimately borrowers will pay the price.
"Customers of financial institutions, that is depositors and borrowers, will also pay via higher spreads between what lenders pay for funds and what they charge for loans," he said.
In plain English, it will cost more to borrow money. Australia's top central banker is especially concerned about plans for one, global cap on the amount that banks can borrow against their assets in order to invest.
"On the leverage ratio I'm personally not actually persuaded of the intellectual basis of this," he said.
"It seems to me that it goes against the whole thrust of allocating capital against economic risk."
The committee imposing the new rules is based in Switzerland but Australia's bank regulator, APRA, joined the committee this year so perhaps Glenn Stevens thinks the noises from down under will make a difference.
But after hearing his speech, acting ANZ chief economist Warren Hogan was more fatalistic.
"I think the main message was that the cost of being a bank around the world is going up because there will be more regulation," Mr Hogan said.
"The costs will be passed on to consumers as it is in all businesses and that will present some challenges for monetary policy."
Such as what should the RBA do when lenders jack up interest rates by far more than the central bank.
A question posed by the chief economist at Westpac, which raised its mortgage rates this month by almost twice as much as the RBA.
"We saw last week where the banks raised their rates by more than the Reserve Bank move, you almost see that as taking some pressure of your need to continue to raise rates?" he asked.
"I'm interested to see Westpac asking this question," Mr Stevens answered.
"Policy will take into account these changes in margins, absolutely."
Room for mirth, even on the serious issues, and on the Reserve Bank boss's own forecasting record.
"I think at the beginning of the year I would not have expected to have the economy looking as good as it does," he said.
"I said we were in recession in April so I felt that things were going to turn out rather worse than they have but who's complaining? Not me."
Home rates 'to hit 8.5%' - LEADING economists have forecast a rebound in Australia's economic growth rate that will force another series of interest rate rises, adding at least $300 a month to the cost of servicing an average home loan by 2011.
Dec 09, 2009
A week after the Reserve Bank imposed its third official rate rise in as many months, a survey of economists has predicted a lot more pain ahead for Australian borrowers.
The economists expect that growth will rebound to 3.2 per cent next year, and that the Reserve Bank will respond by pushing up its cash rate from 3.75 per cent to 4.75 per cent, and then to 5.5 per cent in 2011.
These moves, if passed on in full, would lift Westpac's standard variable mortgage rate from 6.76 per cent to 7.76 and then 8.51 per cent.
National Australia Bank's would go from 6.49 per cent rate to 7.49 and then 8.24 per cent.
The extra monthly repayment on a $300,000 mortgage would amount to $190 next year and $340 by 2011.
But the predictions, contained in a survey of the executive committee of Australian Business Economists, may yet understate what borrowers face over the next couple of years.
Reserve Bank governor Glenn Stevens, speaking at the Australian Business Economists' annual forecasting conference, warned of higher rates still as banks widen their margins to comply with proposed new capital rules designed to make them safer.
''The intention, after all, is that lenders will operate with more capital against the risks they are taking,'' he said.
He said both borrowers and depositors of banks and other financial institutions would pay via higher ''spreads'' between what lenders pay for funds and what they charge for loans.
The proposed rules are outlined in a discussion paper sent to financial institutions by the Australian Prudential Regulation Authority. They are not yet in place and so cannot be used to justify Westpac's outsized 0.45 point rate rise last week.
Treasury executive director David Gruen told the conference the resilience of the economy had been underestimated in the May budget, but that without its $37 billion stimulus packages, Australia would have been in recession in the December, March and June quarters of the past financial year.
Responding to critics of the stimulus strategy, he said Australia had achieved a ''radically better outcome'' than other advanced countries through its actions.
Reserve governor warns of more mortgage rises - If thinking of fixing your home loan you can get the best rates from Touch of Finance
Dec 09, 2009
ECONOMISTS have forecast an upswing that will add more than $300 to the monthly cost of a mortgage as the Reserve Bank governor has spoken of the need for still higher ''spreads'' between what banks pay for funds and what they charge for loans.
The survey of the executive committee of Australian Business Economists has the Australian economy bouncing back to near-normal growth of 3.2 per cent next year.
As a result the economists expect the Reserve Bank to push up its cash rate from 3.75 per cent to 4.75 per cent next year and then to 5.50 per cent in 2011.
The move would lift Westpac's standard variable mortgage rate from 6.76 per cent to 7.76 and then 8.51 per cent. The National Australia's Bank's 6.49 per cent rate would climb to 7.49 and then 8.24 per cent.
The extra monthly repayment on a $300,000 mortgage would be $190 next year and $340 by 2011.
Speaking at the group's conference, the Reserve's governor, Glenn Stevens, warned of still higher mortgage rates as banks widened their margins to comply with proposed capital rules designed to make them safer.
''The intention, after all, is that lenders will operate with more capital against the risks they are taking,'' he said. ''Capital is not free; shareholders have to be induced to supply it and it will have to be paid for.
''Customers of financial institutions - depositors and borrowers - will also pay via higher spreads between what lenders pay for funds and what they charge for loans.''
The rules are outlined in a discussion paper sent to financial institutions by the Australian Prudential Regulation Authority. They are not yet in place, so do not help explain Westpac's outsized rise of 0.45 percentage points.
The Treasury executive director David Gruen said Treasury had underestimated the resilience of the economy in the May budget but without its $37 billion stimulus packages Australia would have been in recession in the December, March and June quarters of the past financial year.
Responding to critics who said Australia did not need to do as much as it did, he said by doing what it did, Australia achieved a ''radically better outcome'' than other advanced countries.
Job ad bounce points to sustained recovery - A 5.2 per cent rise in job ads during November suggests that employment is on the road to recovery.
Dec 08, 2009
While the bounce follows a fall of 1.7 per cent the month before, job ads are now 12.3 per cent above the low point reached in July this year.
ANZ's acting chief economist, Warren Hogan, says the lift in job ads reinforces recent positive data suggesting Australia's economic recovery is gathering pace.
"Total job advertisements are now well past their trough point, with four months of trend growth recorded since July," he noted in the report.
"The 8.3 per cent lift in newspaper job advertising in November is particularly encouraging, given that this sector tends to 'lead' overall job advertising trends. Eventually the improvement in job advertising will translate into higher employment growth."
There was an average of 140,658 jobs advertised in newspapers and on the internet last month, however this is 34.2 per cent lower than the number of ads this time last year.
Warren Hogan says unemployment is likely to continue creeping higher as weak jobs growth fails to keep up with a rapidly growing population.
"In the near term, we expect weak employment growth over the summer months," he cautioned.
"If total hours worked picks up pace, then more of these jobs will be full-time. But even with this jobs growth, continuing labour force growth will still see a further increase in the national unemployment rate, probably to around 6.5 per cent in mid-2010."
The official labour force figures from the Australian Bureau of Statistics will reveal Australia's latest unemployment rate when they are released this Thursday.
Question of trust - Mortgage funds are devising new rules for paying out investors to inject certainty into the market.
Dec 08, 2009
Mortgage trusts are starting to emerge from the state of limbo in which they have operated over the past 12 months, with some funds replacing their limited and uncertain facilities of the past year with permanent liquidity arrangements.
However, investors will have to decide whether to stay in funds that no longer offer withdrawal at call, as they did in the past. And investors in a large number of mortgage trusts are still waiting for their fund managers to work out a stable, long-term approach to managing liquidity risk in their funds. The pace of change has been slow.
The research company Lonsec has reviewed the sector and changed its ratings on a number of funds from "hold" to "recommended", having come to the view that the sector has stabilised. The underlying business of the trusts remains sound, unit prices have remained steady and there has been no loss of capital value.
Within the next couple of weeks Balmain Funds will issue a new prospectus for its $140 million Balmain Mortgage Trust. Units will be sold on a term basis, with investors having the options of 18- or 36-month terms.
Fund managers in the $20 billion market are taking different approaches.
In June, Australian Unity introduced a monthly redemption facility for its Mortgage Income Trust, with 1 per cent of the value of the fund available for redemption each month. In October it increased that amount to 2 per cent a month. Perpetual has settled on quarterly redemption for its Monthly Income fund, with all available cash to be allocated for redemption on a pro-rata basis. Some managers are yet to finalise their long-term arrangements.
A spokesman for Challenger, Stuart Barton, says the group is still working on a couple of options for the Challenger Howard Mortgage Trust. Colonial First State and ING Australia are still working with the interim arrangements they put in place last year.
In the past, investors in mortgage trusts had their money at call and would usually get their cash within a week of making a redemption request. The Australian Government's decision in October last year to provide a guarantee on deposits held with approved deposit-taking institutions contributed to a run on mortgage trusts and forced them to suspend or limit redemptions.
The industry acknowledged that once it had dealt with the immediate problem created by the financial crisis it would have to put liquidity rules in place that reflected the fact that the assets in which the funds invested - mortgages with three- to five-year terms - were not liquid assets.
The industry body, the Investment and Financial Services Association, put together a mortgage trust working group earlier this year with the aim of coming up with a single liquidity solution but managers could not agree on a single outcome. This means investors will have to get used to a variety of term structures and redemption arrangements.
The chief executive of Balmain Funds, John Thomas, says investors already in the fund will be given the choice of moving to a 36-month term or maintaining their current arrangement and being paid out over time.
Mortgage trusts have attracted two types of investors: retirees who are looking for regular income from a relatively low-risk asset and investors who are parking their cash. The funds will not be stabilised until the short-term investors are paid out.
Thomas says that when the Balmain Mortgage Trust last paid redemptions, in September, 22 per cent of unit holders applied to get money out. "Our estimate is that 65 to 70 per cent of existing unit holders will stay long term," he says.
Australian Unity's retail general manager, Adam Coughlan, says about 30 per cent to 40 per cent of the money in the group's Mortgage Income Trust is short-term and will be paid out over time. He says the group's aim is to increase the amount available for redemptions each month to 4 per cent.
The Perpetual group's executive for income and multi-sector funds, Richard Brandweiner, says retail investors making redemptions over the past year have already got back an average of 90 per cent of their balances.
In August, Lonsec restored investment-grade ratings to several funds, including Balmain Mortgage Trust, Perpetual Monthly Income, Challenger Howard Mortgage Trust, Australian Unity Mortgage Income, Axa Monthly Income and ING Mortgage No. 2.
The researcher's review says: "While the sector continues to face ongoing issues at the product and macro level impeding its relative investment attractiveness, there is now sufficient market stability to suggest that the most challenging period for these funds, responding to the large volume of investor outflows, may have passed."
Hardship relief
The Corporations Act requires the operator of a managed investment scheme to treat all investors equally, so if there are restrictions on redemptions, all investors are affected. However, the Australian Securities and Investments Commission provides relief for hardship cases.
Applicants for hardship relief must show they are in a position of severe financial or personal hardship or are permanently incapacitated.
The cap on hardship withdrawals is $100,000 a year and an investor can make four hardship withdrawals a year (up to the cap of $1 million).
In September, ASIC expanded the hardship grounds to include assistance for the beneficiary of a deceased estate, where the beneficiary is suffering hardship. The grounds also include people unemployed for at least three months and with no means of support apart from government assistance.
Personal hardship means you are unable to meet reasonable and immediate living expenses. Financial hardship means you have a binding financial obligation and you do not have capacity to meet the obligation.
Westpac chief stands by 45-point mortgage rise - WBC CEO Gail Kelly has defended the bank's rate rise, saying that pressure to increase prices across all forms of lending will remain while global credit markets are ravaged by the financial crisis
Dec 08, 2009
She also vowed not to use Westpac's business customers to subsidise mortgages just because housing loans happened to be in the political spotlight.
In her first public comments since triggering last week's rates controversy, Mrs Kelly said the ''new normal'' for banks and their customers would be an environment where funding and deposits remained scarce.
''All of us are going to pay more to borrow - be it banks or institutions, corporates or businesses or consumers. We're all going to pay more to borrow as a direct consequence of the global financial crisis,'' she said.
Westpac sparked a furore when it raised interest rates across its variable mortgages by 45 basis points, nearly twice the level of the Reserve Bank's 25-basis-point rate increase.
Mrs Kelly said the rate decision was a consequence of higher funding costs, with pricing for long-term wholesale funding running at about 10 times the rate before the credit crisis hit last year.
''These are difficult decisions, we take an awful lot of time and a great deal of thought to make these decisions, but it was made against this backdrop of this new environment and we wanted to run a sustainable business,'' she said.
She insisted that customers wouldn't feel pain given interest rates remained low relative to the economic cycle. ''No customers will lose their house as a result of this (rate decision),'' Mrs Kelly said.
Her comments came as the bank detailed a management overhaul. Retail banking boss Peter Hanlon will shift into a human resources role, in which he will oversee the merger with St George.
Rob Coombe, who heads the bank's BT Financial Group, will take charge of running Westpac's retail bank, which last year delivered about $2 billion in earnings.
In an update to investors, Westpac said the benefits of the merger were ahead of expectations, with the annual cost savings from the merger running about 19 per cent ahead of initial targets.
In a briefing to investors, Mrs Kelly said Westpac was aiming to win over customers through service and relationship banking rather than just on pricing. She noted that 70 per cent of bank customers valued service over pricing.
The pace of mortgage sales had grown and customer satisfaction rates improved over the past year, despite Westpac having one of the highest standard variable mortgage rates in the market, she said.
Mrs Kelly insisted that Westpac was competitive across some products, particularly on deposit accounts, where in some cases it was paying rates above the interest rate it was charging on mortgages.
Following last week's rate rise, Westpac has emerged with the highest standard variable mortgage at 6.76 per cent. ANZ follows on 6.66 per cent, and Commonwealth is on 6.61 per cent. NAB, which limited its interest rate rise to the move with official rates, is pricing standard variable mortgages at 6.49 per cent.
Despite coming under intense criticism from Treasurer Wayne Swan over the week, Mrs Kelly said she believed politicians understood the pressures behind the bank's decision on rates. ''They want us to be sustainable and open for business,'' she said.
Yuletide rush on homes in Melbourne and Sydney - HOMEBUYERS are shrugging off the pain of interest rate rises in a race to secure houses before Christmas.
Dec 08, 2009
Sydney clearances were down by 2.3 per cent to a still impressive 65.1 per cent, while Melbourne's slipped by only 0.9 per cent to 72.6 per cent.
The real estate industry has predicted that the auction market in Australia's two largest cities will power on to Christmas.
Although last Tuesday's 25 basis points increase in official interest rates - the third 0.25 per cent rise in as many months - is expected to slow booming real estate sales in the new year, November and December are historically the busiest for auctions.
According to Australian Property Monitors, Melbourne had 891 Saturday auctions and Sydney 466.
The highest price paid in Sydney was $4.7 million for a 1901 federation manor in Kirribilli.
Melbourne's most expensive property was a house in South Yarra, that sold for $2.885m.
Melbourne's 891 auctions were down on the previous Saturday's 1036 sales but well up on the 748 sales on the corresponding Saturday a year ago.
The 72.6 per cent clearance rate was also 21.7 per cent higher than a year ago.
Sydney's 65.1 per cent clearance rate was similarly 20.6 per cent higher.
In Melbourne, auctioneers are on track to net $11.1 billion from 18,500 sales for the year, up from $10 billion last year, the Real Estate Institute of Victoria has revealed.
REIV spokesman Robert Larocca said that despite the financial whack, rates were still comparatively low.
And Melbourne's population boom, which was rising by about 1700 people a week, meant housing demand would continue to outstrip supply.
Jellis Craig director Scott Patterson said recent interest rate rises had had little impact in the eastern suburbs.
Online house auctions ... what's next, virtual footy? Online property auctions mean new ways of selling, novel challenges for the players, and questions for the regulators, but it could be the way of the future.
Dec 07, 2009
MELBOURNE on Saturday is like nowhere else in the world.
That is when two of the city's most enduring cultural activities play out - Aussie rules and home auctions.
But just as AFL has had to compete with the rising popularity of soccer, Melbourne's enduring love affair with auctions could be challenged by a new concept.
Online property auctions have long been predicted as the next step for real estate, an industry in which buyers, sellers and agents have embraced internet marketing.
Property has been sold in Australia for some time through web-based negotiation systems such as eBay, which currently has 15 mostly rural homes for sale, including a $665,000 house in Penrith, NSW.
The new year will bring at least three new online home auction players onto the market, including one based in Melbourne. All will take a different approach to selling, raising a host of questions for regulators. But will any of them take off?
There is no doubt the industry is yet to harness the full selling potential of the web. However, attempts to catch up with the booming online trade for retail goods have so far fallen short of revolutionary.
In February, West Australian property site GeeWizAuctions.com claimed its first sale when a modest home in suburban Perth attracted several bids over a five-week cyber-auction.
Agent Laura Grimes of Supersell Realty said her ''low-ball opening bid created huge interest'' and while the property failed to reach its reserve price, she negotiated afterwards to get the sale. ''There was a huge saving in costs for the seller,'' she said. The site at present has 13 properties for sale, all from the same agency.
It follows Queensland-based 2bid2.com.au that launched last year and operates in a similar way. Both sites sign up vendors through real estate agents.
But unlike GeeWiz, an auction on this site runs for just an hour, starting when a registered bidder makes a first offer.
With Brisbane's property market all but dead, the advantage for vendors is that hard-to-sell properties can stay listed indefinitely while they wait for an offer. Several well-known agencies have a scattering of properties available on the site, including Ray White, LJ Hooker and Elders.
Peter Mericka of Lawyers Real Estate in Melbourne says the problem with such sites and another one proposed for Sydney called soldonline.com.au is that they charge vendors, buyers and agents fees that can total thousands of dollars.
''It's not a service but an imposition because the online company expects the estate agent to milk more money out of the vendor,'' he said. ''They usually also require the purchaser to pay by credit card somewhere along the line to have an opportunity to bid. It just fails because there's too much resistance out there.''
Mr Mericka is developing his own web facility, which is like an online expression of interest process, for which his clients pay no extra and potential buyers make an offer free of charge. They can also view other offers.
''It's not binding, but what is known as an invitation to treat,'' he said. ''If the best bid is acceptable to the vendor then we draw up the contracts and send them out.''
He said there was no greater risk of dummy bidding than at a public auction, with bidders required to view the property and register their details.
However, Real Estate Institute of Victoria chief executive Enzo Raimondo said the trend towards online was being tempered by user caution in what is often the biggest transaction of their lives.
''If you buy a house online or at an auction you should be confident that the same laws and protections apply,'' he said. ''At this point they don't.
''The Sale of Land Act and the Estate Agents Act do not cater for physical and online sales ... which is why the REIV asked the State Government to review its laws some 19 months ago.''
Consumer Affairs Victoria is conducting a review.
The REIV (the peak body for real estate agents) is particularly scathing of a website being formulated in Canberra called Uber Estate. It will be the first to allow sellers and developers to list without the intermediary of an agent. Bidders will verify their identity through the same software used by online gambling sites.
''There's no chance of anyone being dodgy or fraudulent,'' founder Mark Higgins said. ''It gives you as the seller total control in a way that's more transparent than anything you see on the weekend.''
He said that while bidders must be Australian, the online format would be accessible to interstate and expatriate buyers.
Online-specialist agent Paul Osborne said Uber Estate would struggle because web portals such as domain.com.au excluded private sellers.
So it seems Melbourne's Saturday pastimes of a street auction in the morning and footy in the afternoon are safe for now.
New warning on mortgages - COMMONWEALTH Bank has warned that increases in mortgage rates over the past week are a prelude to what may follow if rules requiring banks to bolster capital buffers substantially are adopted in full.
Dec 07, 2009
The comments by CBA chief executive Ralph Norris follow the intense storm over interest rates after the major banks - led by Westpac - last week lifted mortgages rates above the official cash rate rise.
Treasurer Wayne Swan yesterday stepped up criticism of the biggest banks for raising interest rates above the Reserve Bank's 25 basis point move, accusing them of taking families for a ride.
''This is one reason the big banks are criticised by the Australian community,'' Mr Swan said yesterday.
''Any bank that used the Reserve Bank's official rate rise as an excuse to take families for a ride this Christmas is letting down their customers and their country.''
CBA said on Friday it would increase rates on standard variable mortgages by 37 basis points, compared with Westpac's 45-basis-point increase.
But Mr Norris told businessday that potential changes in liquidity rules could put more pressure on variable mortgage rates.
''New liquidity rule requirements will have potentially two impacts,'' he said. ''One will be interest rates continuing to increase at a faster rate than the official cash rates, and secondly, the issue around the availability (of funds).''
The banks have been been campaigning against Australia adopting global rules aimed at bolstering capital buffers.
They argue that rules on liquidity as proposed by the Australian Prudential Regulation Authority would be likely to force bigger banks to set aside billions of dollars in largely unproductive assets such as cash and government bonds that cannot be lent, hurting profitability.
The requirement for banks to hold the lowest-risk bonds has been complicated by the relatively shallow pool of Australian government bonds, they add.
Citigroup Australia chief executive Stephen Roberts said debt markets were already starting to react to the prospect of banks being forced to buy government bonds to meet the new rules.
''We have already seen some technical shift in the price of Commonwealth Government securities as a result of what APRA is proposing,'' Mr Roberts said.
He expects some level of compromise before the final rules ''but no one knows at this stage'' what shape this could take.
Separately, regional lender Bendigo and Adelaide Bank took a swipe at the Commonwealth Government and three major banks, after limiting its mortgage rate increase to 30 basis points even though its funding costs are higher.
Managing director Mike Hirst said the fee structure for banks to use the government guarantee to raise funds was uneconomic for small banks, such as Bendigo.
Mr Norris said he was not surprised at the backlash that hit Westpac, which suggests banks will approach future out-of-cycle rate rises more cautiously.
CBA was strongly criticised in June, when it raised its variable home loan rate by 10 basis points outside of any moves in official interest rates.
Housing market continues its red-hot run - THE week's 745 auctions and 787 private sales cost Melbourne buyers $904 million, showing what a rapidly expanding city and a real estate boom can do.
Dec 07, 2009
Agents everywhere reported strong demand. Landmark properties in Blackburn and Newport attracted strong interest, as did anything that caused a collision of demand between investors and owner-occupiers.
Jellis Craig yesterday auctioned a landmark Blackburn property at 20-24 Masons Road that attracted six bidders and sold for $2,670,000.
The eight-year-old house, in the Bellbird area, is on 3022 square metres with a well-established garden. Jellis Craig director Alistair Craig said the country-style homestead's lush surrounds appealed to buyers.
He said the market was ''still showing fantastic strength'', but buyers would have good opportunities in the run-up to Christmas.
In Port Melbourne yesterday, Frank Gordon Real Estate auctioned a 1950s brick home on 596 square metres at 220 Esplanade East that has redevelopment potential because of two frontages.
Agent Con Coroneos said seven bidders, including developers and ''locals who'd had their eye on the property'', pushed the price way past the expected $2 million to $2,410,000.
In Beacon Cove, Biggin & Scott's David Lack had three bidders for a three-bedroom, double-storey home at 1 Orcades Mews, Port Melbourne, that sold for $1,562,000. Mr Lack said the 11-year-old house had been well updated.
Catherine Cashmore of JPP Buyer Advocates witnessed the collision between first home buyers and investors at the auction of 4/2 Celeste Court, St Kilda East. The two-bedroom apartment was last sold in March 2002 for $215,000 but seven bidders pushed the price to $471,000 on Saturday. In Yarraville yesterday, four bidders went after a double-fronted Victorian weatherboard in one of the suburb's best streets.
Jas H Stephens auctioneer Craig Stephens said the house, at 16 Severn Street, was expected to sell in the low $800,000s but sold for $909,000.
And in Moorabbin, Buxton Real Estate had six bidders for a large house at 100 Chapel Road, that eventually sold for $800,000. Agent Adam Gillon said the house, with up to five bedrooms and two kitchens, was suitable for extended families and was eventually bought by a neighbour.
KEY POINTS
?Sales total $904 million as buyers do battle.
?Agents say strong demand shows no sign of abating.
?Bidders push many properties above their reserves.
What a booming Australian dollar means for you - ECONOMISTS reckon it's better to have a strong currency than a weak one, because a strong dollar is generally a sign of a buoyant economy.
Dec 07, 2009
And it's pretty clear that Australia is the envy of the developed world when it comes to the way we escaped the full force of the global financial crisis.
But although we're not suffering to the same extent as the US, Britain or even Europe, the benefits of a surging dollar aren't always that clear-cut.
While it is good for Aussies travelling abroad, for instance, it is a kick in the guts for many companies trying to sell Australian goods overseas.
This is because our products are more expensive to foreign buyers.
If you're a farmer, a winemaker, or even working in our huge education sector, you're facing a tough time, because the 52 per cent rise in the Aussie dollar since October 2008 translates to a crushing price hike for customers paying with US dollars.
Even for Asian investors, the rise will have made an Australian education too costly for many.
"Our education system has grown enormously, thanks in a large part to attracting foreign students to study in Australia," AMP Capital Investors chief economist Shane Oliver says.
"The danger is now that with a stronger currency those students think they may as well go and study in the US or Europe. There's a real risk of our universities getting priced out of the international market."
Tourism
Travellers heading offshore are enjoying a buying power boost, but the strong dollar is bad news for Australia's domestic tourism industry. More people go abroad to capitalise on the strong dollar, while fewer people visit Australia because of the higher costs.
Overall, foreign visitors to Australia have fallen by 2 per cent in the past year, costing our tourism industry millions of dollars in lost revenue.
According to the Tourism and Transport Forum, Australia has traditionally had hundreds of thousands more tourists visiting Australia than residents travelling overseas. But that trend has recently that has reversed.
"It's impossible to say whether Australians have substituted foreign holidays for domestic travel," TTF executive director Brett Gale says.
"They may be doing both. We did a survey three months ago which shows that sentiment has improved over the past nine months along with the improving global economy, but the mood is certainly not exuberant."
Domestic manufacturers that compete with imported goods also have a tough time, because a strong dollar means our money goes further, cutting the cost of imports and making them cheaper than locally made goods.
That's precisely why Pacific Brands decided to move its manufacturing overseas.
Consumers
Economists who reckon a strong dollar is good for consumers because the price of imported goods tends to fall may need to update their research.
While their argument is right in theory, reality appears different.
JB Hi-Fi chief executive Richard Uechtritz says he makes no savings from a strong Aussie dollar, so there are no savings to be passed on to consumers.
"We buy our goods off the local subsidiaries here so they are the ones that are setting prices," he says. "We buy our goods in Aussie dollars and then put a mark-up on top of whatever price they sell to us."
A David Jones spokesman says that retailer operates in the same way. "We don't take any Aussie dollar risk or benefit," he says.
"We buy and sell in Aussie dollars, and it's our suppliers who deal with the currency fluctuations. If we imported everything, you'd have the price of lipstick, or whatever, all over the place and consumers would be asking why.
"But we keep prices steady."
Investors
Whether or not a strong dollar is a good or bad thing for your investments depends on where your money is tied up.
If you invest in companies based here that make most of their money in Aussie dollars, the currency fluctuations are unlikely to make that much difference.
But if you have money invested overseas and through superannuation, most of us do then the impact of a rising dollar can all but wipe out the gains.
Similarly, if you invest in Australian-listed firms that have significant exposure to overseas markets, particularly the US, then it is a blow because the profits they make overseas will buy back fewer Aussie dollars.
RBS Morgans private client adviser Trent Muller says these companies have experienced a challenging time and investors have seen share prices take a hit, but he is advising clients to move money into these oversold stocks in preparation for the Aussie dollar weakening next year.
"We're looking at stocks including QBE, Resmed, CSL, Westfield and News Corp because they've been underperforming thanks largely to their exposure to the US," he says.
"But as the US Federal Reserve starts to talk about raising interest rates next year, the US dollar will strengthen against the Aussie dollar and that will boost returns from these stocks."
But Commonwealth Bank currency strategist Richard Grace says it may be too early to call the Aussie's demise just yet.
"We think it's going higher from here, and have forecast US98 by June 2010," he says.
"That's within a trading range of parity, and we're that bullish for three reasons: The relative health of the Australian economy, further improvements in the global economy, which will be good for commodity prices, and further depreciation in the US dollar."
Grace agrees the US dollar could start recovering as the US starts to talk about raising interest rates, but says that is unlikely until at least the second half of 2010.
"So if you're planning on visiting the US or UK next year, do it sooner rather than later."
Once the US dollar starts to strengthen, Grace says, the Aussie dollar could fall back to around US80. That's more in line with a longer-term average, and can allow our battered exporters time to recover.
CommBank takes middle ground on rates - Treasurer Wayne Swan has lashed out at Commonwealth Bank for lifting its home loan rates by more than the last official rise. Compare the best rates by calling Touch of Finance
Dec 04, 2009
"I've said before there is no justification for Westpac and I believe there's no justification for the Commonwealth Bank to move their rates above the official interest rate rise from the independent Reserve Bank,'' Mr Swan told reporters in Brisbane. ''I believe their customers will be angry with these actions.
Australia's biggest home loan lender today raised its standard variable lending rate by more than the central bank's increase - but less than rival Westpac.
CBA said in a statement today that it would increase its standard variable home loan rate by 37 basis points to 6.61 per cent, effective Wednesday, December 9. The Reserve Bank on Tuesday increased its base cash interest rate by 25 basis points to 3.75 per cent.
But Mr Swan said he was pleased to see NAB not following its competitors.
''These banks will have to live with the consequences of their action and I believe they will be harshly judged by their customers and by the broader community.''
Super-sized rise
Westpac will increase its standard variable home loan rate by 45 basis points to 6.76 per cent, effective today. Westpac executives blamed the super-sized rise on increasing borrowing costs, a stance which lost credibility from many customers after National Australia Bank opted to limit its rate increase to the same size as the RBA's.
National Australia Bank yesterday raised its variable rate by 25 basis points, to 6.49 per cent, also effective from today.
ANZ Bank is expected to announce its rate increase later today, the last among the four major banks to do so.
"While the change in the official cash rate has partly contributed to this interest rate increase, the sustained increase in wholesale funding costs that we are experiencing has also been a major factor," CBA's retail banking group executive Ross McEwan said in the statement.
"Wholesale funding costs continue to remain at record highs and, as cheaper funding expires and is replaced with more expensive funding, the overall cost of our funds has increased."
CBA, the nation's biggest deposit holder, also announced that it would be increasing the interest rates on a range of deposit accounts by as much as 0.5 percentage points.
The interest rate on the NetBank Saver and Cash Investment accounts will rise by 0.5 percentage points.
"In the market for deposits, there is also intense competition amongst the banks," Mr McEwan said.
"As wholesale funding costs remain high we are also increasing our deposit interest rates."
Smaller banks
While Westpac drew flak for its decision to hike rates by almost double the RBA's level, the bank says there is no plan to change the pricing on loans.
''It's the responsible decision based on funding costs,'' a Westpac spokesman said yesterday.
Westpac-owned St George and BankSA, however, may be given leeway to raise interest rates by less than the parent.
NAB hike ignites price war with lower rates rise than Westpac - NATIONAL Australia Bank has taken a bold step towards revitalising competition in the home-lending market, as well as rejuvenating its retail banking operation, by launching a price war.
Dec 04, 2009
NAB responded to Westpac's shock 45 basis-point rate increase on Tuesday by restricting its increase to 25 basis points.
In doing so, the mortgage minnow aggressively pegged its standard variable rate at 6.49 per cent, 27 basis points lower than Westpac's 6.76 per cent.
Aussie founder John Symond said he was struggling to recall such a wide divergence in the mortgage rates of two of the nation's major banks.
NAB's head of personal banking, Lisa Gray, said the surprise move was designed to attract new customers.
"Today we are sending a message to customers at Westpac, and the other banks, that NAB can offer them a better deal," Ms Gray said.
Westpac, with St George Bank now under its wing, boasts a $258 billion home-lending portfolio that dwarfs NAB's $152bn book.
The Sydney-based lender, along with Commonwealth Bank, expanded its market share this year, growing home-lending by 1.5 times the rate of the banking system.
By last September, Westpac's share had grown 1.79 percentage points to 23.5 per cent.
NAB, in contrast, has been in retreat, with its share shrinking by 31 basis points to 12.8 per cent, as it rebuilt links with disillusioned mortgage brokers and started ramping up distribution.
Credit Suisse analyst James Ellis said Westpac and NAB were approaching the mortgage market from different perspectives.
"The Westpac agenda is to improve its funding mix and funding quality, by raising some of its deposit rates and lengthening the term of its wholesale funding," Mr Ellis said. "That benefit comes at a cost, so the margin is recovered on home-lending, where the bank has recently enjoyed strong market share momentum.
"The NAB agenda, on the other hand, is to arrest negative momentum in its retail business, so the two banks are starting from different positions."
Westpac argued on Tuesday that average funding costs continued to rise sharply.
The bank said some term deposits and online rates were among the highest the bank had offered, while more expensive long-term funding now accounted for about 65 per cent of wholesale funding, up from 30 per cent two years ago.
Average wholesale funding costs, as a result, were now 80 per cent higher than a year ago.
Cheaper but less secure short-term funding accounted for 16 per cent of funding for Westpac, compared to 20-25 per cent for NAB.
Revealed: how big oil hikes petrol prices - The Federal Government has asked the competition watchdog to take another look at whether anti-competitive behaviour is pushing up petrol prices.
Dec 04, 2009
The Australian Competition and Consumer Commission (ACCC) pointed to the possibility yesterday when it rejected the proposed merger between Caltex and Mobil.
But it is barely two years since the ACCC delivered the findings of its last inquiry into petrol.
Competition advocates say the Government should implement the recommendations from that investigation before commissioning another.
In most parts of the country, Thursday is the day service station attendants head to the big boards outside their businesses and raise the advertised petrol price.
ACCC chairman Graeme Samuel says it is the high point of what has become accepted as a weekly petrol price cycle.
"All of a sudden there's a price hike, there's a jump of the order of 10, 15, sometimes even more cents per litre," he said.
"That occurs right across those capital cities, and almost religiously all the others follow."
Mr Samuel says the price cycle movements are a prime example of what those in competition circles call "coordinated behaviour".
"The leaders tend to be the major market refiners - Caltex, Mobil and BP," he said.
It is made possible by the use of an industry website called Informed Sources. Through the site, subscribers can get real-time information about the prices their competitors are charging, and coordinate their price accordingly.
Mr Samuel says that is one of the reasons the ACCC rejected a bid by Caltex to take over more than 300 Mobil service stations.
"It would take Mobil out of the market in price leadership and leave two powerful operators that would then be involved in that price leadership each week," he said.
The practice is not illegal, although when the ACCC submitted the findings of its last petrol price inquiry in December 2007, it called for the Government to toughen the legislation and outlaw coordinated behaviour.
Associate Professor Frank Zumbo, a fair trading specialist at the University of New South Wales, says there has been no action on the issue since the former minister Chris Bowen circulated a discussion paper in January.
"The ACCC alerted the Government to this very issue of price coordination and the potential problems that arose as a result of one company shadowing another company or acting as a cosy club," Associate Professor Zumbo said.
"The Government has been sitting on that recommendation, and now the ACCC is saying that there are real problems as a result of possible price coordination."
Yesterday, the Minister for Competition Policy, Craig Emerson, asked the ACCC to look again at whether there is anti-competitive behaviour involved in the weekly price cycle.
"With all due respect to Minister Emerson, it's a bit rich to raise this issue now in circumstances where the Government has been well aware of this issue for past two years," Associate Professor Zumbo said.
Mr Samuel, however, dismisses the suggestion Mr Emerson has been slow to respond.
"I think the last thing we could say about Government is that it has been dragging its feet in the area of reform to the Trade Practices Act," Mr Samuel said.
"They've made extensive reforms, particularly in providing for criminal penalties in relation to cartel behaviour. But this is a matter now that we think needs to be addressed."
Mr Samuel says the Government and the ACCC are working on ways to adapt laws used in Europe and the United States that ban coordinated behaviour.
And he says a new investigation into petrol prices should be useful, because the proposed Mobil-Caltex merger has thrown up more information about the industry than ever before.
Mr Emerson's office did not return the ABC's calls.
Low-doc loans on borrowed time - Responsible lending laws may bring an end to these potentially predatory financial products. Apply for a low-doc loan through Touch of Finance.
Dec 04, 2009
The British financial services regulator has announced plans to ban so-called self-certified home loans, pointing to the possible fate of no-doc and low-doc loans in Australia once responsible lending laws start to come into force here from mid-2010.
No-doc and low-doc loans are an alternative for the self-employed and small-business people who, without payslips or recent tax returns, can't readily verify their sometimes "lumpy" income for a standard home loan.
Instead, they're able to secure loans with a bigger deposit or by signing a statement simply declaring they can afford the repayments.
Low-doc borrowers usually have to come up with a 20 per cent deposit, when others might need just 10 per cent.
In addition, the bank is almost certain to insist on mortgage insurance, which protects the lender if the borrower defaults. On standard loans, insurance is required if the loan is for more than 80 per cent of the value of the property but on a low-doc loan, it may be required at the 60 per cent mark.
Lenders might also charge a higher interest rate to compensate for the extra risk associated with a no-doc or low-doc loan, the corporate affairs manager for Mortgage Choice, Kristy Sheppard, says, though this may be reduced to the standard rate after a couple of years of regular repayments.
In Britain, however, the Financial Services Authority has issued a discussion paper proposing self-certification be banned and that lenders be obliged to verify income for all mortgage applicants.
At their peak, self-certified loans accounted for 45 per cent of the £300 billion of mortgages advanced in Britain during 2006-7, according to one report. Ordinary homebuyers are said to have used them to borrow more than their genuine income would allow.
Under the new proposals, the self-employed and business people would have to provide at least two years of accounts or tax returns to support a home loan application.
Locally, low-doc mortgages also grew in popularity - but not to the scale in Britain - and market observers say they're much harder to come by here.
"There are fewer low-doc loans around these days because lenders have become more risk-averse in recent years - more cautious about whom they lend to," Sheppard says.
"Those that are still offering these products do require some evidence, such as business account transaction statements and BAS [business activity statements], where these weren't required previously."
The chief executive of InfoChoice, Shaun Cornelius, says its database includes 58 low-doc products, from 32 lenders, with rates ranging from 5.38 per cent to 8.49 per cent. That compares to 6.2 per cent or 6.3 per cent for a standard variable loan with a big four bank.
However, "lenders certainly haven't been promoting this category of loans over the last 12 months", Cornelius says.
The head of mortgages at Bankwest, Dean Gillespie, says the demand for low-doc loans has remained constant but Bankwest, like others, has reviewed its activity in the area. "We are conscious of making sure applicants really are true low-doc borrowers," Gillespie says.
Scrutiny has increased, he says, particularly if an applicant claims a higher income than the bank would expect for their circumstances. "We are asking more questions. We are wanting to see their ABN, that they're registered for GST, to see that they're a legitimate low-doc borrower."
Sheppard says low-doc loans have a place because many self-employed people find it difficult to substantiate income when applying for home or investment property loans. The traditional requirements of lenders can make the process "frustrating and time-consuming" for them, she says.
"There are certainly circumstances where people need to use low-doc loans because they can't provide the documentary evidence required by lenders to approve borrowers for 'regular' loans - for example, if the applicant hasn't done tax returns for the past couple of years, has debts outstanding that don't reflect the cash position or can't prove profit to the banks."
However, consumer groups say low-doc loans have been used by "predatory" lenders on the fringe of the market. They give people loans who have little hope of servicing them in the knowledge that ultimately they can force the sale of the property and take the money.
In some cases, ordinary borrowers have been encouraged to dress themselves up as businesses by obtaining ABNs.
Credit ombudsman Raj Venga says low-doc lending seemed to dry up last October and he's "not unhappy that some of the worst kinds of low-docs" are gone, though he acknowledges they have a legitimate role.
Venga notes lenders will soon have to comply with "responsible lending" rules requiring them to determine that a loan is "not unsuitable", having regard to the person's needs, objectives and financial circumstances.
"I think it will make it very hard to have a low-doc loan," he says.
The responsible lending laws apply to non-bank lenders from July 1 and to banks from mid-2011.
Gillespie says the provisions of the new Consumer Credit Code will put more onus on the financial institution or broker to have an understanding of what's "not unsuitable". "That hasn't been tested yet ... and it's going to be interesting the way it comes out, whether low-doc products can continue or not," he says.
The British proposals, if approved, could take effect at the end of next year.
KEY POINTS
British regulators have proposed banning no-doc loans.
Here, low-doc loans are under threat from "responsible lending" rules.
Lenders have backed away from riskier lending products anyway.
Low-doc applicants are being asked to prove they're genuinely self-employed.
Rivals raise heat on Westpac over loan rate - WESTPAC was last night under pressure to reverse some of this week's supercharged interest rate rises across its mortgages as rival banks taking a softer approach. Get the best rates from Touch of Finance
Dec 04, 2009
National Australia Bank said yesterday it would increase its standard variable mortgage rate by 25 basis points, matching the Reserve Bank's increase in the official cash rate earlier this week.
While NAB is feeling the same funding pressures as Westpac, it said it was prepared to absorb the increase in funding and deposit costs over the short term for the benefit of customers.
Commonwealth Bank and ANZ will detail their interest rate decisions today. Neither is expected to match Westpac's 45-basis-point move.
Rival bankers were yesterday inclined to let Westpac take the heat over its rate decision.
''This certainly puts (Westpac chief executive) Gail Kelly in an uncomfortable position,'' one said.
At the same time, Westpac is believed to be preparing to give some ground by allowing its St George and BankSA subsidiaries not to push through the full 45-basis-point rate increase.
NAB's new standard variable rate will be 6.49 per cent.
This compares with Westpac's standard variable rate of 6.76 per cent. The difference in interest rates translates to a saving of $51 a month on an average $300,000 home loan.
By moving its rates in line with the RBA, NAB is looking to outmanoeuvre Westpac as it attempts to build its underweight position in the nation's mortgage market and increase its deposit base. Earlier this year, NAB was the first bank to make aggressive cuts to much-hated fees across transaction accounts and credit cards.
NAB yesterday threw down the gauntlet to Westpac customers to shop around.
''We are determined to be competitive,'' said NAB's group executive of personal banking, Lisa Gray.
''Today we are sending a message to customers at Westpac, and the other banks, that NAB can offer them a better deal.''
A Westpac spokesman said there was no plan to change the pricing on loans. ''It's the responsible decision based on funding costs,'' the spokesman said.
Westpac this week blamed higher funding costs for its decision to raise interest rates on mortgages by almost twice the Reserve Bank's 25-basis-point increase.
While short-term funding costs have eased from the highs reached at the height of the global financial crisis, long-term wholesale funding costs remain high.
NAB's increase in home-loan rates takes effect today. The bank will also increase interest rates on a range of business deposit accounts and variable business loans by 25 basis points from Monday.
During periods of rising official interest rates, most banks generally outline their position within hours of each other. But this time it took at least two days for a rival bank to follow on with its rates announcement.
While bankers are feeling the squeeze on funding costs, most said they would be committing the equivalent of commercial hara-kiri if they moved interest rates up by as much, or more than, Westpac.
''You look at the hiding that Westpac has taken. If anyone went by more, you'd get beaten up worse than Westpac - if that's possible,'' one rival executive said.
The decision on rates stands to mark the biggest test for Westpac's Mrs Kelly. In her former role as chief executive at St George, she built a solid reputation for customer service.
She is hoping to replicate her strategy of personal customer service throughout Westpac's retail network.
Citigroup rapped over insurance sales tricks - CITIGROUP has changed its sales practices after hundreds of customers complained they were tricked into buying credit card insurance.
Dec 04, 2009
The corporate watchdog flagged issues with Citigroup's sales techniques of its insurance product which was spruiked to customers calling to activate new or replacement credit cards.
Some customers were furious after calling Citigroup to activate credit cards only to be harassed by some staff members trying to sell the insurance product.
Citgroup received 174 complaints about sales practices from cardholders, with "a large number" cancelling their CreditShield policies, ASIC said.
The calls were made between August 2008 and January this year.
Tapes of Citigroup's marketing calls revealed some telephone operators persisting with selling Creditshield to callers, despite the cardholder saying 'No' more than once.
On other occasions, Citigroup sold the credit card insurance product to customers who hadn't agreed to purchase it, including cases where the customer had only agreed to receive more information about the product, ASIC said.
Citigroup also used misleading or "ambiguous" phrases during some the phone calls, using the word 'activate' when referring to the purchase of Creditshield, not the credit card activation.
Citgroup has agreed to a number of changes, including replacing words such as 'enrol' and 'activate' with 'purchase' when operators are referring to the insurance product.
The bank said it had worked with ASIC to resolve the regulator's concerns over credit card insurance sales, and had taken "immediate action" to address the issues raised.
"Prior to ASIC contacting Citi, we had taken steps to address concerns raised in relation to the sale of credit card insurance," a Citigroup spokeswoman said.
Citigroup pointed the finger at "third-party agents" who it said were "not adhering to service standards".
"In extreme cases, we took the decision to terminate some agents and compelled other agents to comply with more rigorous standards," she said.
The bank said it had voluntarily contacted customers who had bought credit card insurance during the given period to ensure they were happy with their purchase.
Small business confidence back to boom-time levels - A survey has found that confidence among small to medium businesses has returned to similar levels recorded before the economic downturn.
Dec 03, 2009
The Sensis business confidence index has risen 2 percentage points to 52 per cent - it is the highest level since August 2007.
The survey's author, Christena Singh, says the construction, property, transport and storage sectors are particularly bullish about business prospects over the next year.
She says confidence has increased moderately during the past three months, after two very strong quarters of growth.
"Now this quarter was smaller than what we've seen, 2 percentage points, we're starting to see some level of softening considering that business confidence has come from a particularly low base," she said.
"So it's really good to see that, and it is backed up by improvements in sales profitability, most performance indicators having increased in the last quarter too."
The survey shows profitability among small to medium businesses has also improved again over the past three months to take it to its highest level since early last year, however it is still in negative territory.
Christena Singh says the finance and insurance sectors experienced the strongest profitability, while it was weakest in the retail sector.
"We saw profitability increase by 3 percentage points nationally, from -6 to -3, so we are still seeing some way to go until the proportion of businesses increasing their profitability outstrips the proportion that saw decreases."
Shoppers unfazed by rate rise - Australian retail sales rose a moderate 0.3 per cent in October as consumers spent more at department stores and cafes, suggesting consumption was resilient in the face of rising interest rates.
Dec 03, 2009
The result came in exactly as predicted by economists and added little to the near-term outlook for policy given the Reserve Bank has only just lifted its cash rate and its next policy meeting is not until February.
"This was the expectation going into the RBA meeting this week so it shouldn't change their thinking at all," said JPMorgan chief economist Stephen Walters. "But importantly, over the summer break will be the anecdotal evidence from the retailers on how their sales are going and what the store traffic's been like."
Few headwinds
ICAP economist Adam Carr said that, while the retail data matched market expectations, he had expected a higher result. But there still was pressure on the central bank to raise rates early next year.
''Retail sales were a little weaker than I was forecasting, but I don't think it changes the picture,'' he said. ''The pressure is still for the RBA to hike rates. Income growth is solid and consumer confidence is high. When you look at it, there are very few headwinds to the consumer.''
Department stores reported the largest growth in the month with sales rising 1.9 per cent, albeit coming off a 2.3 per cent drop the previous month. Cafes, restaurants and takeaway food services grew by a further 1.1 per cent in October, but food retailing eased 0.1 per cent for a second month in a row.
Victorians cautious
The Northern Territory saw the biggest jump in spending, rising 1.8 per cent in October, followed by Tasmania (up 1.5 per cent), NSW (up 1.2 per cent) and Western Australia (up 0.9 per cent). Victorians were more cautious with their money, with spending declining 0.9 per cent.
Retail spending had been fairly subdued in the run-up to the Reserve Bank's monetary policy tightening phase as the impact of the federal government's stimulus packages wore off.
Consumer spending is expected to have detracted from economic growth when the September quarter gross domestic product is released on December 16.
In October the Reserve Bank lifted the cash rate by 25 basis points from a 49-year ''emergency'' low of 3.0 per cent. The central bank has since raised the rate twice by 25 basis points each time.
Westpac went further than the Reserve Bank on Tuesday by increasing its standard variable mortgage rate by 45 basis points. The other major banks have yet to announce their rate decisions.
Jobs grow as service sector expands - Activity in the service sector expanded for a second month in November while employment grew for the first time in 17 months, an industry survey shows.
Dec 03, 2009
The Australian Industry Group (AiG)-Commonwealth Bank performance of services index (PSI) eased 2.3 points in November as sales came off the boil, but at 52.5 still remained above the 50 level that marks the threshold between growth and contraction.
The survey of around 200 companies found employment increased in five of nine industry sectors, with the greatest growth in personal & recreational services and communications. The index of employment rose 1.9 points to 50.5.
