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Inflation pushing interest rates up

Inflation data released yesterday by the Australian Bureau of Statistics supports a rise in interest rates next week. Underlying inflation was 0.6 per cent in the December quarter and between 3.2 and 3.6 per cent over the year to December. ANZ Bank economist Alex Joiner said underlying inflation was uncomfortably high while the economy was rapidly returning to stronger growth. BT Financial Group chief economist Chris Caton said the Reserve would lift rates on Tuesday. ‘‘Monetary policy has switched focus quickly from limiting the damage to managing the recovery, and the Australian economy simply no longer needs artificially low interest rates,’’ he said.

 

 

First home buyers getting older

The average age of people buying their first home is getting older. Housing Industry Association analysis of Australian Bureau of Statistics data shows that in 2008 two-thirds of first-home buyers were under 35.In 2001, 75 per cent of first home buyers were under 35. “Strong growth in house prices has meant that First Home Buyers are effectively forced to delay the purchase decision until later in life,” HIA senior economist Ben Phillips said. First home buyers aged over 45 increased to 9.8 per cent in 2008 from 6.3 per cent in 2001.

 

 

Four rate rises on the way

The RBA is expected to raise rates by 25 basis points, to 4 per cent next week. The interbank futures market has priced the chances of a rate rise next week at 65 per cent, and predicts up to 108 basis points, more than four official moves from the central bank, over the next year. Economists said that inflation figures, due to be released today are remaining stubbornly high and would probably cause the Reserve Bank to keep raising interest rates in order to bring it back under 3.0 per cent.

 

 

Houses are still cheap

Last week Rismark released research showing that housing affordability has not declined since 2003 and is nowhere near the commonly quoted seven to eight times average annual earnings. “There is an uninformed perception that houses are much more expensive now, compared to our household incomes, than they ever have been before,” said Christopher Joye, the managing director of Rismark. “But that is not correct, affordability in the housing market is not deteriorating rapidly, average house prices are not seven to eight times household incomes as is often quoted.” Affordability is a ratio of median property prices to average annual incomes. “Rismark’s National Dwelling Priceto-Income Index implies that the true ratio across all regions and all property types is around half this estimate.” Rismark’s research shows that not only are average Australian house prices only about four times average Australian household income, but also that this ratio of prices to income has gone down since 2003.

 

 

Smaller lenders returning to mortgages

Smaller home lenders are returning to the home loan market after doing very little new business since the global financial crisis began in 2008. Liberty Financial, Credit Union Australia and Homeloans Ltd are showing signs that they are ready and primed to write new loans and take on the big banks in the mortgage market. Liberty Financial last month signed on with Mortgage Choice. Liberty is believed to have tightened its credit criteria, focusing on so-called near-prime customers for home and car loans. Mortgage Choice chief executive Michael Russell said ‘’They have confirmed they have funds to lend - in this environment that’s good news for us and that’s good news for home buyers,’’ Mr Russell said.

 

 

Melbourne property boom continues

The Australian property market posted a near five per cent rise (4.8 per cent) in median house prices nationally, with a 12.1 per cent rise overall for the year. Melbourne, having the strongest housing market in the country for the second consecutive quarter, recorded the highest annual growth rate of 18.5 per cent, forcing house prices past the $500,000 barrier for the first time. Sydney’s market, the biggest in the country, also performed well as house prices rose by exactly the national average of 12.1 per cent, following the third consecutive quarter of growth. Although first home buyer demand sustained the market in the early part of the year, ultimately it was upgraders and investors that drove the extraordinary overall result for 2009, as activity in the more expensive suburbs benefited from the surprisingly resilient jobs market experienced in late 2009 and a strongly rising share market.

 

 

Small Business customers like NAB, St George

The monthly Business Banking Customer Satisfaction Monitor published by East & Partners shows that small businesses rate their banks, as of November 2009, at 4.44 on a scale that ranges up to 10. The indicator has declined consistently over 18 months. East also point out, in a research note published yesterday, that two of the big four banks now score lower than three on this monitor. NAB, however, rates most highly of the four. NAB leads the major banks with a score of 6.53, a similar ranking to St George, and has done so for around 15 months. Joseph Healy, group executive NAB Business Banking said yesterday that “I do accept that SMEs have become increasingly dissatisfied with banks” but suggested that the annoyance was not solely due to increased margins on business loans. “I think this [penalty fees] is a large part [of the reason], though. In large part it is because of the way that banks conducted themselves over the last 12 to 18 month during a time when the economy was much more uncertain. Business customers, and SMEs in particular, were very concerned about the profits of the bank and the pricing of risk, and the terms and conditions that we’re trying to negate. Banks have not acquitted themselves well … in what was a challenging 12 to 18 months.”

