Rates are on hold but the housing fire could already be out.

The Reserve Bank decided to keep interest rates on hold during the week, much to the relief of many a home owner, citing concerns about European economies along with satisfaction with current inflation levels.

"Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago," Governor Glenn Stevens said.

But the damage to the housing market could already have been done, with some signs of moderation already emerging.

The RP Data Rismark Hedonic Home Value Index released last week showed signs of softening in April, rising by just 0.2 per cent over the month, after 16 months of strong gains.

A graph of the index’s rolling quarterly capital gains highlights a distinct pull-back in April after a peak in December.

Interest rates have jumped from 3 per cent to 4.5 per cent in as little as eight months. Unsurprisingly, that has had an impact on the number of loans approved, with housing finance falling for six consecutive months.

After dropping a cumulative 14 per cent from October to March, housing finance is now at its lowest level since February 2009.

The majority of this fall is due to owner-occupiers pulling out of the market – down by 24 per cent – as the first home owner’s grant was reduced, while investors rose 9 per cent.

The argument for why Australia didn’t experience the collapse in property prices seen in the US and other parts of the world has always been that the supply of accommodation here was limited while the demand continued to grow.

The stronger lending practices of our banks are another factor. We didn’t have as many loans going to property buyers who obviously couldn’t afford to pay them back.

The NINJA loan (no income, no job and no assets) was non-existent here.

But international commentators rightly point out that it is rare for bubbles in any kind of market not to burst.

The renowned value investor and founder of global investment management company GMO, Jeremy Grantham, says both the British and Australian housing markets should decline by about 40 per cent.

If they don’t, he says, it will be the first time in history that a bubble has not behaved in such a way.

We should be fortunate enough to avoid a property crash of the magnitude of that in the US but prices in any market rarely go only in one direction. They do fall, so don’t be surprised if property values start to soften.

Source: Domain.com.au

Reserve Bank gives borrowers a breather, leaving interest rates unchanged amid renewed signs of global economic weakness.

The Reserve Bank has given borrowers a breather, leaving interest rates unchanged amid renewed signs of global economic weakness.

The central bank’s decision today to keep its key cash rate at 4.5 per cent snaps a series of three rises in as many months, and follows a month of turmoil on global financial markets.

Worries about a worsening debt crisis in Europe sliced 8 per cent – or more than $100 billion – from the value of Australian stocks in May, and virtually eliminated any expectation of a rate rise by the RBA today. The monthly shares slide was the worst since the depths of the global financial crisis.

”Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets,” RBA governor Glenn Stevens said in a statement accompanying today’s decision. ”Investors have generally displayed a good deal more caution.”

Even so, Mr Stevens said ”global growth is still expected to be at about trend pace in 2010. ” While conditions in Europe have been relatively weak,  growth in Asia – home to many of Australia’s top trading partners – ”continued to be quite strong and may need to moderate in the year,” he said.

Since October, when rates were at half-century lows, the RBA has lifted the official interest rate six times in a bid to discourage excessive spending as the economy rebounded from last year’s slowdown. Those rate hikes have piled about $300 on to the average monthly payment for a typical 25-year, $300,000 mortgage.

”They’re obviously waiting and seeing what the effects of past interest rates have been,” said NAB head of Australian economics and commodities Robert Brooker.

”We don’t think they’ll be moving up again until towards later in the year.”
Despite rising company profits, low unemployment and an increase in weekly wages, the recovery remains patchy.

Data out today showed building approvals sank 15 per cent in April, the most since November 2002. Retail sales, though, rebounded, rising 0.6 per cent in April, twice the pace of growth that had been expected by economists.

The Australian dollar was little changed after the RBA’s verdict, trading recently at 83.75 US cents, from 83.64 US cents just prior to the announcement.

Story by Chris Zappone Fairfax Digital

The Reserve Bank of Australia (RBA) has warned lenders and borrowers to be prudent while giving an assurance that Australia does not have a speculative housing bubble on its hands.

Fears of a property bubble emerged after the Australian Bureau of Statistics house price index rose 20 per cent in the year to March.

But RBA head of financial stability Luci Ellis said in a speech that Australian house prices have recovered their small decline from 2008 to post increases of between about 12 to 15 per cent over the past year in capital cities, depending on the measure.

Ms Ellis said recent data suggested Australia does "not have a credit-fuelled speculative boom on our hands".