"Particularly cheerful is the fact that leading indicators such as new orders, sales and employment have all trended higher into expansionary territory," CBA senior economist John Peters said today.
"Unemployment may be reaching a cyclical peak. The latest PSI employment result bolsters our view that the peak in unemployment is likely to be in the 6 to 6.5 per cent range this cycle."
The jobless rate has hovered around 5.8 per cent for some months, surprising policy makers who had feared it would keep rising to peak above 8 pe rcent next year.
The Reserve Bank this week noted unemployment was likely to peak at a considerably lower level than expected, one reason it chose to raise interest rates for a third straight month.
Sales and new orders grew again, though the pace slowed a little after a jump in October. The index of sales dipped 4.3 points to 55.4, while new orders eased 1.8 points to 56.7.
The survey showed firms ran down inventories in November, particularly in retailing, ending October's modest re-stocking. The index of inventories dropped 7.6 points to 44.6.
There was also a pick up in costs, notably in retail, accommodation and cafes and restaurants. The index of input priced climbed 8.7 points to an eight-month high of 66.0
Cash windfall for banks after rate rise - THE major banks stand to make about $660 million in additional cash profits next year if they decide to match Westpac's 45-basis-point rise in interest rates. Get the best rates by Calling touch of Finance
Dec 03, 2009
For Westpac, which ranks as the second-biggest home lender, the earnings boost is the biggest, with some $230 million in additional cash profits expected to flow from this week's interest rate rise, analysts calculate.
Westpac's rivals were last night still mulling their next move. They have not flagged their interest rate intentions, but most are expected to have announced interest rate rises between 25 and 40 basis points by Friday.
Westpac this week blamed higher funding costs for its decision to raise interest rates on mortgages at almost twice the amount of the Reserve Bank's 25-basis-point lift in rates.
While short-term funding costs have eased from their highs reached in the weeks after the collapse of Lehman Brothers, long-term wholesale funding costs remain stubbornly high.
In fact, average costs have increased in the past six months as governments and banks around the world compete in offshore markets for limited long-term funds.
Australian banks are now paying a premium of about 1 percentage point over the benchmark bond rate for term funding. Before the crisis, the premium was as little as 0.1 percentage point.
Craig Williams, a leading banking analyst with Citigroup, said that if the same interest rate increase was applied by each major bank this could mean a boost to cash earnings of between 2 to 4 per cent, depending on the bank. It could deliver $124 million in annual earnings for ANZ next year, $178 million for the Commonwealth Bank and $127 million for National Australia Bank.
Last year, the four major banks reported a combined $16.3 billion in cash profits.
With major banks having tightened their grip on the nation's mortgage market since the onset of the global financial crisis, Mr Williams said mortgage repricing was ''inevitable''.
Since its merger with St George, Westpac has emerged as the second-biggest home lender in Australia, with a market share of nearly 27 per cent, slightly behind Commonwealth Bank's 29 per cent.
By yesterday, St George had not finalised its position on interest rates, but a spokesman said the lender set its interest rate independently of Westpac.
Banks have been passing on the higher cost of funding to business customers, but now they say homeowners must start sharing the pain.
The faster than expected increase in interest rates is expected to put a brake on mortgage lending. However, most economists expect official cash rates to climb to as much as 5.25 per cent by the end of next year, which creating an additional setback to growth. ''The housing boom ended yesterday,'' one analyst said.
Figures released yesterday show the average size of a mortgage written through a broker hit a record in November despite overall sales of home loans falling for the second straight month. An average loan was $367,000 in November, a rise of 6.4 per cent since May.
World economy to bounce back in 2010 - The United Nations has forecast that the world economy will bounce back in 2010 with a global growth rate of 2.4 per cent, but it warned the recovery will be fragile.
Dec 03, 2009
In a preview of its annual economic forecast, the UN overnight credited the massive fiscal stimulus measures by governments worldwide since late 2008 for the expected rebound.
It recommended that these stimulus measures continue, at least until there are clearer signals of a more robust recovery, an increase in employment rates, and growing private sector demand.
The UN report said an increasing number of economies showed positive growth in the second quarter of 2009, with the recovery continuing in the third quarter.
It pointed to increased industrial production, a rebound in global equity markets, and a rise in international trade.
''This is an important turnaround after the freefall in world trade, industrial production, asset prices, and global credit availability which threatened to push the global economy into the abyss of a new Great Depression in early 2009,'' the UN report said.
But the report, The World Economic Situation and Prospects 2010, warned that ''the recovery is uneven and conditions for sustained growth remain fragile''.
The report said the failure to address two risks could cause the global economy to enter into a double-dip recession.
The first is the risk of prematurely abandoning financial stimulus measures and the second is the risk of a widening US deficit and mounting external debt that could cause ''a hard landing'' for the US dollar and set off a new wave of financial instability, it said.
While the global economy has grown in the second and third quarters of 2009, the report said ''because of the steep downturn in the beginning of the year, world gross product is estimated to fall by 2.2 per cent for the year (2009)''.
According to the report, economic growth next year will be strongest in developing countries, especially in Asia.
It predicts growth in developing nations will increase from 1.9 per cent in 2009 to 5.3 per cent in 2010, with China's economy expected to grow by 8.8 per cent in 2010 and India's by 6.5 per cent, both below their pre-crisis pace.
Russia is expected to lead the turnaround among economies in transition, with 1.5 per cent growth in 2010 following a severe drop of 7 per cent this year, the report said.
In the industrialised world, the US economy is forecast to grow by 2.1 per cent in 2010 following an estimated decline of 2.5 per cent in 2009, the UN said.
Recovery in the European Union and Japan will be much weaker - below 1 per cent - next year, it said.
The world's poorest countries will see their robust growth before the financial meltdown slow significantly, the UN said.
The report said 107 of the 160 nations for which data are available registered a decline in per capita income this year, including most developed countries and about 60 developing countries.
In 2010, the UN predicted that only 10 developing countries will see their per capita income decline. But at the same time, only 21 are expected to achieve economic growth rates of 3 per cent or more, the minimum needed to ensure substantial poverty reduction, it said.
The report is produced at the beginning of every year by the UN Department of Economic and Social Affairs, the UN Conference on Trade and Development, and the five UN regional commissions.
Landlords 'to pocket $1.9bn in extra rent' -STRONG demand for housing amid a growing population and record low levels of property construction will help to tighten rental markets considerably, pushing rents higher in 2010 and beyond, a report says.
Dec 02, 2009
BIS Shrapnel's latest Residential Property Prospects report found rents are expected to rise by an average of 5.8 per cent a year over the next three years.
This compares with a 5.7 per cent increase in 2009 and an average annual rate of 4.4 per cent between 2002 and 2008.
If realised, the anticipated rental increases would result in landlords pocketing an extra $1.9 billion in rents between 2010 and 2012.
BIS Shrapnel senior economist Jason Anderson said the supply of housing had "plunged'' while demand remained very strong.
"With the very low rate of medium and high-density dwelling construction in 2009, it is inevitable that rental markets will tighten considerably in 2010, and remain very tight in 2011," Mr Anderson said.
The report said there would be about 30,700 new medium-density and high-density housing starts in 2009, the lowest level since 1991 and a decline of about 30 per cent from a year ago.
Sydney was expected to experience the highest average annual increase in rents at 7.1 per cent from 2010 to 2012.
Melbourne (5.6 per cent) and Brisbane (5.0 per cent) were also forecast to be above the 4.4 per cent average annual increase experienced between 2002 and 2008.
Rent increases in Adelaide (3.4 per cent) and Perth (3.2 per cent), where housing construction had kept pace with underlying demand, were tipped to be below the national average.
Mr Anderson said the high number of first home buyers was also adding to the pressure on rental markets.
"Many qualifying first home buyers were young adults living at home, accumulating the savings which are now required for home loans," Mr Anderson said.
"A first home buyer moving out of the family home and purchasing a former investment property will have actually reduced the available rental stock."
The report said the housing component of the consumer price index (CPI) had risen 56 per cent since the start of the millennium, well above the 36 per cent rise in the overall CPI and higher than the 55 per cent increase in alcohol and tobacco products.
Shock interest rate rise justified, says Westpac - WESTPAC has strongly defended yesterday's shock 45-basis-point hike in variable mortgage rates. Learn all the rate news from Touch of Finance by calling us
Dec 02, 2009
As other banks put their rates under review, allowing Westpac to absorb a furious Wayne Swan's warning of a customer backlash, even seasoned bankers expressed surprise at Westpac's unprecedented move which was 20 basis points above the Reserve Bank's cash-rate increase, The Australian reports.
Banking analysts last night doubted the other major banks would move as high as Westpac's 6.76 per cent rate on competition grounds.
Westpac's group executive retail and business banking, Peter Hanlon, said customers could be confused about the need for the dramatic variable-rate increase, given Westpac had reported a 30-basis-point increase in its 2009 interest margin to 2.32 per cent.
"But I would stress that the margin looks back, not forwards, and we are feeling the pressure from rising average funding costs," Mr Hanlon told The Australian last night.
"Our average cost of funding has risen quite dramatically, and it would have driven margins back over time, remembering that the increase in the 2009 margin only took us back to where we were two years ago."
As is the custom with out-of-cycle rate rises, Westpac went into some detail yesterday to explain its move. It said more expensive long-term funding now accounted for 65 per cent of the bank's wholesale funding mix, up from 30 per cent two years ago.
This had driven average wholesale term funding costs 80 per cent higher than a year ago. Examples in the last few weeks included a $2 billion, three-year bond issue at 110 basis points over the benchmark rate, and a 10-year raising of $10bn at 212 basis points over benchmark.
Before the financial crisis, the usual spread would have been much narrower, sometimes as low as 15 basis points. Deposits were also a lot more expensive, as lower-tier lenders unable to access wholesale markets bid strongly for funds.
Mr Hanlon said interest rates offered for Westpac's online savings and term deposit accounts were among the highest ever offered.
"That reflects our strong commitment to lessening our reliance on volatile offshore term funding markets," he said.
The rate rise came soon after the RBA lifted the official cash rate to 3.75 per cent, expressing concern a renewed resources boom could push the Australian economy back into fast-tracked growth and hold back the recovery of other business sectors.
The chance of a February rate rise, which would be the fourth in the current monetary policy tightening cycle, is at 52 per cent, which economists consider a line-ball call.
Interest rate Decision for RBA Meeting 1 December - Rates increased by 0.25%. For best Fixed rates on the market Call Touch of Finance now
Dec 01, 2009
There's more pain on the way for Australia's borrowers with the Reserve Bank today raising interest rates for the third time in as many months.
As widely tipped, the central bank lifted its key cash rate by 25 basis points to 3.75 per cent following its monthly board meeting. It's the first time the RBA has lifted rates three months in a row.
''In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,'' RBA Governor Glenn Stevens said in a statement accompanying the rates verdict. The central bank's ''gradual'' increases in rates will ''work to increase the sustainability of growth in economic activity,'' he said.
For a typical mortgage holder on a $300,000 mortgage, today's rate rise will add about $47 to monthly repayments, assuming commercial banks match the RBA's move.
The Reserve Bank has made regular public comments in recent weeks that it sees no need to keep interest rates at ''emergency'' levels as the economy rebounds from a slowdown during the past year. Ric Battelino, the RBA's deputy governor, last week said the economy's growth is likely to extend ''for a few more years yet.''
Even with today's rate increase, the Reserve Bank's efforts to tighten monetary policy are likely to be far from over.
"The big change in this statement was their reference to the increases so far as being material,'' ANZ's head of Australian economics Warren Hogan told Reuters.
''I read that as implying that they're ready to now sit back and watch how these increases affect the economy. And the hurdle for further rate hikes will be much higher than we have seen so far.
"So I think our view that they're going to 4 (per cent), 4.25 then sit there for much of the year is the right one. There's every chance they'll do it in February and March, although I wouldn't be surprised if it's dragged out over a number of months."
Before today's move, investors were betting that rates would rise to at least 4.75 per cent in a year's time - equivalent to four more rate rises over the period. Three weeks ago, however, the betting was for rates to rise to 5.25 per cent, indicating confidence in the economy's strength has recently diminished.
The RBA's board is not scheduled to meet again until next February.
Mild downturn
A year ago, the Reserve Bank was in the midst of a series of deep interest rate cuts as Australia joined other countries in attempting to limit the damage from the global financial crisis.
Last December, the RBA sliced one full percentage point from its cash rate, lowering it to 4.25 per cent on the way to a fifty year-low of 3 per cent by April. After a pause, the central bank has started to lift rates back towards more normal levels as fears of an economic crunch abate.
''In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,'' Mr Stevens said in his statement today. ''The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand.''
The jobless rate has been one of the surprises, with Australia's unemployment holding well below 6 per cent when many had predicted a level in excess of 8 per cent. Business investment has also held up well in large measure due to the sharp rebound in China and India.
''Prospects for ongoing expansion of private demand, including business investment, have been strengthening. There have been some early signs of an improvement in labour market conditions,'' Mr Steven said. ''The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.''
Market response
In the aftermath of the rates news, the Aussie dollar initially dropped before recovering to about 91.6 US cents, close to its level before the RBA statement.
Shares, though, turned mildly lower, recently trading about 0.2 per cent down for the day.
Homeowners may win rates respite today-STRUGGLING homeowners may be spared a pre-Christmas rate hike by the Reserve Bank -- a near unthinkable proposition barely a week ago. Interest Rates Decision Live Today
Dec 01, 2009
Key interest rates strategists have suddenly gone cold on the suggestion that the Bank will -- for the third consecutive month -- today lift its cash rate by 0.25 per cent.
They are now predicting a pause on rates, something of a relief for debt-burdened households heading into the festive season.
With questions remaining over the implications of Dubai's debt dilemmas, combined with a raft of softening economic data, the market has been forced to discount the likelihood of a December rate hike, from a near certainty down to only a 50 per cent chance.
But if the RBA board goes against the forecasts and does decide to raise rates today, it will be the first time since 1990 that the central bank has raised its cash rate in three consecutive months. That scenario could be seen as too heavy-handed given the current uncertainty surrounding the global economic recovery.
"All in all, it seems very likely that the RBA will indeed remain on hold at 3.5 per cent after its board meeting tomorrow. What's the rush?" Macquarie interest rates strategist Rory Robertson said yesterday.
He said it was more likely the RBA would come out of its summer hiatus and jack up its rates in February and, potentially, in March if the latest global fuss sparked by the Dubai Government's debt troubles provoked more global credit woes.
Morgan Stanley chief economist Gerard Minack was of the same mind yesterday, predicting a pause by the narrowest of margins.
The pause predictions are at odds with the wider consensus: 90 per cent of economists surveyed by AAP and Bloomberg at the weekend leaned towards a 0.25 per cent lift while a surge in the dollar yesterday indicated support for a modest rise.
Historic rate boost - ECONOMISTS expect the Reserve Bank to make history tomorrow by raising official interest rates for the third month running, despite a warning from the Federal Treasurer that companies are set to slash spending.
Nov 30, 2009
While the money market slashed the chance of a hike in official rates to 55 per cent on Friday, the overwhelming majority of economists surveyed believe the RBA board will increase the official cash rate at its meeting tomorrow.
But market volatility and Dubai's $64 billion debt crisis might stay the central bank's hand, one economist said.
Treasurer Wayne Swan warned company spending in the coming year is set to shrink for the first time since 2001.
"This confirms that businesses remain cautious and the near-term outlook for private investment remains weak," he said in an economic note released yesterday.
Despite the concerns, 13 of 14 economists surveyed by AAP and 18 of 20 surveyed by Bloomberg said they expect the RBA to raise official rates by 25 basis points to 3.75 per cent tomorrow, following two 25 basis point moves in October and November.
If it does, it will be the first time the bank has lifted interest rates three months in a row since it started announcing the rises in January 1990.
"The cash rate at 3.5 per cent is way too expansionary on an economy that won't experience the worst outcomes (of the global financial crisis)," Commonwealth Bank senior economist Michael Workman said.
4cast Financial Markets economist Michael Turner said that while he expected the RBA to lift rates by 25 basis points on Tuesday, recent market volatility could stay the central bank's hand.
Currency and stock markets faced twin worries on Friday after the US dollar hit a 14 month low against the yen and Dubai asked creditors for a "standstill" on paying back its $US60 billion ($A64.38 billion) debt until May next year.
In total, the state-backed networks nicknamed Dubai Inc are $US80 billion ($A85.85 billion) in the red. "Dollar yen has fallen through the floor today and there's some uncertainty with Europe, and this Dubai thing has just gotten ugly," Mr Turner said.
"I know the RBA wants to take a longer term view, but those on the board who are seeing that global confidence is good, but still fragile ... it doesn't make (them) comfortable raising rates.
"But longer term the fundamentals are pretty good."
CommSec chief economist Craig James said the local market should rebound today.
"Our market overreacted on Friday to the woes in Dubai, our banks have little or no exposure and the situation in Dubai is likely to get resolved," Mr James said.
"Certainly, the US market didn't fall to anywhere near the extent that the European markets fell on Thursday and the futures market is pointing to gains."
Late on Thursday reports emerged that Dubai World sought to delay debt repayments, with its property unit Nakheel seeking a standstill agreement on a $US3.5 billion ($A3.8 billion) bond due for repayment on December 14.
Dubai World, which manages strategic global assets, had borrowed $US80 billion ($A87.6 billion) during Dubai's construction boom.
US stocks dropped in an abbreviated session on Friday over concerns that Dubai's debt crisis could stall the global economic recovery from recession.
The Dow Jones Industrial Average fell 154.48 points, 1.48 per cent, to 10,309.92 as Wall Street returned from Thursday's Thanksgiving holiday.
Third of Aussies plan to buy property - MORE than one third of Australians plan to buy a property in the next two years despite concerns over higher living costs and rising interest rates, a survey shows.
Nov 27, 2009
And 40 per cent of Australians plan to revisit their financial plans as the nation emerges with a more positive economic outlook, the survey, commissioned by mortgage broker Mortgage Choice, found.
Mortgage Choice corporate affairs manager Kristy Sheppard said more borrowers were now taking "ownership" over their financial situation.
"As a housing market service provider, Mortgage Choice is pleased to see 41 per cent of respondents planning to buy property in the next two years and 43 per cent of them planning on an investment property.
"Hopefully, increasing demand from this buyer group will stimulate more housing construction," Ms Sheppard said.
"The Australian housing market has emerged from the financial crisis relatively unscathed compared to its global counterparts, which would probably be part of the reason why 64 per cent of respondents believe house prices will rise in the period to November 2010."
The survey found 40 per cent of mortgage holders believed they could afford to make repayments at an interest rate of more than 11 per cent.
The online survey of 1025 Australians, conducted in early November, found 19 per cent of respondents were most concerned about rate rises while 16 per cent were concerned about job security.
It follows a similar survey last year that found 20 per cent of Australians had concerns over job security and 18 per cent were concerned by the federal Government's economic management.
Ms Sheppard said that while many borrowers were concerned about rate rises, 40 per cent were prepared for increases of at least five percentage points, a much higher figure than was forecast for the next few years.
"This suggests many borrowers can comfortably repay their home loan sooner, if they put their mind and budget to it," she said.
"Improved sentiment from Australians around their livelihoods is also terrific to see."
Almost three quarters of respondents were confident the Australian economy would be strong during 2010.
In a further sign of consumer confidence, 17 per cent said they could afford "any increase".
Two thirds of participants believed rates would rise by between 0.25 per cent and 1.5 per cent before June, 2010.
The survey also found more than 60 per cent of West Australian baby boomers believed investing in property was safer than investing in shares.
RBA signals golden era of growth ahead - Australians can look forward to years of brisk economic growth built on booming resource investment, rapid population growth and rising household incomes, a top central banker says.
Nov 26, 2009
In a resoundingly upbeat speech that only fuelled speculation about an imminent increase in interest rates, Reserve Bank Deputy Governor Ric Battellino today also highlighted the strength of Australia's major Asian trading partners.
Mr Battellino noted the domestic economy had held up much better than expected this year, being the only developed economy to boast year-ended growth.
"With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet," said Mr Battellino, in a speech to a housing industry conference.
Rate rise ahead
"He's essentially hinting at a new golden era of growth ahead for Australia," said Su-Lin Ong, a senior economist at RBC Capital Markets. "It suggests that there is no strong argument for a pause at next Tuesday's RBA board meeting."
Investors seemed to agree, according to one measure of pricing from Credit Suisse, which showed a 77 per cent chance of a rise to 3.75 per cent at the RBA's meeting on December 1.
December interbank futures slipped to imply a rate of 3.69 per cent, compared to the current 3.5 per cent, and heralded further rises to 4.5 per cent by June. That outlook helped lift the Australian dollar half a US cent to $US0.9250.
The RBA had already hiked rates in October and November, the first in the G20 to do so since the global credit crisis began.
Global growth picking up
"While the world economy as a whole is forecast to remain relatively sluggish next year, economic growth for the group of countries that comprise our major trading partners is expected to recover to a relatively normal pace," he said.
Mr Battellino played down concerns that weakness in the North Atlantic economies would prevent a recovery in Asia, noting that much of the expansion in the region was fuelled by domestic demand rather than exports.
For China, domestic demand had contributed on average close to 9 percentage points per annum to growth over the past decade, while net exports contributed about 1 percentage point.
"Importantly, the authorities in most of these countries have plenty of scope to pursue policies that sustain domestic demand," he added.
Rising demand in Asia was also fuelling a boom in resource investment in Australia, notably in mining and liquified natural gas. "If this scenario eventuates, it will have powerful and broad-ranging implications for the economy," he added.
For one thing, demand for labour would likely keep immigration strong and thus support rapid population growth, he said. Household incomes were likely to rise solidly, which would help underpin the demand for housing.
The construction industry would likely face substantial competition for workers from the mining sector. Indeed, the need to build enough homes to meet rising the population would stretch the housing industry.
Case for high house prices
Mr Battellino said Australian home prices relative to incomes did seem high compared to, say, the United States. Yet he also saw good reasons for this, including the fact that Australian households spent less of their incomes on non-housing consumption than Americans and tended to pay debt off quicker.
"The experience of the last few years suggests that the Australian household sector as a whole appears to have the financial capacity to sustain a relatively high ratio of housing prices to income," he said.
Mr Battellino also played down worries the global credit squeeze would limit the supply of mortgage credit in Australia, saying lending by banks was relatively high and more than enough to fund needed housing investment.
Bank rewarded for dumping fees - IT WAS a colossal gamble -- the first major bank to dump penalty fees to appease angry customers, a move that would flush more than $100 million down the drain annually.
Nov 25, 2009
But it appears National Australia Bank's pre-emptive bet on fee reductions has paid off in spades.
A month after dumping all penalty fees, NAB saw a 40 per cent reduction in customer complaints and a sixfold increase in customer acquisitions.
NAB chief executive Cameron Clyne yesterday admitted his market-leading purge on penalty fees was so successful in driving new business and generating customer goodwill that it almost covered the drop in fee revenue.
The bank announced in July it would be dumping its overdrawn account and dishonour fees in a bid to win new customers and improve the bank's image.
Rival banks responded to the move almost immediately, but none followed NAB's lead in scrapping penalty fees altogether, with Westpac, Commonwealth and ANZ preferring only to lower such fees to $9, $10 and $6 respectively.
Speaking at an Australia-Israel Chamber of Commerce lunch in Sydney yesterday, Mr Clyne refused to give specifics on how much revenue the new customers were generating, but said its leadership on fees had helped rebuild the bank's shattered image.
"Banks have eroded their image and we have addressed that simply by listening to our customers," he said. "But we have a long way to go. I feel like we have been swimming for eight metres in a 1500m race."
Mr Clyne also said the bank was running the magnifying glass over various financial assets in Britain that are likely to be thrust on to the market in the coming months.
European regulators have ruled that British banks that were propped up by the government during the global financial crisis must sell some assets to not only stop them having an unfair advantage, but also to increase competition.
That ruling is likely to see the Royal Bank of Scotland and Lloyds Banking Group sell auxiliary businesses and individual branches, giving NAB's Clydesdale Bank and Yorkshire Bank an opportunity to expand its business via acquisitions.
Mr Clyne said he was watching the process "very closely".
"We've got two routes there -- either expand or get out," Mr Clyne said. "It's not clear exactly what assets will be divested. There's not enough detail yet as to how the market might play out."
Competition opens door to best home loan rates - At Touch of Finance we can help you choose the best home loan
Nov 24, 2009
FIERCE competition in the home loan market has given borrowers many choices of products, some with good rates and others with lots of useless bells and whistles.
So how do you simplify the range of different offerings?
Consumer advocate at Resi Mortgage Corporation, Lisa Montgomery, says before you commit to a mortgage, you need to understand the structures available, what they can offer you and which one is your "perfect match".
Variable rates
These are the most popular among borrowers as they largely mirror what's happening to official interest rates and provide the borrower with the most flexibility.
The average standard variable rates are currently sitting around 2.5 percentage points above the Reserve Bank's official cash rate of 3.5 per cent but can vary up to half a percentage point between major lenders.
Fixed rates
With fixed rates, someone always loses. It's either the lender or the borrower, and the lender has all the tools to make a more accurate call of where rates are headed.
Rates on fixed loans are generally set for a period of one, two, three or five years, with some longer.
Borrowers who want certainty of loan repayments like the appeal that fixed loans can offer, particularly in a time of rising rates, but they usually have high break fees.
Honeymoon rates
These are normally variable, and considerably lower than the average standard variable rate by 0.5 to 1 per cent for a defined period of time.
These loans appeal to first-home buyers and others looking for a good head start.
They are routinely offered for 24 months but may also be offered for 12 or up to 36 months. Remember that these loans still move up and down with interest rate movements.
Tracking rates
These loans are new arrivals on the market. The rates are "tracked" against the average standard variable rates of the big four banks and are promoted as being lower than those rates by a certain amount of (usually) between 0.5-1 per cent for certain time periods, usually up to three years.
Be aware of the two main differentiators between the tracking rates of various loan providers which are the fees associated with the loan and the revert rate when it comes off the tracking rate period.
First home blockade - BABY Boomers and Gen Xers are opting to stay put in their homes rather than sell, making it harder for Generation Y to get into the housing market, new research shows
Nov 23, 2009
BABY Boomers and Gen Xers are opting to stay put in their homes rather than sell, making it harder for Generation Y to get into the housing market, new research shows.
Only 44 per cent of Australian households have moved in the past five years compared with 73 per cent a decade ago, a Commonwealth Bank housing study has found.
Craig James, a retail economist and the study's author, said the results reflected the ageing population, rising moving costs and an increase in the number of people happier with where they lived.
"Once people have found their dream home they will stay there, but it's interesting over the past decade, even among the home owners, there has been less propensity to move," he said.
"That may be good for the Baby Boomers and Generation X, but if they don't want to move, and state and territory governments don't increase housing supply, then it really puts big pressure on Generation Y to find their homes, and at a reasonable cost."
In Victoria, only 40 per cent had shifted since 2004, and Mr James said the higher cost of stamp duty in the state might have been a factor. "State and territory governments need to pay attention to that," he said.
Private renters were most likely to shift to a new abode, with 85 per cent moving.
The data also showed only 15 per cent of home owners without a mortgage had sold their primary residence, while in 1999 the number was closer to 60 per cent, and 42 per cent of mortgagees changed their address, a 25 per cent drop.
"If you get people who decide to stay in their place for longer, it makes it very, very hard for renters and people wanting to buy to shift out of their accommodation and find the place that they want," Mr James said.
According to the Australian Bureau of Statistics' Housing Mobility and Conditions report single parents were the most frequent house movers, shifting three or more times in five years, with childless couples the most likely to stay put.
The main reason Australians move house is to purchase their own, wanting a bigger or better home, and for neighbourhood reasons.
In 2007-08, the ABS also found most Australian houses were in good condition with no major structural problems, but cracks in the walls or floors were the most common problem followed by sinking foundations and major plumbing issues. Households in Victoria and Tasmania were more likely to report structural problems, with Queensland and Northern Territory homes the least problematic.
The most common types of housing repairs are plumbing, painting and electrical work.
Australia ahead of the pack on jobless - THE OECD says Australia's unemployment rate has stabilised and will not reach the peak of 8.5 per cent predicted in the May Budget
Nov 20, 2009
THE Organisation for Economic Co-operation and Development says Australia's unemployment rate has stabilised and will not reach either the peak of 8.5 per cent predicted in the May Budget or the lower peak of 6.75 per cent forecast in this month's mid-year budget review.
The OECD's assessment, that the unemployment rate will touch just 6.3 per cent next year before turning down, has Australia performing better than any Western country other than Norway and Switzerland.
It says unemployment in Britain will peak at 10 per cent and unemployment in the United States at 10.9 per cent.
Australia's unemployment rate is 5.8 per cent, close to the projected peak of 6.3 per cent in the fourth quarter of 2010.
But detailed employment figures released yesterday indicate that rates will vary nationwide and within each city.
The statewide Victorian unemployment rates of 5.4 per cent for men and 5.2 per cent for women bear little relationship to the extraordinarily low rates of 2.7 and 4.2 per cent experienced in what the Bureau of Statistics describes as southern Melbourne and the 3.4 and 3 per cent on the Mornington Peninsula.
Melbourne's worst unemployment rates are in the south-east where the female rate hits 10.6 per cent and in the north-west where the male rate hits 10.3 per cent.
Unrelated wage data shows pay packets growing faster in the mining states than in NSW and Victoria.
Queensland has overtaken Victoria as the third best-paid state after Western Australia and NSW with a new average wage of $61,500, compared with Victoria's $60,800.
Queensland wages climbed 5.6 per cent, Western Australian wages 6.9 per cent and Victorian wages 4.2 per cent. Western Australia is the best-paid state in the nation with an average annual wage of $67,900.
The OECD says Australia will be only one of three member economies to grow in 2009 and predicts that the Reserve Bank's cash rate will hit 5.5 per cent by mid next year.
Home deposit rules could stem price bubble - A SENIOR Reserve Bank official has floated the idea of regulating the size of deposits home buyers must provide to banks, in an attempt to prevent credit-fuelled asset bubbles.
Nov 19, 2009
A SENIOR Reserve Bank official has floated the idea of regulating the size of deposits home buyers must provide to banks, in an attempt to prevent credit-fuelled asset bubbles.
Amid a raging debate over whether central banks should intervene in asset bubbles, an assistant governor at the Reserve Bank, Guy Debelle, yesterday pointed to moves by Asian governments to tighten lending standards.
Hong Kong, for example, brought in rules last month requiring home buyers to tip in a higher proportion of cash when purchasing properties in an effort to prevent a property bubble. Some flats in Hong Kong have have risen in value by as much as 40 per cent this year.
Asked what central banks could do to address bubbles, aside from raising interest rates, Dr Debelle noted this tightening in loan-to-valuation ratios (LVRs).
''At the moment ... Singapore and Hong Kong are concerned about what's going on in property prices; they're changing maximum LVRs,'' he said at a financial services forum in Sydney.
Australian banks have already tightened the amount of money they will lend to first-home buyers, after low interest rates and generous handouts fuelled a surge in demand.
But as house prices rise, economists are discussing ways to control asset bubbles aside from using rising interest rates, regarded as a blunt instrument because it dampens activity across the economy.
However, mandating how much banks can lend to prospective buyers would be an unorthodox step for regulators, and Dr Debelle stressed that the debate was incomplete.
Banks have already tightened lending standards in the sectors of the market seen as most risky. Before the crisis banks would lend 100 per cent of the value of a property, but this has fallen to about 90 per cent, with tougher standards for first-home buyers.
Banks also require borrowers to take out mortgage lender's insurance for all loans with a deposit below 20 per cent, at a cost of several thousand dollars.
The companies selling this insurance - Genworth, QBE LMI and St George - have posted steady rises in profits during the recession, even in 2008 when mortgage defaults peaked, the report said.
Mortgage insurers in the United States and Europe have been hit by higher default rates and hefty falls in house prices.
Moody's has a negative outlook on the sector in Australia, but said the number of defaults would not reach the levels seen in Europe, in part because high immigration and the strong economy would support house prices.
A report by JPMorgan and Fujitsu last month said that tighter lending standards meant that a return to to the ''re-gearing'' that drove a massive jump in Australian house prices between 2002 and 2006 was unlikely.
THE purchase of an already established home does not attract GST.
However, this is not as simple as it appears, so be careful - services by professionals do attract GST. Check with your professional adviser about GST before you sign the contract.
2 - Do I have to go to the settlement myself?
No. You can have a representative at settlement. This can be anyone who represents you. As long as you send the cheques made out to the right amount it will be fine. You should give the representative written authority to act on your behalf. If the seller sends a representative, they should also have a written authority to accept the purchase money from you or your representative.
3 - Do I have to pay for statutory certificates?
The charges are different for different authorities. To be sure, ring the statutory authority for the right charge and address.
If you are using a lawyer or a conveyancing company, they will know these details.
4 - What happens if settlement is delayed?
This depends on why it is delayed.
If it's your fault, the seller will probably ask you to pay penalty interest.
5 - Should I use a buyer's agent?
A buyers' agent acts exclusively for the buyer.
It appeals to some and not others, and in general you will be charged a fee (which you should be able to negotiate).
Some also act as real estate agents - check it out and decide if you are better off than simply using an estate agent, but make sure you do your research.
6 - What sort of special conditions are likely to be in a contract?
They can cover many issues. Some of the conditions you should be wary of include: releasing the deposit before settlement, penalty payments if you don't settle on time, etc.
7 - What if I do a title search and discover a caveat on the property?
A caveat is a warning that another person or company has an interest in the property.
For example, it may be to secure a personal loan. If there is a caveat, make sure that it is removed before or at settlement.
8 - When should I get insurance?
You should think carefully about insuring the property after you exchange contracts. Although it is not strictly necessary until settlement, you are entitled to have insurance from the time of exchange.
Check with your solicitor or conveyancer.
9 - Can I buy a house with another person?
There are two types of co-ownership.
Joint tenants are just that - they own the property "jointly". This is usually the way property is owned by married and de facto couples. Joint tenants own equal shares of the property.
Tenants in common can sell their share of the land or leave it to any person in a will. Tenants in common can own the property in equal shares or on any other basis, eg 70 per cent - 30 per cent.
10 - Who does conveyancing?
Mainly solicitors. In some states there are also licenced conveyancers. There are also do-it-yourself kits produced for some States.
When you are deciding which to use, some of the issues you should think about are:
o What's the cost?
o What protection is there if they make a mistake? Is there indemnity insurance which covers faulty work?
o Are there other issues that you may need advice about?
o Does the conveyancing looks straightforward (are there caveats, covenants, has the house been owner-built)?
o Do you have the time and energy to do-it-yourself?
WHEN confronted with difficult choices, the options can feel like deciding between swimming a river full of crocodiles or staying to fight a pack of dingoes. So what should you do?
Here are some tips to help you navigate through this challenging obstacle course.
The logical way
The good old pros and cons list. This will clarify the issues and benefits associated with each choice.
Sometimes the choice becomes clear at this point. The next step is just taking the plunge.
The intuitive way
Step 1. Employ the self-examination technique. If the choices weigh up evenly and both fill you with dread, then you need to look internally and ask a serious, lay-it-on-the-line question:
"Are you making conscious choices based on your vision and purpose, or are you falling back in to ways of thinking and feeling that are based on fear and worry?"
Unconscious fear and dread are not good things to use to guide decisions.
The next step is to tune in to your inner compass for guidance.
Step 2. Get to the bottom of it: what do you really want?
There's a big difference between this and "What should I do?"
The 'shoulds' weigh you down, after all obligation is hardly inspiring.
What you 'want' focuses your thoughts on possibilities, and gets to the real heart of the matter - what is your ultimate desired outcome.
Step 3. Look after you: what is in your best interest?
We often put everyone else ahead of ourselves and this serves no one's best interest.
Being of service and making a contribution does not mean sacrificing your own health and happiness.
Dealing with cancer made it very easy for me to say 'no' and make decisions as my life was literally on the line.
Now I know I do not need a life-threatening illness to give me permission to look after me and my best interests. No one does.
Your life is sacred, whether under threat of illness or not.
Stop making decisions that sacrifice its primacy, for this is indeed how you invite illness into your life.
So, ask what is in your best interest, and explore this authentically.
Step 4. Heed your innards: what does our Inner Voice say?
We've all got that guiding inner sense. Call it intuition, call it your Higher Self, call it God. Most of us have learned to ignore it rather than be guided by it.
However, tuning into your feelings and your hidden inner thoughts is one of the most reliable sources of guiding intelligence.
Step 5. Now what? Have you still got resistance?
Likely any tremors of doubt or worry are lingering hangovers from an old way of feeling and being, based in fear, judgement and worry.
This is just the detoxing process as you choose a heart-centered way of being, instead of the fear-based way of being.
Your new self-awareness strengthens your inner resilience.
As you step through the moment of making the decision, you will experience a profound relief
Any remaining resistance will slip away - a spiritual cleansing of your soul, like new rain washing away muddy waters.
For more from Zoe Routh, head to Flying Solo, Australia's community for solo and micro business owners.
When arranging a loan, borrowers need to attend to several crucial issues.
Australian consumers like to think of themselves as financially literate people, able to assess financial products and make an informed choice. Paul Ryan disagrees.
Ryan is a founder of a website called Home Loan Hints, which offers borrowers an opportunity to ask questions about mortgages.
Ryan says: "It is true that we know more about finance than we did a decade ago but we are still not good at doing the preparation before going out to get a loan or reviewing the loan. We are not good on the detail. Ask people what their home loan or credit card interest rate is and most can't tell you."
The questions and answers stay on the site so browsers can consult them. Questions cover whether to fix loans, buying investment properties, the pros and cons of reverse mortgages, government grants, insurance and how to work out loan serviceability.
Ryan recommends borrowers attend to a few important matters before they go looking for a home loan. "Many young borrowers have no idea about their credit rating. Apart from the past couple of years, credit has been very easy to get and people have become accustomed to applying for multiple credit cards and store finance. They do not realise that each time they apply for credit it goes on their credit file.
"Their credit rating is something they have to look after," he says. "They should get a copy of their credit rating and make sure there are no mistakes on it."
Ryan says savings are critical. Most lenders now require a minimum 5 per cent of "genuine" savings before they will consider providing mortgage finance. That means deposits that did not come from government grants or gifts from parents.
Borrowers need to look at different loan options and work out what features they want. "People need to assess this question critically. A lot of people end up paying a premium for redraw and offset functions they never use. A cheap, basic variable-rate loan might serve them just as well," he says.
Ryan says lenders will assess the borrower's ability to service a loan based on interest rates that are 2 percentage points higher than the current rates. People can easily check that out for themselves. "People ask a lot about costs involved in making additional payments, paying a loan out early and so on. This is after they have taken the loan out. These are things that should be checked out before signing a contract.
"They should have a plan to review their loan on a regular basis, either with the lender, a broker or on their own. They need to keep a list of their requirements when they borrow and then refer back to that list to make sure the loan is meeting their needs."
How to bridge the gap
Finding bridging finance is one of the most difficult tasks a property buyer can face, says Opportune Home Loans director Paul Ryan. "Bridging finance is expensive and
hard to find. If you have bought a new property before the old one is sold, the first thing you have to do is negotiate a long settlement period on the purchase and
arrange the sale of the old property as quickly as possible."
Ryan says the most popular bridging loan with the loan writers he knows is St George's Relocation Home Loan. The loan is structured so the borrower only borrows the amount of the
deposit for the new property at purchase and then draws down the balance at settlement.
Few people took the chance to lock in low interest rates.
Home buyers and others with large debts took two big gambles during the past year when the Reserve Bank of Australia cut rates to levels that might only be seen once in a lifetime. They didn't fix their mortgage rates and they didn't reduce their overall borrowing.
Now we are about to find out if they made the right calls.
The RBA move last week to put up interest rates by a quarter of a percentage point is likely to be the first of a number of rises. Economists forecast that the official cash rate, which sat at 3 per cent for five months, could rise to 4 per cent, 5 per cent or even 6 per cent before this new round of tightening is finished.
Borrowers will have to take a look at how their budgets would be affected if their rates went up by that much.
Savers who might have been tempted by two- and three-year term deposit rates of 5 per cent or 6 per cent might consider keeping their money in shorter-term accounts so they can take advantage of increases in deposit rates.
A banking analyst with J.P. Morgan, Scott Manning, says the behaviour of borrowers in the past year has surprised him. Despite the very low rates there has been almost no overall reduction in household gearing. He has also been surprised so few borrowers have taken the opportunity to lock in low rates.
"There was a slowing of the growth in housing outstandings as a percentage of disposable income at the onset of the crisis but this percentage has subsequently rebounded to an all-time high at around 150 per cent," Manning says. "Household interest payments as a percentage of disposable income, while falling dramatically following initial rate cuts, hold the potential to return to around 11 per cent of total disposable income if interest rates increase by 2 percentage points."
He says borrowers preferred to bet that sticking with variable rates would be a better option than fixing. "It may be a case of once bitten, twice shy. Over 20 per cent of households locked in fixed-mortgage rates of between 8 per cent and 9 per cent over the course of 2007/08 and paid substantial exit fees to break those contracts."
About 8 per cent of home-loan borrowers are now taking out fixed rates and it is not hard to see why fixed rates have not been more popular.
The average three-year fixed rate of the big four banks was 7.12 per cent and the average five-year fixed rate is 7.77 per cent before last week's official rate rise, according to banking industry research group Infochoice
With most borrowers able to get some form of discount on the standard variable rate, people were paying about 5.1 per cent for their variable-rate mortgage. Infochoice says the gap between fixed and variable rates is wider than it has been for many years.
The joint head of lending at Centric Lending Services, Sheyne Walsh, advises his clients to look at the fixed versus variable question this way: "If you are paying a little over 5 per cent on a discounted standard variable rate now and rates go up to 10 per cent over the next five years, your average rate over that period will be a little over 7 per cent. Five-year fixed rates are higher than that now. But if you think rates will get to 10 per cent and you can't afford the repayments at that level, then you should work out the point at which you have to move out of variable and into fixed."
For a $250,000 loan at 5.78 per cent (the average standard variable rate of the big four banks before the latest rise) the monthly payment is $1577.30 and will go up $38.04 with a rate increase of 0.25 of a percentage point.
Cashed-up investors with their money in high-yield savings accounts and term deposits will have to review the changing mix of short- and long-term rates on offer to see what's best for them.
A director of fixed-interest broker Curve Securities, Andrew Murray, says one-year rates are the best in the market now. "Some financial institutions are paying more than 5 per cent for one-year terms. You would have to say that is very attractive. A 2 per cent yield over the cash rate with money tied up for only a year is very competitive."
The Infochoice online database shows Suncorp, Heritage Building Society, Macquarie Bank and ME Bank offer 5 per cent or more for one-year term deposits. Among the big banks, St George was offering 4.85 per cent for one year; Commonwealth, Westpac and National Australia Bank 4.5 per cent; and ANZ 4.25 per cent.
Whether having your money tied up for a year is a safe bet depends on how far and how quickly rates move up. Markets economists disagree about how far rates might climb in this cycle but they all agree that the rise will be slow and steady.
Where to for rates?
Westpac chief economist Bill Evans says: "We expect the peak in rates in mid-2010 to be around 4 per cent, with the bank likely to be pausing over the second half of the year."
ANZ's economics department predicts the official cash rate will reach 4 per cent by the end of 2010.
CBA says another rate rise is likely before the end of year but "there are enough uncertainties to mean that the withdrawal of stimulus should be gradual".
Macquarie Group commented last week: "If the Australian economy continues to strengthen, we can expect the RBA over an extended period to move through its various policy settings, from emergency (3 per cent) towards easy (4 per cent) and then neutral (5 per cent or so)."
John Ilhan might have given off the aura of a happy-go-lucky businessman, the man behind some massively successful PR stunts, but behind his achievements in building up the Crazy John's empire was a person who always knew how to clinch the deal.
The street smart, savvy salesman, had a talent born out of selling cars at Ford Credit and becoming Strathfield's top mobile phone salesman in his early 20s at a time when mobiles were as big and heavy as bricks and cost more than $5000 - hardly today's affordable fashion statement.
Few people would remember that John began Crazy John's in the depths of the 1991 recession, when he leased a small shop in Melbourne's cosmopolitan suburb of Brunswick, when all he could afford where a few trestle tables and a stack of brochures to try and sell phones. Purchasing stock for John just wasn't an option given he had to borrow money from his father just to afford the lease.
Starting with so little focused his mind in what the customer really wanted. They wanted better deals - they simply didn't want to spend $5000 on a mobile phone. His solution initially was to buy secondhand phones and pagers from ads in the Trading Post - and re-sell them well below the prices offered by competitors selling new phones. The key was to slash margins and work towards sales volume.
John always joked that he didn't have to do any market research on demographic customer shifts when deciding where to open a new Crazy John's store - he just waited for Telstra or Optus to set up a shop in an expanding area and he'd set one up across the road and offer what he considered better deals.
Store location was everything and so was a headline grabbing deal that captured the imagination of the customer. John was the first in Australia to introduce the $1 phone and the first to bundle accessories with a phone. He broke the rules to create a brand that was fun and irreverent - and broke ranks.
He recognised that Australians loved sport - just like he did - so he aligned the brand with AFL and rugby league teams and was bold enough to try and bid for naming rights to Perth's Subiaco Oval.
John told me the story of trying hard to lock down a new store location for Crazy John's in the heart of Sydney in George Street to give the brand greater prominence in the Australia's largest city.
The site was a hairdressing salon, so John and his close friend Brendan Fleiter simply arranged to fly to Sydney to meet the owner, did the deal on taking over the lease on the spot and left a deposit on the owner's EFTPOS machine as an act of good faith. The hairdresser's bank later contacted the owner querying who paid for a $5000 haircut.
That was John Ilhan - immediately know when he had a good deal, get the deal done quickly and move on.
That's why Crazy John's became Australia's biggest independent mobile phone sellers and John became one of the pioneers in developing Australia's mobile phone industry.
DEMAND for home loans grew by more than 5 per cent in September in what appears to have been a last minute rush by first home buyers to secure the full benefit of a more generous housing grant.
Owner-occupier home loans jumped by a seasonally adjusted 5.1 per cent to 65,505 in September, ending two months of slowing demand, according to Australian Bureau of Statistics data released today.
Economists' forecasts had centred on a 3 per cent rise for September.
The proportion of home loans granted to first time buyers was 26.1 per cent in September, up from 24.7 per cent in August.
However, it remained below the record 28.5 per cent peak set in May.
ANZ economist Alex Joiner said the figures represented "one last surge" from first homebuyers.
"This is not only as the grants are wound back but also as interest rates rise," he said in a research note.
"With more interest rate hikes on the horizon we do not expect that prices will be pushed up as rapidly going forward as they have been in 2009 to date," Dr Joiner said.
From October 1, the Federal Government's increased first home owners grant was cut to $10,500 from $14,000 for established homes and to $14,000 from $21,000 for new properties.
The grant returns to its original $7000 for both categories from January 1 next year.
Today's data precedes the two interest rate increases made by the Reserve Bank in October and November.
COMMERCIAL property investment is not just about investors with deep pockets and buying tall buildings.
Ordinary Australians can own a slice of commercial real estate for only a few thousand dollars, but like all investments they need to do their homework.
There are more things to consider than with residential property investment. Do you go for a tiny piece of a shopping centre by buying shares in Westfield Group? Do you pool your resources with friends or strangers through a property syndicate? Or do you go it alone, either inside or outside of your super fund?
CB Richard Ellis director Philip Rundle says there are four key financial questions every investor should ask before taking the plunge.
Firstly, is the lease secure? "Always read the lease and ask questions where there is any uncertainty," Rundle says.
Secondly, what will the stamp duty cost you?
"Stamp duty can often be a big amount and get forgotten in the purchase calculations," he says.
Thirdly, is the rent net or gross?
"It is important to know what the property's outgoings are and, more particularly, who pays for them," Rundle says.
The final question is: Does the yield reflect the quality of the improvements to the property, the terms of the lease and the strength of the tenant?
It's likely to be a lot tougher to find a new tenant for your office or warehouse than a three-bedroom townhouse on the city fringe.
Going solo
As most commercial properties won't give you much change from $1 million, this is the most expensive way to get into commercial property investment.
But investors can be creative. Rundle says car park spaces are a form of commercial property and can be bought for less than $50,000 a space.
Solo investors tend to stick with what they know. Savills national head of research Tony Crabb says they often target "the ever-popular bank branches, fast food outlets, occasionally a service station, and the street-front shop".
"Sometimes they run their own business out of it," he says.
"These properties are regarded as having stable returns.
"Most remain occupied for a long period and are rarely vacant."