 

 

Banks to absorb rate hikes

The big banks will absorb some of the Reserve Bank’s rate rises that are expected in the second half of the year, say respected economists. “Banks will be raising rates less than the RBA by year’s end,” said AMP Capital Investors’ Shane Oliver. Chris Richardson from Access economics says the banks will cut their lending margins by about 0.3 per cent as the RBA raises rates by up to 1 per cent. In recent years, the margin between variable home loan rates and the RBA rate has risen from 1.8 per cent to as much as 3 per cent. “That’s going to go into reverse,” Mr Richardson said. “We are probably looking at 30 basis points (0.3 percentage points) in 2010 and another 30 or 40 in 2011.” Richardson also forecast that lenders would undercut by a further 0.4 percentage points in 2011, saving borrowers about $140 in total. Westpac said as funding costs eased it would share the benefits with customers.

 

 

ME Bank wants to help WA fire victims

ME Bank wishes to encourage its customers in Western Australia who have been impacted by the recent bushfires to contact the Bank on 13 15 63 as soon as possible. ME Bank will provide financial support to customers directly affected by the bushfires by agreeing to defer home loan, personal loan and credit card fees for three months. Samm Bell, Head of Retail Sales, said the bushfires have been significant in their impact and a cause of great distress. “ME Bank’s response is intended to provide some comfort and practical assistance to those ME Bank customers caught up in this disaster.” All those who were directly affected by the bushfires in WA, either through loss of property or job loss resulting from the fires are being asked to contact the Bank. Once the initial three-month deferral is up, ME Bank will then review the policy and evaluate each customer’s needs on an individual basis.

 

 

Fewer lenders are following the central bank script

With economists almost unanimous in their view that the Reserve Bank will put up the official cash rate by 25 basis points next week, attention is turning to lenders and how they will respond. A review of the mortgage rate changes that followed December’s 25 basis point increase may offer some guidance.

 

While Westpac still stands out for having made the biggest increase in its standard variable mortgage rate in December (45 basis points) and the biggest increase (95 basis points) over the three months from October, when the Reserve Bank increased rates by a total of 75 basis points, plenty of other lenders came close.

 

Of the 74 lenders in the Infochoice database all but five have now moved their standard variable mortgage rates in response to the change in official cash rates in December.

 

Four others joined Westpac in raising their rates by 40 basis points or more and 36 put their rates up by between 35 and 39 basis points. Only 18 held their rate increase to the level of the 25 basis point official cash rate move.

 

It will be interesting to see in the next round if lenders think they have now broken the nexus between official cash rate movements and their own rate changes.

 

Over the three months to December 49 lenders made overall rate increases that were higher than the 75 basis points of increase in the official cash rate.

 

Six lenders followed Westpac’s lead by raising rates by 90 basis points or more over the period. They were AIMS Home Loans, Big Sky Credit Union, Community First Credit Union, Queensland Teachers Credit Union, Reduce Home Loans and Transcomm Credit Union.

 

Only 17 lenders have followed the movement of the official cash rate and increased rates by 75 basis points overall. Only one of them, National Australia Bank, is a major lender.

 

It will also be interesting to see how the Reserve Bank board takes these changes into consideration in its deliberations next months and to what extent it feels that lenders are doing its work for it and reducing the pressure for another official cash rate increase.

 

Interest rate speculation is likely to continue throughout 2010, with senior bank economists predicting several increases in the official cash rate through the course of the year.

 

Westpac chief economist Bill Evans is predicting that the Reserve Bank will raise interest rates by 0.25 of a per cent in February. The bank is forecasting that the official cash rate will rise from its current rate of 3.75 per cent to 4.50 per cent by June and 4.75 per cent early in 2011.

 

 

Sources:

Infochoice, Australian Property Monitors, Brisbane Times, Sydney Morning Herald, The Australian

 

 

 

Current as at 29-01-2010