Resources: Market Update

FIXED RATES HURT MORE THAN 43,000 HOME OWNERS

Posted 12/12/08

More than 43,000 home owners who took out fixed interest rates between March & September this year (the highest level in a decade) have inadvertently denied themselves of any savings from the recent cuts.  They are now faced with a difficult decision; pay a higher interest rate, or incur thousands of dollars in penalty fees for breaking their loan.  To make matters worse they may even be charged administrative and establishment fees by the new lender.

Christopher Zinn, a spokesman for the consumer group Choice, said "People who are on a fixed-term mortgage are invariably surprised to find out the size of the break fee when they choose to refinance,"

Unfortunately what borrowers need to take into account here is that a fixed rate contract is just that a contract.

As interest rates fall, the payout figure becomes even wider, which means for some fixed rate borrowers it may already be too late to save by refinancing.


CONSUMER SENTIMENT SURGES

Posted 12/12/08

The latest Westpac-Melbourne Institute Index of Consumer Sentiment had an unexpected surge this month of 7.5 %; it is now more than 12% higher than just two months ago.

Westpac chief economist, Bill Evans was surprised at the figures considering all the gloom around the global economy however earlier this week BIS Shrapnel said the economy was relatively safe from recession.  It outlined Australia's biggest threat was talking itself into one.

With more good news borrowers' confidence levels also surged and the Index's time-to-buy-a-dwelling index has now reached its highest level since 2002.

NEW YEAR RATE CUT FAR FROM CERTAIN

Posted 11/12/08

RBA governor Glenn Stevens speaking at a dinner for the Australian Business Economists commented that the recent three per cent rate cuts would significantly reduce the household sector's debt burden.

"This is roughly equal to that seen in the early 1990s, when the cash rate fell from 18 per cent to 4.75 per cent. But on that occasion it took two and a half years," he said.

"These are quite big changes. They will take time to have their full effect".

He emphasised there was scope to do more however to remember the importance of "the extent of stimulus that is still in the pipeline".


THE WELCOME RELIEF THAT A RATE DROPS BRING

Posted 10/12/08

The last four months has seen the Reserve Bank of Australia reduce interest rates by 3% and whilst the full cut has not been passed on by the banks it has been significant.

Here is an example of the potential savings that can be made by maintaining old repayment levels and reducing principal.

                                 Peak Rate                   New Rate                   

Loan Amount              $300,000                     $300,000                    

Interest Rate               9.41%                          6.91%                         

Loan Term                  30 Years                      17 Years 1 Month      

Repayment Cycle         Monthly                       Monthly                      

Monthly Repay             $2503                          $2503                         
Interest Paid                $602,963                     $211,938

Whilst the above is of a generic nature and doesn't take into account some of the exit fees it is a great example of how being disciplined can save you hundreds of thousands of dollars as well as years off your mortgage.   

GROWTH IN LENDING INCREASING DESPITE TOUGH TIMES

Posted 8/12/08

Despite the financial crisis mortgage lending continues to grow at a healthy rate in an Australian Mortgage Report released yesterday by Deloitte's.

The annual growth rate of lending is around 10% which is slightly lower than the 2007 figure however the result is heartening. 

The report acknowledged that the lending appetite would continue to remain strong as long as rates remained low, population growth continued and the shortfall in property supply remained. 

James Hickey, a banking partner with Deloitte Actuaries and Consultants said "There is no doubt that the global economic conditions have impacted on both the availability of mortgage funding and consumer sentiment in relation to mortgage settlements. However, the ability of our major banks to actively lend in the market, together with the various government and Reserve Bank of Australia actions to support stimulus, is likely to put a resilient ‘floor' under the housing market for the year ahead."


INTEREST RATES LIKELY TO BE CUT BY THE RESERVE IN 2009

Posted 3/12/08

With the Reserve lowering its cash rate again to a six year low of 4.25% economists claimed the party has not even started and there will be more to come in the new year.

Several leading economists including AMP Capital chief economist Shane Oliver are now tipping the Reserve Bank's cash rate to sink as low as 2.5 per cent midway through 2009.

"It will head towards three per cent, possibly down to 2.5 per cent by mid next year.  Really, they have front loaded the rate cuts given the threat to growth and a desire to avoid a collapse in house prices. Now they'll just chip away at it."

Commsec chief analyst Craig James is of a similar opinion "We are tipping another 50 basis points in February down to 3.75. We haven't seen those levels since the late 1960s.  There is an enormous amount of stimulus in the system, so if consumers can't find great opportunities now, they never will."

The latest rate cuts have been a huge win for the housing industry.


RBA'S MONETARY POLICY STATEMENT

Posted 2/12/08

At its meeting today, the board decided to reduce the cash rate by a further 100 basis points, to 4.25 per cent, effective 3 December 2008.

Recent actions by governments and central banks to stabilise their respective financial systems have begun to take effect. Nonetheless, financial market sentiment remains fragile, as evidence accumulates of weak economic conditions in the major countries and a significant slowing in many emerging countries.

Commodity prices have fallen further. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate significantly in 2009.

The Australian economy has been more resilient than other advanced economies, but recent data nonetheless indicates that a significant moderation in demand and activity has been occurring.

With confidence affected by the financial turbulence and a decline in the terms of trade now underway, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term.

With that outlook, and with capacity pressures now easing, it is likely that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise have been the case.

Weighing up the international and domestic developments of recent months, the board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting.

As a result of today's decision, the cash rate will be at its previous cyclical low point. Given trends in money market yields, most lending rates should fall significantly and will also reach below-average levels.

There has now been a major easing in monetary policy over the past few months.

Together with the spending measures announced by the government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead.

The board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the two to three per cent inflation target over time.