Sean Ryan, director of specialist property law firm FR Law, says research is a key to success, as is "good financial and accounting advice about the correct vehicle in which to structure the investment".
Location
"People often think of inner-city high-rise, but there's a substantial amount of investment that occurs in the fringe CBD and even the suburbs," Ryan says.
He says investors can add value by choosing a site that has flexible development guidelines.
Rundle says people should look for properties in busy areas specific to a particular sector.
"Look for opportunities in locations that have been appropriately zoned for a specific use and which are near larger development sites or land users which may require expansion in the future," he says.
Google Earth can represent a commercial property investor's best friend, Rundle says.
"At the push of a button, Google Earth will give you an instant snapshot of the entire surrounding area, nearby development and major space users. It may also highlight potential liabilities in the area which makes it an invaluable tool when making a major purchase in property," he says.
Syndicates
Pooling your financial resources with others to buy commercial property through a syndicate is a common starting point. These are typically run by either specialist syndicate companies or organised through an accounting firm.
Getting into a syndicate can cost as little as $10,000, Crabb says.
Ryan says property syndicates have grown in popularity in recent times as many investors became disillusioned with the share market.
He says most syndicates are made up of between two and 10 investors. "Beyond 10 it becomes a bit unwieldy," he says.
Anyone investing in a syndicate needs to make sure everything is documented, Ryan says.
"A handshake doesn't cut it anymore," he says. "It's very much a corporate marriage and a corporate divorce.
"You need to decide how you are going to run it and how you are going to get out when it's time to get out or things go wrong such as death, disability or dissatisfaction."
Rundle says syndicates can offer great opportunities but investors should be cautious.
"It's best to only get involved with a professionally structured syndicate that has an experienced manager involved," he says.
"Syndication usually requires a long-term commitment and does not offer a lot of flexibility to individual investors in the event their circumstances change. Being locked into a syndicate when an unexpected personal financial event may occur can be devastating."
With clearance rates high, it takes discipline to ensure you don't pay too much in the bidding room.
Rising auction clearance rates have set the amber light flashing for those who believe you're better off finding a "For Sale" sign than buying under the hammer.
A year ago, sellers in Sydney and Melbourne had only a 50:50 chance of seeing their property go at auction. But auction clearance rates have surged above 70 per cent in recent weeks.
Buyers' agent David Morrell, who operates in Melbourne and Sydney, says: "What we're seeing at the moment, particularly if it's a good-quality property, is an auction can be a painful experience - there's no such thing as 'pinching' a triple-A address."
Property investment adviser and author Margaret Lomas, of Destiny Financial Solutions, says there's only ever a slim hope of bagging a bargain at auction anyway - perhaps if your research shows there's not much demand in a particular area or much interest in a particular property.
"But in a situation where demand exceeds supply - and that's easy to work out, as there'll be a lot of auctions, a lot of people at auctions and clearance rates will be pretty high - in those circumstances, stay away from auctions."
Lomas says the problem is that few buyers have the willpower to avoid getting carried away at auction - and losing your head can be devastating for your investment or, for owner-occupiers, your personal finances.
"If you're buying as a property investor, I really recommend against going to an auction," she says.
"As an investor, cash flow is pretty important ... if you've done the right kind of research, you'll have estimated what price you can get the property at, what rent it's going to get and you'll have a fair idea of what the costs are going to be.
"If you go to an auction and you get carried away by the emotion of the auction, which most people do - people become quite competitive at auctions - it's highly likely that you'll pay more than your figures suggested you should pay.
"For some people that could be a financial nightmare."
Let's say you're proceeding on the basis that the annual interest cost on a $500,000 purchase will be $480 a week. If you end up paying $530,000 at auction your interest cost jumps to $510 a week.
"That's $30 a week you may not be able to afford," Lomas says.
There's no denying it's a more emotional decision for an owner-occupier, who's choosing a home not an investment, but the bottom line - the monthly repayment - still matters, she says.
"An auction will be OK but the warnings remain. If you're inexperienced, at least take someone experienced along with you to bid on your behalf and make sure you're clear on what price you'll go to."
All buyers should have built 2 percentage points of interest rate rises into their calculations before they lift a hand at an auction, she says.
Property lawyer Carolyn Deigan, managing director of the firm Prudent Juris, thinks the only beneficiaries of auctions are real-estate agents. However, one of her tasks is bidding on behalf of clients. Deigan says her advice at auction is to "never, never, never bid until the property has reached the reserve".
Auctions are psychological theatre, she says, and silence gives you the advantage.
If there hasn't been a bid, the agent will try to get you to bid to show your hand, she says, but don't do it.
If there's been some bidding but the property hasn't reached the reserve price and therefore isn't officially "on the market", you'll be urged to bid so the property is passed "in your favour". Deigan says to tell the agent: "No - but I might bid if you reduce the reserve."
"If the property is passed in to another bidder and you identify yourself to the agent as an interested purchaser, they will negotiate with you as well," Deigan says.
Should the property reach its reserve, start to bid strongly and quickly in small increments - with the aim of scaring others into thinking you'll just keep going and they should give up now.
Deigan and Morrell both say they're not shy about talking to other bidders. They'll follow the agent around the room and ask other bidders what the agent just said to them.
Morrell says he'll sound out a rival bidder about how far they're prepared to go, asking: "Have you got another 100 [thousand dollars]?", suggesting they may as well drop out now.
Deigan says there's a point where you've got to stop, not just because you're in danger of paying too much but also because by pushing another bidder higher you're helping to inflate prices generally.
"If you don't get this property, you don't want to make the next one you try to buy more expensive," she says.
There's one plus side to auctions - at least you know where the market is, Morrell says. "With a private sale you could be $200,000 or $300,000 over the market and not know it." (See our story on working out the true value of a property so you pay the right price, page 14.)
Of course, you could always try to secure a property before auction but Morrell says you need to be sure you're not paying an unnecessary premium for taking it out beforehand.
If you make an offer, don't leave it sitting there to be offered against, he says. Set a deadline and tell the agent that if the offer is rejected they should come back with the figure at which they'll sell.
"Be in control," he says. "The whole idea when buying a property is to be in charge of the negotiation, to be proactive not reactive, whether it's a private sale or an auction."
Need to know
Few people have the willpower to avoid being carried higher at an auction.
Investors in particular can't afford to blow their budget.
If you must take part in an auction, don't bid until the reserve is reached.
After that, bid strongly and quickly to disconcert other bidders.
Whether it's a private sale or auction, be in control of the process by taking the initiative.
House proud
Kylie and Mark Watson have bought houses by private treaty and by auction but much prefer auctions because of the certainty and control.
"We've bought a few houses by private treaty and they leave you hanging ... you feel quite powerless," she says. "At an auction it's only 15 to 20 minutes that you have to play 'the game', versus three or four days with a private sale: they might not call you back, then they turn your offer down, then you don't call them ..."
The Watsons are confident they don't pay too much at auction because they research the market and individual properties thoroughly and set a price limit before entering the auction room.
"Mark does heaps and heaps of research and sets the price he won't go beyond," Kylie says. "He turns into a shark at auctions -- it's the only time I ever see him really serious. But he justifies it by pointing out it's an investment for our girls [aged one and three years]."
The Watsons now have five investment properties -- they bought three but split two of them into separate titles -- plus their family home in Canberra.
Interest rates may stay unchanged as retail spending falls
Nov 05, 2009
INTEREST rates could stay unchanged before Christmas after shoppers tightened their purse strings in September and retail spending dipped.
Sales fell by a worse-than-expected seasonally-adjusted 0.2 per cent to $19.7 billion in September compared to August.
Economists had forecast a 0.5 per cent rise at the cash register but despite rising confidence, consumers were more reluctant to spend after the Government's $900 stimulus handouts dried up, The Courier-Mail reports.
Their decision to keep hold of their cash came before the Reserve Bank's decision to lift official rates in October and then again on Tuesday.
Some economists believe the fall in retail spending could see the central bank put the brakes on any expected rates rise next month before the all-important Christmas spending season.
ICAP economist Adam Carr said, "the data really does hammer home the point that the RBA will be gradual in its tightening cycle".
ANZ economist Alex Joiner said the high levels of consumer confidence seen in September had not translated into spending.
"I suppose that's something that will give the RBA some scope for pausing on rate hikes in December," he said.
The Northern Territory recorded the largest drop in retail spending of 0.7 per cent, followed by Queensland with sales down 0.6 per cent in September.
Across the nation the biggest hit was felt by department stores, down 2.9 per cent, followed by clothing and footwear, falling 0.8 per cent.
Australians, however, showed that while they might not be investing in new wardrobes, they are still keen to eat out with cafe, restaurant and takeaway food sales rising in September by 1 per cent.
Treasurer Wayne Swan said: "There are signs of resilience and Australians should take heart that we are the only advanced economy to grow over the past 12 months.
"But as I've been saying for some time, our recovery remains fragile."
Other data from the Australian Bureau of Statistics released yesterday showed building approvals rose 2.7 per cent in September, to 12,476 units.
September was the last month first-time homebuyers would have benefited from the full boost of the Government's more generous housing grant. It was pared back on October 1.
AUSTRALIAN house prices rose 4.2 per cent in the September quarter, latest government data shows. This compares with an unrevised 4.2 per cent in the June quarter. In the year to September, the house price index rose 6.2 per cent, the Australian Bureau of Statistics said.
But economists say the trend is unlikely to continue as interest rates head north and government grants for first home buyers are staggered down.
Today's figures took the ABS measure of capital city house prices to a new high, Macquarie Group interest rate strategist Rory Robertson said in a research note.
"It seems likely that the uptrend in average house prices will tend to flatten from here," Mr Robertson said.
He said the Reserve Bank's October interest rate hike, and tomorrow's expected interest rate hike would impact the surge in average house prices.
The median market forecast was for the house price index to have risen 3.4 per cent in the September quarter and to have risen 4.8 per cent in the year to June 30.
Kirra CommSec chief economist Craig James said the September quarter result was, at face value, a strong number, but he said the local central bank preferred to focus on other measures of house prices.
"The Reserve Bank has made it clear that they focus on the RP Data-Rismark figures rather than the Bureau of Statistics figures, because the ABS figures do not include apartments and are compiled in a different way," Mr James said.
"The RP Data (figures) are substantially lower than the Bureau of Statistics figures and they are seen as a better indication of what's happening in terms of house prices."
Mr James said the September quarter figures represented the "maximum effect" amount of government stimulus being applied to the housing industry.
"What is happening with home prices is that they are rising modestly at the moment but really not enough to frighten the horses, not enough to concern the Reserve Bank," Mr James said.
"The Reserve Bank would be well aware that things like government stimulus, the first home buyers boost as well as super low interest rates are artificially pushing up house prices."
ANZ's head of property Paul Braddick said house prices would "decelerate" into 2010.
Mr Braddick said unless there was "significant action taken" to make building houses easier, Australia would suffer adeterioration in housing affordability "beyond anything we have ever seen before".
"Dwelling completions are forecast to fall below 130,000 in the year ahead, foreshadowing a further dramatic tightening of the housing demand/supply balance," Mr Braddick said.
VARIABLE rate home loans are expected to rise again this week but research has found they still beat fixed rates hands down.
With a Melbourne Cup day rate rise a near certainty, consumer finance experts say it is too late to switch to fixed rates, which have been sneaking up all year.
Your Money last week asked RateCity to crunch the numbers and it found you would have been $3250 better off if you had taken out a $300,000 mortgage on a variable rate five years ago, compared with a fixed rate.
For the past three years, you would have been $1400 better off with a variable rate. Repayments on a $300,000 loan taken out in October 2004, on the average five-year fixed rate of 7.21 per cent, were $129,660. Repayments on the average variable rate in those five years were $126,408.
RateCity CEO Damian Smith says it is best to accelerate your repayments.
"By adding $180 to your monthly repayments on a $300,000 loan, you will not feel the next 1 per cent in rate rises and reduce your loan size," he says.
But fixed rates can provide certainty. In Australia, 85 per cent of mortgages are variable loans compared with 20 per cent in the US. While variable rates are influenced by the official cash rate, fixed rate pricing is driven by wholesale money markets.
Fixed home loan rates are currently near 7 per cent, versus 6.03 per cent for the average standard variable rate of the four major banks.
Resi Mortgage Corporation consumer advocate Lisa Montgomery says it's now too late to fix.
"The horse has well and truly bolted and the gate has shut," she says.
"Fixed rates are now significantly higher than the variable rate that most people are enjoying.
"If you are looking at fixing at over 7 per cent, use a home loan calculator first and work out the repayment and then start paying that amount off your loan to create a buffer rather than lock yourself into a contract."
Queensland Teachers' Credit Union chief executive Mike Murphy says there is now a 1.2 percentage point difference between variable and fixed for three years.
"It would be prudent to negotiate a discount on variable or fix some or your entire loan for three years, provided the differential is not more than 1.5 per cent to 2 per cent," he says.
Loan Market Group chief operating officer Dean Rushton says if you lock in now, you could be paying about 7.5 per cent for the next three years or as much as 8 per cent for five years.
"It's just not worth fixing," he says. "Few people are deciding to fix once they realise variable rates have a long way to go to reach the fixed rates currently on offer."
TOMORROW'S expected rise in the official interest rate won't be the last as the economy recovers and we continue to ride on the coat-tails of a booming China.
The Reserve Bank keeps warning us that a regular level of the official interest rate for an economy performing normally is 5-6 per cent.
The rate is currently 3.25 per cent, so there's still a long way to go to get back to normal over the next year.
But Australian borrowers are becoming increasingly savvy at dealing with interest rate cycles.
Only about a third of Australian households have a home loan and most of those are ahead in their repayments.
At some of our major banks, 90 per cent of home loan borrowers ignored the 4.25 per cent cut in interest rates we received to fight the global financial crisis and kept making the higher repayment.
So this next batch of rate rises is highly targeted to quite a small proportion of the community. And arguably the group that can least afford it will be the most recent batch of first-home buyers who over-borrowed on the basis of rock-bottom rates.
As it stands, rate rises always hit Sydney and Melbourne consumers the most.
They have the biggest mortgages, with the highest property values.
They'll be faced with higher home loan rates and stagnating property prices.
Remember, though, rates are going up because the economy is improving. That means jobs and incomes will be more secure as the 19 consecutive years of positive economic growth continues.
That's the good news. But any rate rise is painful and it's always wise to start taking advantage of the cycle.
Paying off debt rather than saving is now your best investment. Think about it. Why earn 4 per cent interest in a savings account, and pay tax on it, when you can save 6 per cent by paying off more of your home loan or 16-20 per cent by paying outstanding balances on credit card debt.
Fixed-term home loan rates have risen over the past couple of months to between 6.5 to 8 per cent, depending on the term, as banks anticipated the Reserve Bank's decision.
Think carefully whether you have left it too late to lock in, get some good advice and consider the cost of that insurance having a certain repayment future.
Another common strategy is to merge your personal loans and credit card debts into a lower interest rate loan, such as your mortgage. The beauty of this strategy is that the lower interest rate will apply to all your debts, thereby saving you interest in the short term.
However, if all you do is make the lower repayments, it will take a lot longer to pay off your debt so you end up paying more interest over the life of the loan, despite the lower annual interest rate.
One of the most popular steps to help pay off your mortgage sooner is to pay every fortnight instead of each month because over a year you make one extra month's payment.
If you want to do this, make sure your lender is clearly aware of what you want to do.
If you simply front up to the counter and ask to switch from monthly to fortnightly, all they'll do is recalculate your payments so you'll still take just as long to pay it off.
It's also possible your lender will take into account any extra repayments you have already made and reduce your repayments even more to fit the agreed life of the loan.
The easiest thing to do is halve your current monthly payment and tell the bank that's the new figure you want to pay each fortnight.
Investors also need to be aware of the ripple affect of the higher cost of borrowing.
o BE careful of internally geared investment such as hedge funds. Understand the stress implications for your fund of an increase in borrowing rates combined with a volatile market.
o WEIGH up the gearing of listed company investments. Higher borrowing costs eat into profits and therefore returns to shareholders. Look carefully at highly geared companies and make sure they generate the cash flows they would need to meet the higher costs.
o LOOK hard at whether negative gearing still works for you. Higher borrowing costs accentuate the "negative" in negative gearing and can put your cash flow under pressure. Combine this with flat asset values and you don't want to make the bank nervous.
o IF you depend on income from your investments to live on, talk to your accountant or financial planner about how to manage your income portfolio.
The big Australian banks are all re-branding themselves as "local" and "part of the community"
As their lending margins soar, the big Australian banks say they want to get closer to their customers.
In the past month, ANZ, NAB and Westpac have tossed millions of dollars at re-positioning their businesses as "local" and "community-connected" brands.
Earlier this month, ANZ re-fashioned its signage with three fresh blue blobs and added a catch-line "we live in your world".
And on billboards across the city, NAB has promised to bring money "closer to Melbourne".
Westpac is the latest bank to splurge on a public image makeover after admitting that it sold its customers down the drain by slashing more than 500 branches in the 1990s, including 100 outlets acquired through the takeover of the Bank of Melbourne in 1997, the Herald Sun Reports.
Chief executive Gail Kelly's predecessor in the top seat at Westpac, David Morgan, promised to preserve the Bank of Melbourne franchise but within 18 months deployed the wrecking ball.
On Wednesday, Mrs Kelly will try to re-establish Westpac as Australia's "local bank" when she breaks with tradition to present the 2009 annual profit from a press conference among customers in the historic branch at 341 George St, Sydney.
Critics might dismiss this as a gimmick. And it is.
But underpinning the push to be local is the determination of Westpac and the other major banks to prevent a new player from filling the big holes they created in the Australian banking market.
It's an opportunity that Bankwest identified and tried to exploit before it was snatched by Commonwealth Bank at the peak of the financial crisis a year ago.
At its core, the drive to be local is about entrenching the market power of the majors, but they want to do it nicely, this time.
By moving early to beef up their distribution networks with more business bankers and outlets, the majors will be well-placed to head-off competitive threats from smaller players such as Bendigo, Members Equity Bank and ING Direct.
Bendigo's new chief executive, Mike Hirst, admitted as much at the bank's annual meeting last week.
"The major banks compete on price -- we can't compete on price," he said. "So, we have to focus on service."
The big marketing pitches by the majors also present headaches for Members Equity, which remains the country's lowest profile bank even though it continues to be a price leader on deposits, home loans and credit cards
WORLD Bank managing director Juan Jose Daboub says Australia can be a model for developing nations struggling to recover from the global financial crisis.
Australia's success with macro-economic reform over the past 20 years should be an example to the world's poorest countries, which received $US59 billion ($64.4 billion) in aid in 2009, Dr Daboub said during a visit to Australia.
"The many reforms that you have taken on in the last 20 years have paid off," he told the Sky Business Channel yesterday.
These included macro-economic stability, flexible labour markets and nurturing an open economy, he said.
He also praised the "persistence and the consistency" of the reforms.
"I look at Australia as a model that others can follow," he said.
The World Bank expects GDP of all developing nations except China and India to grow by 2.5 per cent in 2010 after falling by 2.2 per cent this year.
"This is a recovery but there are still frailties and there is still (the) risk of unemployment (growing) at dimensions that we need to be very concerned about," Dr Daboub said.
The World Bank expects the combined GDP of high-income developed nations including Australia will grow by just 1.3 per cent in 2010 after this year's 4.2 per cent drop.
ANZ chief executive Mike Smith says Australia's central bank may have increased the official interest too early, given the economy and sentiment was still fragile.
"I still feel that we perhaps should have waited a bit longer (and) for waited Christmas to wash through," Mr Smith told journalists after the bank released its full-year results today.
"The biggest worry at the moment is the interest rate environment ... because it is still fragile."
The Reserve Bank increased the overnight cash rate by 25 basis points to 3.25 per cent earlier this months, from a 49-year low three per cent.
Reserve Bank governor Glenn Stevens said the central bank had cut rates to a very low level because of the severe economic threat, which had now receded, and it was now appropriate to raise rates to a more normal setting.
"I think that if you do put rates up too much you could tip it a little bit," Mr Smith said.
Still, Mr Smith said he was encouraged by the signs of a recovery in Australia.
"We saw the signs of things improving, really on the back of the more resilient economies of Asia," he said.
He also credited low government debt, the strong banking system and the fact that the government could spend money on stimulating the economy rather than to fix the banks as factors that helped Australia.
The stronger economy meant that business lending was likely to pick up in fiscal 2010, Mr Smith said.
"We will start to see an improvement in (lending growth) particularly on the corporate side," he said.
Mr Smith said consumer lending growth had been quite strong throughout the past year, while it had been businesses which had moved to pay down debt to repair balance sheets.
ANZ reported that net profit fell 11 per cent to $2.9 billion in the 12 months to September 30, mostly as bad debts increased.
The Hobart suburb of Clarence City is Australia's best property bargain according to a list of the country's 100 hottest suburbs.
Investors can pick up an average house in Clarence City for just $178,000, according to a report in Australian Property Investor Magazine.
It's a "long-term hold" but the suburb will see significant growth in five to seven years, the report says.
The magazine asked Australia's top property experts to list the hottest 100 suburbs for investors.
With an average median house price of $548,000 across the 100 locations, news.com.au identified the cheapest of those suburbs and they are listed below.
You can read the full list in the magazine which is out today.
Also released today, the Australian Property Monitors quarterly house price series showed house price growth of 3.7 per cent over the September quarter.
"Moderate to strong growth is expected across the market as a whole for the remainder of 2009 and 2010," APM's Matthew Bell said.
"The question as to whether this growth can be sustained throughout 2010 depends on how quickly mortgage rates rise in the next six months," Mr Bell said.
Hottest suburbs with the lowest average house price
IT'S a lie to say that numbers don't lie. This is especially true in the real estate debate about whether you are financially better off renting or buying a house.
Crunching the numbers for this argument can produce almost any answer you like, depending on the assumptions made for factors such as interest rates, house prices, rental costs, investment growth and tax deductions.
And, of course, there's the matter of trying to save up the tens of thousands of dollars it usually takes to build a deposit.
The "rent money is dead money" line is a fair claim in many cases, but things can get murky when the money saved by renting is invested elsewhere typically shares or an investment property that have tax incentives.
It's easy enough to compare the basics. For example, Brisbane's median asking rent for a house is $360 a week, according to a report by Australian Property Mintors. The median house price for Brisbane is $419,000, says the Real Estate Institute of Australia.
The interest cost of a $419,000 loan based on a 6.5 per cent interest rate is $524 a week, and for an 8.5per cent interest rate it is $685 a week. But the basics just don't tell the full story.
Damon Nagel, managing director of property investment firm Ironfish, says most people don't consider the long list of other factors that affect the renting versus buying decision.
He says people can benefit by owning investment property while themselves living in a rented residence, although these "rental investors" are uncommon.
"We have an absolute affinity with owning our own castle."
Home ownership offers a sense of security and the ability to change your living environment without seeking permission, Nagel says, which often outweighs any financial benefits.
He has calculated that a single person earning $70,000 a year who buys a $400,000 home with a 20 per cent deposit will spend $469 a week, based on a 6.5 per cent home loan rate and taking into account all the extras such as council rates and mortgage set-up costs.
But a renter in an equivalent $400,000 property would pay $420 a week a saving of $50.
"When interest rates go higher than 7 per cent, it's even more of a no-brainer to be a rental investor," Nagel says.
"The argument shifts back to buying your own home when rates are low."
Tax deductions worth considering
The key factor is the tax deductions property investors can claim something that owner/occupiers cannot do. But a big benefit of being an owner/occupier is that you pay no tax on your property's capital growth.
"What you save on a swing you lose on the roundabout," he says.
So what is his verdict rent or buy? "It's a Russian roulette question. If I was young and starting out I would do a rental investment. If I had my own home I would keep my own home."
Making your first home an investment property is a strategy also recommended by the chief executive of property company Investa Solutions, Ian Lloyd.
"People tend to do things the traditional way and are scared of doing something a different way, but this strategy means you still own property, and at the worst you can go and move into your investment property," he says.
Young Australians can benefit from having a tenant help repay their property. "I'm trying to encourage my youngest son at 18 to buy his first property at 19 he will be able to set it up to work for him before he leaves university."
Lloyd says the tax deductions are usually the biggest when the investment property is new. "A lot of people forget that you can take your tax benefits in your weekly, fortnightly or monthly pay packet. You don't have to wait until tax time to get the benefit," he says.
An income tax variation form is available on the Tax office website although Lloyd suggests people get their accountant to have a quick look at this strategy.
"Another thing that people miss is the growth you are getting is on a very big asset," he says.
"It only has to go up 10 per cent on a $300,000 property and you have gained $30,000."
Time to Shop for Cheaper Insurance - Ask Touch of Finance for better rates
Oct 27, 2009
ACCORDING to a yet-to-be published Choice survey of 22 insurance providers, premiums for home and contents insurance have risen, on average, a whopping 17 per cent in the past year.
Consumers have been warned to expect further premium increases as providers seek to claw back losses from severe weather events such as the Queensland floods and the Victorian bushfires, estimated to have cost the industry $1.7 billion.
You can shop around the multitude of insurance brands such as NRMA, SGIO, AAMI and Budget Direct for the best deal, but most of those brands are owned by two big companies: Suncorp and IAG.
They have a 75 per cent hold of the market, with QBE and Allianz sharing the rest.
"We did find you can still save as much as $400 by shopping around, so absolutely do your homework," Choice spokeswoman Elise Davidson said.
"It's even worth going back to your current insurer and posing as a new client to see what they can offer."
There are hopes new players such as Virgin Money, Australia Post and Coles will provide some much-needed competition.
Virgin Money, a newcomer in the car insurance market, will branch into general insurance as "a natural progression".
It launched into car insurance in August, directly addressing what manager Matt Baxbycalls "premium creep" by offering two years of capped premiums.
"It seemed strange to us that premiums keep going up, yet the value of the car goes down, so premiums will remain fixed for a set period," Mr Baxby said.
Virgin conducted a cost comparison for Value Hunter on a Holden Commodore garaged at Liverpool and driven by a 39-year-old female with a good no claim bonus rating.
The premium for one year was $727, compared with competitors ranging from $917 (QBE) to $1363 (GIO), with an average of $1110 for all other competitors.
YourShare, a service that promises cash back on annual premiums, was launched last week.
Founder Paul Brady says commissions on insurance products such as home and contents, car and compulsory third party green slips constitute as much as 20 per cent of a policy's cost.
YourShare can get back 50 to 70 per cent of these commissions and refund them to the consumer in the form of an annual cheque.
Earlier this year, Value Hunter looked at this award-winning service, which specialised in clawing back trailing fees from retail superannuation, managed funds and life insurance.
Some policy holders received as much as $1000, depending on the number of policies -- money for nothing, given the trailing fees were previously going to nameless fund managers.
The catch was that 50 per cent of the invisible fees went to YourShare, instead of the fund, and the rest to the consumer.
Now YourShare has expanded to the general insurance market as brokers and can get the commissions back in the same way they do for superannuation.
According to the Insurance Council of Australia, net premium revenue for the March 09 quarter was $5.33 billion.
"This means (in theory) $533 million to $746 million could be cash back to consumers," Mr Brady said.
First home buyers urged to beat interest rate rise
Oct 26, 2009
BANKS are urging first-home buyers to lodge mortgage applications ahead of the next rate rise so they qualify for the biggest possible loans, an investigation by The Sunday Telegraph has found.
Despite financial markets factoring increases of 2.5 per cent by December 2010, potential buyers risk having the amount they can borrow scaled back if they delay lodging applications.
The danger of such a tactic is buyers being rushed into loans they can barely afford today, which become unaffordable when higher rates kick in.
A Sunday Telegraph journalist sought a home loan through major banks last week.
Based on an income of $61,000, a deposit of $55,000, and a good savings record, NAB offered a loan of "at least $450,000".
"You could bid on a property at auction this weekend knowing that is the least we will lend you," a mortgage adviser at NAB's Surry Hills branch said.
He said the loan amount could be even greater once the buyer went through the official application process, when some "human discretion" could be applied.
"But you will need to hurry to get in before there is another rate increase as that will reduce the amount you can borrow," he said.
A $450,000 loan, equal to 7.5 times stated income, would require repayments of $2496, based on the NAB variable rate of 5.29 per cent -- more than half of the buyer's income.
And if rates increase by 2.4 per cent over the next year, as tipped, repayments will rise by $700 a month, leaving less than $1000 a month to live on.
ACCORDING to the property clock, the best time to buy is at the bottom, 6 o'clock, just after the oversupply has hit and properties are at a discount to their underlying value.
And either side of 6 o'clock is generally considered bargain time. Of course, the opposite is true for sellers.
The top of the market, or 12 o'clock, is the best time to sell, when prices are at their peak. And either side of midnight is still okay.
So what's the time in your market right now?
South Australia- 7 o'clock
RP Data national research director Tim Lawless says property sales in Adelaide remain low with little improvement in the past year.
"Adelaide's recovery is taking a little bit longer. It is so widely expected that interest rates will be moving off their historical lows, so most people know they are unsustainably low," he says.
"Adelaide had a monumental 2007 with 25 per cent annualised growth, however, it has been subdued since.
"South Australia is resources driven with oil, gas, gold and uranium at Roxby Downs and there is also a strong manufacturing sector of submarines and its ports are strong exporters of agriculture, not just wine but grazing."
Victoria - 12 o'clock
"Sometimes in a movie the clock spins around 24 hours in a few seconds - well, that's Melbourne," buyer's advocate Christopher Cohen from Morrell and Koren says.
"It's 12 o'clock high with a bell on top. The bell just keeps on clanging and it keeps landing back on 12 o'clock.
"Good properties are few and far between but there are plenty of buyers.
"I'm talking from the buyers' side so I want everything to have a low price but it just isn't the case. Prices in Melbourne are roughly back to 2007 levels and in some cases surpassing them."
The market will stay this way for some time to come, he says, as there is a lot of pent-up buyer demand with no sign of any softening.
Queensland - 6 o'clock
Brisbane is trailing the property market recovery but as it shakes off its hangover there will definitely be growth, RP Data's Mr Lawless says.
"It is moving more from a seller's market to a buyer's market. Adelaide and Brisbane are in similar positions because they both had quite similar growth phases in 2007, so the 2009 growth rates have not been very high," he says.
The year-to-date growth rate in Brisbane to July has been 3.3 per cent, compared to 5.8 per cent nationally.
"Nonetheless, this is a solid performance coming out of the 2008 downturn. ''Queensland's best growth driver is its population growth, particularly in the southeast.
"Also, the resources market is starting to kick up a gear again so it makes sense we'll start to see stronger economic growth in the next 12 months.
"I think we'll see Queensland and Brisbane gather pace, as 2009 has been a hangover year, which it is starting to shake off.
New South Wales - 11.30
NSW is on the brink of a housing crash caused largely by the firsthome buyer grant and overzealous lending by the banks.
Steve Keen, professor of economics at the University of New South Wales, points out that the market was heading down until September last year before being turned around by what he calls the first-home "vendors" grant.
"It was buyers that benefited most," he says.
"That extra $7000 that many first-home buyers got was then used to obtain an extra $40,000 on their mortgage. That extra cash was then used by the vendors to leverage another $200,000 when they traded up."
"So properties up to $1 million have seen their prices artificially inflated by this short-term stimulus."
"When it removes and interest rates rise, those borrowers that stretched to afford their properties will fall behind on their payments, use their credit cards in desperation until they run out of money and eventually face repossession.
"Prices will tumble."
Tasmania - 7 o'clock
Property analyst John Edwards of Residex is bullish about Tasmania.
The median house price in Hobart is $354,000 and its been at that level since about May 2008.
"It is the most affordable market in Australia and it's likely to see growth opportunities because of baby boomers looking to escape the rat-race from Melbourne and other cities," he says.
Mr Edwards expects these buyers will look where property is more affordable.
BUYING in a boom or selling in a slump can cost you tens of thousands of dollars if you are on the wrong end of the deal, or it can set you up for a bumper profit if you get the timing right.
When to make your move, either as a vendor or buyer, is second in importance only to location, according to many property experts.
Even just a $20,000 overpayment on your purchase price can add another $40,000 in interest repayments over the life your mortgage.
Or losing out on a potential $20,000 in the sale price can mean another $40,000 loss in equivalent investment earnings or having to fork out more to borrow for your next property.
Within the property market there are many different economic forces at play and the face of a clock can be used to show where the market is at any given time.
Typically, there are good times to buy and bad and the same goes for selling. Knowing where you are in the property cycle can help you make the most of your sale or let you snap up a bargain purchase.
The two main positions on the property clock are undersupply and oversupply. Everything else is either leading in to one of these market conditions or coming out of it. But let's start with undersupply.
12 o'clock
Undersupply, or midnight, is "party time" for investors and property sellers.
This is when demand from rental tenants and property buyers is so high that the number of properties available can't keep up.
Landlords put their rents up and tenants just keep rolling in. As the rents get higher, the number of wannabe investors increases, as they see high rents as a good investment option.
At the same time owners who list their properties for sale also get a high number of bids and offers because there are a plethora of buyers out there bidding against each other.
Undersupply is caused by several factors, including strong immigration and population growth.
The construction cycle also has a role to play, as does the economy and the share market. When construction is down, the shortage, or undersupply of properties, gets worse.
And when the economy is strong and people are getting regular pay rises and secure work, this gives them extra confidence to borrow more and pay a higher price. The share market also joins in the mix of market forces.
When the share market is too risky - prices are unstable or falling (sound familiar?) - then people also switch out of shares and in to property, further increasing the number of buyers.
As more buyers flood the market they are forced to compete against each other and the only way to win in this situation is to pay a higher price.
But as is the case with all market forces, there is always an opposite effect. While property sellers are partying, enjoying their inflated property prices, the opposite is happening for would-be buyers.
For buyers considering purchasing a property at 12 o'clock, it's more likely to be a nightmare then a party.
3 o'clock
By now all those ripper high sale prices and rising rents are attracting every man, woman and dog to the property market.
Suddenly there are developers wanting to get a piece of the action building new projects to sell for high prices.
Soon new construction gets under way to help meet all this pent-up demand as the investors continue to want a slice of those big rental incomes and cashed up former home owners look to trade up to their next home - not to mention the backlog of first-home buyers.
However, gradually the number of new properties starts to catch up with the demand. At the same time, many buyers, despite their desire, are simply priced out of the market.
No matter how secure their job or how optimistic they are about borrowing more money, they simply can't make the finances stack up.
Tenants, too, start to withdraw or at least say no to more rent increases and the whole market starts to ease back.
This is what's called afternoon nap time, 3 o'clock.
The heat of the market and high prices have become overwhelming and people are starting to feel less confident.
Sellers lower their price ranges and buyers are fewer and farther between as they start to realise if they hold out a bit longer they might have more control over how much they pay.
This time is now one of evensupply, where the number of properties and the number of buyers are roughly matched.
There's no frantic hurry to buy before the price goes even higher. In fact this is often when many buyers take a siesta.
6 o'clock
Unfortunately for the developers, speculators and the sellers, as the clock ticks down to 6 o'clock the tables have turned and there are now more properties than there are buyers.
This is the typical oversupply time, the bottom of the market and the bottom on the property clock.
This can often coincide with hard economic times and the tail end of high interest rates.
People no longer feel confident about borrowing too much and might feel their income or jobs are at risk.
For a seller this is definitely not the right time to put your house up for sale. Not only will there be few buyers willing to consider your property but their offers are also likely to be considerably lower than you expect.
But it is good news for buyers. With lots of properties to choose from and very few buyers to compete with, you now have the highest chance of snapping up a bargain.
This is also the time when investors have to discount their rents and the attraction of residential property as an investment starts to lose its shine.
During the next three years or so it's a buyers' (and a renters') market.
9 o'clock
Guess what? It's time to wake up and get real.
Property prices have sunk so low that people have decided not to sell. All those highrise units and new housing estate homes have been sitting floundering on the market with no buyers. Suddenly the developers are getting realistic and stop building.
They also start to face up to their losses and it becomes a case of a little less cash in the bank or a lot more debt on the books if they don't sell for what they can get.
Prices come down and, hey presto, the buyers come back. As the property clock heads up to 9 o'clock so do the prices.
Gradually activity returns. This usually coincides with improved economic conditions and improved consumer confidence.
The economy, the workforce, the consumers are all back on a roll and things are looking up again. And before you know it, it's midnight again!
WANT to buy a house before prices take off again, but found yourself having problems getting a loan?
Online lender MyRate.com.au has revealed the top five reasons would-be borrowers have their applications rejected.
MyRate spokesman Kevin Sherman said that with lending criteria becoming a lot stricter in the past 12 months, people could benefit from understanding how these changes would affect their chances of securing a home loan.
"The recent turmoil brought about by the GFC coupled with deflating property prices and an increasing unemployment rate has seen all lenders change their risk appetite. As such, it is now a lot tougher to qualify for a home loan," he said.
Top 5 reasons would-be borrowers have their loan applications rejected:
1. The borrower cannot demonstrate they have saved a genuine 5 per cent deposit
"These days I'd go so far as to say it's impossible to get a loan without at least a 5 per cent deposit" said Sherman. "This is a significant change, as a few years ago consumers didn't even need a deposit for some loans."
2. The borrower has servicing issues - for example, they do not have a steady income or are still on work probation
"This is a concerning factor for borrowers with a new job," said Sherman. "The problem lies in that many employers are now extending probationary work periods from the usual three months to six months. Their reasoning: there is so much quality talent looking for jobs that employers are 'playing it safe' just in case an employee doesn't work out or in case the business needs to lay staff off. This means that people are having to wait longer to secure a loan."
3. The borrower cannot supply enough funds to cover at least a 10 per cent deposit for new purchases, or 15 per cent of the property value for refinances
"Deflating property prices in the current climate and a softer estimate for future growth means that lenders now want their borrowers to put up more of the money themselves in order to reduce the risk to the lender. It isn't uncommon for lenders to now demand a 15 per cent deposit in some situations," explains Sherman.
4. There are issues with the property that they wish to buy
Sherman said: "There are certain types of properties that lenders might now consider 'unsuitable'. This could be because the apartment you want to buy is in a giant complex of similar flats which makes the lender concerned it will be hard to sell should they need to. A property may be a little run down or be valued at a lower price than expected, which may affect the loan amount the lender will agree to."
5. There are issues with the borrower credit file
"It could be that you have been shopping around for finance and, as such, your credit file is showing too much activity - something which is viewed by lenders as a negative as they may think you were denied finance by various providers. It could be an unpaid Telco bill. Basically, anything that may raise suspicion will be closely scrutinised and assessed for risk."
"The bottom line is that lending policies have tightened significantly. Banks and lenders are more cautious than ever before, with most looking for a better quality borrower. The best thing you can do for yourself is to be organised and over-prepared - you'll come across as a great candidate if you can demonstrate your ability to repay to the best of your ability."
INTEREST rate rises have been widely tipped to push many first-home buyers out of the real estate market, but they may prove more resilient than expected.
A long-term housing shortage in Australia is the main reason for strong buyer demand, but a bucketload of grant money and bonus payments to first-home owners has fuelled record buying by these property newcomers.
Now that some of the grants have been scaled back and mortgage interest rates are on the way up again, what is the future for first-home buyers?
According to the Real Estate Institute of Australia, first-home buyers are expected to take a breather, although only for a limited time.
Record-high purchase levels by first-home buyers have already started to taper down and this trend is forecast to continue, REIA president David Airey says.
"We had about 170,000 firsthome buyers in the past year - that's about 50 per cent above the usual number in the market, so I expect them to drop back to normal levels," Airey says.
"The reduction in first-time buyers will certainly have an effect in the $250,000 to $450,000 price range, which is typically where these buyers aim for. Properties in this range could see sales decline but it will be a limited affect and probably not noticeable until the first quarter of next year," he says.
"My advice for first-time buyers is to keep being selective about properties, not to overpay and not to feel compelled to buy.
"Do your research and in particular ensure you are not buying above the limits of your financing and borrowing ability." Although the interest rate rise will curtail some buyers, Airey does not see any major problems with recent first-home buyers.
Lending rules tightened
During the past couple of years, since the global financial crisis started, lenders have increased their lending criteria and often stress-tested repayment levels for future interest rate rises, he says.
"Interest rates are a worry but responsible lenders have been pricing in interest rate rises for quite some time when they calculate the borrowing capacity of first-home buyers.
"Given that we have been expecting up to about a two percentage point increase for some time, it should be in the capacity of most people."
Mortgage broker Resi says if the latest 25 basis point interest rate rise was enough to knock a buyer out of the market, then that buyer couldn't afford to be looking in the first place.
"I disagree with some commentators that the latest interest rate rise will affect the first-home buyer market," Resi consumer advocate Lisa Montgomery says. "It might make some people more cautious but it shouldn't knock too many out of the market altogether.
"Buyers really need about a 2 per cent buffer to keep them prepared for further rises over the next one to two years.
"I think those first-home buyers in play at the moment will stay in play until they lock in a purchase. Winding back the boost payments for these buyers really isn't going to make much of a difference either.
"With low-end prices at $300,000-plus, the cut-back of a few thousand dollars in a bonus grant should not stop anyone from making their purchase.
"Another growing option is for first-home buyers to share their purchase with family and friends. It takes away that 'total commitment' leap for many first-time buyers by sharing the load.
"Property is still the great Australian dream and for many people without a partner and a dual income it really is very hard to break into the market, but sharing a purchase is an option that we expect to continue."
Buying for an investment
Another growth area is first-home buyers taking the investment plunge rather than buying to be owner-occupiers.
Montgomery says there has been a rise in the number of firsttime buyers purchasing small investment properties just to get a toe in the market.
"Having rental income as a contributor to paying the mortgage is a nice way to do that," she says.
"While interest rates are still relatively low and rental yields are holding strong, investing is a great alternative to owner-occupier situations." Although Australia's recovery from the financial crisis is among the strongest in the world, it is still not a certainty. There are mixed signals that mean interest rates may not have to rise as quickly or as far as forecast.
First-home buyers are the most vulnerable to rising costs because they often have a bigger emotional investment in securing their first home, and have often borrowed to the maximum.
But advisers, and most lenders, now recommend first-home buyers should never borrow to their maximum, especially as we start another cycle of rising rates.
New borrowers should factor in at least another two percentage points on their mortgage and work backwards from there.
CommSec chief economist Craig James does not think the latest rate increase will affect the housing market too much because interest rates are still historically low.
However, like most economists, he predicts further official increases in the future.
"Budding homebuyers need to do their sums. Rates will continue to rise in the next 12-18 months, probably between 1.5 and 2 percentage points," James says.
Future rises will be based on local economic conditions, in particular the Reserve Bank trying to control inflation.
A recent fall in unemployment indicates the economy is travelling better than expected.
However, this is a doubled-sided coin for first-home buyers.
It indicates that job security has improved for many, which could prompt them to go out and spend, which would further push up inflation and interest rates. On the other side of the coin, it signals pay rises might soon be back on the agenda, which could help new borrowers cope with the higher mortgage repayments.
Mortgage Choice's Kristy Sheppard says borrowers "need to take ownership" of their mortgages. "Borrowers need to prepare themselves for a festive season featuring higher mortgage repayments, " she says.
Top five tips for first-time buyers
o Get your loan pre-approved by a lender so you know the amount you can borrow and repay.
o Ensure you have saved a sufficient deposit and you also have enough to cover the buying costs such as stamp duty and mortgage insurance etc.
o Do your research on the area and type of property which you're intending to buy.
o If you're buying a new home or a property off-the-plan, make sure you get independent advice about all documentation and contracts.
o Don't buy for the sake of buying. There will always be more property coming up on the market
ADELAIDE'S housing prices will increase 23 per cent by the middle of 2012, the biggest rise in values of all the capital cities, and nearly twice the growth rate of Perth and Canberra, according to a new report.
The sluggish Sydney market, which hasn't seen a rise in median house prices since 2003, will turn in the second-best result in the three years from June 2009 to June 2012, with compound price growth of 21 per cent, says mortgage insurer QBE's Housing Outlook report.
"Double-digit house price growth is forecast across all capital cities from June 2009 to June 2012, particularly in those markets with positive affordability," according to QBE LMI chief executive Ian Graham.
In Melbourne, price rises of 19per cent by mid-2012 are forecast, Darwin 17 per cent, Brisbane and Hobart 15 per cent, Perth and Canberra 12 per cent.
"Despite a 0.25 per cent rate rise in the first week of October, housing interest rates are expected to remain at a stimulatory level for some time, with the low interest rate environment remaining supportive of the first-home buyer," Mr Graham said.
The ending of the increased first-home owner grant boost scheme in December could cause prices at the lower end of the market to dip in the first quarter, but pent-up demand would mean only a short-term easing, he said.
Housing markets have turned quickly with the Australian Bureau of Statistics showing capital city median prices fell 1.4 per cent in the year to June.
The report, prepared by economist forecaster BIS Shrapnel, said the weak economy would dampen house price growth until mid next year. "Household income overall is being undermined by the reduction in working hours," the report said.
Mr Graham said that from later next year, comparatively low interest rates and improved economic conditions would speed up the growth in house prices.
"A broad-based recovery is forecast from the second half of 2010 as conditions in the labour market stabilise and investors and buyers are attracted back into the market by low interest rates and high rental yields."
However, it will be nothing like the last market peaks where prices rose 24 per cent in Sydney in its boom year of 2002, 31 per cent in Brisbane in 2004 and 36per cent in Perth during 2006, Mr Graham said.
The report said flatter economic growth this year and into next would result in the Reserve Bank pausing interest rises until the second half of 2010 with rates rising more strongly thereafter.
"Price growth is forecast to ultimately slow from 2012-13 as further rises to interest rates, in response to lower unemployment and emerging inflationary pressures, begin to impact on affordability and demand," it said. Sydney's median house price was $544,000 at June, a fall of 0.4per cent during the previous year. The report forecasts a 2 per cent rise for 2009-10, a 7 per cent increase in 2010-11 and 11 per cent the following year. The pace of growth is similar in other capitials.
The Housing Outlook report says the very low residential vacancy rates of between 1.2-2.9per cent in the capital cities will drive strong rental growth next year and more moderate growth from 2011 as more new housing is built.
WHEN buying a new home location is everything. And now there's research to prove it.
The St George Bank national property hotspots report has identified the top 24 suburbs around Australia likely to provide the strongest value for home buyers.
The suburbs were selected for their proximity to central business districts, transport and retail outlets, as well as renovation potential and strong pricing.
St George commissioned RP Data to undertake the nationwide analysis to determine the best value suburbs.
"Many opportunities still exist to buy well located, affordable properties in capital cities and regional areas," the report said.
The cheapest suburb in the country is Redan, in the regional city of Ballarat, Victoria, where the current median house price is $190,000.
Ashburton, a suburb 12 kilometres southeast of Melbourne, was the most expensive with a median price of $706,750.
Bea Riel of Sunshine Coast Some of the other standout suburbs were Granville (Sydney), Chadstone (Melbourne), Keperra (Brisbane), Bassendean (Perth), and Thebarton (Adelaide).
The report also found that in 2008/09 the median dwelling value across Australia's capital cities rose by 4.5 per cent.
Darwin recorded the biggest rise in value, up 7 per cent in the year to June, while Adelaide recorded the smallest at 0.6 per cent.
Dwelling value in Melbourne rose 6.5 per cent, while rival city Sydney grew 5.9 per cent.
Canberra was up 3.1 per cent in the year, while Perth and Brisbane grew 1.9 and 1.4 per cent respectively.
"Since December 2008, Australian median dwelling values have rebounded and, as at the end of June, they sit at their highest ever (median) level of $471,818," St George Bank chief economist Besa Deda said.
The report also found the number of home loans given to owner occupiers rose 25.7 per cent in the year to July, on the back of successive interest rate cuts and two Federal Government fiscal stimulus packages.
Ms Deda said the interest rate cuts and extension of first home buyers grants had breathed life into the housing market.
"The number of loans extended to owner occupiers has risen in nine of the last ten months,'' Ms Deda said.
"The value of all loans retreated in June and July, but it follows six consecutive months of increases and annual growth remains buoyant at 24.3 per cent."
Between September last year and April, the Reserve Bank slashed interest rates by 425 basis points to 3 per cent, while in October last year the Federal Government boosted the first home owners grant to $14,000 for existing dwellings and to $21,000 for new properties.
However, Australia faces an undersupply of housing estimated at between 20,000 and 80,000 residences a year.
Ms Deda said an imbalance between demand and supply of housing had placed a floor under dwelling values.
The hotspots report found that the population grew by 406,000 in 2008, and this was likely to place upward pressure on housing prices over the medium to long term.
"With fewer dwellings being built, the supply shortage continues to be exacerbated and is anticipated to increase over the next few years as the population grows further and the required amount of dwelling commencements needed to fill this shortage goes unfulfilled," it said.
Full list of suburbs (with current median house price)
Sydney
Granville $347,500
Rockdale $525,000
Lidcombe $475,000
Riverwood $470,000
Waterloo $560,000
Melbourne
Brunswick $532,000
Ashburton $706,750
Chadstone $553,000
Flemington $530,000
Fawkner $337,500
Brisbane
Margate $347,000
Keperra $398,000
Cannon Hill $482,250
Fairfield $587,500
Kedron $480,0000
Adelaide
Thebarton $391,250
Glanville $300,000
Perth
Bassendean $445,000
Thornlie $365,000
Hobart
North Hobart $335,000
Darwin
Rapid Creek $523,000
Canberra
Dickson $505,000
Regional Australia
Gulliver $294,500
(from Townville, Qld)
Redan $190,000
(adjacent to Ballarat city centre, Vic)
Source: St George National Hotspots Report, information compiled by RP Data.
Aussie dollar above US90c after fall in unemployment
Oct 14, 2009
SANTA has come early for Australian families, with a surging dollar promising a cheaper Christmas despite a rise in interest rates.
Consumers will soon be bombarded with across-the-board discounting on imported goods, as retailers pass on the savings made courtesy of the rising Aussie dollar.
The local currency punched through the US90c mark yesterday to set fresh 14-month highs, spurred on by a shock 0.1 per cent fall in Australia's unemployment rate, The Daily Telegraph reports.
And there are no signs of it easing, with economists yesterday revising their forecasts upward, with some now tipping the Aussie dollar to reach parity with its US equivalent midway through 2010.
Consumers directly benefit from a stronger local currency with the price of imported goods such as computers, furniture, appliances and TVs easing significantly towards Christmas.
Harvey Norman chairman Gerry Harvey yesterday said imported goods should be down 30 per cent or more from last Christmas.
"Because of where the dollar is going at the moment, there is very little pressure on pricing, in fact there will be price decreases on anything that is imported," he said.
"Consequently, you will see fridges, washers, small appliances and all that sort of thing, selling for prices less than 10 and 15 years ago. TVs will be between 10 and 30 per cent cheaper today than a year ago.
"There is no doubt it will be the cheapest Christmas ever."
CommSec's Savanth Sebastian said it was unlikely the big retailers would absorb the savings they were making on currency exchange.
He said transport costs had fallen this year and retailers had already directly benefited from the Federal Government's stimulus measures.
"Any imported good should fall in the next couple of months, it is a matter of whether the retailers are in a position to pass that on ... and they should be," he said.
"The likes of JB Hi-Fi, Harvey Norman and David Jones, you would expect the savings will be passed on because the larger retailers have had some good times this year thanks to the fiscal stimulus."
Helped by the prolonged weakness of the US dollar, the local currency has rallied briskly from the March lows of US63c, a recovery that has stunned most economic observers.
Westpac economists said yesterday that growing speculation of a 0.50 per cent rise in November would push the dollar higher.
"It's hard not to see further strength as the market will inevitably focus on the potential for a greater than 25 basis points hike (in) November," they said in a report.
The strategy To manage my mortgage when I start a family.
Now there's a big ask. How can anyone afford both a big mortgage and a family? While lower interest rates have eased home-loan affordability, there's no question that juggling a mortgage and a family can be tough. Many first-home buyers in particular find they've just got on top of this making regular mortgage payments lark when they then have to turn around and ask whether they can do it on one income for a period.
That's why it's important to start planning early if you're thinking of starting a family. Smartline Personal Mortgage Advisers managing director Chris Acret says building a buffer by making extra repayments is the ideal way to go. If your loan has a redraw facility or 100 per cent offset account, you can simply put in extra money now and use that buffer either to suspend or reduce your repayments when the time comes. Paying higher repayments now will also get you used to living on a budget. One strategy used by some couples is to live off one income even before they start their family and pump the other partner's income straight into the mortgage.
What's better? A loan with redraw or an offset account? Acret says both offer flexibility but it's a bit easier to access your cash buffer with an offset account as you can simply withdraw any money you need with your cash card. He says offset accounts are a great place to put lump-sum payments, such as the baby bonus and maternity leave, as you can easily access some of the money if things get a bit tight. But he says the account should be a 100 per cent offset (which means each dollar in the offset account effectively wipes out a dollar of your home loan), not a partial offset (where each dollar saved reduces the amount "owing" on your mortgage by less than $1).
That's fine for all those people who've planned ahead but what about those of us who were less organised? There are still plenty of options and Acret says you should discuss them with your lender or mortgage adviser. Budgeting (don't groan - we all hate it) is going to be critical. Acret says you need to understand all the assistance you'll be entitled to - government benefits, holiday, maternity and long-service leave and any other cash you can get your hands on. How effectively will this plug the gap while you're living on a reduced income? On the plus side, he says, you probably won't be spending a lot on lifestyle in the early stages of parenthood, though you will have to meet other expenses such as medical care and items for the baby. Understanding how much money you'll need - and how much you'll have - will help you decide whether you can afford your current mortgage repayments.
What can I do if it's looking a bit tight? Acret says options include a period of reduced repayments or even a repayment honeymoon. This will, of course, depend on how helpful your lender is prepared to be but he says, even in these tougher times, most lenders are prepared to be more flexible with existing borrowers than they might be with new customers. It's in no one's interest for you to default on your mortgage. He says some people switch to a fixed-rate loan when they start a family to guard against interest-rate rises but that's "not necessarily a good idea in the current environment".
Acret says lenders are charging a big premium for fixed rates (2 to 2.5 per cent higher depending on the lender and loan term).
If you must fix, he says, only fix part of your loan.
He says borrowers should also beware of repayment honeymoons, where you stop making repayments entirely for a period. "You should keep making payments in some form, even if you have to switch to making interest-only repayments," he says.
"You wouldn't want to pay nothing for very long because the amount owing on your loan would just keep growing and you'd be going backwards."
LEAN in. Come closer. If you promise to keep this under your hat, I'll not only show you what to do with your home loan, but how you can save thousands of dollars on your repayments by using a little-known strategy that is bound to annoy the hell out of the mortgage industry.
Your biggest financial decision this year will likely be what you do with your home loan. After all, you've been warned. Officially.
Late last week, Reserve Bank governor Glenn Stevens said he thought interest rates were below normal and would move "a good deal north" as the economy recovered.
Economists reckon Stevens' compass is locked on to a 2 per cent increase by the middle of next year.
That translates to the average $300,000 mortgage holder coughing up an extra $375 a month. A fair whack given it will likely coincide with higher prices for goods and services.
The thing to remember is that no one really knows where long-term interest rates are going (during the last election Kev and his colleagues ended every question with the line "we're committed to keeping downward pressure on interest rates" - the Global Financial Crisis has made a mockery of that).
Few people get it right. Case in point: most experts failed to predict the previous two periods of sharp rate increases. In 1994, rates jumped by 2 per cent in a matter of months, and between August 2007 and July 2008 interest rates on variable mortgages leapt 1.3 per cent.
Fix your rate
To guard against these rapid hikes, you may be thinking about locking in your current rate. Many of my banking mates have told me that six months ago they couldn't sell a fixed rate for quids, yet now it's all that most customers are talking about.
The best advice (especially for struggling people who have recently bought their first home) is to stress test your ability to repay - just like the banks do. Go to your bank's website and work out what your repayments will be after you add a few percentage points to your rate.
A home loan is most people's largest ongoing expense so it pays to ask uncomfortable questions. If the results show that you'd be seriously in trouble (an all-too-common issue for people who overextended themselves with the help of government largesse), fix your rate.
Don't fix your rate
For everyone else, switching to a fixed rate will most probably be the wrong move - because it's too late.
The two main advantages of a fixed rate are knowing exactly how much you'll have to repay, and potentially beating the banks (who can play funny buggers and jack up your rate without a lead from the RBA, as some have done over the past few years).
Yet this all comes at a cost. Think of a fixed rate as an insurance policy that you pay from day one.
Right now mortgage researcher Infochoice's benchmark variable rate sits at 5.24 per cent. After a scout around, we found that a competitive three-year fixed rate will cost you 6.65 per cent, while fixing for 10 years will cost upwards of 8.5 per cent.
Put simply, by taking a three-year fixed rate you are choosing to increase your interest costs by 27 per cent.
By spreading the insurance over 10 years you'll increase your costs by 62 per cent - which you'll start paying from day one! Also remember that after your fixed term ends, you revert back to a variable rate.
Now, if you're still sitting on the fence about whether to fix your rate, a smart strategy would be to increase your repayments to what you'd be paying on a fixed rate deal.
This has a number of advantages - one of which is that you get to see how higher repayments will affect your household budgeting.
But even better, the extra repayments you make will compound and pay off your mortgage quicker - plus you'll have built up a buffer should you hit tough times.
The strategy To get the extended first-home buyer grant before it disappears.
Where is it going to? The grant isn't going anywhere but it is being reduced to normal levels from October 1. First-home owners who sign a contract to buy a home from that date will receive an extra $3500 instead of the current $7000 and those who buy a new home will be eligible for an extra $7000 instead of $14,000. After December 31, the First Home Owners Boost will stop and first-home buyers will be eligible only for the standard grant of $7000.
So if I buy a new home before October 1, the Government will give me $21,000 but if I leave it until 2010, I'll get only one-third of that? That's right. The First Home Owners boost was an incentive to stimulate the economy. Generous as it was, it was only intended to be a short-term measure.
What do I have to do to get in before the deadline? Eligibility is based on the date the contract is exchanged, so to get the full boost, the last date you can enter into the contract is September 30. If you are buying a new home, building must start within 26 weeks of the contract and be completed within 18 months. If you're an owner-builder, construction must start before the cut-off dates and be completed within 18 months. If you're buying off the plan, the contract must specify a completion date on or before December 31, 2010, for the $14,000 boost if the contract was made before June 30 this year.
Or March 31, 2011, if the contract was made between July 1 and September 30. Contracts made after October 1 must specify a completion date on or before June 30, 2011, or be completed by this time.
You'll need to meet the standard requirements for the first-home buyer grant, such as being over 18, not having previously owned or had an interest in an Australian residential property and at least one of the applicants living in the home for at least six months on a continuous basis within 12 months of the transaction being completed.
How do I apply? You can get a form from your state's revenue department. Check out the NSW Office of State Revenue at osr.nsw.gov.au or phone 1300 130 624; the Victorian State Revenue Office at http://www.sro.vic.gov.au or phone 132 161; or the ACT Revenue Office at revenue.act.gov.au or phone (02) 6207 0028. Each state also has its own concessions for first-home buyers.
Will property be cheaper after this? It's hard to say but the first-home buyer end of the market has gone gangbusters, despite pressure on prices in other segments of the market.
THE Reserve Bank of Australia has left interest rates on hold for the fourth month in a row and signalled the end to its recent rate cutting cycle, economists say. The central bank left the cash interest rate at three per cent after its board meeting on Tuesday in a decision that was widely expected.
In a statement accompanying the decision, RBA governor Glenn Stevens indicated monetary policy was now on a neutral footing.
"The board's judgment is that the present accommodative setting of monetary policy is appropriate given the economy's circumstances," Mr Stevens said.
"The board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target."
Nomura Australia chief economist Stephen Roberts said the absence of any commentary referring to the potential for rates to be cut further meant the RBA had ended its easing cycle.
"They have brought back a policy bias, from an easing bias back to neutral," Mr Roberts said.
"But it could be quite a lengthy period on hold because inflation is coming down and the outlook on the economy is still fairly mixed."
The RBA had cut the cash rate by 425 basis points between September last year and April this year to its current three per cent.
Mr Stevens said economic conditions in Australia have been stronger than expected a few months ago, with both consumer spending and exports showing resilience.
"Measures of confidence have recovered a good deal of ground," he added.
"This suggests that the risk of a severe contraction in the Australian economy has abated."
Mr Stevens said while the risks to the global economic outlook had diminished, they had not disappeared.
"There is tentative evidence that the US economy is approaching a turning point, but conditions in Europe are still weakening.
"Growth in China, in contrast, has been very strong in recent months, which is having an impact on other economies in the region and on commodity markets.''
Colonial First State head of investments markets research Stephen Halmarick said the chance of more rate cuts had diminished.
"It seems they have gone back to a neutral bias," Mr Halmarick said.
"They say current settings are appropriate given the circumstances and that is consistent with the message the governor has been sending out in the past few weeks.
"I read this statement as a continuation of what he told us at the ABE (Australian Business Economists) speech last Tuesday."
The RBA governor was cautiously optimistic about the outlook Australian economy, saying growth was likely to firm into 2010.
"It is pleasing the RBA has says there is more hope for improved conditions in the months ahead, but there are a few notes of caution, which I think is warranted," Mr Halmarick said.
Financial markets will now being looking ahead to the next set of forecasts for growth and inflation in the RBA's quarterly statement on monetary policy to be released this Friday.
"That will probably give us an idea on timing on when they might adjust policy outwards," Mr Halmarick said.
"For the moment, they will pretty happy to let the recovery run for a couple of months."
With interest rates falling dramatically over the past few months, the key question is whether or not borrowers should fix their home loans.
Almost every industry expert has a different view. Some senior economists are forecasting further large falls in the RBA cash rate whilst others say we're nearing the bottom of the cycle. To the ordinary borrower, it can all be very confusing.
Of course, the reasons for choosing a fixed rate mortgage as opposed to a variable product may differ based on individual circumstances.
For first homeowners who are on a tight budget, a fixed rate mortgage is a great way to lock in a rate and know exactly what the payments will be for a few years while they are settling into their home. Fixed rates may be slightly higher than a variable option, but if knowing the rate is locked in helps borrowers sleep at night, it can be a great option.
On the other hand, a mortgage product with a variable rate may provide greater flexibility for homeowners looking at selling their property or who are looking to pay off their mortgage faster with extra repayments.
So what are the main things to be aware of?
A fixed rate loan may be costly to leave early
The majority of fixed rate loans will charge a break cost that is based upon the economic cost to the lender of reversing the funding they have locked away for the life of the loan. So if you anticipate paying out the loan early, a variable rate option may be more appropriate.
Do you want to pay off more than the required repayments?
Most fixed rate loans limit any additional repayments to a specific amount each year (eg. $5,000) and if you put more into the account, the lender could pass on any costs.
Read the fine print
Variable rate loans can offer more flexibility when paying the loan back early, but this could incur high exit fees with many 'introductory' rate loans. It's important to understand the terms and conditions of the product that you're applying for.
Ultimately, you should work out what's more important to you; the knowledge of exactly what your repayments are with a fixed rate, or the flexibility to repay the loan early that comes with a variable rate.
If you want the best of both worlds, most lenders will allow you to 'split' your loan.
For example, you could have $200,000 as a variable rate loan and $200,000 on a fixed rate loan. This can be a great option as you are protected against rate movements on one side, yet you retain the ability to put extra funds (such as a tax refund) into the variable portion. It also means you'll be charged a lower break cost on the fixed portion if you need to pay out the loan within the fixed rate term.
If you're comfortable that you can afford the repayments on your mortgage, the question of whether to fix or not comes down to what is most suitable to your individual circumstances. That means weighing up your plans for the next few years against any savings you might pick up from renegotiating your loans.
The average punter now has more money in their back pockets - so what should you do with it?
Go on holiday, buy a new car, invest in essential toys or reduce their debt?
Interest rates have reduced dramatically over the past eight months and with average weekly earnings on the rise, people with variable mortgages now have additional funds to play with.
Although it may be a little boring, looking to reduce debt by putting additional funds towards owning your home or investment property may hold you in good stead when times get a little tighter.
Mortgage Choice senior corporate affairs manager Kristy Sheppard says since rates started to decline, reaching a half-century low in April, variable rate borrowers have experienced a significant reduction of their minimum repayment level when compared to this time last year.
"Effectively using any extra money made available as a result of rate decreases, wage increases, government incentives and the like can make a noticeable dent in any mortgage. Borrowers should take note of simple ways to repay their mortgage sooner.
"For example, by continuing to repay a mortgage at the higher rate, borrowers can save on the total interest repaid and the time it takes to own their property outright."
For example, the monthly repayment for a loan of $300,000 at a standard variable rate of 5.85 per cent over 30 years is $1770. Compare this to $1723 when there is a 0.25% interest rate cut. If the borrower continues to make repayments at the higher rate, they will save $42,206 in interest and wipe two years off their loan.
These top tips will help you own your property faster.
> Up the frequency
By paying a loan fortnightly or weekly rather than monthly, you can save thousands of dollars in interest. This is because there are 12 calendar months and 26 fortnights in a year. If you pay fortnightly, you actually make the equivalent of thirteen monthly repayments each year.
> Just a little bit more
Paying a little extra every month can have a big impact in the long run. Consider rounding up to the nearest $10, $50 or $100, or avoiding the temptation to drop your repayments in line with interest rate changes. Based on a loan of $300,000 at 5.85 per cent over 30 years, if you round the monthly repayments of $1770 up to $1800, the loan will be repaid approximately 10 months earlier and will put over $17,000 extra in your pocket.
> You've heard of buying in bulk, so why not save in bulk!
Making a lump sum payment (big or small) into a loan can make a substantial difference. Say a borrower received a bonus of $900. When deposited into the above-mentioned loan, it would reduce the overall term by two and a half months and the total repayments by almost $4278.
> Feeling a little, off... set?
Loan accounts such as a 100 per cent off-set account enable consumers to link a savings account with their home loan account and 'off-set' or use that amount to reduce the interest accumulated on their mortgage. For example, if a borrower has $5000 in a full offset account, then on the above-mentioned loan the term would be reduced by one year and the borrower would save over $22,879. Note that some lenders offer partial offset only.
> A mortgage whole in one
All-in-one facilities save interest on a loan by having all of the borrower's income directly deposited into the loan account, which immediately reduces the loan balance. The loan account effectively becomes the borrower's main banking facility and access to the funds is by way of cheques and/or debit or credit cards.
> Take everything with you when you move
If you are likely to move home and want to take your mortgage with you, make sure your lender will allow the transfer of your loan to another property and not charge the earth to do it. If your loan isn't portable, you are likely to incur discharge costs and new establishment fees.
> Bargain hunt
If you went for the premium loan you are more than likely on a higher interest rate and paying more for facilities and features you don't use. Consider refinancing and switching to a more basic product offering a lower interest rate - your repayments will be lower, therefore, you'll be able to afford to pay extra and own your property quicker. However, borrowers should be aware they may incur break or 'switching' fees when refinancing.
> Keep your eye open for package deals
If you are looking at taking out a home loan, investigate your eligibility for a professional package (aimed at higher income earners) where you can receive reduced interest rates and, often, no application or other fees, Gold credit cards and home insurance discounts. With an existing loan, look at doing a home loan health check because if your circumstances (for example, income) have changed since you took it out you might be able to get a better package for your current situation.
BEFORE banks or non-bank lenders lend you money for a car or a home, or phone companies enter into a mobile phone contract with you, they look at your credit record to assess whether you have a good record of repaying your debts.
A bad credit file can cost you a lot in the long term. If you haven't paid your bills, or if you've had your power cut off, your car repossessed or skipped payments, exceeded card limits or defaulted, you could be refused a loan or be charged a higher interest rate.
A whole industry has grown up supplying credit to people who are considered bad risks - at higher interest rates.
You can obtain a copy of your credit file for free within 10 working
days by contacting Veda Advantage at www.mycreditfile.com.au (alternatively, you can pay a fee to have your credit file delivered more quickly).
Importantly they contain records of overdue payments of 60 days or more when you have been sent a letter notifying you of the default. Also 'clear out' listings - when the credit provider has unsuccessfully tried to contact you in writing and has reported you as a missing debtor.
Step 2 - Clear up any disputed credit records
If you believe that a bank or phone company has unfairly listed an overdue account on your credit file, you should contact them and ask for an explanation and for the incorrect information to be immediately rectified.
If you are not happy with the explanation you receive, call the Banking and Financial Services Ombudsman (http://www.bfso.org.au) or the Telecommunications Industry Ombudsman (www.tio.com.au)
Step 3 - Improve your credit
To change a bad credit record into a good one, use credit as much as you can, meeting all repayments on time, so the good record outweighs the bad.
You do not have to spend more, just put all your spending (bills, groceries, petrol, transport pre-pay tickets) on a credit card and pay it off every month.
You can arrange with your bank to have your card paid automatically from your savings or transaction account.
Apply the same strategy to buying a tv or washing machine - take a loan or buy on instalments (make sure you can afford it) just to get the credit rating points. Put any regular family bills you can afford in your name.
Step 4 - Get help from family and friends
Get someone else to check you are paying your instalments and bills each month - a parent, friend or partner. Think of other ways to get organized, so you can borrow your way out of trouble.
It is best to try to take control first, then try financial counselors (www.afccra.org). Consumer organisations have expressed concern about the quality and high cost of services offered by some businesses that charge people to prepare Debt Agreement applications and the like, with concern that scams are mixed in with the legitimate services.
While interest rates are unlikely to be cut again in this economic downturn, talk of rate hikes is premature and the cash rate will most likely remain unchanged for at least a year.
That's the consensus among economists contacted by The Sunday Telegraph in the wake of crucial inflation data released on Wednesday.
The inflation rate was eagerly anticipated because any signs the economy was heating up through rising inflation would have signalled the beginning of rate-hikes, possibly this year.
And even though the headline inflation rate (which excludes the most volatile components of the Consumer Price Index) fell to just 1.5 per cent from the previous year's level of five per cent, the underlying rate, which includes even volatile components, remained above the RBA's target range of two to three per cent at 3.9 per cent.
Coupled with the recent glut of positive economic data, the news means that financial markets are pricing in two quarter-point hikes in the first half of 2010.
Another barometer of future rate hikes, a Credit Suisse index that monitors trading activity, suggests rates will have risen by 0.95 per cent in a year's time.
Buoyant retail sales, data from the US pointing to a stabilising economy and increasing construction activity, along with a vibrant Australian housing market, are all helping build a case for rate hikes in the near future.
Nevertheless, every economist in our survey thought the financial markets were wrong to price in two rate hikes for early next year, and either said there would be no change until late in 2010, or that we were likely to get a further cut in the cash rate later this year as unemployment figures continued to deteriorate.
"Unemployment is the most important factor for the Reserve Bank," said Rory Robertson, Macquarie Bank interest rate strategist. "If we're going to see rate hikes we will need to see a real spark in labour demand. That means a sizeable increase in job vacancies, and more signs that unemployment is stablising at a lower than expected level.
"In other words, bright news on the jobs front means bad news for interest rates."
But while unemployment is rising, rate hikes remain off the agenda, and most experts see unemployment continuing to rise for many months to come.
In the wake of the inflation data, ANZ economists have scratched out their forecast for rate cuts later this year and are now predicting no change until November 2010, at which point they are predicting an increase.
"The next move will be up, but not for a long time" said Saul Eslake, ANZ chief economist.
"And that isn't unprecedented. Remember we went through the whole of 2005 without a rate change" he said.
History suggests the RBA never increases rates while unemployment is rising, and with jobless numbers predicted to increase to between eight and nine per cent by the end of 2010 - an increase of up to 55 per cent from today's 5.9 per cent - it is hard to see rates rising within the year.
"There is some good news coming through and it bodes well for a recovery starting later this year or early next" said Shane Oliver of AMP Capital. "But it's the unemployment data that really matters.
"The RBA will not want to jeopardise a fragile recovery by raising rates too early, so we'll need to see unemployment peak before rates start going up.
"Financial markets can't seem to cope with the concept of 'no change', so keep jumping from predicting increases to decreases and back to increases."
ONE of Australia's major banks is planning to introduce "Muslim-friendly" loans that do not charge interest, to comply with Sharia law.
Instead, the National Australia Bank will structure an Islam-approved line of finance to make money from alternative methods.
These include profit-sharing on the transaction, joint-ventures or leasing-type arrangements.
For example, to get round the Islamic ban on usury - or unfair lending - a Muslim mortgage often works by the bank buying the property, then selling it to the customer at a profit, with the customer then repaying the entire sum in instalments.
In this way the profit margin is built in from the start. It also has the advantage of making the loan immune from future interest rate rises.
NAB said the loans, which will start out small, will have to be cleared by a Sharia Advisory Board to ensure they meet strict criteria before they can be made available to the public.
"We are dipping our toe in the water with this scheme and thought we may be able to offer this product in high-density Muslim areas," said Richard Peters, head of community finance and development at NAB.
"We suspect there is demand out there, but we don't know how big it is, so we will trial a few products first."
For the trial's purposes NAB will pump $15 million from its not-for-profit finance division into the program, which will distribute the funds through various community finance schemes around the country.
The bank will monitor the take-up and assess potential demand.
Interest-free loans of up to $1000 will be available to help finance household items, such as washing machines and fridges.
The loans would also be available to non-Muslims.
The news comes just days after federal Assistant Treasurer Chris Bowen said that Australia could exploit international demand for Islamic finance to create more jobs.
IT'S easy to say your life shouldn't revolve around the mortgage, especially if you don't have one, so I won't bother. But what about making the mortgage revolve around your life?
Thanks to the lowest interest rates anybody can remember, a home loan could be your new best friend. So be nice to it. Used positively your mortgage could, perversely, boost your wealth as the most tax-effective form of saving outside super. And look what's happening to that.
A mortgage with either an offset or a redraw facility is the key.
It'll be slightly more expensive, but for many borrowers it will more than pay for itself.
An offset is a savings account attached to the mortgage where you can have your salary paid.
The beauty of it is that the bank counts the extra money as paying more off the mortgage, even though it's not, and so the interest you're charged drops.
But that's only the half of it. Since in the eyes of the Australian Tax Office you're not getting interest, just paying less, it's not taxable.
And here's where it can even create wealth, without the downside of super. The interest that the Tax Office thinks you're not getting is more than a safe bank deposit pays.
So with an offset account you're earning 5 or 6 per cent depending on the mortgage which is tax free. In contrast, popular online savings accounts pay only 4.25 per cent, which is taxable.
On a 30-year $250,000 mortgage at 5.75 per cent, Mortgage Choice calculates that keeping $10,000 in an offset account would make you more than $43,000 better off. Or looked at another way, would lop two years and four months off the length of your mortgage.
These days most home loans come with at least a redraw facility which is almost as good.
It lets you make extra repayments and, at a pinch, you pay your whole salary in as you can with an offset, then draw down as you need it.
But it's the poor relation.
There's usually either a maximum number of redraws you can make, or a fee for each one, and if you're really unlucky your mortgage features both.
The great thing about an offset is you can pay your whole salary into it and then use a fee-free credit card attached to it for expenses.
Like a Kreepy Krauly that's escaped from the pool, the good ones will sweep money out of your offset and pay off the credit card.
See, you can get the mortgage to do just about everything except audition for The Biggest Loser.
But maybe you just want to get rid of it - the mortgage, that is - as fast as you possibly can. Fair enough.
Independent arbiter Canstar Cannex says the cheapest mortgage is a basic one from AMO at 4.88 per cent.
It's the only mortgage where the comparison rate, which takes into account fees and charges, is also below 5 per cent. But by basic, AMO means basic. You don't get things like redraw facilities and, more to the point, you can't vary the repayments.
So basic loans won't let you pay off the mortgage early, though they're ideal if you're on a very strict budget and don't have any extra savings anyway.
Mind you, while there is a trade-off between flexibility and rates, it isn't very onerous.
Canstar Cannex says the next cheapest mortgage, only 0.01 of a percentage point dearer, is Mortgage Ezy's 4.89 per cent, which boasts most features of a standard bank loan, such as a redraw facility.
"The problem with super cheap basic loans is that there's nothing to keep the rate there," says mortgage broker Tony Harris of Easy Living Finance. "The lender can put up rates any time. Also they tend to be offered by non-bank lenders."
A halfway house, so to speak, between basic and fully optioned mortgages is the honeymoon or introductory rate.
Honeymoon rates had a bad name, and I'll raise my hand here, until recently.
The banks loved them because they could be used to lure in unsuspecting borrowers with what seemed a cheap-as-chips rate that after a year leapt to something above the going variable rate.
Combined with punitive exit fees, euphemistically called "deferred establishment fees", the result was that suckers, oops I meant borrowers, were locked in to high-rate loans before they knew it.
But that jig was up when lenders had to reveal the true cost of the loan with a comparison rate.
It not only killed off introductory rates for a time but also prompted lenders to move their fees to the back of the loan where they aren't included in the calculation.
That's why exit fees can be huge in the early years of a mortgage - often up to 1.5 per cent of the amount borrowed. The lucky ones face just a couple of months' repayments.
But honeymoon rates have been sweetened. These days the introductory rate converts to the standard variable rate, so there's no question that a genuine discount is involved.
Still, it must be said that over the average life of a mortgage it doesn't amount to a great deal.
And there are still traps. Deciding whether to take a fixed or variable rate honeymoon is one of them, especially when the rates are identical.
For example, you can get 4.99 per cent for a year either fixed at NAB or a variable rate at Resi. The comparison rate gives the game away: NAB's true rate is 5.82 per cent compared with Resi's 5.26 per cent.
That's not all.
If, as expected, the Reserve Bank has another go at cutting interest rates during the year, the NAB rate won't change but Resi's will.
Better still is Resi's extended two-year honeymoon of 4.99 per cent, a variable rate with no application fee and a redraw facility.
After two years, the rate will be kept at half a percentage point below the average standard variable rates of the four big banks.
By the way, even though the credit crunch and the banks with their government guarantees are squeezing out smaller lenders, Resi says it has $2.5 billion to lend, which is worth bearing in mind as the banks get fussier about who they lend to.
Don't turn up your nose at interest-only loans either.
They're not just for investors who can claim the tax deduction and maximise their cash flow. They especially suit first home buyers too. So long as you pretend it's a standard mortgage and make whatever the normal repayments would have been.
That way you're cutting into the principal just like everybody else but you have greater flexibility if your income falls because, for example, you have children.
Or for that matter it lets you buy some furniture or fix the inevitable faults.
You'll be amazed at some of the stupid things the previous occupants allowed or, if it's a new place, the builders got away with.
The biggest bugbear for home buyers has become the time it takes to get approval.
"Some lenders are taking up to two weeks to even give a conditional approval which means the loan is subject to various conditions," says Chris Acret, managing director of mortgage brokers Smartline. "This is a huge issue when you have a five-day cooling off period."
Because lenders are tightening standards, using a mortgage broker could save a lot of hassles later. "All the lenders have different qualifying rates which governs how much you can borrow.
So you might not qualify for a St George loan but get a Commonwealth one.
"I have a client who couldn't get a loan six months ago but now qualifies because interest rates have dropped," Harris says.
And if you're borrowing more than 80 per cent of the property's value, you'll need to take out mortgage insurance, which requires separate approval from the insurer.
Brokers are free and are paid a commission by the successful lender, which doesn't affect the rate.
Some even go further and rebate some of the commission they receive.
Peach Home Loans will refund $250 on a $150,000 loan and $1250 on one over $750,000.
Instead of the upfront commission, Mates Rates Mortgages will refund the monthly or trailing payments it gets from lenders.
How much depends on which lender it's signed you up with but 0.15 per cent is the average, paid on the last Friday of each month.
On a $250,000 loan that's $375 a year paid into whatever account you want.
Occasionally brokers will even have cheaper mortgages on the shelf that aren't available through branches.
When dealing with banks, it's not who you know but how much you want that counts.
And the more you want the better, so long as you can afford it.
The banks will lop at least 0.7 of a percentage point off the advertised standard rate if you borrow more than $250,000 although even then it pays to look around.
The Commonwealth, for example, is believed to have raised its benchmark to $750,000.
These deals are known as professional packages and come with an annual fee of $300 or more.
But it's worth it.
"Against the discounted rate it pales into insignificance," Harris says.
Speaking of discounts, is it better to fix?
No say the experts.
Although the Reserve Bank didn't cut rates last week, as the global recession worsens more cuts are likely later in the year.
"I'm against fixing because it pitches the consumer against the market. But maybe you could consider it when rates are in the mid fours," says Peter James, joint managing director of Resi.
Besides there's only one sure way of saving money on your mortgage.
Pay it off faster.
CASE STUDY
IT ISN'T just fixed rate loans that have heavy break costs.
Rick Williams had to pay $4000 in break fees to quit his RAMS variable rate home loan in return for saving more than one per cent in interest.
But in the nine months since, he's more than made up for it, with the bonus of a 3 per cent rate cut along the way.
Luckily, Westpac bought out his loan, contributing $1500 to the break fees.
Rick, who runs an IT consultancy, Platform 24, was keen to re-finance with a bank because the mortgage rate on his RAMS loan was "creeping up faster than that of the banks or other lenders".
As it turned out, RAMS was one of the first Australian victims of the credit crunch.
The break quote cost doubled between Rick's two phone calls to RAMS, getting the figures and confirming them - or in this case, not confirming them.
He consulted fellow business network group member Wayne Dive, a mortgage broker with Smartline, who told him to sit tight. But when Westpac offered to buy out former RAMS borrowers, Dive did the calculations and checked out other lenders. He recommended the offer.
"Given the climate we're in, it seems a very wise move to have your loan with a bank," Rick says.
"Also it's a very good rate."
He's taking advantage of the low rates by "paying off more than we have to. It has a redraw facility so we're putting in as much as we can.
"It's the safest place to put money."
CASE STUDY
AN INTEREST-only home loan is the way to go if you're thinking of starting a family.
Ella Smith and Adrian Legg have just bought a home - the first one they saw as it turned out, though 11 houses later - and will only pay the interest on their $498,000 mortgage.
But they'll be treating it as a normal principal and interest loan, so the excess repayments will go into their two offset accounts.
"Down the track we'll have kids. If our income drops we'll just have the interest to pay," says Ella, a freelance writer.
They'll also be able to draw on their savings from the offset accounts.
"I can use the offset account to pay the interest," Ella says.
Their Westpac loan, with an interest rate of 5.21 per cent, was negotiated by broker Leeanne Scott of Mortgage Choice.
This is Ella's third property, so the couple missed out on the first home owner grants.
Still, if it wasn't for the flat she bought when she was 24, and an $85,000 profit selling it four years later, there'd be no dream home ... or Adrian, who is a teacher at the Australian Institute of Music. "When I owned my first flat he was my neighbour - he was renting the flat next door."
MORTGAGE borrowers are being urged to stick with variable loans, despite warnings that interest rates could start rising early next year.
Experts say fixed rates have become so expensive they make little sense for all but the most conservative borrowers.
Three-year fixes now cost about 1.5 percentage points more than the average variable rate - a margin equivalent to six, quarter-point rate rises.
Aussie Home Loans executive chairman John Symond says it does not make sense to lock into such a high rate today, "given it will take six rate increases before a variable rate loan would be more expensive".
"You are better off taking the savings today," he says.
Money markets - where banks raise funds for lending - are pricing in rate increases starting in early 2010, with the cash rate tipped to hit 3.4 per cent in 12 months, 0.4 percentage points up from today.
Every economist Your Money contacted thinks the money markets have it wrong, and that rates will stay flat or fall in the next year.
AMP Capital Investors chief economist Shane Oliver says Australia's economy will contract in the June and September quarters, putting it in a technical recession. "With unemployment still rising and inflation so low, the RBA will find it very difficult not to cut rates when that news comes through," he says.
Oliver predicts the cash rate will fall 0.75 percentage points to just 2.25 per cent by the end of this year, to be back near 3 per cent in 12 months.
Macquarie interest rate strategist Rory Robertson is less bearish, but does not foresee interest rate rises in the next year.
"The recent economic data has been so good that there is no evidence households need helping right now," he says.
National Australia Bank chief economist Alan Oster says it's "about 50-50 whether rates will stay flat or fall within the next few months".
Economists and mortgage brokers say if borrowers are too stretched to afford future rate rises or can't sleep because of the uncertainty, fixing part of the loan is a good idea. But they say it is important to have some of the loan on a variable rate to maintain flexibility.
Commsec chief equities economist Craig James says rates may rise next year, "but it will be a slow journey upwards and probably will only rise by 2 per cent from today's levels by 2012".
The experts forecast
* Craig James: Cash rate flat for next year and hitting 4 per cent in 2011.
* Shane Oliver: Rate to drop to 2.25 per cent by end of this year and be back to 3 per cent in a year's time, rising very slowly from then on.
* Rory Robertson: Flat for next year, and it won't rise until unemployment starts falling, likely to be in 2011.
* Alan Oster: 50/50 on whether rates will be the same or lower by the end of the year.
THE Reserve Bank is holding open the option of further interest rate cuts later this year in case the surge in consumer spending and confidence collapses once the government's cash handouts have been spent.
RBA governor Glenn Stevens underlined the surprising strength of the Australian economy and the reduced risk of a global meltdown in his statement yesterday announcing official interest rates would be held steady at 3 per cent for the fourth month in a row.
"Economic conditions in Australia have, to date, not been as weak as expected a few months ago," he said.
HIA managing director Ron Silberberg welcomed the decicion, saying current mortgage rates were not a barrier to economic recovery.
Australia is being boosted by growth in China, which has become stronger and is spilling over into the Asian region, The Australian reports.
Mr Stevens cited "tentative evidence" that the US economy was approaching a turning point, although conditions in Europe were still weakening. He said world recovery was likely to be slow.
The International Monetary Fund is updating its world economic forecasts for the G8 summit in Italy, where the formal sessions considering the global economy start today. The IMF is expected to outline an improvement in the outlook.
The Reserve Bank has been persuaded by Australia's strong retail sales and housing credit that the economy will perform substantially better than its May forecast of a 1 per cent contraction this year.
The bank has been particularly struck by rising house prices, which have increased 4 per cent this year, according to Rismark-RP Data, and are now back to the peak of February last year.
This contrasts with every other advanced nation, where housing prices are falling. Housing credit has grown at an annual rate of 7.5per cent in the past six months.
The house price growth so far this year is not worrying the Reserve Bank, but it is monitoring it for any sign of a renewed housing bubble. However, the consumer strength is being offset by tumbling business investment and falling business borrowing, as companies seek to cut debt in the face of tighter lending standards.
Reserve Bank leaves door open for interest rate cuts - Learn more about the market expectations from Touch of Finance
Mar 17, 2009
THE Reserve Bank today left the door open for further interest rate cuts, saying a decision to hold rates steady at its March 3 policy meeting was prudent given significant stimulus already flowing to the economy, but would "leave adequate flexibility for policy at future meetings".
The decision to keep rates on hold in March was a line-ball call as board members "could see reasonable cases for both courses of action", according to the minutes.
The minutes suggest that any future decision to cut rates is likely to be a meeting-by-meeting consideration.
Importantly, the RBA had anticipated the economy would contract in the fourth quarter when it took the decision to leave rates unchanged.
A contraction in the economy of 0.5 per cent in the fourth quarter was reported the day after the board meeting. The size of the contraction, the first in eight years, surprised economists who had forecast a small rise.
"The latest available information suggested that the national accounts to be released the following day would probably show a small fall in GDP in the December quarter, a weaker outcome than had appeared likely a few days earlier, though not significantly different from the forecasts made for the previous meeting," it said.
The board also noted early signs that efforts to stimulate the economy were having some expansionary effect.
"Early indications were that the monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect, but the size of this remained unclear and it would take some time for the full impacts to come through," it said.
Ahead of the release of the minutes, financial markets were pricing in a further 40 basis points of rate cuts at the next policy meeting in April.
Since September 2008, the RBA has cut its cash rate target by 400 basis points to a 45-year low of 3.25 per cent. In the same period, the government has unveiled two fiscal packages of $10.4 billion in October, and in February a four-year package worth $41.5 billion.
First Home Owner Grant to end - Hurry and apply through Touch of finance for a new loan
Mar 13, 2009
THE Rudd Government is resisting requests to extend its highly successful increase in the first-home buyer's grant, raising fears of a housing slump once the scheme is terminated on June 30.
A record 26.5 per cent of new home loans went to first-home buyers in January, and the scheme appears to have reversed a five-year decline in the new home building industry, softening the effects of the recession.
While Prime Minister Kevin Rudd hailed these results as evidence of the success of the stimulus package, two key ministers sought yesterday to douse expectations the scheme would be extended.
Finance Minister Lindsay Tanner told the National Press Club he was delighted the scheme was being so successful and said its future was open to debate as the May budget was developed.
"But I'd have this to say; it's going to be a very tough budget and there are lots of other issues that we also have to give consideration to. So I don't wish to fuel any expectations about that."
Launching a review of the adequacy of housing supply, Housing Minister Tanya Plibersek said all measures forming part of the economic stimulus package had to have a cut-off date.
"If people are to bring forward their decision to purchase, which is the stimulus effect that we want to have, then the first-home owner's boost has to have an end date," she said.
However, Ms Plibersek said the Government remained open to taking further measures in housing if they were needed to counter the effects of the global financial crisis.
Doing your homework on home loans - Get advice from our experts at Touch Of Finance
Mar 11, 2009
FIRST home buyers should temper the elation of finally owning their own home with an awareness of the pitfalls of having a mortgage.
Australian Mortgage Options managing director Robert Projeski argues borrowers should take elementary measures to ensure they do not become financially burdened by their new commitment.
"Celebrate getting your loan, by all means, but simple steps can remove the need to commiserate later on," Mr Projeski said.
Lower interest rates and increases in government grants have enticed more Australians, particularly first home buyers, to buy residential property. The number of permits in January to build private sector houses rose for the first time since April 2008, despite total approvals to construct dwellings falling, official data showed.
"Your loan should have a redraw facility, flexibility, an offset account and the facility to make extra repayments," Mr Projeski said yesterday.
"There are costs involved in refinancing, such as establishment fees, application fees, solicitors' fees and discharge fees, so make sure you are saving more than you are spending when making the switch," he added.
He also suggested increasing the regularity of repayments, from monthly to fortnightly, or using a mortgage offset account to reduce the time to service the mortgage.
"The more money you have parked in your loan account, the lower your balance because the accrued interest is lower over the shorter period of time," he said.
"By splitting your monthly repayment into two, you can literally save thousands over the term of your loan."
Mr Projeski said if a dual-income household earning $100,000 a year placed their wages on the account of their $300,000 30-year mortgage at the current standard variable rate of 5.91 per cent and withdraw $700 a week for expenses, the loan would be repaid in eight years.
"The borrowers will save $264,000 (in interest)," he said.
It is also important to check bank statements for errors, Mr Projeski said.
He also warned against hidden fees such as account keeping fees, fees for taking money back out of the account, monthly fees and annual review fees.
"This can equate to well over 0.25 per cent, sometimes more, and the cost for things like redraws could end up totalling 0.5 per cent on top of the rate," he said.
Slide towards recession signals a rate cut bonanza - You can learn the lowest interest rates from Touch of Finance
Mar 10, 2009
THE Australian economy's rapid deterioration is likely to force the Reserve Bank to resume cutting interest rates as soon as next month.
With the economy shrinking sooner - and faster - than expected, investors and economists said a cut was back on the RBA's April agenda, the Daily Telegraph reported.
Not only is the RBA likely to cut sooner, it may go lower for longer.
"The April RBA board meeting is live," ANZ Bank's head of Australian economics and interest rate research Warren Hogan said yesterday.
Another cut would likely bring rates to 2.75 per cent, the lowest ever. If commercial lenders follow suit, the average variable mortgage rate would fall to as low as 5per cent - last seen in 1960, according to RBA data. The lowest mortgage rate on record is 3.88 per cent from 1950-52.
At 5 per cent, monthly payments on a $350,000 loan would decline to $2046.06, a saving of $103.24.
"The April RBA board meeting is live," the ANZ Bank's head of Australian economics and interest rate research Warren Hogan said yesterday.
The economy grew at an annual pace of just 0.3 per cent in 2008, the slowest rate since 1991, when Australia was last in the depths of recession.
Prime Minister Kevin Rudd said it was impossible for the economy to "swim against the tide" of the global recession. Treasurer Wayne Swan said the result was "sobering".
Economists said the Government would probably have to provide further financial support on top of its previous strategies to keep activity from stalling.
"We anticipate a further substantial fiscal stimulus from the Budget in May," Westpac's head of economics Bill Evans said.
HSBC's chief economist John Edwards said: "One comforting thing is that while we had a pretty weak December quarter, we came out of it without a major decline in employment."
Glimmer of hope on housing - Apply now through Touch of Finance
Mar 06, 2009
BUILDING approvals have fallen again, but there are signs the struggling housing sector has turned the corner.
That glimmer of hope came from Australian Bureau of Statistics figures that showed the number of private sector housing approvals rose 1.1 per cent in January.
It was the first improvement in that category since April 2008, which RBC Capital Markets senior economist Su-Lin Ong said was a tentative sign the large interest rate cuts since September last year were starting to flow through.
"While the housing sector remains weak, there are some tentative signs of policy traction as multi-decade lows in mortgage rates lend support," Ms Ong said.
"The details were less dire."
However, the data indicated property investors remained firmly on the sidelines.
The number of approvals in the "other dwellings" category, which includes flats, townhouses and other multi-unit homes, declined for the sixth month in a row after backpedalling 15.4 per cent in January.
ICAP senior economist Adam Carr said the caution shown by property developers reflected difficulties securing credit.
"It was really only through January that developers were seeing an easing in credit tightening," Mr Carr said.
"Now it makes sense to me that developers wouldn't then run out and get an approval. There is too much uncertainty."
In terms of the overall picture, total dwelling approvals fell by 3.7 per cent in January, seasonally adjusted, extending a slide that began in July and has continued unabated for seven months.
The result was well below the market forecast of a 1.6 per cent rebound.
Building approvals have sunk 33.5 per cent in the 12 months to January.
CommSec chief economist Craig James said it would be a couple more months before the big interest rate cuts and the boost to the first home owner grant came through in the data.
"At some point in time we are going to see an almighty rise because we just can't continue to under build here in Australia," Mr James said.
Housing Industry Association chief economist Harley Dale said it would take more than the revival in the first home buyer market to generate a recovery in residential construction.
"A further decline in building approvals in January is a very weak update on the short-term prospects for new home building activity," Mr Dale said in a statement.
The worst performing state was New South Wales, where building approvals fell a massive 19.1 per cent in January. Approvals were also down in Queensland and Western Australia.
Building approvals rose in South Australia, Victoria and Tasmania.
Taking a step into property investing - Touch of Finance shows you the points to be considered
Mar 05, 2009
PROPERTY investing is becoming more popular as interest rates tumble, the share market remains in the doldrums and returns from cash deposits head towards zero.
One of the first questions any real estate investors must ask themselves is whether they plan to buy an established home or build a new one.
Property experts say there are positives and negatives with both approaches. It is important for investors to research and understand exactly what they want.
Is it peace of mind? Is it instant income? Is it bigger tax deductions? Is it long-term growth? Answers to these questions will help shape an investment decision.
The type of investment property - residential or commercial - also is a factor.
Real estate author, investor and university lecturer Peter Koulizos says there is no right or wrong answer in the debate over whether it is better to build or buy an established investment property.
"If you are looking for hassle-free investment in property, you are probably better off building or buying new because you have very low maintenance on the property and you tend to get a better-quality tenant," he said.
"However, buying established gives you the opportunity to value-add whether through renovations or subdividing."
Investors, however, should expect to be paying more for repairs to an older house.
"Because interest rates are so low and builders are very keen to get work, I think it's a fantastic time to be buying new," Mr Koulizos said.
"There are not many times in the property cycle where there is a situation such as we have now where it's worth building from scratch and keeping it to rent."
A big potential downside with building an investment property is that investors do not receive any income while it is under construction. Including planning approvals, that can take more than a year.
"One of the issues you have to address with your bank or lender is are you paying interest while it is being built, or are you going to let that accumulate?" Mr Koulizos said.
Another downside is limited choices on where to build.
Vacant blocks are scarce in most established suburbs.
Brock Harcourts chief executive Greg Moulton said that was a factor investors must weigh up against the benefits of building, such as tax and stamp duty savings.
"The opportunities to build in some of the high-growth areas just aren't there," he said.
"If you want a better return and bang for your buck in the short term, maybe look at building, but if you are looking at a long-term investment opportunity you will be going where the capital gains are - and nine out of 10 times that is in established areas."
High capital growth areas traditionally were close to the city, near the beach or in the eastern suburbs, Mr Moulton said.
"One of the advantages with buying in established areas is convenience with schools. A lot of people want to invest close to decent shopping centres and decent schools," he said.
"In developments out further, some of the schools haven't been established long and they don't have a reputation."
Real Estate Institute of SA president Robin Turner said while most property investors bought established homes, there was a good argument for building.
"As with everything, they need to do their paperwork thoroughly and be very clear about what's included in the price, so there's no nasty surprises," he said.
"It can be exciting and rewarding for most people to see a new home rise out of the ground, plus there's a significant saving in stamp duty."
Stamp duty only is charged on the land component of the home, not the cost of building it. Mr Turner said another benefit was that new homes often were more desirable to live in and had new floorplans and modern, efficient designs.
A drawback when building in a new area was not knowing the structures that were to be built around you, he said.
Rossdale Homes developments manager Denny Havriluk said apart from stamp duty, there were other savings to be made when building.
"There are far greater depreciation benefits on newer homes, resulting in bigger tax savings," he said. "Newer homes can be purpose-built specifically for investment to maximise these benefits.
"Conversely, the depreciation benefits on a 20-year-old home, for example, are halved. There is only so much you can claim in regard to wear and tear."
Mr Havriluk said newer homes often had better growth potential because they gave investors early entry into new developments.
"If you can get in early to a new land division where there is demand for rentals, as the area becomes more established and developed, you're more likely to enjoy capital growth over a longer period," he said.
Hamra Homes marketing manager Gaby Haidar said a key factor in building an investment property was selecting the right suburb.
"Investors need to be smart about their choices and should pick a growth suburb to build, ensuring good returns and maximum capital growth," he said.
Mr Haidar said house and land packages were a popular choice with investors. "Investors are able to see exactly what is on offer from the plans and display homes," he said.
Weighing up the positives and negatives
o There are typically better tax benefits for depreciation on newer homes.
o The 2.5 per cent capital works deduction on houses is worth a $5000 annual tax deduction on a $200,000 building but only $1250 on a $50,000 building.
o Most tenants prefer newer properties, so rental returns may be higher.
o New homes are usually more energy-efficient.
o Repair bills are generally lower for new homes.
o Modern floorplans and designs can be popular.
o There a limited choices where you can build an investment property.
o Building a home can have construction delays and hidden costs.
o Established homes deliver investment income from the day of settlement.
o The best capital growth traditionally comes from established areas where vacant land is rare and expensive.
o When buying established, you know what the surrounding facilities and other homes are like.
o Value can be added to established homes by renovating or subdividing.
Banks reveal ATM charges, then you choose - Touch of Finance shows how to avoid extra charges
Mar 04, 2009
THE new ATM fee system is a "wake up call" for consumers, according to a banking expert.
Under the system, which came into effect yesterday, banks have to reveal their direct charges and give users the option to either go ahead or cancel the transaction if they are not willing to pay the fee.
The fees range from nothing, for Bank of Queensland customers, to $2 for most major banks.
Some ATM owners - including Commonwealth Bank, ANZ, St George and Westpac - charge an additional fee for simply checking your balance.
"The new ATM system definitely makes fees more transparent for the consumer but it does serve as a wake-up call for consumers to tighten up ATM practices," Canstar Cannex financial analyst Peter Arnold said.
The reforms are the work of the RBA and have taken years to develop.
Previously, fees charged by card providers to customers for using a "foreign" ATM averaged between $1.50 and $2. Under the new system, the charges are about the same.
But Mr Arnold said it was hoped competition would drive prices down.
To minimise the fees you pay, Mr Arnold recommended:
* FINDING out whether your bank or your credit union had agreements with lenders that allowed you to use other ATMs;
* USING EFTPOS to withdraw cash;
* BEING aware of where your lender's ATMs are in your area, and those of any other bank you can use without charge; and
* CHECKING transaction history online or by phone.
"These are simple things," Mr Arnold said, but they will save money.
Reserve Bank's interest rate decision 'a vote of confidence' - Learn more from Touch of Finance
Mar 03, 2009
THE Reserve Bank has given a vote of confidence in the strength of the Australian economy, holding interest rates steady in the face of tumbling world share markets, as the Australian economy defies the worst of the global recession.
Reserve Bank governor Glenn Stevens said interest rate cuts over the past six months and the federal Government's emergency stimulus packages were supporting spending by businesses and households, which was helping the Australian economy avoid "the sort of large contraction seen elsewhere"...
The RBA's rates decision came as the Australian Bureau of Agricultural and Resource Economics yesterday forecast sharp falls in export earnings from iron ore, coal and natural gas. But it said the slump could be short-lived, gradually picking up again from 2010-11, fuelled by growth in China and India.
ABARE said the fall in national income from mining would be partly offset by increased earnings from farm exports, led by wheat, barley, canola, cotton, sugar and lamb.
Wayne Swan said the Reserve Bank was able to hold rates steady because the Australian economy was outperforming its major trading partners.
"It's pretty fair to say without the action of the Australian Government and without the action of the Reserve Bank in recent months, the global recession and its impacts on this country would have been far worse," the Treasurer said.
Mr Stevens said that while conditions were weak, demand in Australia had not declined as much as in other countries. "Notwithstanding evident economic weakness at present, the board judged that the stance of monetary policy was appropriate for the moment," he said.
The bank's decision leaves its official rate at 3.25 per cent, and standard variable rate mortgages at 5.74 per cent, their lowest levels since late 2003.
Financial markets were surprised by the RBA decision, despite numerous official hints that the bank believed enough had been done to lift demand.
Markets were calling a 50-basis-point rate cut an even-money bet immediately before the bank's decision was announced, and at the close of trade yesterday were starting to price in a 50-basis-point cut for April.
The Bank of England and the European Central Bank are expected to cut rates by 50 basis points this week, while huge falls on Wall Street and in European markets on Monday night have raised fears that the outlook for the world economy is darkening.
Interest rates set to hit record low tomorrow - Touch of Finance takes a look
Mar 02, 2009
INTEREST rates are tipped to fall to record lows tomorrow, as the effects of the global downturn threaten to hit our economy hard.
Thirteen of 16 economists surveyed expect the Reserve Bank to cut the official cash rate at its monthly board meeting tomorrow.
The median forecast was for a 50-basis-point rate cut. That would take the cash interest rate to a record low of 2.75 per cent.
A further 50-basis-point cut, if passed on in full by lenders, would knock another $77.96 a month off the average mortgage of $249,645 and would send the cash rate under the record low monthly average rate of 2.89 per cent seen in January, 1960.
While domestic business data is still strong, many economists say deteriorating conditions among Australia's key trading partners will weigh on the domestic economy.
More optimistic analysts said the run of rate cuts and $52 billion in Federal Government stimulus programs would support local demand.
RBC Capital Markets senior economist Su-Lin Ong said a 50-basis-point rate cut in March was a close call, with the Reserve near the end of its easing cycle.
"It's pretty clear they are very reluctant to cut any more but the reason we think a move is justified is the global downturn has worsened since the last board meeting," she said.
UBS senior economist George Tharenou said the prospect of a technical recession - measured by two consecutive quarters of negative economic growth - in the first half of this year justified the need for a 50-basis-point cut this week.
ANZ economist Riki Polygenis, however, said the economy is yet to feel the full effects of the large Reserve rate cuts since September. That reinforced the case for a 25-basis-point rate cut this month.
RBA sees stimulus spending boost - Touch of Finance shows you how this information can change your spending budget
Feb 06, 2009
Touch of Finance explains the Federal Government's Stimulus Package
THE Reserve Bank of Australia (RBA) says the recent boost to disposable incomes through lower interest rates and the Federal Government's fiscal stimulus package has resulted in a pick up in household consumption.
In its February Statement on Monetary policy, the RBA said recent data "suggest that household consumption picked up in the December quarter as falling interest rates, lower petrol prices and the Australian Government's fiscal stimulus package provided a significant boost to real household income.''
The RBA said the Federal Government's one-off payments to pensioners, carers and low-to-middle-income families in December were estimated to have boosted disposable income by around 4.5 per cent in the quarter.
"While some of the extra disposable income has been saved, a sizeable portion appears to have been spent by households,'' the RBA said.
"Recent liaison with retailers suggests that some of this activity was sustained in early January, broadly consistent with the recent readings on consumer sentiment.''
The RBA said softer housing construction activity during late 2008 was expected to continue into the early part of 2009.
"In the near term, dwelling investment is likely to fall significantly, given recent trends in building approvals and dwelling commencements.''
"The bank's liaison with developers has also indicated a significant reduction in the availability of credit for new development, which may slow the recovery in the near term.'
"However, the increase in the First Home Owner Grant and the significant falls in mortgage rates will limit the fall in dwelling investment and contribute to a recovery from late 2009.''
The RBA said it expected gross domestic product (GDP) growth to print at just 0.25 per cent over the year to the June quarter 2009, well down from its November forecast of 1.5 per cent.
But the central bank said recent interest rate cuts and the Federal Government's fiscal stimulus packages would support the local economy from the global economic downturn.
"The extent of the impact on domestic growth will be moderated by easings that have occurred in monetary and fiscal policy and by the significant depreciation of the exchange rate,'' the RBA said.
"It is likely that the slowdown in Australia will be less severe than in many of our major trading partners.''
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NAB, St George and Commonwealth Bank pass on full interest rate cut - Touch of Finance can give you the best advice for you Home Loan
Feb 04, 2009
Australia's Big Banks pass on interest rate cut in full
Big four banks pass on full 1pc cut
Westpac, ANZ cut 1pc yesterday
Could be last cut, warn banks
THE nation's big banks have all passed on yesterday's official interest rate cut in full after NAB, Commonwealth Bank and St George announced cuts to mortgage rates this morning. Touch of finance welcomes this action.
The three have passed on a one percentage point cut in standard variable home loan rates, matching yesterday's easing from the Reserve Bank of Australia (RBA).
The RBA slashed interest rates by one percentage point, taking the cash rate to a 45-year low of 3.25 per cent.
Westpac and ANZ were the first to pass on the cut yesterday. Announcing a 100 basis point drop to their standard variable home loan rates, easing to 6.91 per cent and 5.91 per cent respectively.
NAB and Commonwealth Bank mortgage rates will both drop to 5.74 per cent from February 13. St George's standard variable rate is now 5.89 per cent, effective February 13.
However the banks warned they may not be able to match future interest rate cuts.
Commonwealth Bank's head of retail banking Ross McEwan said the bank may not pass on future interest rate cuts.
"As the world economic crisis continues and the current pressure remains on funding costs, any future changes in interest rates will need to reflect these higher costs of funds," said Mr McEwan.
"On this basis, we may not be able to pass on in full any future interest rate cuts."
NAB executive general manager Lisa Gray said she expects the differences in home loan rates to close, as banks compete for funds.
"It is important to acknowledge, however, these latest rate cuts have come at a time when our funding costs are at very high levels and we may not be in a position to pass on full rate cuts in the future."
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Government unveils $42 billion economic stimulus package - Touch of Finance can help you use this money wisley
Feb 03, 2009
Australian Government proposes massive stimulus package
BREAKING NEWS: MORE than 10.6 million Australians will receive cash bonuses under a $42b Government plan to boost the economy.
As the Reserve Bank prepares to announce another cut in official interest rates this afternoon, the Government has released details of its plan to support up to 90,000 jobs.
It also revealed a $22.4 billion fiscal budget deficit will blow out to $33.3 billion by 2009-10.
Under the economic stimulus package:
FromMarch, families eligible for Family Tax Benefit Part A will receive a $950 Back to School Bonus for each eligible child.
One-off $950 payments will also be made to:
Around 1.5 million single-income families who receive Family Tax Benefit Part B;
Farmers and rural-dependent small business owners receiving exceptional circumstances assistance'
Youth Allowance, Austudy, Abstudy and Education Entry Payment recipients;
From April, workers earning up to and including $80,000 will get a $950 tax bonus;
Those earning $80,000 - $90,000 will get $650;
People earning between $90,000 - $100,000 will receive $300.
The Government will also:
Iinstall free ceiling insulation in 2.7 million homes;
Construct 20,000 public and social housing dwellings and 802 Defence houses;
Double the rebate to landlords who install insulation in rental properties to $1000
Increase the Solar Hot Water Rebate from $1000 to $1600;
Spend $850 million on fixing roads, building boom gates for rail crossings and building community infrastructure such as town halls, libraries and sport centres.
Schools will also benefit:
All 9540 Australian schools will receive up to $200,000 for maintenance and building works;
Every primary, special and combined Prep - Year 12 school will receive money for large-scale infrastructure such as libraries and multi-purpose halls;
About 500 new science laboratories and language learning centres will be constructed in high schools.
Meanwhile, businesses will be eligible for a share of $2.7 billion worth of investment tax breaks.
Prime Minister Kevin Rudd and Treasurer Wayne Swan will hold a press conference this afternoon to discuss the plan and the budget and economic outlook.
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Housing industry wants $2b government boost to prop up the housinng industry - Touch of Finance believes this is a much needed stimulus for the industry
Feb 02, 2009
Australia's flagging economy could be stimulated by a $2 billion federal government injection to fast track construction of 25,000 rental dwellings, the housing industry says.
But extending a more generous first home owner's grant beyond June 30 is not a preferred option for the industry because it will remove the urgency to take advantage of the boosted grant.
Federal cabinet is meeting on Monday to finalise the government's latest response to a flagging economy and the global financial meltdown.
Its first economic stimulus package included big increases to the first home owner's grant scheme as a way of helping the housing industry out of a slump.
The Housing Industry Association (HIA) says constructing approved rental housing is now its priority.
"We think going to the private sector to provide part of their projects for low-income tenants could have quite an appeal," managing director Ron Silberberg told ABC Radio on Monday.
The federal government could determine how much new product it wanted coming into the market to meet public housing needs and therefore how much it wanted to spend, he said.
That could be in the order of $1-2 billion to help fund the 25,000 dwellings already approved for construction, he suggested.
The HIA said it was not a preferred option to extend the boost to the first home owner's grant beyond June.
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WHEN the eight men and one woman who sit on the Reserve Bank board regroup after a two-month break tomorrow, they'll be considering not only how much to cut their cash rate (a further 1 percentage point is likely) but also how far it should eventually fall.
It's a question they've rarely had to consider. But at 4.25 per cent, the bank's current cash rate is now equal to its lowest ever. Every step down from here sets a new floor.
And there's a belief within the bank that low floors are dangerous. When the US cut its rate to a low of 1 per cent earlier this decade to lift itself out of recession, it arguably sowed the seeds that helped create the subprime bubble whose bursting is now destroying economies worldwide.
Might 2 per cent be a good floor for Australia's cash rate? And, if so, should the bank move quickly or take time?
One argument that will be forcefully put is that if Australia needs a new floor, it may as well get it quickly, to create the maximum economic boost.
The counter-argument ("keeping the powder dry") is that if the board delivers only some of what it thinks is needed tomorrow, it will be in a better position to judge whether the rest is needed further down the track.
A cut of 1 percentage point would take the cash rate from 4.25 to 3.25 per cent, still above the likely eventual floor.
A cut of 1.5 points (for which there are precedents, in New Zealand last week, and in Australia in the lead-up to the last recession) would take our cash rate to 2.75 per cent, nearer the eventual floor.
Tuesday's decision, unlike nearly all the board's earlier decisions, will be genuinely made by the nine board members sitting around the table. In recent months, Governor Glenn Stevens has invited the meeting to think beyond approving his recommendation and in at least one case, he has presented it with an open recommendation.
The views of board members such as Treasury Secretary Ken Henry (who is busy helping draw up Kevin Rudd's economic stimulus plan) and the academic economist Warwick McKibbin (who believes things are so bad we need to halve the GST) will be fully aired.
Bank staff believe that although the Government's $8.7 billion "cash splash" boosted consumer spending at the end of December and the start of January, the effect is fading.
Whether we are in a recession or merely a period of very slow growth, all the information from overseas since the RBA board's November meeting points to things getting worse.
The International Monetary Fund believes that the world (reportedly including Australia) is headed for recession.
Some of the graphs sent out to Reserve Bank board members are apparently frightening. And since they were sent, the US has provided updated data showing its gross domestic product shrank 3.8 per cent in the December quarter.
Things are changing quickly, for the worse. This will be at the top of the board members' minds as they decide how low to take Australian rates, and how soon.
Interest rates will be cut by 100 basis points in February say Reserve Bank economists
Jan 30, 2009
January 30, 2009 10:39am
THE Reserve Bank (RBA) is universally tipped to slash the official interest rate next week to 1960s levels as it continues to try to mitigate the impact of worsening global economic conditions.
All 17 economists surveyed by AAP expected the central bank to slash the cash rate next Tuesday to stimulate a domestic economy facing its first recession in 18 years.
Nine economists, a majority, expect the cash interest rate to be cut by 100 basis points, following the RBA's February 3 board meeting, which would take the cash rate to a 45-year low of 3.25 per cent - its lowest since 1964 when regulators set it at 3.18 per cent.
The remainder expect a 75 basis points reduction.
If the commercial banks match a 100 basis point move, home borrowers on an average $250,000 mortgage would save $162 a month as their repayments fell 10 per cent to $1,458.
The cash rate has already been slashed by 300 basis points since September last year, reversing a dozen rate rises between 2002 and early 2008.
And by the end of September 2009, the cash rate could hit a record low of 2 per cent, five economists say.
Westpac senior economist Justin Smirk said the RBA would have to slash interest rates by 100 basis points next week to avert a prolonged recession, in concert with Federal Government stimulus programs.
"It's about ensuring the economy isn't going into a meaningful contraction,'' he said.
UBS economist George Tharenou said the RBA would slash interest rates more aggressively in 2009 than it did during the last recession, starting with a 75 basis point cut next week.
"We have taken the view global deflation is more of a threat in 2009 than the early 1990s recession,'' he said.
The International Monetary Fund expects the world economy to grow by just 0.5 per cent in 2009 as the US, Europe and Japan contract, and growth in China slows.
AMP Capital Investors chief economist Shane Oliver, who is betting on a 75 basis point cut, said fears of high inflation have given way to RBA concerns about a prolonged recession.
"We have seen a turnaround from an obsession with inflation to an obsession with depression,'' he said.
"The main reason is the global growth outlook has deteriorated even further from the last (board) meeting in December.''
RBC Capital Markets senior economist Su-Lin Ong, who is backing a bigger one percentage point move, said a slowdown in Australia's key Asian trading partners made the case for a series of rate cuts.
"With the bulk of Australia's key export destinations in recession, that is yet to filter through to the economy,'' she said.
"We're poised to see a large drop in the terms of trade: that's going to have implications for income and employment.''
TD Securities senior strategist Joshua Williamson said falling business investment would push up the jobless rate from 4.5 per cent at present, which made the case for a 100 basis point cut on Tuesday.
"The one defining theme of the economy in 2009 will be a sustained rise in unemployment: we think 7 per cent by the end of this year,'' he said.
Nomura Australia chief economist Stephen Roberts said with leading economic indicators on employment and home building pointing to a downturn, the RBA would cut interest rates by another 75 basis points in February.
"With complete confidence, they can see inflation marching well inside the target band in 2009, and as a result monetary policy can focus on the real downside risk to the economy,'' he said.
Headline inflation fell 0.3 per cent in the December quarter, marking the biggest quarterly fall since 1997.
Consumer price index (CPI) and underlying inflation, which is based on the RBA's preferred measures, both fell closer to the central bank's 2 to 3 per cent annual target band in late 2008.
VICTORIA has some of the best-value housing in Australia - as long as you don't mind living outside Melbourne.
New figures released yesterday by the Residential Development Council and RP Data show five regional Victorian centres are among the top 10 most affordable areas in Australia.
The Latrobe Valley -- including the towns of Morwell, Traralgon and Moe -- tops the list, with Mildura, Ballarat, Bendigo and Shepparton also in the top 10 cheapest places to buy a house.
The research compared the average household income for each state with the median house price for different regions, and calculated the percentage of income that would be spent on mortgage repayments.
It named the Gold Coast, Sydney, Sunshine Coast, Perth, Ballina, Brisbane, Adelaide, Melbourne, Mandurah and Mackay as the least affordable markets.
The data showed 93 per cent of the average Queensland household income would be needed to meet a mortgage repayment on a median-price Gold Coast property.
Caryn Kakas, executive director of the Residential Development Council, said even the most affordable properties were putting families under stress.
"The general rule of thumb is spending anything above 30 per cent of your income on mortgage repayments or rent is classified as housing stress," Ms Kakas said.
Every one of the top 10 urban centres on the most affordable list, with the exception of the Latrobe Valley, required more than 30 per cent of the average household income to meet repayments.
It was a different situation in the rental market, with the Latrobe Valley, Ballarat, Mildura, Great Taree (NSW) and Dubbo (NSW) named as the cheapest places to rent a house -- all requiring less than than 22 per cent of the average household income in rent. Sydney, the Gold Coast, the Sunshine Coast, Mackay and Brisbane were the least affordable.
It was estimated it would take around 38 per cent of the average NSW income to pay the median rent in Sydney.
STUDENT accommodation is hitting the big time as property investors flock to the sector to recession proof their nest eggs.
Developers are also moving in and building clean and classy apartment blocks aimed at overseas students.
Demand for rental units near university campuses is growing as student numbers increase. Rents are regular and high.
The head of Chas Everitt International Property says with universities under pressure to teach more students, they can't afford to build accommodation.
"There is already a strong argument to be made that bricks and mortar represent a sound long-term investment, but student housing is unique in that rent per square metre is, on average, much higher than rentals for normal residential units," Barry Everitt says.
"And finding a tenant is usually no more arduous than keeping the property listed with an agency affiliated with the institution.
"Many institutions compile free property listings and distribute the lists to prospective students at the end of each academic year."
Everitt says the key to a successful investment is to target areas close to campuses. Rents and occupancy rates are highest in the closest properties.
"Demand for student accommodation is outstripping supply in the Caulfield area," Graeme Callen, of Biggin and Scott, Carnegie, says.
"Monash (Caulfield campus) is about 100 beds short of what's required for the student intake."
Callen says prices vary considerably. He has a student apartment for sale on Waverley Rd for $169,000 -- it brings in $970 a month, a return of 6.9 per cent.
Several of Callen's clients have bought and renovated three and four-bedroom houses that are bringing rents of about $250 a week per student tenant.
Callen says the majority of student tenants are overseas-born, and the security of purpose-built student accommodation appeals to their families -- and the fact that all furniture is supplied.
Tenants usually stay for two or three years and are happy to move in and out without the need to buy all the usual equipment.
The D2 apartments in Carlton are aimed at the luxury end of the market.
Designed and developed by Piccolo Developments, D2 has 116 apartments with double beds, bathtubs, balconies and sweeping views.
Developer Michael Piccolo says there has been consistently strong growth in the number of students seeking accommodation of "about 19.9 per cent a year, making a highly attractive return on investment".
"This combined with the low trading of the Australian dollar makes a strong argument for buying into this robust property sector," Piccolo says. "Furthermore, latest ABS Trade in Services figures show international education activity contributed $14.2 billion in export income to the Australian economy in 2007-8, up 23.4 per cent from the previous financial year."
Piccolo says D2 is one of the first student accommodation buildings in Victoria with a six-star energy rating.
Prices start at $210,000 for a one-bedroom apartment and range up to $345,000 for a two-bed/two-bathroom unit.
"The economic downturn has not affected the demand for student housing -- if anything the low Australian dollar has made studying in Australia very attractive for overseas students," Piccolo says.
Speaking of his most recent development, Piccolo says: "Buying into the student housing market is an affordable investment starting from $210,000 for a new, quality apartment in the heart of Carlton providing a gross return of up to 8 per cent. The low entry price and high returns have attracted first-time investors and self-managed superannuation funds."
HOMEOWNERS stuck with a fixed-rate home loan while variable rates tumble have been warned not to panic and break out of their loan.
They need to weigh up all the options first and remember why they took out a fixed-rate loan in the first place, says Smartline Blackwood mortgage adviser Cathy Anderson.
"Choosing a fixed rate is often an emotional decision. Most people fix because they fear not being able to make the repayments should rates increase, and want that security of knowing exactly what their repayments are," she said.
"Some people continue to want that security, even if it comes at a higher cost. You should also consider the money you have saved along the way."
The Reserve Bank has cut the official cash rate by 3 percentage points since September last year, and most economists predict more cuts of at least 2 percentage points in the coming months.
Ms Anderson said the first step for people wanting to switch from fixed to variable was finding out what their lender was going to charge in break costs.
If the costs were prohibitive, people could look to reduce their effective rate by increasing their loan repayments, she said.
"However, may lenders allow only small levels of additional repayments on a fixed loan - generally around $5000 to $10,000 per year - so this will need to be investigated.
"If you have a $250,000 home loan at a rate of 8.29 per cent and make your standard payments with an additional lump sum of $5000 each year as your lender allows, this reduces the effective rate of the fixed loan to 7.66 per cent."
Ms Anderson said borrowers should remember that there was always more to a home loan than the advertised rate.
"The individual has a certain degree of control over their loan, which impacts on the effective rate," she said.
"That's why it's so important from the outset to choose a loan that suits your circumstances, and not just whatever is offered to you over the counter."
The RBA's recent tightening - despite rising global uncertainty and the banks' additional increase in their lending rates - and the associated rationale indicates that it is becoming much tougher on inflation. In essence the RBA is now forecasting inflation to remain above or at the top of its target range out to mid 2010 and has clearly stated that growth in demand must slow significantly to contain inflation.
As such the Bank has indicated that "monetary policy is likely to need to be tighter in the period ahead."
In the absence of a major collapse in global or domestic growth pretty soon, this is obviously pointing to further rate hikes, with the next move probably coming next month.
In fact money market pricing implies an 85% probability of another tightening in March and another move is largely priced in thereafter.
While the RBA is no doubt employing an element of jawboning to try and get Australians to slow their spending, with interest rates going higher and higher the risk that they go too high - if they haven't already - resulting in a hard landing in 2009 is becoming increasingly significant.
With investment activity in the economy likely to remain strong a lot of the brunt of the slowdown in growth required by the RBA will have to fall on consumers.
There are several points to note regarding all this.
First, there are several reasons why interest rates have not yet had the desired impact in slowing growth, and these include the impact of offsetting influences such as tax cuts and the boost to national income from higher commodity prices, strong wealth gains from higher share markets till recently and the fact that much of the rise in household debt has been amongst older higher income households who are less affected by higher interest rates.
But just because interest rates have not yet achieved the desired slowdown in growth and inflation doesn't mean that they will just keep rising with no impact.
While the last two tightening cycles in 1994 and 1999-2000 had happy endings, this hasn't always been the case, and the longer and higher interest rates rise the greater the risk.
The late 1980s/early 1990s experience highlighted just how hard it is to know where the "tipping point" for the economy with respect to interest rates is.
Between January 1988 and November 1989 the cash rate was increased from 10.6% to 18.2% and mortgage rates rose from 13.5% to 17%.
For most of this period there was little apparent impact with growth remaining strong, unemployment continuing to fall (reaching a low of 5.6% in November 1989) and inflation rising.
There was talk of the economy bubbling over with effervescence like a glass of champagne.
Then suddenly in late 1989 the economy began to falter and by the time the RBA started cutting interest rates in January 1990 the economy was heading for "the recession we had to have".
By the time underlying inflation peaked in June 1990 the economy was already in recession!
Of course there are big differences between now and the situation in the late 1980s. Interest rates and inflationary expectations were much higher, changes in interest rates were not clearly communicated and business debt was the big issue back then.
But the 1989-90 experience highlighted how hard it is to know where the tipping point is and once passed it may be too late to turn the ship around.
Secondly, if consumption is to bear the brunt of the slowdown it comes with greater than normal risks this time around. This is because the household sector is saving less and is far more indebted today. The ratio of household debt to disposable income is now over 160% compared to 40% in 1989 and debt servicing costs are now eating up around 14% of household disposable income compared to around 7% in 1989 and this is all underpinning very overvalued houses.
While much of the rise in household debt has been in higher income and older households, there has still been a big general increase in debt levels, including for young families with a mortgage which are the group most at risk right now.
Thirdly, Mortgage stress is at record levels and still rising, housing finance is showing signs of starting to soften again, weekend auction clearance rates are starting to come in below year ago levels and consumer and business confidence are now falling sharply, with business confidence at its lowest since 2001. See the chart below.
(business and coinsumner confidence graph here)
Fourthly, Australia's inflation problem appears to be largely due to supply side problems as opposed to strong demand. Key areas behind the rise in inflation over the last two years have been fuel, food, alcohol and tobacco, health and housing (rents).
The forces behind inflation in these areas appears to owe more to supply side problems, or global forces, which are little affected by interest rate driven demand management.
In fact, in the case of housing costs, higher interest rates may actually make the problem worse to the extent that they further dampen housing construction resulting in a worsening housing shortage and ever higher rents.
It's worth noting that retail price inflation in Australia is running at just 2.5% year on year.
The problem is that, with supply side problems keeping price gains in key areas elevated, to bring overall inflation back to target, higher interest rates will have to have a big negative impact on prices in the rest of the CPI basket via much weaker consumer spending.
Fifthly, there is a risk the RBA is underestimating the impact of the global downturn on Australia. The impact of higher coal and iron ore prices on domestic demand is likely to be offset if the Federal Government finds greater budgetary savings.
More broadly, it's worth noting that the recent slump in business and consumer confidence is tracking the decline in US confidence measures and the local share market has fallen sharply providing a negative shock to wealth, all of which will help to drag down growth.
So overall there is a growing risk that the RBA will end up going past the point on interest rates that will tip the economy over into a hard landing in 2009.
It is worth noting that up until about six months ago all major global central banks seemed more concerned with inflation than growth. The Fed was the first to switch over to being more worried about growth, followed by the Bank of England, the Bank of Canada, the Bank of Japan and now even the European Central Bank is relaxing its anti-inflation rhetoric.
The RBA is the odd one out, but it too is likely to have changed its tune by year end, but by then rates may be much higher.
What does this all mean for investors in shares?
The threat of higher interest rates and a harder landing for the local economy next year, with obvious implications for profits which are already slowing rapidly, are likely to act as a dampener on Australian shares.
Fortunately, the market is now cheap trading at the low end of our fair value range (see chart below) and this should provide a buffer. But from a broader perspective after out performing global shares every year between 2000 to 2007 with the exception of 2003, the more aggressive stance on interest rates locally will likely constrain the relative performance of Australian shares over the next 6-12 months, possibly seeing them under perform global markets.
(Australian shares graph)
Rising local interest rates further complicate stock picking.
Consumer stocks and other sectors exposed to the Australian economy were being seen as attractive given the uncertainty swirling around globally exposed stocks and financials. This is no longer the case.
Conclusion
In the short term the Australian economy should see reasonable growth, but with the RBA tightening aggressively as the global outlook deteriorates the risks are rising. Rising Australian interest rates may act to constrain the relative performance of Australian shares.
Fortnightly rather than monthly payments will shorten a loan
Take the shortest term you can afford rather than stretch it out
CUTTING more than seven years off your home loan can be as simple as halving your monthly repayments and paying that amount fortnightly.
Savings & Loans general manager of marketing and member experience Sarah Cutbush said many of the credit union's members managed to pay their mortgage off early.
But she said there was "nothing really tricky about it'', just simple strategies that most people could employ.
"It's little things that over the life of the loan can really add up,'' she said.
Ms Cutbush said paying fortnightly rather than monthly could cut years off the loan because it resulted in an extra month's repayment being made each year.
She also suggested choosing one thing a week to go without - maybe buying one fewer coffee a day - and putting that money off your mortgage.
And in a falling interest rate environment, leaving your repayments unchanged as rates fell could cut time off your mortgage without you really noticing it, Ms Cutbush said.
She also suggested that when people take out their mortgage, they choose the shortest period they could afford rather than be tempted by up to 40 years.
According to calculations by National Australia Bank, repaying a $250,000 standard variable rate 7.74 per cent, 30-year home loan fortnightly rather than monthly would save $112,302 in interest costs over the life of the loan and cut seven years and three months off the loan.
Repaying an extra $100 a month on the same loan, with monthly repayments, would save $79,645 in interest and cut the life of the loan by five years and one month.
"These strategies are not only simple, they will add very little to your overall mortgage repayments - and in some cases nothing extra at all,'' NAB state general manager retail banking Ann-Marie Chamberlain said.
"It's about paying off your mortgage the smart way, not the hard way.''
Ms Chamberlain also suggested making the first mortgage payment on the settlement date and linking the home loan to a 100 per cent offset account, at no extra cost.
"When you borrow money to buy a home, you generally don't make your first loan repayment until one month after the settlement date,'' she said.
"By planning ahead and making that first payment on your settlement date, you will always be one month ahead on your loan.''
She said a 100 per cent offset account linked the home loan to a savings account.
"This means that any money in your transaction account will work for you by reducing your interest repayments,'' she said.
"Combining three of the strategies - fortnightly repayments, making the first repayment on settlement date and linking to an offset account - could significantly impact your home loan.''
NON-bank lender Aussie Home Loans has dropped its standard variable mortgage interest rate by a further 40 basis points, on top of a 50-basis-points cut before last week's change to the official cash rate.
Executive chairman John Symond says Aussie's 7.65 per cent rate is below that of the big four banks and will lead to increased competition.
The mortgage broker also announced it was also reducing its basic variable rate for first homebuyers to 6.99 per cent.
The rate change has been effective for new and existing borrowers since Monday 10th November.
Interest costs on $350,000 variable loan are down almost $550 a month
RBA cut the official interest rate by 75bp last week
PRESSURE on landlords has been eased by hefty interest rate cuts since September.
The Reserve Bank of Australia's efforts to prop up a stumbling economy have delivered hundreds of dollars in monthly savings for landlords battling to repay investment property loans as well as their own mortgages.
Since September, almost $550 a month has been wiped off the interest cost of a $350,000 variable rate investment loan thanks to official RBA rate cuts and the banks passing on most of them.
Last week's 0.75 percentage point reduction in the official interest rate followed cuts totalling 1.25 per cent in September and October. Real Estate Institute of SA president Robin Turner said the interest rate cuts had been "wonderful news for investors''.
"The attraction of bricks and mortar as an investment is greatly improved with interest rate reductions,'' he said. ``Rents stay the same or go up but the holding costs drop dramatically.
"With each 1 per cent fall in interest, the holding costs drop around 10 per cent.''
Wealth For Life principal Rex Whitford said the rate cuts meant greater cash flow for property investors. "Anything that reduces the cost structure is a net gain,'' he said.
The flipside for some investors is the tax deduction they receive on a negatively geared property is reduced, but Mr Whitford said: "If they invested for a tax deduction, they had their head in the wrong place''.
"I think the Reserve Bank jacked the interest rate up too high in the first place, because we had the Treasurer running around saying the inflation genie was out of the bottle,'' he said.
Mr Whitford cautioned investors not to blindly spend or reinvest elsewhere any cash freed up by the recent rate cuts.
"It's best to keep some powder dry,'' he said.
Australian Capital Realty principal Tami Portakiewicz said falling interest rates gave investors an opportunity to begin or renew a fixed rate loan at a lower cost.
Mrs Portakiewicz said the recent rate cuts should provide a much-needed boost to the market after enquiry levels had started to fall.
RBA cut interest rates by 75bp to 5.25 per cent yesterday
CBA first bank to lower mortgage rates in response
HOME owners have plenty to cheer about after the Reserve Bank of Australia (RBA) slashed its key interest rate by three quarters of a percentage point.
The central bank's decision at today's monthly board meeting was larger than the half-point reduction economists had expected and takes the cash rate to its lowest level in five years at 5.25 per cent.
Economists doubt the central bank will stop there.
Its decision follows last month's whopping reduction of a full percentage point, underscoring the RBA's intent to stop the economy from being dragged into a global recession.
If the latest rate cut is passed on in full, a borrower with an average $300,000 mortgage could expect to save about $150 on monthly repayments.
However, Commonwealth Bank of Australia - the only bank to announce its rate decision so far - cut its standard variable home loan interest rate by just 58 basis points.
RBA governor Glenn Stevens painted a grim global scenario for today's decision, saying economic data continue to point to significant weakness in the major industrial economies, as well as further signs of a slowdown in China and other parts of the developing world.
He said recent reductions in Australian borrowing rates, the depreciation of the Australian dollar and the fiscal stimulus announced last month would work to assist growth in the period ahead.
"But deteriorating international conditions and falling commodity prices will have a dampening influence,'' Mr Stevens said in a statement.
"On balance, it appears likely that spending and activity will be weaker than earlier expected.''
Federal Treasurer Wayne Swan said Australia was not immune from dramatically changing international events.
"We do have some underlying strengths, but we are being buffeted significantly by these changed circumstances and it was recognised today by the Reserve Bank's decision,'' Mr Swan told reporters in Canberra.
Business, builders and retailers welcomed the rate decision coming on top of the government's $10.4 billion economic stimulus package, which gives one-off payments to pensioners and low-income families as well as bigger grants to first home owners.
Opposition Leader Malcolm Turnbull welcomed the rate cut but said retail banks should be passing on the cut in full.
"The banks have been receiving a lot of support through guarantees from the government,'' Mr Turnbull told reporters in Sydney.
"They are strong and profitable, and the benefit of these rate cuts and the stimulatory effect that these rate cuts are designed to have cannot be enjoyed by consumers, by homebuyers, by businesses large and small, unless they are passed on.''
However, CBA's Retail Banking Services Group executive Ross McEwan said there had been a significant increase in all three elements of its funding costs over recent weeks.
"Similarly, the cost of short-term onshore funding has increased in recent weeks, and we are also experiencing increased costs in retail deposits.''
RBC Capital Markets senior economist Su-Lin Ong said the reluctance by key lenders to fully pass on moves in the cash rate would keep the pressure on the RBA to cut further.
"The increasingly poor domestic data and unfolding global recession suggest that another cut is likely in December,'' Ms Ong said.
She now predicts a further cut of 50 basis points in December, bringing the date forward from February in her previous call.
THE Reserve Bank has slashed interest rates by 75 basis points to 5.25 per cent and economists say borrowers can look forward to more cuts in coming months.
Today's 75 basis point cut beat market expectations of a 50 basis point cut.
If banks pass on the rate cut in full to borrowers, home owners with an average $300,000 mortgage will see a further $150 knocked off their monthly repayments.
But by 6.30pm, just one bank had announced it was cutting its mortgage rates - and the cut was not the full amount. Almost immediately after the RBA announcement, Commonwealth Bank said it would cut interest rates on its standard variable home loan rates by 0.58 per cent, effective November 10.
How low will they go?
Today's rate cut follows a 1 percentage point cut in October, and a 25 basis point cut in September.
NabCapital senior markets economist David de Garis said more rate cuts from the RBA were likely.
"There is nothing to suggest that they have finished at this stage,'' Mr de Garis said.
"It looks like we are going to get a sizeable easing at the next meeting, quite conceivably half a per cent, with a bit more in the new year."
ANZ chief economist Saul Eslake said ANZ is forecasting the cash rate will fall to 4.5 per cent during the current easing cycle. But he wouldn't rule out the possibility that rates could go even lower.
"The possibility of setting a new all-time low next year cannot be dismissed,'' he said.
Market reaction
After toiling in the red for much of the day, the share market jumped about 40 points after the rate cut announcement.
The benchmark S&P/ASX200 index ended the day almost flat, down 0.15 per cent, at 4215.1, while the broader All Ordinaries index lost 0.08 per cent to 4169.8.
The Australian dollar lost more than US1c in the hour after the RBA's announcement, and ended the day at $US0.6651/55, down 2.5 per cent on yesterday's close of $US0.6823/28.
Why the big cuts?
Citigroup managing director of economics Stephen Halmarick said the RBA's concern about the world economy sparked the big rate cut.
"They are really worried about the global economic outlook," he said.
"They are to be applauded for really acting aggressively to move rates lower: markets are a bit surprised it was 75 rather than 50."
The cuts are an attempt to stop the economy being dragged into a recession in the face of a deepening global financial crisis.
Recent local economic data has pointed to rising unemployment, falling house prices and weak consumer spending.
Reserve Bank governor Glenn Stevens said today world financial markets had remained "turbulent" over the past month.
"Global equity prices have been volatile and fell further in net terms, and there have been significant exchange rate movements, including a sharp depreciation of the Australian dollar," he said.
"Weighing up these international and domestic developments, the Board judged that a further significant reduction in the cash rate was warranted."
Last week the US Federal Reserve cut interest rates by half a percentage point to 1 per cent, and the European Central Bank is expected to cut interest rates by 50 basis points to 3.25 per cent this week.
IF economists are right, the safest bet you can make on Cup Day is that the Reserve Bank will cut interest rates when it meets.
The Sunday Herald Sun surveyed 10 economists and finance houses and all expected an interest rate cut on Tuesday.
The only question dividing the experts was how much rates would fall -- with a clear majority predicting half a per cent cut, but a few guessing they would come down even more.
A cut of 0.5 per cent would lower payments on a 25-year mortgage of $250,000 by about $85 a month.
It would also boost the struggling Victorian housing market, which yesterday saw more than a third of listed properties fail to sell.
AXA Australia's chief investment officer Mark Dutton spoke for most experts when he said the slowing economy would push the Reserve into cutting between 0.5 and 0.75 per cent.
The ANZ, CommSec, AMP and Austock's Michael Heffernan predicted a 0.5 per cent cut, as did Access Economics' Chris Richardson.
Mr Richardson said the danger of inflation had diminished in recent months.
Peter Switzer, of Switzer Financial Services, believed the Reserve would follow Tuesday's cut of 0.5 per cent with another of the same size in December.
"They need to maintain the momentum," he said.
Laurence Blake, of E.L & C Baillieu Stockbroking, said the decline in home loan lending would have a big influence on the RBA's thinking.
"For this reason they will cut by at least 0.25 per cent on Tuesday," he said.
Bank analyst Robert Camilleri of Aviva Investments was more optimistic, saying he believed the bank would cut rates by 1 per cent.
AMP Capital economist Shane Oliver said the state of the sharemarket would influence the Reserve.
The only pessimistic note on a Tuesday rate cut was struck by Professor Paul Kerin, of the Melbourne Business School, who was not convinced there will be a rate cut.
"I think they will be conservative by the standards of what people are predicting," he said.
TENANTS across Australia look set for a short-term reprieve from rising rental prices, with analysts expecting landlords to pass on the benefits of interest rate cuts.
After a sustained period of rent increases, there are signs the market could have peaked, with landlords in some cities either leaving rents unchanged or lowering prices to secure tenants.
But the latest data from Australian Property Monitors warns that in the longer term, a lack of residential dwellings and continued strong demand for rental properties will most likely send prices up again, The Australian reports.
Centres most affected by the mining boom have helped landlords record solid year-on-year rental yields, with landlords in Darwin getting rents 19 per cent higher than last year while those in Perth were getting 6 per cent more and those in Newcastle 10 per cent more.
However, in Perth, despite the big leap in rents over the year, rents for units dropped 6 per cent between the June quarter and the September quarter, from an average of $350 a week to $330.
In Brisbane, where rents for houses were flat between the June and September quarter, Ben Nilsen, a pharmacology student at the University of Queensland, said that when he and his mates were searching for a house to rent earlier in the year supply was very tight.
Even among six people, the $900 a week he and his five co-tennants were forced to settle on for their Lucia house in the city's west, was well outside what they had wanted to pay.
"We were looking at all sorts of places not that close to uni, but while we're paying more than we'd like, at least we're only 10 minutes' walk to uni," he said.
APM senior economist Liam O'Hara said the report provided some evidence that Australia's rental market was easing. "The demand to raise rents for both houses and units has softened, which should provide some relief to renters," he said.
But he agreed that in the longer term, increased competition would most likely lead to higher rents.
"The serious problems Australia faces with infrastructure investment coupled with a slowing building sector will maintain upward pressure on asking rents, particularly in regions where supply is tight," Mr O'Hara said.
AUSTRALIAN interest rates are tipped to fall to the lowest level since the aftermath of the September 11, 2001, terror attacks as the central bank worries about a recession.
One Sydney academic is even forecasting an unprecedented zero per cent interest rate by 2010 on the premise that debt-laden consumers will close their wallets and threaten to push the economy into a deep economic contraction.
Macquarie Group interest rate strategist Rory Robertson said the Reserve Bank of Australia would cut the cash rate, now at 6 per cent, to 4.25 per cent over the next year.
This would be equal to where the cash rate was in December 2001, in the aftermath of the September 11 terrorist attacks in the U.S.
Interest rates have not fallen below that level since the RBA began interest rate being tipped
publishing a target interest rate in January 1990.
Debt futures markets are expecting two bigger-than-usual interest rate cuts by Christmas.
They expect the RBA to cut interest rates by 75 basis points next month and follow up with another three-quarters of a percentage point move in December.
Another big rate cut next month, following from October's 1 percentage point move, would make it the most generous series of official interest rate relief since 1992, in the aftermath of the last recession.
Such cuts would take the cash rate to 5.25 per cent in November and 4.5 per cent by Christmas, a level not seen since mid 2002.
"As the financial conditions continue to deteriorate, the Reserve Bank is becoming increasingly worried about the outlook for growth," Mr Robertson said.
"So the Reserve Bank is cutting aggressively to limit the risk of recession in Australia."
University of Western Sydney associate professor of economics and finance Steve Keen is radically bullish on interest rates, predicting a 2 per cent cash rate by the end of 2009, dropping to zero per cent in 2010.
Dr Keen said the RBA would become more concerned about high household debt levels than inflation, if deep rate cuts in 2009 failed to stimulate the economy.
"The debt bubble is bursting and when it bursts, people stop spending and borrowing," he said.
"They (the RBA) can cut the pain but they can't boost the economy."
Earlier this month, the RBA cut interest rates by 100 basis points for the first time since May 1992.
The RBA cut rates by one percentage point on five occasions during 1991 and 1992.
Dr Keen said another series of deep rate cuts was needed now because household debt levels made up a much bigger portion of gross domestic product than in the early 1990s. He said central bank policymakers before the 1930s Great Depression focused on consumer price inflation and ignored asset prices, and this mistake was repeated more recently.
"Reserve banks everywhere got it wrong, not just ours," he said.
"They focused on the wrong problem, which was inflation."
Macquarie's Mr Robertson said the RBA was more concerned about reversing the 12 rate rises from 2002 to March this year and would deliver bigger-than-usual rate cuts before Christmas to reduce home mortgage and business borrowing rates.
FIRST home buyers captivated by the lure of $21,000 in new government grants have stormed builders and real estate agents in search of bargains.
Large numbers of first homebuyers are expected at inspections on the weekend.
Real Estate Institute of Queensland chairman Peter McGrath said he had spoken with a half dozen agencies who said they were getting more inquiries about homes, especially at the lower end of the market.
The mini-boom was the most tangible sign yesterday that Prime Minister Kevin Rudd's $10.4 billion economic rescue package was taking effect.
Apart from cash incentives to families and older Australians, the package doubled the first home buyers grant to $14,000 for existing homes and trebled it to $21,000 for new homes.
Renewed interest came as one of the NSW's largest developers vowed not to increase property prices to take advantage of cashed-up home buyers returning to the receding property market.
Landcom marketing general manager Robert Sullivan said they would continue offering up to $16,000 worth of rebates on new house and land packages on top of the increased first home owner grants - giving up to $37,000 extra cash to new buyers.
"We will not be making any changes to rebates we've currently got on the market," Mr Sullivan said.
"Customers out there have been ... looking around and shopping around for the best deals. It would be very dumb of the market to pass on the new grants in a price increase."
For a year developers have been offering their own cash rebates to home buyers to stimulate the market and with Mr Rudd's increased grants, buyers in two minds have been spurred to act.
Cornish Group sales manager Colin Lake, offering 1200 house and land packages in Camden's new Spring Farm estate, said they had been flooded by approaches from first home buyers.
"We've had an instant response in the past two days. The phones have been running hot with younger buyers asking how they can make it work.
"First home buyers have been coming into our office, which is unusual as it's usually only second and third home buyers who can afford a new home. But the $21,000 is effectively the full 5 per cent deposit on a $420,000 package."
Mt Annan couple Greg and Melinda Sinclair have wanted to buy a home for several years, but the trebling of the grant made the decision for them. The public servant and at-home mum to Cameron, 4, and April, 2, are sick of rising rents and want their own place.
"Between the first home buyers grant and interest rates starting to go down, we are finally able to buy a place now," Mr Sinclair said.
"And Clarendon Homes are also giving us another $7000 rebate, so it's $28,000 we will be saving.
"I think a lot of people will jump into the market thanks to the grant, whether the houses are new or used."
RP Data researcher Cameron Kusher is expecting more people will be going to open houses on Saturday and testing the waters.
"It certainly won't be a case of a huge number of sales and a significant decline of total stock on the market," Mr Kusher said.
Sale volumes and auction clearance rates have been well down over the past few months.
NAB and Aussie Home Loans have joined the rush to cut interest rates, following the ANZ's surprise move to change rates independent of the Reserve Bank for the first time in over a decade.
NAB yesterday dropped its standard variable home loan by 20 basis points to 8.36 per cent.
The 0.2 per cent cut would also apply to business loans, and some rates on fixed mortgages would be reduced by 0.3 per cent, the bank said in a statement.
NAB's one-year fixed home loan has been cut by 30 basis points to 6.99 per cent.
This followed Aussie's decision on Saturday to drop its rate on variable home loans for first home buyers by 30 basis points to 7.79 per cent.
On Friday, ANZ lowered the interest rate on its standard variable home loan by 25 basis points to 8.32 per cent for new and existing customers, effective from October 27.
NAB spokesman Ahmed Fahour said policy measures taken by the Federal Government this month have had a positive impact on the credit market, enabling the bank's funding costs to fall.
"We welcome this new development and anticipate we will see some relief in the significantly higher premium we are currently paying for wholesale funds," he said.
"Should this be the case, then we hope. . . we can pass on further interest rate cuts to our customers."
Westpac and Commonwealth banks have also said they were reviewing rates.
New research shows the relief was long overdue for families who have had to cut luxuries and work longer hours to cope with 12 consecutive rate rises.
Mortgage lender ING Direct will today release a report showing one in five South Australians believe past rises have led to relationship problems.
A further 35 per cent said it had put more strain on the family and 17 per cent had considered selling their home.
The quarterly study surveyed 240 SA mortgage holders between October 8 and 13.
It was conducted the day after the Reserve Bank dropped the cash rate by 1 percentage point to 6 per cent.
With housing, petrol and food costs soaring, the ING study showed half of South Australians were reluctant to increase their mortgage payments. Instead, some used the savings to pay bills, buy food and necessities and pay off their credit cards.
About one-fifth of those surveyed turned to credit to cope with past rate rises, 15 per cent worked longer hours and 39 per cent cut back on luxuries to meet higher repayments.
However, the study also found 10 per cent of South Australians were now able to plan for a holiday, baby or new car and 10 per cent felt less likely to lose their home.
ING Direct executive director Brett Morgan said confidence was on the rise.
"Home owners were very cautious with the first cut, reluctant or unable to spend it on themselves," he said.
"The October rate cut appears to have given mortgage holders more breathing space with their finances."
FIRST home buyers captivated by the lure of $21,000 in new government grants have stormed builders and real estate agents in search of bargains.
Large numbers of first homebuyers are expected at inspections on the weekend.
Real Estate Institute of Queensland chairman Peter McGrath said he had spoken with a half dozen agencies who said they were getting more inquiries about homes, especially at the lower end of the market.
The mini-boom was the most tangible sign yesterday that Prime Minister Kevin Rudd's $10.4 billion economic rescue package was taking effect.
Apart from cash incentives to families and older Australians, the package doubled the first home buyers grant to $14,000 for existing homes and trebled it to $21,000 for new homes.
Renewed interest came as one of the NSW's largest developers vowed not to increase property prices to take advantage of cashed-up home buyers returning to the receding property market.
Landcom marketing general manager Robert Sullivan said they would continue offering up to $16,000 worth of rebates on new house and land packages on top of the increased first home owner grants - giving up to $37,000 extra cash to new buyers.
"We will not be making any changes to rebates we've currently got on the market," Mr Sullivan said.
"Customers out there have been ... looking around and shopping around for the best deals. It would be very dumb of the market to pass on the new grants in a price increase."
For a year developers have been offering their own cash rebates to home buyers to stimulate the market and with Mr Rudd's increased grants, buyers in two minds have been spurred to act.
Cornish Group sales manager Colin Lake, offering 1200 house and land packages in Camden's new Spring Farm estate, said they had been flooded by approaches from first home buyers.
"We've had an instant response in the past two days. The phones have been running hot with younger buyers asking how they can make it work.
"First home buyers have been coming into our office, which is unusual as it's usually only second and third home buyers who can afford a new home. But the $21,000 is effectively the full 5 per cent deposit on a $420,000 package."
Mt Annan couple Greg and Melinda Sinclair have wanted to buy a home for several years, but the trebling of the grant made the decision for them. The public servant and at-home mum to Cameron, 4, and April, 2, are sick of rising rents and want their own place.
"Between the first home buyers grant and interest rates starting to go down, we are finally able to buy a place now," Mr Sinclair said.
"And Clarendon Homes are also giving us another $7000 rebate, so it's $28,000 we will be saving.
"I think a lot of people will jump into the market thanks to the grant, whether the houses are new or used."
RP Data researcher Cameron Kusher is expecting more people will be going to open houses on Saturday and testing the waters.
"It certainly won't be a case of a huge number of sales and a significant decline of total stock on the market," Mr Kusher said.
Sale volumes and auction clearance rates have been well down over the past few months.
Kevin Rudd planning pre-Christmas handout to help economy
Oct 14, 2008
By David Uren and Matthew Franklin, October 14, 2008
Pre-Christmas handout expected to help economy
Tax rebate and pensioner payments possible
A MULTI-BILLION-DOLLAR cash handout to consumers to lift spending ahead of Christmas is under consideration in an attempt to boost the economy and stave off the expected effects of the global economic crisis.
The Australian reports the package is likely to include a one-off tax rebate, some direct infrastructure spending and a payment to pensioners and other welfare recipients, and was discussed at the strategic budget policy committee meeting held over the weekend.
Details of the spending plans are expected to be announced later today.
The Government has not yet settled on the size of the package. Sources suggest it will be less than $10 billion, but possibly as much as $5 billion.
It comes amid mounting evidence that the economy is slowing, with new lending to individuals and business in August falling 30 per cent below levels of a year ago and job advertisements down for the fifth month in a row in September.
"I believe that the purpose ofhaving a surplus is to make sure you've got a buffer for the tough times. And the tough times have come," Kevin Rudd said yesterday.
The Government's planned spending package follows the Reserve Bank's interest rate cut, which will lift disposable income by about $10 billion a year.
Banks are now cutting their fixed-rate home loans, with National Australia bank reducing its rate by 1.6 percentage points and Westpac cutting its fixed rate loans by 1.1 percentage points.
The Government's planned spending package is aiming to stem the slide in consumer spending that Treasury expects over the next six months. The latest retail sales figures have not shown any fall, but Treasury believes the magnitude of share price collapse and the rising concern about global recession warrant a pre-emptive strike.
Goldman Sachs JB Were chief economist Tim Toohey said there was a large enough surplus, including the Building Australia Fund, to lift economic activity, however he doubted the government spending package would have much short-term benefit.
"There is no guarantee that what they deliver in terms of transfers and rebates will actually get spent. With a lot of economic uncertainty, most will probably get saved," he said.
Cabinet's strategic budget and policy committee was meeting last night to further hammer out the details, with the budget expenditure review committee to meet later in the evening.
COMMONWEALTH Bank of Australia is to acquire the Bank of Western Australia (BankWest) and St Andrew's Australia from their UK based parent HBOS for $2.1 billion.
The nation's biggest mortgage lender said the purchase was conditional on all necessary competition, regulatory and government approvals.
The Commonwealth Bank said it would maintain and grow the BankWest brand after the takeover, and customers could make transactions at either's ATMs without penalty.
Commonwealth said it would fund the acquisition through a $2 billion accelerated institutional placement.
It said the method of funding the acquisition would allow it to maintain APRA Tier 1 capital at 7.6 per cent and Tier 1 capital under UK FSA rules at 10.1 per cent.
The Commonwealth said ratings agencies Standard & Poor's, Moodys and Fitch all had confirmed the group's credit ratings with stable outlook following the acquisition.
The Commonwealth Bank said, even with the acquisition, it was determined to continue to carry substantial surplus capital due to the current volatile market conditions.
Commonwealth Bank chief executive Ralph Norris said the purchase from the troubled UK banker, HBOS, offered rare value.
"The Commonwealth Bank regularly reviews acquisition opportunities but rarely have we seen a quality asset such as BankWest become available on such attractive terms to us," Mr Norris said.
"The strength of our current capital and funding position combined with the strategic value of this transaction makes this an attractive opportunity for the group and its shareholders."
Mr Norris said the acquisition of BankWest provided a significant opportunity to further develop the group's business in the WA market.
"It complements our existing operations and will deliver additional growth opportunities in key market segments, as well as enhanced product and service delivery opportunities for customers."
He said the Commonwealth Bank intends to maintain and grow the BankWest brand and that Commonwealth Bank and BankWest branches will not be closing as a consequence of the acquisition.
Both Commonwealth Bank and BankWest customers would be able to use each others ATM's without paying additional fees, he said.
St Andrew's is HBOS Australia's wealth management business, providing life insurance and wealth management products.
"Its range of products is complementary to the group's existing wealth management business," Mr Norris said.
Commonwealth Bank said the purchase did not extend to HBOS's other Australian businesses, Capital Finance Australia, BOS International (Australia) and HBOS's Australian Treasury operations.
Commonwealth also confirmed that it had conducted "high level, exploratory discussions" with Queensland-based banker-insurer Suncorp-Metway.
If the acquisition is successful, it will create a bigger bank than a combined Westpac-St George and would give the Commonwealth Bank the biggest market share in WA, which has amongst the highest growth rates in the country because of the mining boom.
Credit Suisse has served as exclusive financial adviser to the group on the transaction.
BankWest and St Andrew's owner, HBOS, is in the process of being taken over in the UK by rival bank Lloyds TSB Group, in a deal worth £12 billion ($29.65 billion).
COMMONWEALTH Bank of Australia is to acquire the Bank of Western Australia (BankWest) and St Andrew's Australia from their UK based parent HBOS for $2.1 billion.
The nation's biggest mortgage lender said the purchase was conditional on all necessary competition, regulatory and government approvals.
The Commonwealth Bank said it would maintain and grow the BankWest brand after the takeover, and customers could make transactions at either's ATMs without penalty.
Commonwealth said it would fund the acquisition through a $2 billion accelerated institutional placement.
It said the method of funding the acquisition would allow it to maintain APRA Tier 1 capital at 7.6 per cent and Tier 1 capital under UK FSA rules at 10.1 per cent.
The Commonwealth said ratings agencies Standard & Poor's, Moodys and Fitch all had confirmed the group's credit ratings with stable outlook following the acquisition.
The Commonwealth Bank said, even with the acquisition, it was determined to continue to carry substantial surplus capital due to the current volatile market conditions
Commonwealth Bank chief executive Ralph Norris said the purchase from the troubled UK banker, HBOS, offered rare value.
"The Commonwealth Bank regularly reviews acquisition opportunities but rarely have we seen a quality asset such as BankWest become available on such attractive terms to us," Mr Norris said.
"The strength of our current capital and funding position combined with the strategic value of this transaction makes this an attractive opportunity for the group and its shareholders."
Mr Norris said the acquisition of BankWest provided a significant opportunity to further develop the group's business in the WA market.
"It complements our existing operations and will deliver additional growth opportunities in key market segments, as well as enhanced product and service delivery opportunities for customers."
He said the Commonwealth Bank intends to maintain and grow the BankWest brand and that Commonwealth Bank and BankWest branches will not be closing as a consequence of the acquisition.
Both Commonwealth Bank and BankWest customers would be able to use each others ATM's without paying additional fees, he said.
St Andrew's is HBOS Australia's wealth management business, providing life insurance and wealth management products.
"Its range of products is complementary to the group's existing wealth management business," Mr Norris said.
Commonwealth Bank said the purchase did not extend to HBOS's other Australian businesses, Capital Finance Australia, BOS International (Australia) and HBOS's Australian Treasury operations.
Commonwealth also confirmed that it had conducted "high level, exploratory discussions" with Queensland-based banker-insurer Suncorp-Metway.
If the acquisition is successful, it will create a bigger bank than a combined Westpac-St George and would give the Commonwealth Bank the biggest market share in WA, which has amongst the highest growth rates in the country because of the mining boom.
Credit Suisse has served as exclusive financial adviser to the group on the transaction.
BankWest and St Andrew's owner, HBOS, is in the process of being taken over in the UK by rival bank Lloyds TSB Group, in a deal worth £12 billion ($29.65 billion).
RBA slashes official interest rate by 1 percentage point
DESPERATION turned to jubilation for cash-strapped Australian families last night, after major lenders indicated they would pass on most of the Reserve Bank's interest rate cut.
Westpac was the first bank to announce the reduction, pledging to lower its standard variable home loan rate by 0.8 percentage points with the three other big banks delivering the same discount during the afternoon.
Mortgage broking network Aussie Home Loans also promised a cut of 0.75 points.
For families, the result represented a stunning -- and desperately-needed -- reversal of fortune, with the cut translating to a $273 reduction in monthly repayments on a $500,000 mortgage.
Mother-of-two Suzanne Andrews, from Lalor Park in Sydney's west, said her family's home loan repayments had increased by more than $65 a week over the past two years, with their bill now totalling more than $2000 a month.
Despite remortgaging two years ago, she and husband Mark had been forced to take drastic action to ensure the household budget balanced.
The cut means repayments on their $300,000 mortgage will drop by $164 a month -- a result Mrs Andrews described as "excellent''.
"I am so excited,'' she said.
"(A future cut) could mean we could have health insurance again. We cut it out because it was costing too much and we were not using it. So it went. All the leisure items have gone off the list, you just pay for what you need to survive.''
Mother-of-two Linda Evans said every dollar saved on her $260,000 mortgage with Aussie Home Loans would be welcome relief.
"The quicker the better,'' she said.
"We've got school fees to pay, so it will definitely make a difference.''
But she said she was angry that her lender had elected not to pass on the full 1 per cent cut to those struggling with mortgage stress.
"I just think it's unfair -- if it went up 1 per cent they would take the full amount,'' she said.
" I just can't understand why we aren't entitled to the full amount when it goes down.''
Homeowners Candice and Richard Allen said the rate drop would not only release the tension on their own budget, but also allow them to keep their tenants.
The Allens moved to Parklea in Sydney's west three years ago, leasing their Melbourne home. If the rate cut hadn't come, they would have been forced to put up the rent.
"We don't want to do it because we rent here and we know what it is like to be on both sides of the fence,'' Mrs Allen said.
Patrice Borg, from Hamlyn Terrace on the Central Coast, agreed that the cut would ease the pressure on her family's budget.
BORROWERS shouldn't spend the "imaginary" savings of an interest rate cut, the nation's largest consumer organisation warns.
Banks have passed on 80 per cent of yesterday's one percentage point cut in the official cash rate, reducing by about $150 the monthly repayments on a $300,000 mortgage.
While the cut appears to be a significant break for homeowners, the Australian Consumers Association's said banks had increased variable mortgage rates above central bank hikes during the past year.
"So ... this ... is a return to what you would have been paying a little earlier, perhaps last year," spokesman Christopher Zinn told Channel 9.
"Don't just spend any imaginary savings. Put them into your mortgage or clear credit card debt more to the point, if you have it."
Mr Zinn said the banks should also be cutting the interest rates on credit cards.
"Currently some of them are well over 20 per cent," he said.
Westpac first to announce home loan cut, others soon follow
AUSTRALIA'S big banks have moved to cut interest rates on home loans, although all have declined to pass on in full the RBA's shock one percentage point cut, with each of the big four favouring 80 basis point reductions.
While Westpac was first off the block, NAB, ANZ and Commonwealth all followed suit - although none passed on the full rate cut, each opting for 80 basis point reductions.
Westpac's rate cut will be effective from October 13, the bank said. The new variable rate will be 8.56 per cent.
CBA's rate cut will be effective from October 13, reducing its basic variable rate to 8.02 per cent.
ANZ Bank reduced its standard variable home loan rate by 80 basis points to 8.57 per cent, while NAB's 80 basis point cut takes its home loan rate to 8.56 per cent, effective October 20.
"Westpac will continue to monitor the external environment, and our cost of funding position, and will look to pass on further interest rate reductions where possible," Westpac's head of retail and business banking Peter Hanlon said.
"Since the beginning of September this year, term funding costs have increased to the highest levels seen since this crisis began over 12 months ago."
Commonwealth said while it wasn't cutting rates as much as the RBA reduction, "we do expect global financial markets to normalise over time and once that does occur we will be able to reduce rates by more than the RBA adjustments".
"Our customers can also expect out-of-cycle interest rate reductions."
Westpac said about 50 per cent of the bank's lending was funded with deposits, with the remaining 50 per cent of funding coming from short and long term borrowing in Australia and overseas.
The bank said the cost of its funding base had increased materially over the past year, and most notably in the last few weeks.
Aussie Home Loans will cut its standard variable home loan rate by 75 basis points.
Analysts tipping 50 basis point rate cut next week
No guarantee banks will pass on any possible cut
INTEREST rates will be cut deeper and faster than previously expected, as the global financial crisis continues to bite.
Analysts surveyed by The Advertiser are expecting rates to drop by up to 75 basis points by the end of the year, to 6.25 per cent.
Financial markets are expecting the Reserve Bank to cut the official cash rate by 50 basis points next week, bringing the rate to 6.5 per cent.
Banks are refusing to guarantee they will pass on the cuts in full and analysts have warned they are unlikely to.
ANZ chief economist Saul Eslake said the banks were unlikely to pass on all of a 50 basis point cut and even less if the cut is just 25 basis points. "I'm sure (the RBA does) not want the rates that customers are paying to go up," he said.
"The question is whether they think the rates ought to come down."
Analysts surveyed before the interest rate cut last month unanimously forecast the next downward movement would be just 25 basis points.
Steep falls on global share markets, in the wake of the abortive vote on the $US700 billion bailout package earlier this week and economic problems in Europe and Britain, have prompted some analysts to revise this position.
The possibility of a co-ordinated global interest rate cut by central banks to reinvigorate the world economy has also been suggested.
The Bank of England is tipped to lower its rates from the current level of 5 per cent when it meets next week, with many economists forecasting rates of just 3 per cent this time next year.
AMP Capital Investors chief economist Shane Oliver expects the US Federal Reserve to drop its rates, from 2 per cent now to 1.5 per cent in the next three to six months.
Pay down debt and take a look at your mortgage and super options
WE are approaching the end one of the most tumultuous weeks in stock market history, one in which we've seen the credit crunch ramp up from a global storm to a force 9 hurricane, becoming stronger and more dangerous with every bank it destroys.
Financial institutions previously thought invincible have been brought to their knees. Trillions of dollars have been wiped off the value of global stock markets.
The sight of giant investment banks going bust or throwing themselves into mergers has created a panic not seen since the great crash of 1929.
Savers in the US, terrified their bank will be next to fall, are sticking savings under mattresses.
Others are buying gold in unprecedented quantities. Gold rose by $90 on Wednesday night -- its biggest ever increase -- because worried people know that, whatever happens, gold will always have a value. Even if the world really does end up in Mad Max territory, you can always buy a loaf of bread with a gold coin.
A bank, on the other hand, can leave you with virtually nothing. A trader described it as ``judgment day'' for capitalism.
After all, the free market has been left to its own devices and has, to put it mildly, stuffed it up, with gigantic corporations either nationalised in the US -- as was the case with Fannie Mae and Freddie Mac -- or bailed out with expensive loans and taken out of shareholders hands like AIG, the world's largest insurer.
And yet, open your window in suburban Australia and the sun's shining, the birds are still tweeting. It hardly feels like Armageddon here.
Don't be fooled. The financial tsunami that is crushing Wall St and has thrown the UK into recession -- and is threatening to do the same to continental Europe -- is heading our way.
Meanwhile Asia and, worse, China, our economic messiah, have already become engulfed. China even had to cut interest rates earlier this week to boost its flagging economy, thanks largely to export orders from America falling through the floor.
So, what can you do to protect yourself? Here's our guide to surviving meltdown.
CREDIT
Paying off high-interest debt such as credit cards, store cards and personal loans is an absolute priority.
It's never sensible to be paying interest rates of nearly 20 per cent. But in a slowing economy, when unemployment is forecast to rise and getting a decent pay rise out of your employer will be tougher and tougher, ditching fixed debt is more important than ever.
There are plenty of credit cards around offering zero per cent on balance transfers for six months or more, which means that every penny you repay during that period goes towards repaying the capital and not towards servicing these high rates of interest.
Try and dump as much debt as you can on these zero per cent cards. Apply for multiple cards from different banks if necessary because one card's limit may not be high enough.
But always make sure you only use these cards as a way of saving interest and do NOT spend on them. Put a very low cap on the credit limit if necessary to prevent you getting deeper in debt.
Mortgages
Here's one area where the crunch has already arrived and virtually all homeowners have felt its fury.
Bank funding costs have risen and they have been quick to pass on the cost to borrowers.
Mortgage rates have risen by about 0.5 per cent since last August, in addition to the 1 per cent of official cash-rate increases we were belted with until the first cash-rate cut in seven years was announced earlier this month.
But while the Reserve Bank has made it clear that it wants to continue to cut the cash rate, nobody can be sure their bank will pass on the next cut in full.
The one reassuring factor is that even if your bank doesn't pass on the full cut, the Reserve Bank is likely to cut again, and again, until it gets mortgage rates down to its desired level.
Remember, its intention is to put more money in more pockets to help encourage us to spend and boost the economy.
Even so, it might be a good idea to have a broker look at your current deal and see if you can't save a few more dollars by getting a more competitive rate.
Super
Superannuation savings have been decimated as the share market has suffered its fifth worse bear market in the past 50 years.
The typical balanced super fund is down 11 per cent this year and well over 20 per cent since the peak of the market last November. Workers face the uncomfortable truth they will have to continue working for another two or three years to repair damage to their savings.
Others are coming out of retirement, realising they don't have enough to last them the rest of their lives.
Some people complained that super funds have not done enough to protect their money.
But, unfortunately, ultimate responsibility for your super fund once you are at or in retirement is down to you. You have the option, any time, of switching super into cash if you are worried about the market.
If you are losing sleep, it might be the best thing to do.
During these turbulent days financial advisers really earn their money. If you haven't heard from yours lately, call and get advice immediately.
Savings
Interest rates are on the way down and they'll continue falling to stave off a recession, but there are still good deposit rates on offer.
Given these rates are only likely to get lower, it probably makes sense to lock into a high rate by investing in a term deposit account. You can fix your interest rate for up to five years, although you can't touch your savings for the whole term otherwise you will lose some or all of the interest. The best one-year term deposit accounts are paying around 8.6 per cent.
If you want to retain access to your cash then you'd need an online saver account, and Bankwest is paying 8.10 per cent.
The collapse of one of our banks seems unlikely, and a new scheme introduced this year means that the first $20,000 is protected, effectively by the government, while anything above that would hopefully be returned through the liquidation of the company.
But if you're really nervous and want to prepare for armageddon, buy gold. The Perth Mint said business was "going crazy'' in recent days.
Property
As the global slowdown intensifies, more people are laid off and more people worry about how safe their jobs are, fewer people are prepared to stretch and buy a new property. Demand and prices fall.
As for renters, the lack of supply of new properties because of lack of affordability will mean a continued shortage of apartments and a continued rental squeeze.
ONE in three Australian households is saving up to repay debts or pay bills and one in four already have begun putting a little aside for Christmas presents, a new survey has revealed.
Backing up the Reserve Bank's assessment that Australian families are now bunkering down financially, the latest Melbourne Institute Household Saving and Investment Report has found a "significant'' shift in spending and savings.
The report found the number of Australian households saving for a rainy day jumped from under 30 per cent to 40 per cent in a year.
Those saving for their retirement swelled from 29 per cent to 37 per cent, while those saving to cover their debts or future bills grew from 22 per cent to 33 per cent.
Melbourne Institute research fellow Guay Lim said these were "huge'' movements in savings behaviour, heralding a new climate of frugality.
"People are more concerned about the future and they are saving more,'' she said.
The Melbourne Institute report also found that fewer Australian families were running into debt than a year ago.
Confirming the more frugal sentiment, new figures from the Reserve Bank yesterday showed the slowest growth in average credit card debt, since records were first kept 14 years ago.
The average credit card balance stood at $3138 in July -- up 4.6 per cent over the past year.
CommSec chief economist Craig James said while the value of credit card transactions rose by 4 per cent for the month, consumers lifted repayments by more than 7 per cent.
Market turmoil could prompt another rate cut in October
RBA cut official interest rates this month, by 25 basis points
THE current turmoil in world financial markets has increased the chance of a follow-up interest rate reduction in October, despite the minutes of the central bank's last board meeting suggesting policy makers may wait before cutting further.
The minutes of the Reserve Bank of Australia's (RBA) September 2 meeting, released today, indicated it was not in a hurry to embark on a series of official interest rate cuts.
But economists said the two-week old information was out of date because it was written ahead of the current woes in the US financial sector, which has sent stock markets tumbling around the world.
The minutes said there was in place "a necessary precondition for a decline in inflation back towards'' its target band of between 2 and 3 per cent over the course of the economic cycle.
The RBA decided at its September 2 board meeting to cut interest rates for the first time since December 2001, by 25 basis points to 7 per cent.
ANZ senior economist Katie Dean said turmoil in the US, following the collapse of investment bank Lehman Brothers, made an October rate cut more likely than not.
"The minutes are two weeks old,'' she said.
"There's clearly disruptions in financial markets - that would suggest the Reserve Bank would be prepared to provide more insurance when they meet in October.
"We've had cataclysmic falls in US financials ... I think the conditions have been met.
"The events over the last couple of days overwhelmed the better economic data.''
Ms Dean said better than expected labour force and retail trade data released last week had reduced expectations of an October rate cut.
"The message from the minutes was the Reserve Bank was watching the data,'' she said.
"If there was good economic data ... they would be inclined to stay on hold.''
The RBA today noted the risk in easing monetary policy too soon, given that it did not expect to see clear evidence of an expected fall in inflation for some time.
"Policy had to balance these risks,'' the minutes, published at 11.30am (AEST) today, said.
"After considering all the evidence, the board came to the view this balance was best achieved by reducing the cash rate at this meeting.''
The RBA said waiting too long to ease monetary policy from what it described as a "quite restrictive setting'' could result in demand weakening more sharply than necessary.
"This would deliver a faster reduction in inflation, but at greater short-term economic cost,'' the minutes said.
The Australian dollar had little initial reaction to the RBA release, hovering around the US79.54c mark soon after 11.30am AEST.
The Australian dollar then fell below $US0.7900 after midday for the first time since August 17, 2007.
RBC Capital Markets senior economist Su-Lin Ong said the RBA minutes said little that was new, suggesting the central bank would take a caution approach with rate cuts.
"There was little new information in today's September board minutes with the key policy section confirming that the tightening in financial conditions which is exerting a significant restraining influence on activity was largely the reason for the recent 25 basis point cut,'' she said.
"An easing bias is evident, but in line with the (RBA) governor (Glenn Stevens') recent testimony, it appears to be a cautious approach with no indication that the RBA wants to move quickly or aggressively.''
Ms Ong said recent financial market developments had superseded the minutes.
"As we have argued on a number of occasions, it is that the global backdrop will prove the determining factor in deciding the quantum of this current easing cycle,'' she said.
"The faltering global growth outlook continues to argue for a larger easing cycle than the 100 basis points that we have pencilled in.''
JPMorgan chief economist Stephen Walters noted that the minutes had referred to the "opposing forces'' of the soaring terms of trade boost against the slowing demand in the economy, when considering the September 2 rate cut.
"Board members debated the merits of the timing of the first reduction in the cash rate, and balanced the risks of easing too early against the perils of waiting too long,'' Mr Walters said.
"It seems, therefore, that, before the events of the last few days at least, officials were in no rush to ease policy.
"This is partly because inflation is very likely to rise in coming quarters, and will return to target only `over time'.''
Future direction of monetary policy would have to be re-evaluated after the turmoil in financial markets since the board met two weeks ago, Mr Walters said.
"Indeed, the bottom line is that whatever RBA officials were thinking two weeks ago probably needs to be reviewed extensively,'' he said.
"Given what has happened in markets and the shifting perceptions of risk.''
The Federal Government has officially launched its $512 million housing affordability scheme, which aims to take $20,000 off the cost of new homes and ramp up supply.
Prime Minister Kevin Rudd says the housing affordability fund, which was announced last year as an Labor election promise, is now open for applications.
Mr Rudd says the scheme will bring down infrastructure charges and holding costs by allowing developers to partner with councils and governments to build new homes.
"This half-billion dollar scheme means that local authorities and others around the country can put in their submissions to become partners with us in this scheme," he said.
"We want to tackle the housing affordability crisis for Australian families.
"It has got out of control and we need to start bringing it back under control."
Mr Rudd says at the end of last year the cost of buying a home was seven-and-a half times the average annual wage, up from 1996 when it was four times an average wage.
Under the scheme grants for $10,000 would be provided to reduce infrastructure costs with a further $10,000 coming from local authorities.
Housing Minister Tanya Plibersek says the fund will also provide incentive to local authorities to speed up approvals and cut red tape.
"By working together with developers and different levels of government this housing affordability fund will make a major saving for young Australians, particularly those buying entry level modest homes," she said.
Recent rate cuts will save about $54 a month on a $300,000 mortgage
Paying that $54 into mortgage will save thousands and cut years off loan
MAINTAINING your mortgage repayments at pre-rate cut levels could save you thousands of dollars and shave years off the term of your loan.
Increasing the frequency of your payments from monthly to fortnightly will save you even more, says Aussie Home Loans chairman John Symond.
Last week?s interest rate cuts will save around $54 a month on a $300,000 mortgage.
Mr Symond said if borrowers keep up their repayments and swap to fortnightly rather then monthly repayments they could save up to $245,000 over the term of their loan and pay it off 10 years earlier.
?This sacrifice, which is less than a tank of petrol a week, could make world of difference to a borrower?s life, especially their future wealth, ? Mr Symond said.
The Reserve Bank of Australia cut official interest rates last week for the first time in seven years.
Big banks and other lenders moved quickly to lower home loan rates.
ANZ cut its variable rate by 25 basis points to 9.37 per cent, CBA cut its variable rate to 9.33 per cent, Westpac to 9.36 per cent, and NAB to 9.36 per cent.
The Reserve Bank of Australia is still worried about high inflation, but analysts see one or two more cuts in official rates this year.
Savings made by keeping old repayments and paying fortnightly:
Loan amount New fortnightly repayments Saving in dollars and years
Official interest rates have fallen for the first time in seven years
Banks may not pass on further cuts if RBA keeps lowering rates
THE first Reserve Bank (RBA) rate cut in seven years was greeted with relief by borrowers last week. All the big banks and non-bank lenders agreed to pass on the 0.25 per cent cut in full -- and in record time.
Pressure exerted by Treasurer Wayne Swan before the announcement prompted the banks to respond within five minutes of the announcement last Tuesday.
The cut will mean a homeowner with a $300,000 mortgage will save around $55 a month in repayments, based on a 30-year term.
But the cut has also presented house-hunters -- and those looking to re-mortgage -- with a bit of a quandary. Should they stick with their variable-rate loan, or take some of the cheaper fixed-rate deals now on the market?
The typical bank variable rate will now be around 8.36 per cent, compared to the best fixed deals, which start from around 7.99 per cent -- an immediate saving for those who fix.
But economists say that the cash rate may well fall by as much as 1.5 per cent during the next year or two -- and that means variable mortgage rates could fall to around 7.11 per cent.
That lower rate, however, assumes that the banks will pass on all of the cash rate cuts -- and that is unlikely.
Last Wednesday, CBA boss Ralph Norris was emphasising that, although the RBA may well announce a series of rate cuts, the rising cost of funds on the international wholesale markets, where banks raise around one-third of their mortgage funds, means that the banks may not be able to pass on many more cash rate reductions.
"I can't guarantee anything,'' Mr Norris said. "At the moment, we have a situation where offshore funding costs have increased dramatically -- about eight-fold in margin over the last nine or 10 months, due to the overseas (sub-prime) crisis.''
It all makes the decision, for those in the market for a mortgage, much more complex even than usual.
Jennifer Nielsen, CEO of mortgage broker The Loan Market Group, says: "The cheapest fixes at the moment are around 8 per cent and you wouldn't want to fix yet. Variable rates are the way to go. The trick is to fix when you can see we are nearing the bottom of the cutting cycle -- and we are a long way from that at the moment.
"We are almost certainly looking at a downwards or, at worst, flat period in mortgage rates, so you shouldn't lock yourself into a fixed rate at current levels, unless you really need that peace of mind.''
"It all comes down to individual circumstances. The financial markets are pricing in an 80 per cent chance of another cut next month and are expecting a further two by next April, bringing the cash rate down to 6.25 per cent.
Frank Lopez, of financial data firm Cannex, says borrowers can get the cheapest variable rate, if they go for a deal with no bells or whistles -- just a clean repayment mortgage.
Wizard is offering a rate-breaker loan at 7.88 per cent, with a fee of $760. One Direct Home Loans is offering a rate of 8.61 per cent, but with a fee of just $60. These deals have minimal features, but also competitive rates.
"Many people who take mortgages with lots of additional features, such as redraw or payment holidays never actually use them -- or don't use them enough to justify the higher rate they pay for the privilege,'' Mr Lopez says. "Think hard before paying for any extra features at all.''
Savers
While borrowers may be celebrating the rate cuts, the future looks less rosy for those banking their pennies.
Savings accounts rates have already been falling and may fall rapidly as further cuts kick in. But there were some good deals available this week.
Many planners advised those who depended on savings accounts to boost their income to lock into a term deposit account before rates fell any lower.
Paul Bilson, of Woodward Nhill Financial Planning, said he favoured a mixture of term deposits and income funds.
"Sure, put part of your money into term deposits, but remember there will be penalties if you need to access your cash," he said.
Mr Bilson said most income funds, which primarily invest in mortgage debt, were returning seven to 8 per cent
"There is a little more risk," Mr Bilson said.
"They are not guaranteed - you have to make certain that the one you choose is very well rated."
He said companies including Mariner, Axa and Colonial First State all ran good funds invested in quality loans, fixed interest securities and cash.
Investors
Usually a rate cut is welcomed by the stock market because it makes the returns on cash less attractive and so forces more money into the stock market.
But after the cut on Tuesday, the market finished marginally down and fell further later in the week, stripping 5 per cent off Australian stocks.
It was the worst result since the major index fell 5.53 per cent in March.
Shane Oliver, chief economist at AMP Capital, said: "It is difficult to escape the bad news in the economy, which is going to make it harder for companies to grow their profits, and that will act as a drag on the stock market for some time."
He said retail and discretionary spending would be hit hard by an economic slowdown.
"Unemployment will rise, but these things do not last forever," Mr Oliver said.
Conveyancing and some travel costs are some things that can't be claimed
PROPERTY investment remains one of the most popular ways to make money, but for uneducated investors it can be easy to make mistakes at tax time.
The Australian Taxation Office says it has identified a number of common mistakes in the tax returns of rental property owners, and has compiled a list.
Construction costs are a big issue, with confusion common about what items can be depreciated and what is a capital works deduction of 2.5 per cent a year.
"Certain types of construction - including extensions, alterations and structural improvements - can be claimed as capital works deductions. However, the land on which a rental property is constructed cannot be claimed,'' the ATO says.
Deductions can be claimed for the decline in value of some types of depreciating assets in residential rental properties, for example curtains, blinds, dishwashers, refrigerators, stoves, television sets and hot water systems.''
The ATO says other areas where a tax deduction cannot be claimed include:
*CONVEYANCING costs, which instead form part of the cost base.
*TRAVEL expenses where the main purpose of the trip is a holiday and the property inspection is incidental to that.
*EXPENSES relating to private use of the property.
*INTEREST on any private portion of a loan that is used for both investing and private purposes.
TAFE SA's co-ordinator of property and share investment, Peter Koulizos, said common mistakes he saw included people not declaring capital gains, or not claiming as much as they were entitled to because they did not have a depreciation schedule.
"Depreciation schedules have been around for a while but not well advertised. It's amazing what the quantity surveyors find that can be depreciated,'' he said.
A depreciation schedule costs about $500 for a typical three-bedroom investment property.
Accountants are not always able to help property investors with tax questions. "It's very hard to find an accountant that knows about property, and harder to find one that invests in residential property. Luckily we have one who lectures for us,'' Mr Koulizos said.
The ATO says people should keep records of their expenses with their tax return. "You must keep records of rental income and expenses for five years from the date your income tax return is lodged, and records of ownership and all the costs of acquiring and disposing of your property for five years from the date you dispose of your rental property,'' it says
THE Reserve Bank has cut official interest rates for the first time in almost seven years but the central bank is unlikely to follow up with another easing in October, economists say.
The central bank today said it would lower the cash rate by 25 basis points to seven per cent, from 7.25 per cent, following its monthly board meeting.
The cut was widely expected by financial markets and is the first since December 2001.
In an accompanying statement, RBA governor Glenn Stevens said the outlook for demand and inflation was uncertain, with weakening household demand offset by a rising terms of trade.
Commonwealth Bank of Australia chief economist Michael Blythe said the tone of the RBA statement suggested the central bank was more likely to cut rates again in November, rather than October.
"Right at the moment, it doesn't look like they'll be back-to-back rate cuts," he said.
"You don't get a sense of urgency about what they've said.
"While there's nothing there to stop them cutting again, you don't get the feeling it will be followed up by another move next month.
"It's the fact inflation is uncomfortably high and will remain high for a while.
"The household side is weaker but the business side, with profits and capital spending, is strong."
Mr Stevens also said household demand was likely to remain subdued.
"On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead," he said.
"Inflation is likely to remain relatively high in the short term, with the CPI (consumer price index) affected by the high global oil prices in mid year and other increases in raw materials prices."
But the RBA said the outlook for demand and inflation was still uncertain.
It cited Australia's rising terms of trade, the ratio of export to import prices, as a driver of inflation.
"The rise in Australia's terms of trade that has occurred is working in the opposite direction, adding substantially to national income and ability to spend," the RBA said.
"Fixed investment spending by businesses continues to be very strong.
"At the same time, high prices of oil and a range of other commodities have added to global inflationary risks."
Conversely, the RBA said tight financial conditions, high petrol prices and lower asset values were restraining demand.
More borrowers are refinancing home loans to get better deals
There's a growing shift back to variable rate loans
HOME loan refinancing is on the rise as homeowners seek a better deal on their mortgage, new data shows.
Bernie Lewis Home Loans said refinancing loans rose to 22.1 per cent of total loans in 2007-08, up from 17.6 per cent the previous year.
"This indicates that people recognise that better deals may be available, and they are seeking them out,'' managing director Mark Lewis said.
"In periods of stable interest rates, people tend to become complacent about their home loans and credit in general. However, when rates rise there is a necessity to look more closely at the loan arrangements,'' he said.
"With petrol prices going up, the cost of living going up and interest rates going up, people are hitting the limits and asking how they can reduce costs.
"We always advocate you should review your loan at least every couple of years anyway, because it's such a dynamic market with new products, new features and new benefits.''
Bernie Lewis Home Loans has also noticed a shift back to variable rate home loans.
"Earlier this year we were writing close to 50 per cent into fixed rate loans, but this has now dropped back to around 30 per cent,'' Mr Lewis said.
Expectations of an upcoming official interest rate cut - as early as next month - have been improving the popularity of variable loans.
Mr Lewis said financial markets had been pricing in a rate cut, and historically the Reserve Bank of Australia had started with a 0.50 percentage point cut when lowering rates.
"The chances of a rate cut are certainly very high,'' he said.
Reserve Bank of Australia gets out the interest rate axe
Aug 26, 2008
Stephen McMahon
THE best medicine for the economic slowdown is a healthy dose of interest rate cuts on September 2, according to the latest minutes from the Reserve Bank of Australia.
The minutes from the August board meeting underline the RBA's desire to slice interest rates from 7.25 per cent to offset the "slower trend in demand".
Economists said the RBA minutes made it "crystal clear" the RBA will cut interest rates next month, with the only question being whether the RBA will drop rates by 25 basis points in September and October or go for one big 50 basis-point hit next month.
Westpac managing director of economics Bill Evans said a 50 basis-point cut in September is "better policy", with the language in the minutes stronger than in the past.
"However, they do not provide the unambiguous evidence that the bank plans to move by 50 basis points," Mr Evans said.
"But with credit markets remaining weak, and much weaker than we saw in April-June, the case should still be made that the best policy would be a move of 50 basis points."
The Australian dollar hardly flinched after the release of the RBA minutes, suggesting the market was not surprised by the sentiment and has already priced in a series of interest rate falls.
The combination of weaker commodity prices and a stronger US dollar meant the Aussie continued its downward slide from last month's peak of US98.50, with the currency at US86.36 in late trading.
Financial markets have fully priced in a series of cuts that will take the official cash rate to 6.25 per cent by April 2009.
But investor confidence took a dive as credit crunch concerns resurfaced on Wall Street and Australia's benchmark S&P/ASX 200 index yesterday dropping 2.4 per cent to 4866 points.
Since the stock market peaked in November, the index has fallen 29 per cent.
Despite continuing inflationary risks that could spark a flurry of wage rises, the RBA minutes said clear evidence now existed that the global economic slowdown is hitting households hard.
In the first half of the year, the RBA said the share market and house price drops wiped 5 per cent off households' net worth and as a result the September quarter GDP is expected to be low.
"Scope to move towards a less restrictive setting of monetary policy was judged to be increasing," the bank's minutes said. "Market expectations about monetary policy in Australia had changed significantly in the past month, reflecting the accumulating evidence of slower demand in the economy."
The RBA board pointed to "weakened" consumer spending, auction clearance rates "well below last year" and business confidence "well below average" as signs on the depth of the slowdown.
INNER-city living may be out of the question for most first-home buyers, but they are not out of the market yet.
A drop in house prices in Melbourne's outer suburbs could be just the opportunity many first home buyers have been looking for to enter the property market.
Although the strongest demand for properties over the June was in the inner and middle ring of suburbs -- showing a return of fundamentals in the Melbourne market -- there was a small drop in price in the outer suburbs and a drop in the number of sales.
According to the latest figures, median price of inner- suburban homes increased by almost 2 per cent between March and June this year from $670,000 to $682,900, while middle-ring suburbs jumped by slightly more from $437,000 to $482,250.
Median prices in outer suburbs decreased by 1.66 per cent, from $346,000 to $340,250.
The Real Estate Institute of Victoria said this made sense as there had been an increase in the number of inner and middle city property transactions but a fall in the outer suburbs.
The cheapest Melbourne suburbs is always a good place for first home buyers to start.
REIV figures for the June quarter reveal that the top five most affordable suburbs include Melton South (a median of $190,000 in June), Melton ($202,000), Werribee ($241,000), Meadow Heights ($250,000) and Cranbourne ($255,000).
Cranbourne, Wyndham Vale, Broadmeadows, Deer Park and Craigieburn have a median price just under $270,250.
REIV boss Enzo Raimondo said the three factors that made 2008 a better time for first home buyers to enter the market than 2007 are:
HOUSE prices are far more stable this year compared to last year, so buyers are less likely to be priced out of the area they want to buy in.
IT is a buyer's market meaning vendors are far more likely to negotiate with prospective customers.
THE headline median price has dropped since December 2007.
At the same time the tightest rental market in over 25 years provides further incentive to make the move to home ownership as rents are likely to continue to increase.
"Due to the influx of 1500 people a week into Melbourne we are unlikely to see prices drop from this point, however the housing market is subject to overall economic conditions," Mr Raimondo said.
"First-home buyers should look in the middle and outer suburbs for properties priced at or below the Melbourne median, the closer to amenities such as public transport, parks and shops the better."
The REIV recommends first home buyers to be aware of the financial assistance available as the State Government has recently provided increased incentives, especially if you are buying a newly built home.
Even the dogs are barking that the Reserve Bank board is almost certain to cut the official interest rate at its meeting in two weeks' time. But those expecting a cut of 50 basis points are barking up the wrong tree.
You have to ask yourself if the Reserve governor, Glenn Stevens, looks like a 50-basis-point kind of guy. Is he the kind of guy who'd go for the grand gesture? The kind who'd panic?
Or is he the kind who definitely wouldn't panic; who'd keep his cool and act in a quiet, confident, carefully measured way? He looks like a 25-basis-point kind of guy to me. Speak softly and carry a big stick. And we do know he's the kind who'd move the rate by 25 points two months in a row.
What's more, if the object of the exercise were to make a big impression on consumers and business people - and what central bankers call the "announcement effect" is an important element when you're trying to influence psychology and change behaviour - it's not at all clear that one big 50 beats two 25s in quick succession.
If you've been around for a while you know that central banks rarely move rates just once when the time comes to change direction. If 25 points were all you thought you needed to do, you wouldn't bother.
So we can expect two or three rate cuts before the end of the year. But, at this stage of the game, a total cut of between 0.5 and 1 percentage point is all we should expect.
Remember that, although the deputy governor, Ric Battellino, was right to remind us last week that the Reserve cannot wait for a fall in inflation before it starts cutting rates because it has to act pre-emptively, we've still got an inflation problem and downward pressure on inflation needs to be maintained.
In other words, while the sharpness of the slowdown in demand this year has been enough to induce the Reserve to ease the tightness of policy, it will want policy to remain reasonably tight until the evidence that the inflation rate is moving into the target zone is clearer.
Of course, implicit in this approach is the Reserve's judgment that the economy is far from falling in a heap. Should demand continue slowing sharply, that would be a different matter.
In that case the Reserve would keep easing - confident in the judgment that inflation had receded as a problem while weak growth and rising unemployment had moved to the foreground. You can't have both problems at the same time.
Moving to the next big question - will the banks pass on all the cut in the official rate? - Mr Battellino was also right in reminding us that what the Reserve ultimately cares about is the level of the banks' lending rates, not the level of its official rate.
That's a no-brainer. It's the interest rates actually paid by businesses and households that affect the strength of demand.
The official rate's only role is to affect the banks' lending rates.
So, should a cut in the official rate fail to educe the desired fall in bank lending rates, the Reserve's obvious response would be to keep cutting the official rate until it did.
This reminder could be seen as letting the banks off the hook. Feel free to keep fattening your
interest margin, chaps; we'll accommodate you by making further cuts in our official rate as required. But the banks would be unwise to see this as a green light. The Reserve would not feel comfortable facilitating uncompetitive behaviour on the part of the banks.
The Reserve keeps a close eye on bank margins. When the global credit crisis forced up the banks' borrowing costs, and they first began making their "unofficial" increases in mortgage rates, Mr Stevens was willing to defend them against public criticism.
He made the lesser-of-evils point that he'd rather see them raising their prices than starting to ration their lending because lending had now become unprofitable.
But the banks' most recent unofficial increase could not be justified by their higher borrowing costs. It was a blatant attempt to take advantage of the decline in competition from the non-bank mortgage lenders and widen the banks' interest margin.
So the Reserve will be offering no support for the banks this time - as was clear from the observation last week of an assistant governor, Philip Lowe, that there was "no obvious reason" for the banks not to pass on any cut in the official rate.
Indeed, not. In fact, since the Reserve's intention to begin cutting the official rate became clear, the cost of the banks'
most important source of wholesale funding, the 90-day bill rate, has fallen by more than
50 basis points.
So, should the banks fail to pass the rates cuts through in full, they can expect no sympathy from anyone. They'll be roundly condemned by both sides of
politics, the media and every talk-back jock in the business.
Will they fail to flow on in full? They and their chief executives are certainly greedy enough and heedless of their customers' interests, but I doubt they're that stupid.
Banks are taking a closer look at finances before lending
You need to sow a savings history and that debts are under control
Calculator: Work out your borrowing power
DITCHING the credit cards, paying your bills on time and shopping around for lenders are among tips from experts on how to secure a home loan.
Amid the credit crunch, mortgages are harder to get than at any time in the past 20 years, experts say.
Faced with a collapse in home lending approvals, would-be borrowers need to get their financial affairs in order before approaching banks, they say.
Despite the plummeting house prices and imminent interest rate cuts, experts predict getting a mortgage will not get easier -- with banks toughening their lending criteria.
Steven Anderson, head of research at ratings agency InfoChoice, said potential borrowers needed to take time and care over their mortgage applications.
"This is the first time in a while that the banks haven't been falling over themselves to lend to you,'' he said.
His view is shared by Phil Naylor, CEO of the Mortgage & Finance Association of Australia.
"I think lenders are getting more stringent,'' he said. "They haven't changed their policies, but they are dotting the Is and crossing the Ts.''
To help would-be borrowers, the major banks and financial experts have listed the most common reasons why people are turned down for mortgages.
The bank doesn't think you can service the debt
Mr Anderson said banks were conservative when it came to estimating how much debt people could service.
"If they won't give you the loan, you should seriously consider a smaller property,'' he said.
One way to look better is to consolidate any debts.
"Get rid of unnecessary debt -- if you've got credit cards and you don't use them, get rid of them,'' Mr Anderson said. "The banks don't look at how much you owe, but at how big the credit limits are.''
Kelvin Lawrence, Westpac's general manager of mortgage portfolios, said banks looked hard at people's savings history.
"Having a history of genuine savings stands a borrower in very good stead with the institutions,'' he said.
He said if a bank was unhappy with an applicant's savings history, they could work with a customer to put a savings plan in place.
Steven Shaw, NAB's general manager of mortgages and consumer insurance, said it was sometimes possible to get around the savings requirements if a family member was prepared to guarantee the loan.
The term of the loan is greater than the time until you retire
According to Mr Anderson, this is the easiest financing problem to get around.
"All they do is change the terms of the mortgage,'' he said.
"So instead of paying the loan off in 25 years they give you a shorter period, so you pay it off quicker.''
You have had debt defaults or a bankruptcy
Mr Anderson said most banks overlooked small defaults on bills.
"If it's only minor it probably won't matter,'' he said.
Mr Lawrence said the number of defaults was also important.
"We look at one versus multiple defaults,'' he said.
"We are looking for a trend.''
Mr Anderson said that in the past there were more lenders prepared to provide low-doc or no-doc loans, but those options had shrunk.
"There are still specialist lenders who will lend to people with bad credit histories, but you will be charged a much higher interest rate,'' he said.
"Really, the only option is to get someone to go guarantor.''
Security is not acceptable
This means the bank does not accept the valuation of the property and refuses to lend the money.
Mr Anderson said while it was possible to get your own valuation and appeal against a rejection, there was little chance of the bank accepting it if the difference was too big.
Mr Naylor said being turned down was not the end of the world.
"The bottom line is if one lender doesn't want to lend to you -- shop around,'' he said.
"That's why mortgage brokers are a good idea -- hopefully they can find a lender that meets your requirements.''
THE Federal Government has warned it will pressure banks to pass on looming interest-rate cuts but has refused to reveal any details of its strong-arm tactics.
With the Reserve Bank expected to outline its policy for cutting the official cash rate today, the Government remained gun-shy yesterday about the methods it would use against banks to help homeowners.
A spokesman for Treasurer Wayne Swan said there were a range of options for increasing competition among banks.
But no timeline had been set before banks who failed to pass on rate reductions were pulled into line, the spokesman said.
"We expect banks will follow within a reasonable timeframe," he said.
Acting Prime Minister Julia Gillard said interest rates were a matter for the Reserve Bank, which acted independently.
THE Federal Government has warned it will pressure banks to pass on looming interest-rate cuts but has refused to reveal any details of its strong-arm tactics.
With the Reserve Bank expected to outline its policy for cutting the official cash rate today, the Government remained gun-shy yesterday about the methods it would use against banks to help homeowners.
A spokesman for Treasurer Wayne Swan said there were a range of options for increasing competition among banks.
But no timeline had been set before banks who failed to pass on rate reductions were pulled into line, the spokesman said.
"We expect banks will follow within a reasonable timeframe," he said.
Acting Prime Minister Julia Gillard said interest rates were a matter for the Reserve Bank, which acted independently.
"We don't speculate on what the Reserve Bank might do about interest rates," Ms Gillard said yesterday.
"But if interest rates were to fall, then we would expect the banks to pass that on to mortgage-holders."
Ms Gillard said the Government would release a scheme in November that would make it easier for people to change banks.
Assistant Treasurer Chris Bowen also highlighted the bank-switching plan yesterday, saying it was currently very difficult for people to change financial products.
"Let's give people the chance to move their bank accounts if they're not satisfied with the service they're getting," he said.
AS expected, the Reserve Bank has kept official interest rates steady today at a 12-year high of 7.25 per cent, in line with expectations.
The decision was widely tipped, with all 19 economists surveyed by AAP expecting the RBA to leave the cash rate steady.
Reserve Bank governor Glenn Stevens indicated in a statement that while the board felt it was appropriate to keep rates steady this month, relief could be in sight.
"Weighing up the available domestic and international information, the board judged that the cash rate should remain unchanged this month. Nonetheless, with demand slowing, the board?s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing," he said.
The RBA hasn?t cut rates since December 2001.
Interest rates 'won't go higher'
ANZ chief economist Saul Eslake said the statement give a clear impression that interest rates have peaked.
"That's an indication not only that there aren't going to be any more increases in interest rates but raises the question of when do they cut," Mr Eslake said.
"The statement does not give any clues as to when that might be."
The central bank reaffirmed its forecast for inflation to fall back within its 2 to 3 per cent target band during 2010.
Mr Eslake said moves this year by commercial banks to raise their borrowing rates independently of RBA decisions has been a "critical factor altering their thinking" about the economy.
"Additional rises in market interest rates and tougher credit standards have delivered some additional tightening of financial conditions without them having to lift a finger," Mr Eslake.
"That's clearly had some impact on the economy."
Rates cut by Christmas?
Lehman Brothers chief economist Stephen Roberts said Mr Stevens' statement about a "less restrictive" monetary policy stance had increased the possibility of an interest rate cut by the end of 2008.
"There could be one by Christmas - they're going to wait for more data," he said.
"They've got an easing bias but there's no timing on that ... they're not in a particular rush to change.
"They talk about uncertainty weighing on both inflation and growth."
Mr Roberts, who is forecasting rate cuts in the March quarter, said the RBA would not move on interest rates until at least after the October 22 release of September quarter consumer price index data.
"They did talk about inflation remaining high in the short term, but on balance economic growth remains subdued," he said.
Are the banks listening?
But even if official rates do come down over the next few months, there?s no guarantee this will translate into savings on home loan interest rates.
As NEWS.com.au reader Rob of Sydney says: ?Home owners with mortgages are not looking at what the RBA does but what banks decide to do.?
And recently the banks have decided not to mirror movements by the central bank, but instead to push through independent hikes to home loan rates. Our readers are not confident that the banks will show as much eagerness to lower rates.
?We all know banks will take their time to pass on any cuts (just like the servos with petrol). If anything they will probably wait 'till the second half of next year to pass on any cuts? It's profit gouging (profit making is no longer good enough),? said another reader, Bi Al of Sydney.
The banks? independent moves have not impressed Treasurer Wayne Swan, who said last week they should follow any RBA cuts.
?I think customers will be absolutely filthy if the banks do not pass on, within a reasonable time, any official cash rate reductions,'' he said.
But the banks aren?t necessarily listening. Commonwealth Bank chief executive Ralph Norris last month refused to guarantee that CBA would cut interest rates if official rates were cut.
Advisers warn against selling shares and moving everything to cash
More banking news in our Money section
INVESTORS are cashing in on high rates of return from simple deposits in the bank as the share market turmoil continues to drive other investments down.
Banks are desperate for funds to lend and are competing for the retail deposit dollar like never before.
Savers are getting up to 9 per cent from their deposits and that compares very favourably to what else is on offer.
However, some financial advisers warn against moving out of falling investments to cash, and even suggest buying assets when the market seems low.
Minister for Superannuation Nick Sherry has warned Australians their super fund probably lost about 6 per cent of their retirement savings in the past 12 months, but "take a deep breath and look at the medium-term average".
Balanced share funds and managed funds have also lost money in the past year.
"People are saying, 'Why should I take any risks with my money when I can put it in the bank and get a good rate?' " says Steven Anderson, a researcher at banking information service Infochoice.
"All of a sudden we are seeing very attractive term deposit rates for relatively small sums of cash."
Peter Arnold, a researcher with the other major banking research firm, Cannex, is also upbeat on savings accounts.
"These are the best returns I have seen from deposit products ever," Mr Arnold said.
Suncorp banking manager Terry Wasmund said there had been a shift towards cash investment:
"Property is beginning to plateau, the stockmarket is not returning what it was a few years back and the economy is changing.
Higher interest rates have ensured that there are a number of competitive savings options available for consumers to profit from, including some of the best term deposit rates we've seen in a long time."
Term deposits were once the favoured method of saving for many people: lock away the cash so you couldn't get hold of it when temptation came calling.
However, over the past 10 years or so, they fell out of fashion and became a bit neglected by banks. The rates on offer from term deposits even fell back to about the same as high-interest at-call accounts.
But then along came the US sub-prime mortgage crisis and the credit crunch that followed.
The best term deposit rate in the market last week was 8.7 per cent for a deposit of $10,000 over a term of one year at Suncorp and BankWest.
However, there are many banks and credit unions offering rates over 8 per cent.
For a term of two years, the rates aren't quite so attractive, but still very high by historical standards.
The best two-year rate on a term deposit of $10,000 was 8.5 per cent last week at National Australia Bank.
All the major banks and credit unions have two-year term deposit accounts offering more than 8 per cent. More good news is that these products are generally fee-free.
The high-interest online savings account was introduced to Australia three years ago by BankWest. Now all major financial institutions are offering a high-interest-bearing online account.
The benefits are that money can be added to them regularly. Cash can also be taken out of them regularly, which may or not be a good thing, depending on how disciplined a saver you are.
"The online savers are up around 8 per cent but are really very versatile," Mr Arnold said.
"The money is there waiting to be used or added to, unlike the term deposit, which is a fixed amount locked away."
The best rates on savings accounts last week were BankWest promotional introductory rates of up to 8.5 per cent. The best ongoing rates are in the region of 7.5 per cent. There was even a BankWest account offering 9 per cent interest on savings, but with some conditions.
Other good news is that, like term deposits, fees are low or non-existent with the online savings accounts.
Mr Anderson said most of the online savings accounts needed linked transaction accounts to enable funds to be put in and out of the savings account.
Independent research shows vacant rental properties are on the rise
Supply is good at top end of market, but still tight for battlers
Guide: How to get a good rental deal
LANDLORDS citing a shortage of rental properties as a reason to hike rents might not have a leg to stand on, an independent researcher says.
Statistics from the Real Estate Institute of Australia put vacancy rates as low as 0.5 per cent in Darwin, 1 per cent in Sydney, and 1.6 per cent in Melbourne.
Louis Christopher, founder of independent analytics firm SQM Research and head of property at ratings house Adviser Edge puts the national vacancy rate at 2.9 per cent for June.
Vacancy rates of less than 3 per cent tend to show strong demand for rental properties ? and give landlords an excuse to raise rents - while vacancies of higher than 3 per cent tend to show an oversupply of properties.
Mr Christopher?s research, which is based on online rental listings and data from the Australian Bureau of Statistics, indicates that compared to last year most cities are showing a rise in available rental properties.
?In Melbourne and Sydney, it seems the downturn in the real estate market is actually providing more rental properties as vendors withdraw their property for sale and rent it instead,? he said.
Mr Christopher said Sydney had over 19,500 vacant rental properties in June, up 9000 on the same time the previous year, while Melbourne had 9450 vacant properties up 1800. (See a full capital city breakdown below).
Tough at the battler end of the market
Mr Christopher said although overall vacancy rates might be improving, there was still an acute shortage of affordable rental properties.
?The statistics do mask the fact that there really is a tale of two markets where there remains an acute shortage of lower-end affordable stock, while at the upper end of the market - $600 a week and over ? there appears to be an abundance of supply.?
He said in some markets landlords had priced themselves out of the market.
?Renters, particularly younger renters are now opting to stay at home with their parents for longer or grouping together more often.?
In an effort to address the problem, the Federal Government has launched its National Rental Affordability Scheme. this aims to increase the supply of affordable rental dwellings by 50,000, and possibly 100,000, by 2012. The properties will be rented out 20 per cent below market value. The scheme will offer incentives to developers at a cost of $623 million over four years.
Conflicts of interest?
Mr Christopher is critical of the REIA?s data and said there are potential conflicts of interest in the way the information is collected.
?There are some serious questions that need to be answered surrounding the method used by the various industry bodies in calculating the vacancy rate, their sample sizes and how they compile their vacancy rate data,? he said.
A spokesman for the Real Estate Institute said the vacancy data released by the institute was based on data sent in from its members ? real estate agents from around the country . He acknowledged there were flaws in the system and said the institute would welcome independent research on the subject.
A full rundown of vacancy rates by postcodes is available on www.sqmresearch.com.au.
EARTHWORKS have begun on the Eminence estate in Doreen. Heavy machinery is preparing for the first two stages.
In Cookes Rd, off Yan Yean Rd, Eminence is on 41.8ha of undulating land and will have 309 houses when completed.
Stage-one sales have started on the Villawood Properties project, prices ranging from $135,000 to $191,000 for lots from 430sq m to 885sq m. Twenty-four lots of 44 have already been sold in stage one.
The average size of lots still available is 632sq m and the average price is $165,000.
The master-planned community, with views of the local area and CBD from its elevated position, has a range of house-and-land packages from some of Melbourne's leading builders.
Marshall Baker is offering two house designs, Metricon Homes has four, Porter Davis 16 and Simonds Homes two.
Villawood is finalising details of a display village, which is expected to open next year.
With the bulldozers on site, work also is about to start on the premier feature of the first two stages, Graffs Park.
The project involves building an an interpretative structure and preserving parts of Graffs Cottage, which will be completed in November.
The cottage was a late 19th-century farm homestead at 195 Cookes Rd.
Eminence will have 8ha of parks and reserves, complete with play equipment, seating and barbecues, scattered throughout the estate featuring remnant redgum trees. A network of walking and cycling tracks will wind through and around the features that Eminence has to offer.
A proposed preps to year-12 school has been earmarked for the site.
Villawood also has dedicated large open areas for active recreation, including a soccer pitch.
In the burgeoning City of Whittlesea with access to local shops, Eminence is 45 minutes by car from the city.
It is minutes from Yarrambat public golf course, Doreen football oval, Plenty River and the popular picnic spot Yarrambat Park, as well as horse riding, bushwalking and archery areas.
If you have a medium to long term view take a look at bargains
Experts say banks and resource stocks are worth a look
Trading: The latest market news and prices
RECENT months have seen the streets running red with stockbrokers' blood, and it is at times like this that brave investors can make a killing. But it takes guts.
It goes against human nature to buy into a falling market, but many experts are now saying that the market is now awash with bargain buys -- oversold stocks that are the babies thrown out with the bathwater of the credit crunch.
If your investment view is medium to long term -- say, three to five years -- plenty of equity-market experts are prepared to say it's time to take a punt.
Here we run through some of the stocks the experts think make most sense right now, even in a deteriorating bear market.
* BANKS
DAVID Halliday, associate director at Macquarie Private Wealth, nominates the big Australian banks as great opportunities for investors.
"If someone has a three- to five-year horizon on their investment, they've got to be looking to pick up some banks,'' he says.
Bank shares are trading at price/earnings (P/E) multiples of less than 10 times forecast 2009 earnings.
This is exceptionally low -- the result of big declines in share prices this year. Earnings, however, have remained robust.
"Dividend yields are around 8 per cent, and most of them are fully franked. In many cases, that'll take the yield after tax to well over 10 per cent,'' Mr Halliday says.
"Given the fact banks have in many cases already fallen 40 per cent, you're picking up a 10 or 11 per cent after-tax yield.
"Certainly, all the indications from the banks themselves -- and, as recently as last week, from the International Monetary Fund -- is that the banking environment in Australia is still quite robust.
"It's pretty hard not to be looking at buying some banks.''
Mr Halliday stresses, however, that prospective buyers need to be stayers.
"It doesn't mean there's not some further downside but, after 40 per cent-plus falls, this looks like a pretty good entry point for longer-term investors,'' he says.
"Even if you do factor in some earnings downgrades in the sector during the next 12 months because of tough credit markets and an ordinary property market, I still think the price is pretty reasonable.''
Mr Halliday nominates Westpac as the pick of the banking bargains.
"It's had a very big fall -- down from $32 late last year -- and as recently as eight weeks ago it was over $26 when it announced the potential merger with St George.
"If and when that goes through and the market gets to sit back and look at it in the cold light of day, Westpac's capital position, market share and some of the efficiencies and synergies it will extract from that will be extraordinary.''
* RESOURCES
COMPANIES involved in the extraction and sale of a diversified range of minerals are Colonial First State equity adviser Hans Kunnen's picks.
"I lean towards the major miners: BHP, Rio Tinto and Woodside,'' Mr Kunnen says.
"Strong commodity prices, and the fact they have fallen in recent times, suggests to me that these look like bargains.''
In Mr Kunnen's view, the commodity-price resilience underwriting the big miners' profits is going to continue.
"Because Rio and BHP are diversified, we just see very strong demand for their products,'' he says. "The amount of infrastructure spending around the world is mind-boggling.''
Mr Kunnen says "infrastructure refreshment'' in China, India and the Middle East is at extraordinary levels, but his attitude to the Australian banking sector is less bullish.
"I like their dividends, but I'd like to see a bit more clarity on sub-prime provisioning.
"NAB came out and said it had an additional $1 billion or so for provisioning as a result of sub-prime. The dividend yields look attractive, provided they can maintain their earnings.''
Mr Kunnen says that if investors are hunting bargains, they should begin with the big resources players, then the banks and next consumer staples such as Woolworths.
Russell Investments strategist Andrew Pease says Australian equities are eight per cent undervalued, based on modelling that concluded local shares were 20 per cent overvalued last October, just before the All Ordinaries index topped out.
He says earnings growth for the resources sector over the next 12 months is expected to average 40 per cent.
Average P/Es in the financial sector, which includes the big banks, have slipped from 15 times earnings this time last year to just over 10 times last month.
"It's difficult to be overly pessimistic about the local equity market,'' Mr Pease says.
"Valuations look attractive in absolute terms, and compulsory superannuation contributions are likely to pour $30 billion into the equity market this year.''
The message is clear. The equity abattoir is having a sale, and bargains are to be found among the offcuts. Just remember -- this meat should be left to age.
In a depressed market it's important to do your research
Don't just go with the agent promising the highest price
More property news in our Money section
HIGH interest rates and sluggish property prices mean that now is not the best time to be selling your home. But regardless of the market there are always people who decide to sell for personal reasons, such as job transfers, expanding families or, sadly, stretched finances.
If you are selling, or are planning to, it's important to move carefully and do your research.
Experts say that with the right approach, you can maximise your profits, even in a slow market.
Spring is traditionally the busiest time on the real estate calendar, but experts agree there is little point waiting until then to list your property.
Rod Cornish, head of property research at Macquarie Bank, says it could be advantageous to sell now ahead of potential competitors in September.
Whether the strategy will pay off hinges on what happens to interest rates.
"There may be one more rate rise.
Although the Reserve Bank may see potential for some stability and try to hold off, the banks may have to move," Mr Cornish warns.
"It could be better to wait for a year but it depends on the area. The outer areas will be as they are now but the inner and middle-ring suburbs could see some improvement. However, it won't be runaway improvement."
There is some good news for sellers, with the latest data from Australian Property Monitors showing that "average days on the market" has fallen from a year ago.
Homework pays off
Home owners are advised to be methodical when it comes to setting their price and not just go with the agent promising the highest price.
John Edwards, head of property analysts Residex, says vendors should not adjust the price once a property is on the market.
"Just take it off and let it rest for a couple of months and go back," he says. "That's why it is important to get the right price in the first place - if you set it at the right price you will sell it in a month."
Tim Foote, principal of Belle Property Mosman, agrees: "It is absolutely possible to achieve a great price in any type of market, as long as the property has great presentation, good marketing and appropriate pricing."
Mr Foote recommends choosing an agent who is an experienced and knowledgeable negotiator, but some home owners keen to maximise profits are selling without an agent.
With potential savings of $10,000 to $20,000 - typically spent on commission and advertising - it is easy to understand the appeal.
Adrian Bartholomeusz, 40, who has a background in technical sales, has just listed a second property after success earlier this year.
In March, he sold a two-bedroom apartment on behalf of a relative and got $50,000 more than the price originally quoted by an agent. His only advertising costs were $200 for signage and $100 for Internet advertising each month.
It took three months to sell the first apartment and while longer than a standard sales campaign, he believes the wait paid off.
His advice is to make sure potential buyers are genuine and to do inspections by appointment only.
Paul Giezekamp, director of Property Secrets, says if you can avoid selling now, do so. Even if you are suffering mortgage stress, you should look at refinancing, fixing rates or renting rather than bailing out of the market.
Mr Giezekamp's advice is to sit tight for another three years when he expects prices to pick up.
"Why would you sell in a down market? That is not what the rich would do," he says. "Even if you have outgrown your property, rent it out and go and rent a more suitable property and take advantage of the tax deductions."
However, if you need to sell, the real-estate maxim of making your house look appealing is crucial.
"It is far easier for buyers to truly engage with a property when it is shown at its best," says Belle Property's Foote.
But don't get carried away. Keep an eye on your budget when dressing a house for sale in the current climate. Money is best spent on kitchen areas but be careful not to overcapitalise.
Presentation can be as simple as mowing the lawns and making sure all maintenance work is done.
John Edwards says some sellers are failing to do these simple tasks, which brings down the price. "No matter how unhappy you feel about selling, get out in the garden, mow the lawn, open up the house and make it nice, airy, breezy and successful," he says.
To auction or not to auction
Macquarie Bank's Rod Cornish says decisions on going to auction depend on the type of property, its location and how keen the vendors are to sell.
Latest figures from RP Data show the residential auction clearance rate in NSW fell in May to 61 per cent compared with 72 per cent for the same period last year.
There are also fewer properties going under the hammer and a higher number of withdrawals. In May, 15 per cent of properties listed for auction were cancelled, compared with eight per cent for the same period last year.
Maximising your profits
> Research your suburb's performance
> Be realistic about the current market
> Seek advice from more than one agent when setting a price
> Don't adjust the price once you've started the marketing campaign
> Presentation is still important
> If there are no buyers within a month of listing look at your marketing campaign
> Stick to a tight budget when dressing up your home to sell
PEOPLE suffering interest rate pain can take comfort from the fact Melbourne house prices have risen an average 8.1 per cent in a year.
That's twice the rise of country housing last year.
The highest median price increase in the metropolitan area was a whopping 53 per cent in Huntingdale.
Sandhurst (50 per cent) came second followed by Carlton (47 per cent).
The Valuer-General's calendar year 2007 figures show Melbourne houses rose to a median of $375,000. Houses in country Victoria rose an average 4.5 per cent to $232,000.
Melton, Rockbank, Millgrove and Diggers Rest had the lowest growth.
The Real Estate Institute of Victoria's chief executive, Enzo Raimondo, said the figures confirmed what every seller and buyer knew: last year was a bumper year for residential property in Victoria.
But he said the market had changed: prices had fallen in many suburbs and the auction clearance rate had slumped to 65 per cent.
This weekend there are just 360 properties up for auction compared with 477 last week and 614 this time last year.
In country Victoria the median house price has soared 164 per cent in 10 years from $88,000 to $232,000 in 2007.
Lake Tyers Beach recorded the largest increase (59 per cent), followed by Strathmerton (37 per cent) and Ouyen (31 per cent).
Environment Minister Gavin Jennings said the figures, which included every Victorian sale, showed growth levels had slowed from an 18.9 per cent peak in 2002 to 7.3 per cent in 2007.
The figures show the median price of units increased 10.3 per cent to $331,000 and vacant blocks rose 2.5 per cent to $142,500.
Valuer-General Robert Marsh said the total value of property sales across the state was almost $74 billion, an increase of 22 per cent since 2006.
The total number of sales rose 14.8 per cent from 152,890 in 2006 to an estimated record of 175,455 in 2007.
Regional property prices are expected to benefit from the State Government's regional first home bonus, which is provided in addition to the first home owners grant, and the first home bonus, giving first-home buyers in regional areas up to $15,000 towards their new home.
The five Melbourne suburbs with the highest median house prices in 2007 were: Toorak at $2,530,000, Brighton $1,600,000, Canterbury $1,500,000, East Melbourne $1,432,500 and Malvern $1,411,000.
The five lowest were: Melton South at $180,000, Rockbank $189,000, Millgrove $190,000, Melton $192,500 and Diggers Rest $200,000.
LOWER personal income tax, new health and education rebates, and hikes to luxury car taxes, water and taxi fares are just some of the changes that will hit Australians from tomorrow, as adjustments to the tax, social security, education, health and childcare systems take effect.
Changes to income tax thresholds will see a person earning the average wage of $58,000 save about $10 a week from tomorrow. People earning between $35,000 and $45,000 will save about $20, The Australian reports.
Families will benefit from an increase to the childcare rebate from 30 per cent to 50 per cent, and a 50 per cent refund for education expenses capped at $750 for each primary school child and $1500 for each high school child.
On a state level, residents in NSW, Victoria and South Australia will face higher water rates, while taxi fares will increase in NSW and Western Australia. Queensland residents with solar panels will be able to claim 44c for every surplus kilowatt-hour fed into the electricity grid.
The Rudd Government has denied the savings promised to households in the federal budget have already been eaten up by interest rises and high fuel costs.
Kevin Rudd said the raft of tax and social security changes would still deliver relief to embattled working families.
The Prime Minister said that while families had "copped a slug" thanks to higher rates as well as increased food, petrol and childcare costs, the suite of measures introduced in the Government's first budget would still deliver savings.
"A typical young family with a couple of kids, one in pre-school, one in school, they stand to be, through the measures introduced through the budget, about $52 a week better off," Mr Rudd said.
On Friday, Health Minister Nicola Roxon ramped up the Government's attack on the Coalition for referring a number of key bills to Senate committees, thereby delaying their passage.
Ms Roxon said delaying the increase of the Medicare levy surcharge threshold would cause confusion for families who were considering extending private health insurance.
"There are 465,000 Australians who currently pay that tax who, if the Government budget had been supported by the Liberal Party, would no longer be being hit by that tax," she said.
Under the changes, the threshold at which the levy is applied increases from $50,000 for singles to $100,000 for singles and from $100,000 to $150,000 for families.
Ms Roxon refused to say whether families would be compensated for the delays.
However, it is understood the new thresholds will apply from tomorrow irrespective of the Opposition's position, provided the legislation is enabled this financial year.
OWNING property has always been the great Australian dream. Whether you are a first-timer or an experienced homebuyer, you need to ask yourself why you want to buy.
Will you want to live in it or are you buying it as an investment to rent it out and pay it off. Do you want a house or apartment, large or small, townhouse or land to build?
Whatever your answer, the more real estate market research you do, the more likely you are to effectively define your goals and understand what?s affordable.
Get onto mailing lists and develop good relationships with real estate agents in the area in which you are looking. Keep in regular contact with them. They can alert you to properties about to come onto the market in your price range.
Step 2 - Work out how much you can afford
Calculate how much you can spend, say one third or less of your pre-tax income in loan repayments. The amount will vary with different lenders, so if you don?t get the deal you want from one, try another.
The loan to value ratio (LVR) is the percentage of the purchase price that lenders will agree to lend. Some lenders will insist you have as much as 10 per cent of the purchase price in a deposit.
Don?t forget to factor in the following costs: legal fees, loan establishment fees, government charges (stamp duty and GST), property and pest inspection fees, moving costs and building and contents insurance.
First home buyers may be eligible for grants and exemptions on stamp duty (see www.firsthome.gov.au/).
Step 3 - Find a lender
Look for your loan at the same time or before you start looking for property.
Do some research online to see who is offering the best mortgage interest rates, then approach them in person to get approval ?in principle? for your loan. This means if you need to buy at auction, you have the money organised ahead of time.
Banks, building societies, credit unions, solicitors and mortgage originators all offer home loans. A mortgage broker can help you find the best lender and the best rate for you.
There are many loans on offer, so you will need to do more research to understand the terms: a honeymoon rate offers a cheaper interest rate for the first 12 months; a standard variable rate rises or falls when interest rates rise or fall; fixed rates are fixed for a certain period; a redraw loan means you can pay it off, then reborrow that money ? you may have to pay a service charge of say $25 every time you redraw.
Step 4 - The buying process
You?ve found the property you want to buy and arranged building or pest inspections. They are good, you make an offer, negotiate the price and the final offer is accepted.
Contact your solicitor or conveyancer (to find one visit www.solicitors.net.au) to do title or body corporate searches, draw up a contract, then arrange to exchange it with the seller.
Once you exchange contracts you are legally bound to go ahead with the purchase. This is also when you pay your deposit of around 10 per cent of the purchase price.
Sign the contract if you and your solicitor are satisfied that everything is in order. Often there are six weeks between exchange and settlement. During this time, you can arrange building and contents insurance on the property, and income protection insurance for yourself.
On the day you are due to settle, before your solicitor passes over the final cheque (or makes the transfer online) you should ask to inspect the property.
You need to check that no damage has been done to it in the intervening period and that all fixtures and fittings that appear in the contract are still in place.
You don?t have to settle on the property until all these conditions have been met.
Prospective buyers can log-in and watch an auction online
More personal finance news in our Money section
WE'VE become accustomed to using online technology and websites for researching property and familarising ourselves with what's on the market in a particular area.
Now buyers can watch and even bid at an auction using technology and a website called Ptyauctions.com.au.
Managing director Gavin Stuart, who developed the idea, was an investment banker involved in the commodities area, reports The Australian .
The system was first used for international bidding on coffee crops, and he has now transferred the idea to property, believing it will open up auctions to international buyers as well as those within Australia.
Potential buyers can see an internet broadcast of an auction and, if registered, bid.
Earlier this month, the first online bidder based in Melbourne was successful in buying a house at Wahroonga in Sydney's north. Mr Stuart says it's a value-add for agents to be able to offer this to vendors who pay, starting from $350, to have their property listed on the site.
Prospective buyers can log on and watch a webcast of the auction.
If they want to bid, they must show their bona fides through a four-step process checked by Ptyauctions, and register 24 hours beforehand.
Bidders use the keyboard to put in a bid, which is received on a laptop at the auction, and a member of Ptyauctions then alerts the auctioneer.
The company sets up the equipment needed and removes it when the auction is over.
Mr Stuart says agents have also expressed an interest in buying the footage, should there ever be issues about what happened at a particular auction.
He says it differs from the online bidding that happens on, say, eBay, because it cannot be used if there is not a physical auction taking place.
"So far we have had people bidding from all around Australia as well as Dubai, Hong Kong, London and the US.''
The Wahroonga buyer, however, didn't buy the property sight unseen. Her parents looked at it first and told her it was suitable.
A property investor himself, Mr Stuart doesn't advocate buying property without seeing it.
But he says webcasts allow sellers to reach a greater number of buyers and also allow both buyers and sellers to watch the auction if they can't be on-site.
INTEREST rates may be on hold, but the Reserve Bank is on high alert for any signs of a fresh outbreak of inflationary pressures.
In a widely anticipated move yesterday the Reserve Bank left rates at 7.25 per cent, but warned that while the economy was clearly slowing, "considerable uncertainty" existed about the opposing forces of easing demand and high inflation.
Economists said RBA governor Glenn Stevens would require nerves of steel over the next few months as money from the Budget tax cuts and the mining boom rolled into the economy.
NAB chief economist Alan Oster said the RBA needed to hold its ground and looked through the June quarter consumer price index data in late July, which is likely to show inflation even higher than the 4.2 per cent in the March quarter.
"The bank will need to sit and wait as demand seems to be slowing," Mr Oster said.
But investors on the Sydney Futures Exchange are betting there is an almost 70 per cent chance of interest rates rising to 7.5 per cent by the end of the year.
Renewed fears in the United States that the global credit crunch is returning has hurt some of Wall Street's biggest investment banks and raised fresh concerns about the health of the global economy.
Investors worried about the knock-on effect of the global credit crisis smashed the share price of Australia's two debt-laden investment banks, Macquarie and Babcock & Brown.
In the US, Wall Street titan Lehman Brothers is believed to be seeking to raise an additional $US3 billion to $US4 billion ($A3.12 billion to $4.16 billion) in fresh capital ahead of announcing its first ever quarterly loss later this month.
The Wall Street Journal reports that Lehman Brothers' losses may top $US2 billion.
Financial institutions globally have already written down more than $US350 billion in losses related to risky US sub-prime mortgages.
This week Standard & Poor's has also cut its credit ratings for Lehman, Merrill Lynch and Morgan Stanley, warning that further writedowns "may continue to depress earnings".
NATIONAL Australia Bank is expected to report modest single-digit earnings growth for the first half of its financial year
The consensus average of analysts' forecasts is for Australia's second largest bank to report a cash profit of $2.213 billion - which would be a 5.6 per cent lift on the $2.095 billion it booked in the 2007 first half.
Like most of the other big banks, NAB has backed away from giving specific earnings guidance although its commitment to keep cost growth within inflation has been a source of some reassurance.
But lacking that guidance and without the trading updates other banks have provided, concerns have emerged over the possibility of increased provisions and poor returns from its UK operations.
Citigroup analysts describe NAB's disclosure style as an "under-promise and over-deliver mantra" that works well when the bank meets expectations.
"But with the unprecedented volatility in the banking sector over the last half, first half 2008 provides some risk of a divergence," the CitiGroup team said in a note to clients.
Citigroup is forecasting first half cash earnings of $2.195 billion - which represents a 4.8 per cent improvement on the previous corresponding result.
But the analysts noted their forecast is about five per lower lower on NAB's preceding interim half earnings.
"While tight costs will help cover benign revenue growth, a material uplift in bad debts provisions will win the day," they wrote.
"While management has provided little comment, single name exposures, combined with possible conduit writedowns, are likely to drive a material uplift in provisions."
The bank has already set aside a windfall $220 million gain from its share of the Visa float as a bulwark against any potential writedowns stemming from the credit turmoil.
Last week, it said there would be a "small writeback" to the charge it had against its $110 million exposure to struggling fund manager Allco Finance Group Ltd after selling all the shares it held as security.
Credit Suisse analyst are also wondering how much NAB's exposure to relative weakness of the UK economy, through its Clydesdale bank subsidiary and nabCapital, will drag on earnings.
Credit Suisses predicts an 11 per cent decline in NAB's first half earnings from its UK operations compared to the second half of 2007.
Even so, they are forecasting first half cash earnings of $2.280 million, which is three per cent above consensus and would represent an 8.8 per cent improvement on the previous corresponding result.
While identifying the UK result earnings risk as central to tomorrow's results, Credit Suisse analysts also noted some upside possibilities.
With more than half its full-year requirements in term funding already raised and with lending growth lagging core deposit growth, NAB may have created a funding surplus.
As well, NAB's costs growth pledge made for an "attractive cost restructuring story in a slowing macro environment," they said in a note to clients.
JP Morgan analysts expect virtually flat growth in earnings and have warned that of increasing levels of new impaired loans.
Deutsche Bank analysts forecast a close to eight per cent increase in cash earnings of $2.253 billion.
"Good cost control (sub inflation), and a strong Australian banking performance should underpin growth, offsetting higher bad debts and a weak wealth management contribution," they said.
THE Reserve Bank of Australia today left interest rates unchanged but warned of "considerable uncertainty" about the economy.
At its meeting today, the RBA board decided to leave the cash rate unchanged at 7.25 per cent.
Economists were unanimous in their expectation that interest rates would remain unchanged after today's RBA board meeting.
"Weighing up the available domestic and international information, the board's judgment is that the current stance of monetary policy remains appropriate for the time being," RBA governor Glenn Stevens said in a statement.
"The board will continue to evaluate prospects for economic activity and inflation in the light of new information.
However, Mr Stevens noted that inflation in Australia over the past year had been high and price growth widespread, against a backdrop of strong growth in demand and limited capacity in the economy.
"In order to reduce inflation over time, growth in aggregate demand needs to be significantly slower than it was in 2007," he said.
Mr Stevens said there was accumulating evidence that this was occurring, with indicators of household spending recording subdued outcomes in recent months and weaker demand for credit.
He noted also that demand was being restrained by tougher lending conditions.
However, Australia's terms of trade was rising and would work in the opposite direction.
"It will add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the bank has been assuming for some months now," he said.
"Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation.
"On balance, the board's current assessment is that demand growth will remain moderate this year.
"In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected.
"Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed."
The RBA will on Friday release its next quarterly statement on monetary policy.
THE weakening property market represents a good opportunity for investors looking to buy housing to let, according to experts.
With Melbourne experiencing high levels of immigration, they said rental vacancy rates were set to remain at record lows as rents kept rising for the foreseeable future.
When asked their views on investment opportunities in the housing and commercial sectors, a selection of property experts said the easing in price growth this year meant that now was a good time to look at buying housing to let.
But they were cautious about the commercial sector.
"The negativity in the market provides investors with an opportunity," ANZ head of property and financial system research Paul Braddick said.
"The fundamentals are solid in commercial and residential. We think that once we are over this period of uncertainty coming from the global financial markets growth will resume in 2008-09."
Rod Cornish, head of research at Macquarie Real Estate Group, said: "The next 12 months will be a more favourable time to buy.
"We think rates will come down in the first half of next year and this will build momentum."
Robert Papaleo, director of strategic research at property consultant Charter Keck Kramer, said investors with sufficient equity should look to enter the market.
"Now is a good time to buy because there is good income to be had from rents," he said.
Melbourne is experiencing strong population growth and rental vacancy rates below 1 per cent in some areas.
Property adviser Residex said advertised rents for houses in Melbourne increased by 18.64 per cent in the year to March - faster than anywhere else in Australia.
Australian Bureau of Statistics figures showed Melbourne also was the fastest growing capital, with 61,700 people moving to it in 2006-07.
Housing Industry Association chief economist Harley Dale said that while new home building activity was growing in Victoria for the first time in five years, it would not be enough to meet demand.
"We will need to see a recovery for a good few years before supply matches demand," he said.
Mr Dale said that in the meantime the prospects for investors were bright.
"If you have the opportunity to negatively gear, it has never been better," he said.
Mr Cornish said people looking to buy rental properties should concentrate on the inner city.
"Look where the rents are rising fastest," he said.
Chris McNeill, of property consultant Spade Consulting, agreed.
"The advent of the so-called two-speed housing market, in which house values have increased more rapidly in leafy inner urban areas, should come as no surprise," he said.
"Unless planning authorities exercise the political willpower to very substantially increase supply in desirable locations, I suspect solid investment properties - particularly those with a land-based component -- in trendy inner urban areas will remain a very solid investment class."
While direct investment in residential land development, retail, commercial and industrial properties are increasingly beyond the average investor, you do not have to be in the big league to dabble in property investment.
"There are many vehicles available to the small investor, including publicly listed property companies and property syndicates," Mr McNeill said.
"Equally, if you want to be your own master but can't afford Melbourne, there are still relatively inexpensive properties to be found in regional Victoria."
But experts warned that investors looking for opportunities in the commercial sector through listed property trusts, or Australian real estate investment trusts (A-REITS) as they are now called, needed to be cautious.
A-REITS prices have been battered in recent months with the S&P/ASX 200 A-REIT Index falling 22.6 per cent in the six months to the end of April.
CommSec chief economist Craig James said the correction had gone too far.
"It's still the case that the Centro situation has affected sentiment around the sector. The baby has gone out with the bath water," he said.
"Look closely at the trust you are investing in. Check its gearing levels."
Dugald Higgins, associate director with PIR Independent Research Group, which monitors commercial property trusts, said: "There is debate on whether listed property trusts have come back to a fair value. The sector was over-valued."
He warned it might take years for their prices to recover.
"Investors need to be aware that getting in now may still expose them to a period of flat returns as the market recovers," he said.
"After the 1987 crash, many shares took some time before they started to go back up."
Mr Higgins also warned that some trusts had cut dividends and that could be a wholesale across-the-market event.
In the long-term, however, he was more optimistic.
"If investors are willing to look long-term, there are value opportunities," he said. "Prices haven't been here since 2005. People forget you invest in property for the long-term."
Against a background of interest rate pressure and the credit crunch, two new treasurers prepare to hand down their budgets.
IN THE next two weeks the financial course for Victoria and Australia will be set. On Tuesday, Victorian Treasurer John Lenders will deliver his first state budget. The following Tuesday, federal Treasurer Wayne Swan will make his budget debut. The Reserve Bank board meets on the day of the state budget, and its decision may cast a shadow over both performances.
The Australian Bureau of Statistics delivered a set of figures last week that neither Mr Lenders nor Mr Swan would welcome. Inflation had jumped to 4.2% nationally in the year to the end of March. It was the highest level in 17 years. In Victoria, inflation was even higher, at 4.4%, on the back of a surge in prices for electricity, food, petrol and housing. The Reserve Bank's "comfort zone" for inflation is 2% to 3%. From May 2002, there have been 12 interest rate rises. The last fall in rates was in December 2001. Indeed, throughout that year rates fell six times from 6.25% to 4.25%.
The global economy and outlook have changed considerably since then. In the United States, the Federal Reserve has had to pump billions of dollars into the economy to stave off recession, even though many analysts and commentators already say a recession has arrived. The subprime loan crisis has had a domino effect, feeding into a credit crunch that is affecting business worldwide. Although Australia's exposure to the subprime crisis has been minimal, it has led to banks for the first time raising their rates marginally and independently of rises by the Reserve Bank.
While Australia's booming economy, fuelled by the commodities bonanza, has been largely shielded from developments overseas, in certain critical areas, for example, food and petrol, Australians are hostages to events elsewhere. The price of oil has soared to $US120 ($A128) a barrel, which has flowed on to a bowser price in Australia of $1.50 a litre. OPEC president Chakib Khelil warned yesterday that it may hit $US200 a barrel.
As The Age reported last week, food, petrol, housing and finance are only about 50% of consumer spending, yet they make up 80% of the factors contributing to inflation. Factor in a credit card debt of $31 billion with inflation and rate rises, and the slump in business and consumer confidence, as reported recently, can be easily understood. According to a survey by the National Australia Bank, business confidence is at its lowest level for seven years. Consumer confidence, according to the latest Westpac-Melbourne Institute index, is at its lowest for 15 years. NAB chief economist Alan Oster attributed the business confidence slump to "tighter financial conditions, falling global equity markets and the global credit crunch". Expectations for the next 12 months were poor as well.
One of the strongest indicators of confidence is the housing market. The Age reported last Saturday that Melbourne house prices, for example, had recorded their largest quarterly fall in value in 15 years. Chris Lamont, chief executive of policy at the Housing Industry Association, spoke of a "nervousness among consumers".
Treasurer Swan has emphasised two elements in the lead-up to the May 13 budget: that it will be tough and that it will look after "working families". The Labor Government finds itself in the situation, having vouchsafed tax cuts for all from July, of now having to put the dampeners on spending. And yet, as was disclosed yesterday, Mr Swan finds himself rolling in money thanks to a budget surplus for the year to February of $17.6 billion, $3 billion higher than forecast for 2007-08. Mr Swan's balancing trick will be to help families yet not fuel inflation. A view to the long-term must be included in the Government's economic strategy. Indeed, it should be the view of all governments.
Infrastructure may not be one of the most beautiful words in the language, and nor does it have in the short-term much electoral appeal, but it does have the potential to enrich society if investment is made wisely into its best use for communities. The obvious areas are hospitals, schools and public transport, yet in an era of climate change, an equally important area is water. While this newspaper noted with approval the breakthrough agreement of the $10 billion Murray-Darling rescue plan between the Commonwealth and Victoria, and this state's water strategy, which includes the desalination plant (if concerns are properly addressed over the proposal), a long-term view must include greater emphasis on recycling.
More broadly, in a two-tiered economy the challenge is to expand productivity across the board. Messrs Swan and Lenders have that task before them.
INVESTORS have breathed a small sigh of relief that there were no nasty surprises in ANZ's first half results, pushing the bank's shares over 2 per cent higher.
Australia's fourth largest lender today posted a seven per cent decline in first half profit, broadly in line with analysts' expectations.
At 11.19am (AEDT), ANZ share were 46 cents, or 2.18 per cent, higher at $21.60 after rising as high as $21.74 against a 0.6 per cent rise in the benchmark S&P/ASX200 index.
Net profit was $1.963 billion for the half year to March 31.
Cash profit, which strips out non-core and one-off items, fell 14 per cent to $1.674 billion.
Intersuisse director of equities Andrew Sekely said investors were relieved that ANZ had not provided more bad news today.
"The stock had already been given a hiding on the back of the Opes Prime fiasco," Mr Sekely said.
"The result it's come out with is broadly in line with expectations.
"But I think that there is a sigh of relief that there are no new ugly surprises coming out of the report."
ANZ provided financing to failed broker Opes Prime and another troubled broker, Tricom. Earlier this month, it announced that its bad loan provisions for the half would blow out to about $1 billion.
Macquarie Equities associate directors Lucinda Chan said there was some relief as ANZ's numbers today had been better than some had expected.
"They've also provided for future problems and the balance sheet looks good," she said.
"The Asian market is still very strong and their plan to break into Asia seems on track."
ANZ's total provisions against bad debts for the first half hit $980 million, including a $376 million collective provision.
Chief executive Mike Smith declined today to provide a raw number estimate for the provision charge in the second half.
"All the problems that we have identified have been identified. We know what we know. And you know what I know," he said.
Damaged brand
Mr Smith today admitted the bank's involvement with Opes Prime had damaged its brand.
"The reputational issue is what it's all about," Mr Smith told investors today.
"In terms of the actual size of the problem, it's very small, of course. But in terms of reputation it is huge."
The ANZ is Opes Prime's biggest secured creditor. Opes owed the bank $650 million, and the bank began selling a pool of shares originally from Opes clients to recover its money.
But the bank is now involved in Federal Court battle - effectively a test case - over whether it had the right to claim ownership of the shares.
"We are dealing with a bunch of sophisticated day traders who were clients of this organisation," Mr Smith said today.
"The position is very unpleasant and I have to say I'm somewhat pissed off about the whole thing."
Mr Smith committed to making public a review he is leading into the bank's involvement in margin lending.
"The question to ask is, 'Should ANZ have been in this kind of business?' Quite clearly not."
FIXED rate home loans are becoming a less attractive option for borrowers as talk of further rate rises by the Reserve Bank dies down.
The flexibility offered by variable rate loans has traditionally attracted Australian borrowers, with variable rates historically making up about 80 per cent of all mortgages taken out.
But in recent months the take-up of fixed rate loans has increased following a spate of rate hikes by lenders, with borrowers opting to fix the rate on 37 per cent of all home loans that were taken out in February.
By March economists were telling borrowers to expect one more rate hike before the end of the year.
Since then there have been indications the economy has slowed, prompting speculation that the Reserve Bank might not feel the need to raise rates any further. Some economists are saying the RBA?s next move could be a cut in rates ? although downward moves are not expected until late next year.
According to broker Mortgage Choice 33 per cent of home loans approved in March were fixed rate loans, down from 37 per cent in February.
Rate changes
Back in November banks were offering fixed rate home loans of between 7.67 per cent and 7.89 per cent ? much lower than the 8.32 per cent variable rate at the time.
Today, standard variable rates among the big five banks range from 9.36 per cent to 9.47 per cent. Fixed rates for terms of one to three years range from 8.89 per cent to 9.35 per cent.
Why fix?
Fixing home loans can provide certainty to borrowers worried about future interest rate movements. If they are financially stretched and don't think they could cope with higher home loan costs, fixing their mortgage is one way to provide certainty.
On the downside, if variable rates fall, borrowers who have fixed their loan will be stuck paying a higher rate until the fixed term expires.
Different variables
More borrowers are shying away from basic variable loans, with the take up rate falling to 17 per cent of approvals last month, from a 12 month average of 22 per cent.
Home owners are instead moving into standard variable loans, which offer more bells and whistles along the lines of discounts and more flexibility with repayments. Demand for standard variable home loans rose to 36 per cent of approvals in March, up from a 12 month of 33 per cent.
THE dollar opened stronger today as highest producer prices in a decade boosted chances of a further hike in interest rates.
At 7am AEST, the dollar was trading at $US0.9427/31, up from yesterday's close of $US0.9416/19.
Overnight the unit traded between $US0.9389 and $US0.9448.
The Producer Price Index (PPI) was double market forecasts of a one per cent rise and was the biggest jump since the series began in 1998.
In the year to March, the PPI climbed by 4.8 per cent, its biggest rise since 2000.
Ozforex corporate dealer Darren Richardson said the strength of the dollar was from yesterday's PPI.
This raised fears of higher inflation and for the Reserve Bank of Australia (RBA) to raise interest rates further to quell economic growth and higher prices, he said.
"(PPI was) well above market expectations, and with that increase we saw some more pressure being placed on the RBA to increase in interest rates in the future," Mr Richardson said.
Investors found the dollar more attractive with its higher yield and the possibility it could give them a greater return, Mr Richardson.
"Inflation and economic growth still quite buoyant in Australia," he said
"That has investors looking to invest in the Australian dollar, taking advantage of that high-yield."
Overnight prices for light crude oil futures hit a new peak in New York, $US117.76, before ending at $US117.48, a record close.
"Oil prices were a little bit higher as well today and that is always a negative for the US dollar," Mr Richardson said.
Mr Richardson said the domestic Consumer Price Index (CPI) due tomorrow would be "extremely important" in determining whether the central bank raises interest rates again this year.
"They will be the final nail in the coffin for interest rates if they are well above market expectations," he said.
"It will guarantee another interest rate increase and would obviously boost the Aussie dollar but put a bit more pressure on home buyers and home owners."
Today with no economic data due the local unit should find resistance around $US0.9400, Mr Richardson said.
RESERVE Bank chief Glenn Stevens says he understands the pain being felt by homeowners but most are coping with high interest rates.
Mr Stevens yesterday defended recent increases in official interest rates, saying they had been necessary to contain inflation and reduce the need for more drastic action later on.
The RBA governor acknowledged Australians with mortgages were battling but said most seemed to be managing debt repayments.
"You've had a big rise in the amount of debt households wanted to take on, but for the most part, so far, the bulk of those households appear to have been managing to carry that pretty well," he said.
Prime Minister Kevin Rudd said he had not been fully briefed on Mr Steven's remarks but it was clear that borrowing costs, rents, petrol, groceries and child care were "all heading north, not south".
"That means the family budget is hurting," he said.
Minutes from the Reserve Bank's April meeting, released yesterday, indicate domestic demand is likely to slow, bolstering hopes official interest rates have peaked.
Economists believe the RBA will probably keep rates on hold for the rest of the year and could begin cutting them early next year.
During a question and answer session in Canberra, Mr Stevens said unchecked inflation would have led to even higher interest rates.
"I know that mortgage holders . . . many . . . are doing it tough," he said.
"But if we don't control inflation, they'll be doing it much, much tougher.
"High inflation is a recipe for very high interest rates -- that's exactly what we're trying to avoid."
THE Reserve Bank of Australia (RBA) is expected to leave interest rates on hold for the remainder of 2008, after the central bank's latest board minutes pointed to moderating inflationary pressures in the economy.
In the minutes of its April 1 board meeting, at which the RBA decided to leave the official cash rate unchanged at 7.25 per cent, the bank said ``recent information, including through liaison sources, provided indications that domestic demand was slowing?.
?The current stance of monetary policy was exerting a significant restraining influence on both households and businesses,? the minutes, released at 11.30am (AEST), said.
?The slowing global economy and tighter financial conditions in Australia were likely to reduce expansionary forces on the economy.
?Provided this moderation continued, members expected inflation to decline over time, though they recognised that there were significant risks in both directions.?
On inflation, the RBA reiterated that March quarter consumer price index (CPI) figures, due out on April 23, were likely to show inflation of around 4 per cent.
While the RBA said it would revise its inflation forecast after the CPI figures were released, its preliminary assessment was that ?inflation on both a CPI and underlying basis would fall by a little more than earlier thought over the next two to three years.?
St George treasury economist Amanda Tan said the minutes hinted that inflation was slowing faster than the RBA had previously forecast, which meant a May interest rate rise was unlikely.
?This reinforces our expectation they are going to leave rates on hold next month ... and the rest of 2008,? she said.
?The particular line we're focusing on is they're now saying inflation is falling faster than they thought.
?That's the main phrase that has reinforced our expectation rates will be on hold.''
The RBA said additional rises in borrowing costs passed on to borrowers by the banks, independently of RBA moves, had also impacted.
JPMorgan economist Helen Kevans said a slowdown in domestic demand, as outlined in the RBA minutes, made a May rate rise less likely.
?A May rate hike is looking increasingly unlikely,'' she said.
?We haven't fully ruled it out.
?We've seen domestic demand easing: there is a chance March was the end of the tightening cycle.?
While the RBA said it would revise its inflation forecast after the CPI figures were released, its preliminary assessment was that ``inflation on both a CPI and underlying basis would fall by a little more than earlier thought over the next two to three years.
?This was premised on demand growth slowing sufficiently to reduce capacity pressures.''
As recently as February, the RBA forecast in its quarterly monetary policy statement that underlying inflation would be above 3 per cent into 2010.
That level would put inflation above the central bank's longstanding 2 to 3 per cent target.
?The RBA is right in saying inflation will ease more than previously forecast,'' Ms Kevans said.
Westpac move could start trend to cheaper home loans
Apr 15, 2008
Nick Gardner and George Lekakis
April 15, 2008 12:00am
THE big four banks are in position to extend their dominance of the mortgage market after Westpac yesterday became the first to slash broking commissions.
To offset rising costs caused by the global credit squeeze, Westpac will cut upfront commissions by 20 basis points to 0.50 per cent of the loan amount. It will also slash trailing commissions by 10 basis points to 0.15 per cent of the loan amount.
The effect of the commission cuts will be to reduce the cost of borrowing from Westpac compared with non-bank lenders that rely on brokers to sell their mortgages.
The news sparked speculation Westpac's big bank rivals will soon follow suit, triggering a 26 per cent dive in shares of Australia's biggest home loan broker, Mortgage Choice.
The stock closed down 36.5 at $1.035.
In an effort to play down the negative impact of the Westpac move, Mortgage Choice chief executive Paul Lahiff said the cuts would not affect his company's bottom line this financial year.
Mr Lahiff also suggested Mortgage Choice did not originate many loans for Westpac.
"While Westpac is a top-floor bank in Australia, it's not a top-floor lender as far as Mortgage Choice is concerned," he said.
"It would probably fall into the second half of the top 10 of our lenders. "
Mr Lahiff said Mortgage Choice had tried to negotiate a better outcome with Westpac on the cuts but "hit a brick wall".
"There was just no willingness to engage in meaningful discussion or debate," he said.
Existing commissions - 0.70 per cent upfront and 0.25 per cent trailing - are worth around $1800 and $750 respectively on an average $300,000 loan.
Westpac's cuts will be implemented over the next three months, forcing upfront commissions to drop to $1200 on an average home loan of $300,000. The annual trailing commission on such loans will be $450.
Westpac defended its decision, saying lenders had been shielded from the global credit crunch while home borrowers had been hit.
"It's not sustainable to look at our increased costs and only pass them on to customers. All banks are in the same boat," a spokesman said.
A St George spokesman hinted the regional bank was considering similar action on its distribution deals with brokers.
"While we haven't made any changes to broker upfront or trail commission structures, we are looking very closely at market forecasts and what the right profit-sharing model needs to be," he said.
Aussie Homeloans boss John Symond said the Westpac move was short-sighted.
"Other banks are putting more thought into the process," he said.
"There will be cuts, but there will be opportunities to earn more if you exceed certain targets."
INTEREST rates might be close to peaking, the Reserve Bank of Australia told a parliamentary committee yesterday.
"I can't tell you at what point rates can start to come down, I can't even promise that they might not rise again. I think for the time being this is the right number," RBA governor Glenn Stevens said.
But the fallout from the international credit crunch is continuing, with the Commonwealth Bank again lifting mortgage rates outside the official line -- this time by
12 basis points and putting its variable rate at 9.44 per cent.
Interest rates were now "towards the top end of the range" Mr Stevens told the House of Representatives economics committee meeting in Sydney.
Economists said the four interest rate rises in rapid succession since August seemed to have done the job, with retail sales dropping for the second month.
The Australian Bureau of Statistics retail sales data for February showed a 0.1 per cent fall, and economists expected further falls for March.
Opposition Treasury spokesman Malcolm Turnbull, who has kept himself on the backbench committee despite his frontbench role, seized on the RBA's new take on inflation and argued it was confirmation the Federal Government and the Treasurer Wayne Swan had overcooked the inflation scare.
"The governor was very, very clear that inflation is not out of control, it's under control," Mr Turnbull said.
"I think it's very reassuring because it offsets the language being used by the Treasurer."
But the Treasurer said the comments were disingenuous because the governor had admitted inflation was a problem.
"Mr Turnbull's claim that inflation is not a problem has been flatly rejected," the Treasurer said.
"Unlike Mr Turnbull, we understand the financial pressure on families, and that's why we are so determined to tackle inflation and put downward pressure on interest rates."
Mr Stevens also rejected speculation Australia was heading towards a recession.
"Recession? I don't think we are going to have one any time soon," Mr Stevens said.
He said that while there was definitely some mortgage stress, fewer people were being squeezed than the statistics suggested.
The RBA boss said only 15,000 home owners were more than 90 days behind in their mortgage payments -- a comparatively low figure compared with the total number of mortgage holders.
Mortgage stress is defined as a household spending more than 30 per cent of their income repaying home loans.
David Uren, Economics correspondent | April 02, 2008
The bank board is prepared for a terrible inflation figure for the March quarter, to be released in three weeks, but yesterday said it expected a slowing economy would eventually reduce the pace of price rises.
"Inflation should decline over time, provided demand slows as expected," governor Glenn Stevens said following the bank's monthly board meeting, which resolved to keep official interest rates at their 14-year peak of 7.25per cent for the next month.
Mr Stevens said there were tentative signs that domestic demand was slowing, pointing to plunging consumer and business confidence and weaker growth in debt levels.
"The board's judgment is that the current monetary policy setting is appropriate for the time being," he said.
Wayne Swan welcomed the Reserve Bank's decision, which he said was a reprieve for working families, but said it did not weaken the Government's resolve to cut budget spending.
"We'll play our role with this budget," the Treasurer said. "Our determination is to put maximum downward pressure on inflation and to modernise our economy."
Financial markets say there is only a 7 per cent chance that the bank will lift rates next month, while they now expect two rate cuts over the next 12 months.
However, many private sector economists believe it is premature to talk about rate cuts. They expect rates to remain steady into next year. "The RBA will be on hold for an extended period of time," ANZ economist Riki Polygenis said.
Mr Stevens's statement yesterday represents a sharp change in the bank's rhetoric from February, when it was worried about the momentum behind growth in consumer demand.
Although the national accounts released after the bank's last board meeting in March showed that consumer demand grew twice as rapidly as production in the latter part of last year, Mr Stevens believes that has now changed.
Reports from major retailers Myer and David Jones last week highlighted slower consumer spending, with Myer chief executive Bill Wavish saying comparable-store sales actually fell in March.
UBS retail analyst Michael Peet said markets were expecting softer sales in coming months.
"A lot of people with mortgages have less money to spend on discretionary items," he said.
"The staples like food and some areas of apparel will continue, but consumers might delay a big purchase like an expensive bed or other furniture."
The executive director of the Australian Retailers Association, Richard Evans, said the downturn was the sharpest in five years.
"Our feeling is that consumers are suffering and their buying habits are changing," he said. Sporting goods sales were down while there was a rise in house-brand sales, with more people shopping at cheaper chains such as Aldi.
The retail and commercial property markets were also softening. Head of property research at Adviser Edge, Louis Christopher, said auction clearances in recent weeks had been 15 to 20per cent below normal, at less than 50per cent in Sydney and little more than 60per cent in Melbourne.
"Buyers have stepped back but sellers as yet are not willing to meet the lower bid. They're holding back believing they will get the price they want so we'll see a stalemate for several months."
The commercial property market was rapidly weakening, with the flow of investment from fund managers down by 70per cent from November.
The Reserve Bank believes the world economy is slowing and is concerned that sentiment in world financial markets remains "quite fragile".
Mr Stevens said consumers and business had suffered a "substantial" tightening of conditions since the middle of last year, with official rates rising by a full percentage point and the banks adding more to the rate rise to recoup their higher funding costs.
INTEREST rates are widely tipped to remain on hold today even though inflation is still well above the central bank's target zone.
A new report shows inflation remained at four per cent for a second consecutive month in March, well above the Reserve Bank of Australia's two to three per cent target.
However, economists widely expect the central bank to leave its official cash rate unchanged at 7.25 per cent after today's monthly board meeting.
If that proves correct rates would stay at a near 12-year high of 7.25 per cent following rises in February and March.
None of 19 economists surveyed last week forecast an interest rate increase today. The RBA's nine board members meet this morning before announcing their decision at 2.30pm.
Attention is turning to interest-only loans as struggling home buyers pore over their budgets again after yet another official rate rise.
Just as there has been a surge of demand for fixed-rate loans in recent months - the proportion of fixed-rate loans rose from 15 per cent in mid-2007 to 24 per cent by the new year - so interest-only loans are expected to become more popular.
Loan advisers say interest-only loans, though they generally have been the preserve of property investors, could be a useful tool for owner-occupiers who find themselves stretched to the limit after the 12th consecutive rate rise by the Reserve Bank since May 2002.
Variable loan rates have risen from about 6 per cent to 9 per cent in that time. On a $400,000 loan over 25 years, that's the difference between paying $2577 a month and paying $3357 a month.
An interest-only loan for that amount, however, would bring repayments back to $3000 a month.
"In this environment, where people are finding it difficult to make their payments, it's a short-term strategy that can help," says Lisa Montgomery, head of consumer advocacy for Resi Mortgage Corporation.
Meanwhile, lenders are suggesting interest-only loans as a way for younger borrowers to buy the "right" home the first time - to avoid the transaction costs involved in upgrading to a bigger home.
Centric Wealth's joint head of lending services, Sheyne Walsh, says this also builds in repayment flexibility that's in the control of the borrower, not the lender. No matter what your reason for taking an interest-only loan, it requires discipline.
Advisers say borrowers who switch to interest-only because of higher rates should ensure they return to principal and interest as soon as they can afford to do so. And those who use it as a deliberate strategy to get a leg up the property ladder should make voluntary repayments of principal from day one.
With an interest-only loan, repayment of principal generally isn't required for 10 or even 15 years. The loan then converts to a standard principal-and-interest loan - or, more likely, the property is sold and the loan repaid in the interim.
Most property investors - about 60 per cent - use interest-only loans, but recently they've also been marketed to owner-occupiers, a trend that has attracted the interest of the central bank.
A Reserve Bank bulletin noted last year that interest-only loans were one reason why home loans were, on average, being repaid more slowly.
It said interest-only loans had grown from a low level in the early 2000s to account for about a third of the value of housing loan approvals in 2005.
Current figures aren't available, as neither the RBA nor the Australian Prudential Regulation Authority tracks interest-only loans on a regular basis. The Australian Bureau of Statistics only separates out fixed-rate loans in its data.
The Reserve has expressed concern about this increase in the use of interest-only loans and their availability to a wider variety of borrowers, including low-documentation and sub-prime borrowers.
In a 2006 Financial Stability Review, the bank noted that any fall in the value of a property would be more likely to result in interest-only borrowers having negative equity - owing more than the property's worth - than if they'd been paying off principal as well as interest.
It also found that interest-only loans were more likely to be in arrears than principal-and-interest loans.
Montgomery says the concern with interest-only loans is that people assume that property prices always rise and therefore capital growth alone will give them equity in their home.
"If used for owner-occupiers, you are very much relying on capital gain to get you any equity in the property," she says. But if property values fall you could end up in a situation where you're forced to sell for less than you paid, leaving you with an outstanding debt.
"This strategy should be for the short-term only," Montgomery says. "Some people will say, 'This is nice and comfortable,' and not pay any more."
However, Walsh says interest-only loans, when used wisely, can help younger people into homes that will suit them better in the long run, while building in some "safety net" flexibility.
His strategy involves taking perhaps a five-year interest-only loan but paying off principal even though you're obliged to pay only interest.
"You make sure you can afford principal and interest in the first place, and from day one you're making principal payments and moving ahead," he says. But in a month where the car registration and insurance is due, or when one income is lost during maternity leave, borrowers aren't compelled to make the higher payment.
Another advantage is that younger clients can afford to borrow a little more than they would under a standard variable loan, getting them beyond the one- or two-bedroom house they'll end up selling once they have kids - at a high cost.
To find the right home loan, you need to keep a few navigation rules in mind, writes Lesley Parker.
Federal Treasurer Wayne Swan wants people to "go down the road" if they're unhappy with their home loans, as mortgage rates come the closest they've been to double digits in more than a decade.
Upset with the banks for topping up their mortgage rates by more than the recent official Reserve Bank increases, Swan last month announced a package aimed at making it easier to move to another lender with a better deal.
Swan says that the loan market is extremely competitive at present, with a wide variety of deals available. However, this is not much help if financial institutions make it difficult to switch mortgages easily.
To alleviate the hassle of switching, he has told banks to make it easier for customers to transfer their automatic direct debits and credits to a new institution, and the Australian Securities and Investments Commission will investigate hefty home loan exit fees.
Official statistics show that some borrowers are already "voting with their feet", as Swan put it, spurred into action as mortgage rates headed to 9 per cent - with possibly more to come.
The latest available Bureau of Statistics figures show that a record $4.2 billion worth of loans was refinanced in December, when every third loan issued was for that purpose.
If you're set to join the 20,000 borrowers who are refinancing each month - or the estimated 80,000 people coming off a three-year fixed-rate mortgage this year - which home loan can you rely on?
The short answer, says Christopher Zinn, a spokesman for the consumer group Choice, "is the one that you can forget about, because your payments aren't stretching you too much".
By Choice's rule of thumb, that's a loan where you don't borrow right up to the maximum you can afford but leave a 2 per cent buffer for further rate rises.
And it's the loan you went in to borrow, not the $100,000 extra your lender pushed across the desk, says credit ombudsman Raj Venga - who helps sort out the mess when people end up with loans that don't work.
Beyond that, the home loan you can rely on is the one that has the right mix of affordability, flexibility and security for your circumstances.
That's not necessarily the one with the lowest interest rate but the one with reasonable fees, plus features such as the ability to make early repayments, to split between variable and fixed rates or to take a repayment holiday.
In a climate of rising rates, it's possibly the one where you can lock in a rate well before settlement.
At the other end of the spectrum are the loans that should be labelled "use with caution".
In this category are loans that don't require you to prove your ability to repay; loans where you can borrow more than 100 per cent of the value of a property; line-of-credit loans that demand strict budgeting; mortgages where exit fees are a percentage of the loan; and 40-year-loans where total interest snowballs.
RATES VERSUS FEES "We're all so obsessed with the home loan rate," Choice's Zinn says, "but it's the entry costs, the exit costs, the terms and conditions that matter in the long term."
It's easy to be swayed by the low interest rate on a loan product when in fact it has high ongoing fees and charges that will add up over time to more than offset the interest savings.
Honeymoon rates are a good example, where an attractive rate applies for six months but the loan then reverts to the standard variable rate rather than one of the "discount" rates now readily available.
"They get you in the front door but you do end up paying for that over time in elevated interest rates," Zinn says.
Another big area is start-up fees, says Lauren Newlands, a financial analyst with Cannex, which considers such things when assigning star ratings to home loan products.
These upfront fees can be more than you bargained for. Cannex lists application fees, legal fees, settlement fees, securitisation fees, documentation fees and valuation fees as examples.
"If a lender has no application fee, or a very low one, check [it does not] have these other fees," Newlands advises. "One loan might look expensive because it has an application fee but it may not charge any of these others and you may end up ahead."
At the other end, be wary of exit fees, sometimes known as deferred establishment fees. They can have a big impact on how good a deal you're getting when, on broker Centric Wealth's calculation, people repay or refinance their loans on average every 4.8 years.
Exit fees have become more common in recent years and the period during which you're liable has been stretching out to as much as five or even seven years.
Importantly, they can be expressed either as a flat amount or as a percentage of the original loan - and if you're talking about a larger mortgage, a percentage rate can really hurt. A 1 per cent exit penalty on a $200,000 loan will be $2000 but on a $400,000 loan - common in Sydney or Melbourne - it's a stiff $4000.
"We've seen a case where it was 4 per cent," ombudsman Venga says. That's $16,000 on a $400,000 loan.
Centric Wealth's joint head of lending services, Sheyne Walsh, says: "A mortgage may be a 30-year commitment but more than likely you're really signing up for five years. The question is: if my circumstances change and I want to switch, or change banks, what will it cost me - $800 or 0.9 per cent?"
LOCKING IN A good home loan will allow you to mix and match features and even interest rates.
Walsh says about 80 per cent of Centric's customers split their loans, not just once in some cases but perhaps two or three times.
The most common split is between fixed and variable, to gain the security of knowing your commitment on the fixed portion while being able to apply extra repayments to the variable loan.
"We ask customers, in the best scenario - you get a pay rise, bonuses - what's the most you could pay off in three to five years? That figure becomes the variable portion of the loan," Walsh says.
But even with variable loans it's possible to mix and match products to achieve a better rate overall, he says.
Fully featured loans with facilities such as redraw can come at the price of a higher interest rate than for a "basic" loan. Rather than taking the full amount as a fully featured loan, borrowers could combine standard and basic loans, he says.
"Do they need all the features for the whole $400,000? Or could they have just $30,000 on a fully featured loan and $370,000 on a basic, cheaper product?"
Go a step further and you could have a three-part loan: say, $200,000 fixed for five years, $170,000 on a basic product and $30,000 fully featured.
Rate lock is another useful feature at a time when rates are still rising, Walsh says. You pay a fee to lock in today's rate even if rates rise in the months before your property transaction is settled. On smaller loans, just be sure the fee doesn't outweigh the eventual cost of a rate rise.
FLEXIBILITY The benefits of early repayments - building a buffer in case of bad times, reducing the life of your loan and lowering the total interest - almost go without saying.
But as well as extra repayments, Cannex looks to see if home loans permit "repayment holidays".
"It's a nice feature for anyone with two incomes paying for the mortgage who's thinking of starting a family," Newlands says. "If you can pay extra on your loan, it allows you to take a 'holiday' when someone's not working."
This is different to redraw, where you make early repayments to build up an excess that you can withdraw for expenses such as renovations. With a repayment holiday, the excess you've built up is actually applied to your standard payments, so you're obligation-free for the period agreed with your bank. Walsh says interest-only loans can achieve a similar result, so long as you pay both principal and interest voluntarily instead of just the mandated interest. That way you're getting ahead on the loan but can drop back to interest-only in the months when the budget is tight.
USE WITH CARE Unfortunately, a number of home loan strategies can land you in hot water if you're not so disciplined.
Line-of-credit loans, for example, demand strict budgeting. These loans come with a credit card that you use for all your expenses while your pay goes directly into your mortgage.
This deposit reduces the interest payable on the loan, until you withdraw the money to pay off the card at the end of the month.
The trouble is that some people overspend on the card. "They live on the limit and they don't pay it off," Walsh says.
And higher rates on these loans may well offset any benefit, the Australian Securities and Investments Commission warns on its consumer website.
No-deposit loans can be another trap. People can now borrow 100 per cent - or even 106 per cent - of a property's value but at the cost of having to pay mortgage insurance (to protect the lender, not you) and a higher interest rate.
Mortgage insurance on a $400,000 loan might be $3400 if you have a 15 per cent deposit but $12,000 if you're borrowing the lot, Choice says in its Risky Home Loans report.
The 106 per cent mortgage will help you cover purchase costs but on a 30-year loan it will be more than five years before you get back to the 100 per cent level and 15.5 years before you achieve 80 per cent, it says.
"If your home gains in value you'll reach these percentages much sooner but if it loses value you'll be deep in the red for a very long time unless you can make extra repayments," it says.
Choice is also concerned about the arrival of the 40-year mortgage. The longer loan makes the monthly repayments slightly more affordable but, again, at a cost.
On a $250,000 loan, at an interest rate of 8 per cent, your repayments will be about $100 a month cheaper than on a 30-year loan but you'll pay about $174,000 more in interest over the life of the 40-year loan than you'd pay over 30 years, according to Choice.
In any case, a rate rise of just 0.5 percentage points would wipe out any benefit.
The spread of low-doc loans beyond their initial target market of self-employed and business people - who can't or don't want to fully document their income - has also raised concerns.
According to Cannex research, borrowers with low-doc loans are three times as likely to default as those with full documentation.
Credit ombudsman Venga says that while low-doc loans have their place, they've been involved in every case his office has seen of "predatory lending" - where loans are advanced even when the borrower has no hope of repaying.
"The trouble with low-doc loans is if you don't look at someone's ability to pay, there are bound to be problems," Venga says.
AUSTRALIAN banks have not ruled out further increases in lending rates above those set by the Reserve Bank, amid widespread expectations that it will lift rates again today.
Economists say more evidence of growing inflationary pressures will prompt the Reserve to raise rates by 25 basis points, and possibly again in two months. The Reserve will announce its decision at 2.30pm after a board meeting.
Another interest rate rise would take the official cash rate to 7.25%, the highest since the mid-1990s, and increase the standard variable home loan rate to about 9.25%.
It would be the the first back-to-back rate rise from the Reserve since November and December 2003, and the 12th rise since May 2002.
Unofficial inflation figures yesterday showed underlying inflation had hit a six-year high. The TD Securities-Melbourne Institute monthly gauge rose by 0.3% last month, taking annual inflation to 4.1%.
The figures follow official inflation figures released at the end of January, showing underlying inflation hit 3.6%, which prompted the Reserve to increase the cash rate last month.
Australia's major banks have been increasing lending rates above the official level set by the Reserve, saying the increases are necessary to recoup higher borrowing costs.
Prime Minister Kevin Rudd warned that banks moving outside official rates settings would hear from the Government. Mr Rudd backed comments by Treasurer Wayne Swan that banks with record profits should be mindful of their corporate and community standing.
"If they (commercial banks) move outside of official interest rate settings, then mindful of the general circumstances of financial markets at the time, I am sure the Government will not be restrained from making appropriate comment," Mr Rudd said.
TD Securities economist Joshua Williamson said rates would rise again in May if the consumer price index due late next month shows inflation was still uncomfortably high.
Mr Williamson said domestic banks would continue to raise rates above official cash rate. "Wholesale funding costs have increased since the last Reserve Bank tightening and the retail banks will want to claw back the cost by rising home loan rates, credit cards and business loans," he said.
The banks have left open the possibility of further moves.
ANZ spokeswoman Charelle Murphy said her bank was monitoring the situation. "Liquidity remains tight in financial markets and there continues to be a squeeze on interest rate margins," she said. Interest rate margins are the difference between lending rates and what the banks pay for credit in international markets. The banks blame the recent credit squeeze for the rises.
Commonwealth Bank spokesman Bryan Fitzgerald said the bank would wait for the Reserve's announcement and review its position then.
Westpac spokeswoman Jane Counsel said: "Rates are under review and, like all banks, Westpac continues to face higher wholesale funding costs. We will continue to manage those costs in the interest of all stakeholders."
National accounts figures will be released tomorrow, providing a clearer picture of whether the Australian economy is growing. Yesterday, the Bureau of Statistics reported that Australian companies had continued to profit despite uncertain world conditions and higher interest rates.
Company gross operating profits grew 3.9% in the December quarter compared with the previous quarter. But business inventories ? stock in warehouses and shelves ? rose 0.7% in the quarter, below economists' expectations.
Economists use this to forecast gross domestic product, with estimates so far pointing to a quarterly rise of 0.8% and an annual rate of 3.9% ? slower than the 4.3% in the September quarter. A strong GDP reading would heighten chances of another rate rise after today's anticipated increase.
Opposition Leader Brendan Nelson said slower growth would affect a person's ability to keep a job.
The Australian dollar opened firmer today after a German bank's offer to help rescue a US bond insurer boosted high-yielding currencies.
At 7am AEDT, the Australian dollar was trading at $US0.9269/70, up from yesterday's close of 0.9241/46.
Overnight, the domestic currency traded between a low of $US0.9224 and a high of 0.9270.
Germany's Dresdner Bank announced overnight its intention to support a bail-out package for US bond insurer Ambac Financial Group.
Ambac's triple-A rating has been threatened by its exposure to risky US mortgage-backed securities.
But news that a rescue plan for the troubled bond insurer was closer to completion helped high interest rate currencies, especially the New Zealand dollar which surged to a record $US0.8115, beating its previous high reached in July.
The Australian dollar also broke through the 100 Japanese yen barrier for the first time since December 27 as traders sold low-yielding currencies.
Macquarie Group associate director of foreign exchange Joanne Masters said the fact a European bank was willing to help out boosted risk appetite.
"The idea is, if you can get the European banks, who have sub-prime exposure, that gives it substance and spreads the cost," she said.
But Ms Masters said market optimism would wane in coming days unless more details of the plan were made public.
"I think quite a lot is riding on this rescue plan," she said.
"If it fell through, the Aussie and the Kiwi are vulnerable."
Dresdner, which is owned by insurer Allianz, has been the first European bank to announce its intention to inject capital into Ambac.
The foreign exchange market paid little attention to news overnight that US existing home sales had fallen in January to a nine-year low.
The National Association of Realtors said existing home sales fell by 0.4% last month to an annualised pace of 4.89 million units.
But the numbers were less drastic than market forecasts of a 1.5% slump.
"I don't think the market reacted that much to the home sales numbers," Ms Masters said.
"Everyone agrees the housing sector is very weak.
"To see a US recession, we need to see consumer spending weaken."
In the absence of major domestic data, the Australian dollar is expected to hold between $US0.9220 and 0.9270 today to touch new highs during offshore trade.
The RBA's recent tightening - despite rising global uncertainty and the banks' additional increase in their lending rates - and the associated rationale indicates that it is becoming much tougher on inflation. In essence the RBA is now forecasting inflation to remain above or at the top of its target range out to mid 2010 and has clearly stated that growth in demand must slow significantly to contain inflation.
As such the Bank has indicated that "monetary policy is likely to need to be tighter in the period ahead."
In the absence of a major collapse in global or domestic growth pretty soon, this is obviously pointing to further rate hikes, with the next move probably coming next month.
In fact money market pricing implies an 85% probability of another tightening in March and another move is largely priced in thereafter.
While the RBA is no doubt employing an element of jawboning to try and get Australians to slow their spending, with interest rates going higher and higher the risk that they go too high - if they haven't already - resulting in a hard landing in 2009 is becoming increasingly significant.
With investment activity in the economy likely to remain strong a lot of the brunt of the slowdown in growth required by the RBA will have to fall on consumers.
There are several points to note regarding all this.
First, there are several reasons why interest rates have not yet had the desired impact in slowing growth, and these include the impact of offsetting influences such as tax cuts and the boost to national income from higher commodity prices, strong wealth gains from higher share markets till recently and the fact that much of the rise in household debt has been amongst older higher income households who are less affected by higher interest rates.
But just because interest rates have not yet achieved the desired slowdown in growth and inflation doesn't mean that they will just keep rising with no impact.
While the last two tightening cycles in 1994 and 1999-2000 had happy endings, this hasn't always been the case, and the longer and higher interest rates rise the greater the risk.
The late 1980s/early 1990s experience highlighted just how hard it is to know where the "tipping point" for the economy with respect to interest rates is.
Between January 1988 and November 1989 the cash rate was increased from 10.6% to 18.2% and mortgage rates rose from 13.5% to 17%.
For most of this period there was little apparent impact with growth remaining strong, unemployment continuing to fall (reaching a low of 5.6% in November 1989) and inflation rising.
There was talk of the economy bubbling over with effervescence like a glass of champagne.
Then suddenly in late 1989 the economy began to falter and by the time the RBA started cutting interest rates in January 1990 the economy was heading for "the recession we had to have".
By the time underlying inflation peaked in June 1990 the economy was already in recession!
Of course there are big differences between now and the situation in the late 1980s. Interest rates and inflationary expectations were much higher, changes in interest rates were not clearly communicated and business debt was the big issue back then.
But the 1989-90 experience highlighted how hard it is to know where the tipping point is and once passed it may be too late to turn the ship around.
Secondly, if consumption is to bear the brunt of the slowdown it comes with greater than normal risks this time around. This is because the household sector is saving less and is far more indebted today. The ratio of household debt to disposable income is now over 160% compared to 40% in 1989 and debt servicing costs are now eating up around 14% of household disposable income compared to around 7% in 1989 and this is all underpinning very overvalued houses.
While much of the rise in household debt has been in higher income and older households, there has still been a big general increase in debt levels, including for young families with a mortgage which are the group most at risk right now.
Thirdly, Mortgage stress is at record levels and still rising, housing finance is showing signs of starting to soften again, weekend auction clearance rates are starting to come in below year ago levels and consumer and business confidence are now falling sharply, with business confidence at its lowest since 2001. See the chart below.
(business and coinsumner confidence graph here)
Fourthly, Australia's inflation problem appears to be largely due to supply side problems as opposed to strong demand. Key areas behind the rise in inflation over the last two years have been fuel, food, alcohol and tobacco, health and housing (rents).
The forces behind inflation in these areas appears to owe more to supply side problems, or global forces, which are little affected by interest rate driven demand management.
In fact, in the case of housing costs, higher interest rates may actually make the problem worse to the extent that they further dampen housing construction resulting in a worsening housing shortage and ever higher rents.
It's worth noting that retail price inflation in Australia is running at just 2.5% year on year.
The problem is that, with supply side problems keeping price gains in key areas elevated, to bring overall inflation back to target, higher interest rates will have to have a big negative impact on prices in the rest of the CPI basket via much weaker consumer spending.
Fifthly, there is a risk the RBA is underestimating the impact of the global downturn on Australia. The impact of higher coal and iron ore prices on domestic demand is likely to be offset if the Federal Government finds greater budgetary savings.
More broadly, it's worth noting that the recent slump in business and consumer confidence is tracking the decline in US confidence measures and the local share market has fallen sharply providing a negative shock to wealth, all of which will help to drag down growth.
So overall there is a growing risk that the RBA will end up going past the point on interest rates that will tip the economy over into a hard landing in 2009.
It is worth noting that up until about six months ago all major global central banks seemed more concerned with inflation than growth. The Fed was the first to switch over to being more worried about growth, followed by the Bank of England, the Bank of Canada, the Bank of Japan and now even the European Central Bank is relaxing its anti-inflation rhetoric.
The RBA is the odd one out, but it too is likely to have changed its tune by year end, but by then rates may be much higher.
What does this all mean for investors in shares?
The threat of higher interest rates and a harder landing for the local economy next year, with obvious implications for profits which are already slowing rapidly, are likely to act as a dampener on Australian shares.
Fortunately, the market is now cheap trading at the low end of our fair value range (see chart below) and this should provide a buffer. But from a broader perspective after out performing global shares every year between 2000 to 2007 with the exception of 2003, the more aggressive stance on interest rates locally will likely constrain the relative performance of Australian shares over the next 6-12 months, possibly seeing them under perform global markets.
(Australian shares graph)
Rising local interest rates further complicate stock picking.
Consumer stocks and other sectors exposed to the Australian economy were being seen as attractive given the uncertainty swirling around globally exposed stocks and financials. This is no longer the case.
Conclusion
In the short term the Australian economy should see reasonable growth, but with the RBA tightening aggressively as the global outlook deteriorates the risks are rising. Rising Australian interest rates may act to constrain the relative performance of Australian shares.
CONSUMERS have been warned there will be no escaping an interest rate hike next month - and it could be a double whammy.
Explosive documents released yesterday showed the Reserve Bank Board almost went for the shock treatment earlier this month as it battles to control inflation.
Leading economists said yesterday there was a big chance the central bank would push up rates by half of a percentage point next month ? double the usual increase. This would ramp up monthly repayments on a $300,000 home loan by $100.
It will also lift standard variable rates on home loans to almost 10 per cent and add to the misery of many homebuyers.
The Reserve Bank normally raises rates by only a quarter of a percentage point but this tradition could be overturned next month.
"Not only does this shore up the case for a hike in March, but it suggests a more aggressive move might be needed," Macquarie Bank's Brian Redican said.
No end to rate-rise risks
There were more danger signs yesterday when the Reserve's assistant governor Malcolm Edey warned inflation would almost hit 4 per cent in the next quarter.
The last time the Reserve Bank ordered a half a percentage point rise was eight years ago. If rates do rise by the bigger amount it will take take the cash rate to 7.5 per cent ? the highest level since 1995.
Interest rates have jumped 11 times in the past six years, plunging Australian families into mortgage stress.
Federal Treasurer Wayne Swan told Parliament that the Rudd Government was working with the Reserve Bank and remained "committed to putting downward pressure on inflation and downward pressure on interest rates".
Prime Minister Kevin Rudd again tried to shift the blame, saying his Government inherited an economy with underlying inflation running at a 16-year high.
Economy strong
But Opposition Leader Brendan Nelson maintained the economy was in "first-rate shape" when the Coalition lost office late last year.
Under new independence rules, the Reserve Bank for the first time yesterday released the official minutes of its February 5 board meeting.
The document showed the board was very close to raising rates earlier this month by half of a percentage point.
The minutes said "there was a case for the board to send a stronger signal of its intention to act as necessary to reduce inflation".
In the end the bank decided on a smaller increase, although it warned it would continue to review the policy.
THE Reserve Bank is almost certain to leave interest rates on hold today but it is likely to be a short-term reprieve for homeowners.
The Adelaide Bank has already become the first mainstream lender to increase its lending rates above official levels in response to the soaring cost of borrowing on global credit markets.
However in the past month, all of the big banks have indicated they may follow suit.
To date the big four banks -- NAB, ANZ, Commonwealth Bank and Westpac -- have decided not to pass the funding cost increases from the tightening of the credit markets to its mortgage customers.
But all have maintained a close watching brief on the possibility of passing on the cost increase to households with variable rate mortgages.
A spokesman for Commonwealth Bank -- the price leader on the mortgage market -- said there are no plans to change mortgage rates at the moment but the bank continues "to monitor the position".
Despite the growing financial pressure on households, Australian shoppers spent almost $20 billion in October.
Economists said this resilient spending will put further pressure on the RBA to lift interest rates in February to 7 per cent.
Yesterday, the Australian Bureau of Statistics showed retail spending rose by 0.2 per cent to $19.8 billion in October -- before the RBA lifted interest rates to 6.75 per cent in November.
Last month's rate rise was the 10th consecutive increase in the past 5 years. The ABS retail spending data was weaker than expected with sales up 0.2 per cent compared to a lift of 0.7 per cent in September.
Most economists expect RBA governor Glenn Stevens will wait for the release of the December quarter consumer price index data in late January before raising rates again.
TD Securities global strategist Stephen Koukoulas said the retail sales data if maintained into 2008 would help alleviate some inflation concerns.
"However, given that underlying inflation is already at an elevated level, the lag involved may not come soon enough to stave off another rise in official interest rates," Mr Koukoulas said.
"Remember that employment and wages are still growing, which will keep trend retail sales growth in positive territory."
Investors on the Sydney Futures Exchange are betting there is a 63 per cent chance of an interest rate rise in February.
Until after the Federal election campaign was completed, most banks regarded a lift in variable interest as untouchable because of fears of a consumer and government backlash.
Mr Koukoulas said other regional banks dependent on the global capital market for funding could follow Adelaide Bank's lead.
Adelaide Bank was more susceptible to the rising cost of international credit because it sources more than 50 per cent of its funding from wholesale markets rather than depending on its deposit base.
In early November, however, two of the country's largest banks -- ANZ and NAB -- said they had been absorbing the higher costs without passing it on to customers.
THE Reserve Bank of Australia (RBA) is widely expected to keep interest rates unchanged following yesterday's monthly board meeting, despite economists forecasting a sharp acceleration in economic growth.
The bank will announce its decision on rates at 9.30am (AEDT) today.
Economists expect the central bank will hold off raising rates again until February to assess the impact of the August and November rate rises, and to see whether lingering credit worries in global financial markets are showing signs of improving.
It will also allow the reserve bank to see key inflation data released in late January.
Still, economic growth is expected to have accelerated when the national accounts are released for the September quarter later today, which will provide no relief for building price pressures.
Economists expect gross domestic product (GDP) for the three months to September to have surged 1.0 per cent for a rapid annual growth rate of 4.8 per cent, well above the long-term trend.
Such growth will reflect strong consumer demand, a minor improvement in exports, a build-up in business inventories - goods on shelves and in warehouses - and increased construction work.
This will offset a fall in company profits, and flat business investment and government spending in the quarter.
Advice for home buyers looking to put that first roof over their head
Decide early to plough money into saving for a home instead of renting the nicest place and buying the best furniture.
The bigger deposit you have the better, the less you borrow, and the more principal you are going to be paying back early.
Work out what you will be paying in ongoing rates and maintenance costs, as well as the mortgage each month.
If that amount hasn't been going into your savings and rent, then maybe you can't afford it.
And that figure should be the absolute minimum, because things happen - children come along or there might be an illness or job loss in the household.
Don't say once you have a mortgage you'll change your ways - it's better to do it beforehand.
If you are renting in the city and have to go to the outer suburbs to afford a home remember to add transport and petrol costs to your budget.
Beware the "100 or 106 per cent loan" - it is an extra cost and over a long period of time.
Land-house packages sometimes hide the cost of the loan in the price of the home. You might actually be paying more for the home, while the loan might not seem too bad on the surface.
Be careful of any deal offering you a loan when you haven't been able to get one before.
Get advice from a lawyer or an accountant.
Don't use friends or family as a guarantor if you don't have enough equity or income. The lender is really saying it is not prepared to take the risk and wants someone else to take the risk. If things go wrong, the family conflict can be devastating. It is better if family give you money.
Once you're in the market, watch out for the other spending and debt that can tip you over the edge.
THE proposed first home saver account allows first home buyers to commit additional savings to a "superannuation-style" account.
The account can be accessed after four years to help towards a deposit on a first home.
A cap of $10,000 (indexed) will apply to total contributions each year.
Savers will be eligible for a low tax rate of 15 per cent on the first $5000 of income they deposit in their account each year and interest earned will be taxed at 15 per cent or less.
An additional $5000 a year may be contributed towards a first home saver account from after tax income.
As an example, a couple both earning $56,732 and each saving the equivalent of 10 per cent of their post-tax income could accumulate a deposit of around $63,662 in five years.
BREAKING into the property market can feel a bit like climbing Mt Everest.
House prices and interest rates seem to keep rising faster than it's possible to stash money away for a deposit.
For many people it can seem that our great Australian dream of owning a home is turning into a nightmare.
But there are things you can do to get a roof over your head and meet the repayments.
Although there is no quick fix, unless you win a lottery or get an inheritance, a close look at how you juggle your finances is the first step to becoming a home owner.
Changing your mindset over the type of home you want and where you want to live could also get you into the market much sooner than you think.
WORK OUT A BUDGET
Discipline and research are the keys to saving a deposit and meeting mortgage repayments according to partner at HLB Mann Judd, Matthew Gardiner.
Without savings discipline, first homebuyers will find it difficult to buy a home or to take advantage of the new Federal Government's proposed First Home Saver Account.
The scheme, to help young people get into the property market, is based on a very simple idea - save and don't spend.
"Although these promises may benefit those who are committed to working hard, budgeting and saving, they won't help those who have become used to an environment of easy credit over the last 10 years and have never before had to save," Mr Gardiner said.
The first step to owning a home is to set a budget - work out what you spend and where and how much you can save.
Arrange to have every bit of extra money sent directly to a separate high-interest earning account as soon as you are paid, so you aren't tempted to spend it.
And set a timeframe or milestones so you can see how you are getting what you are working toward.
Next, avoid other forms of debt.
"If you must have a credit card, only spend what you can afford to pay off
within the month to help avoid interest charges," Mr Gardiner said.
Once you're in a position to buy a property your budget discipline will also help you research exactly what you can afford.
Also, consider what would happen if you have two incomes and started a family. Could you support the mortgage on one income if necessary?
And what about more interest rate rises?
"It's always a good idea to factor in to your calculations a higher interest rate than that offered by the bank, particularly honeymoon rates that can lull borrowers into a false sense of affordability," Mr Gardiner said.
Most people who are currently having their homes repossessed were only just "getting by" and couldn't afford any increased payments, he said.
GET REAL
The order of the day is to "compromise", says Wakelin Property Advisory director Monique Wakelin.
Unfortunately, first homebuyers have very high aspirations and, in many instances, are unwilling to adjust their expectations.
"The first home never is, and never will be, the dream home. The first home is just to get a foothold into the market," Ms Wakelin says.
"If you get to your dream home it's going to be in a couple of steps."
Buyers should work out what they want from a property and be prepared to compromise on accommodation or location.
Deciding if the property is for lifestyle or for capital growth in the short to medium term determines where you look. Choosing lifestyle usually means sacrificing the location to get a bigger home.
And it doesn't matter if you are single, a couple or have children, Ms Wakelin says.
If you have $400,000 to spend and want to live in Richmond you will be in a flat, she says.
"If you want a three-bedroom house you will live somewhere like Craigieburn, Melton, those sorts of areas."
LOOK OUTSIDE THE SQUARE AND DO YOUR HOMEWORK
Young people should consider moving to the outer suburbs or alternatively, buy a home with friends or family, Londsale Financial Group general manager Theresa Mills says.
But you still have to do your homework.
"This is the single biggest financial decision most people will make in their lifetime and they do not give it adequate research time," she says.
"Being informed can save you many dollars in terms of the cost of your transaction and the ultimate growth of your transaction.".
Understand the lending products and the land house packages. What are they really costing you?
Don't get caught in the emotion of the day. There will always be another property.
Ms Mills suggests young people buy a home with friends or family to get a start in the market and spread the deposit burden and repayments as well as the conveyancing and legal fees.
Look at it as a "project" - renovate it, live in it and then sell a couple of years down the track.
HOME BUYING TIPS Do your research and plan a strategy.
Talk to successful property owners and use the internet - information is free.
Wanting the right home in the right location can mean taking on a mortgage that reduces everyday quality of living.
Whatever the area you decide on, go to auctions, compare prices and understand what drives the market in that area.
Look carefully at all financing and mortgage products. Is it really what you think it is?
BUY ONLY IF YOU CAN AFFORD IT
Although there are many reasons to justify buying a home, only go ahead if you can really afford it.
That means you can stump up with the money every month for the mortgage and still have plenty to pay for the other necessaities such as food, utilities, transport, clothing, lunches etc.
It is an emotional decision and easy to get into trouble if you don't do the maths, says Consumer Action Law Centre chief executive Carolyn Bond. "Saying that it's better to borrow now, even if it's just another one per cent, adds thousands of dollars each year to the cost of your repayments," she warns.
And don't get hoodwinked by the no-deposit-honeymoon interest rate deals, warns Financial Counsellor Jan Pentland.
"If it looks too good to be true, it probably is. There is no free lunch and whatever seems to be free will be paid for by the consumer in some way," Ms Pentland said.
Also, factor in the cost of setting up a new home, such as window and floor coverings, new furniture if needed and establishing a garden.
"There's double trouble when they (first homebuyers) get sucked into financing these costs and other purchases such as furniture by 'interest free' credit," Ms Pentland said.
"If they don't pay it off in time, which inevitably they won't, the interest on these facilities is very high."
It's important to do the hard yards beforehand and avoid the no deposit "106 per cent loan caper", agrees Ms Wakelin.
"When we have back to back consumer debt as well as enormous borrowing on a home, it is putting people up against the wall. It's just too hard," she says.
"I'd really like to see people have the 10 per cent deposit if they can get it, particularly if they are going into the outer suburbs where there is not going to be all that much growth happening," Ms Wakelin says.
Homeowners should then aim to reduce the debt as quickly as possible, to build up equity in the home.
TEACH CHILDREN TO SAVE AND AVOID DEBT
Learning to manage money early on has a huge impact on how soon you buy a home.
A recent survey by Mortgage Choice found that 28 per cent of Australians are over 40 before they buy their first home and 10 per cent are more than 50 years old.
Parents have to teach children from the time they receive pocket money, not to spend every cent they get, consumer law adviser Ms Bond says.
If you get to 18 or 19 and have a high rate of spending, it's no easy job to say you'll get into the habit of saving later.
By then the damage is done because the credit market is set up to hook you in and then trap you into long term debt.
"No one wants to lend you money for a year and have you pay it back," Ms Bond says.
"Whether it's a credit card, a personal loan or a mortgage, you will be marketed to during the course of that to borrow more."
No: 2007-20
Date: 7 November 2007
Embargo: For Immediate Release
STATEMENT BY GLENN STEVENS, GOVERNOR
MONETARY POLICY
At its meeting yesterday, the Board decided to increase the cash rate by 25 basis points to 6.75 per cent.
Inflation in Australia has increased. Underlying inflation was 0.9 per cent in the September quarter and close to 3 per cent over the past year. The annual pace of CPI inflation was lower, but this reflected two very low quarterly results nearly a year ago, as well as recent changes to the treatment of child care costs. By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.
During 2007, the pace of growth of demand and output has also increased. There are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist. Growth in labour costs has been contained so far, and high levels of investment are adding to productive capacity in some sectors. The rise in the exchange rate will help to contain pressure on prices. But growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to 2 - 3 per cent in the medium term.
In reaching its decision, the Board continued to look carefully at developments in international financial markets. Conditions have improved over the past couple of months, but confidence remains fragile. Funding costs for intermediaries remain elevated relative to official interest rates, and capital market conditions are still difficult, in several major countries. This is likely to result in some moderation in growth in those countries in 2008, and forecasts for global growth have been revised down accordingly. The world economy is still expected to grow at an above-average pace, however, led by strong growth in China and other parts of Asia. High global commodity prices remain an important source of stimulus to Australian spending and activity.
In Australia, the tightening in credit conditions resulting from the global turmoil has been less pronounced than elsewhere. Wholesale funding costs have risen a little compared with official rates, and some borrowers have experienced an increase in interest costs as a result, but the flow of credit to sound borrowers does not appear to have been impaired.
Having weighed both the international and domestic information available, the Board judged that a further increase in the cash rate was needed now in order to contain inflation in the medium term.
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