"It would not be desirable for the current situation to turn into one," she said in a speech.

"It will therefore be important for lenders to remain prudent in their standards.

"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."

She told a residential property conference housing prices have been under upward pressure in Australia, with most short-term drivers coming from the demand side following the increased first home-buyers grant, low interest rates and lower than expected unemployment.

"The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices," she said.

"Some of that pick-up in construction does seem to be happening."

She said the supply of housing was always going to be quite "sluggish".

"But whatever the causes, the ability to add to supply is falling short of this higher rate of population growth, despite some pick-up recently," she said.

"Naturally that is putting upward pressure on housing prices."

Ms Ellis said it would be "desirable" for the supply of new dwellings to become more flexible than it had been to date because extra people need somewhere to live, and both house prices and rents could rise.

The more that housing prices rise, the more some people might feel they must stretch their finances to buy a home, she said.

Another concern was that if too much of the response to faster population growth comes as faster growth in housing prices, this could be "built into people’s expectations".

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment, or worse," she said.

She also said fewer households had bought their homes without debt.

Across the mortgage market, lending standards were now a little tighter than they were a few years ago and the fraction of low documentation loans was now lower than it was two years ago for both owner occupiers and investors, she said.

As well, only a minority of recent home loan borrowers started with a loan to value ratio above 90 per cent, she said.

Ms Ellis also revealed the RBA has been carefully watching lending standards in the important first-home buyer market segment.

"First-home buyers have long faced greater risk than more established home owners who have more equity in their home," she said.

"But as far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."

AAP

The string of interest rate rises since October is not deterring borrowers from taking out variable rate housing loans, leaving mortgage holders potentially more exposed to higher repayment costs.

The Reserve Bank, in its quarterly Statement of Monetary Policy released today, said fixed-rate housing loans now account for only about 2 per cent of total – the lowest ratio in a decade.

”This share has been well below its decade average of 11 per cent for almost two years, with the result that the share of outstanding loans at fixed rates has declined substantially,” the RBA said.

Fixed loans mortgage borrowers in the market fell to 4.8 per cent of the total in 2009 from as high as 19.4 per cent in 2007, separate data from the Australian Bureaus of Statistics data and RateCity research show.

Fixed-rate loans, which currently charge an interest rate about 1.5 percentage points higher than standard variable rate loans, demand larger fees for providing borrowers with certainty about monthly costs.

Variable rate mortgages, while offering more repayment flexibility, expose borrowers more directly to Reserve Bank interest rate changes. The RBA has lifted rates six times out of its past seven monthly board meetings – including earlier this week – adding about $300 per month to total repayments for those borrowers holding a typical $300,000, 25-year variable rate mortgage.

Borrowers flocked to the certainty of fixed-interest mortgages during the last cycle of rising interest rates, with the ratio rising to 22 per cent a month over the six months to March 2008.

The average three-year fixed rate mortgage rate was 9.42 per cent in August 2008, according to RateCity. That compares with 7.38 per cent for a standard variable rate today.

”There are still a lot of people out there, still paying these high interests rate for fixed loans,” said RateCity consumer advocate and spokeswoman Michelle Hutchison.

Being locked in also meant those borrowers missed out on tumbling rates over the past two years when the RBA drove its key cash rate to 50-year lows in a bid to avert a sharp economic slowdown.

Outlook changes
Interest rate futures pointed to a rate cut this morning for the first time since August of 2009 as fears unleashed by the sovereign debt crisis in Europe forced central banks reconsider the case for a global slowdown.

As of Friday afternoon, the market was rating the possibility of a rate cut in June by the central bank at a 6 per cent chance – a reversal of previous months when the outlook has been consistently pointed to the prospect of rates to rise in coming months.

The turmoil in financial markets – including steep plunges on Wall Street overnight – has also trimmed the prospect of further rate rises in coming months.

Credit markets are pricing in a cash rate for the RBA of 5 per cent within a year from a current 4.5 per cent.

czappone@fairfax.com.au

The housing industry has lashed out at the Reserve Bank’s rate rise today, claiming it will discourage the construction needed to relieve the nation’s housing affordability crisis.
One developer went further, claiming future rate hikes threatened to trigger a collapse of Melbourne’s housing market.
The RBA lifted interest rates to 4.5 per cent from 4.25 per cent today, pushing up the monthly cost on an average $300,000 mortgage over 25 years by $46. It’s the sixth increase since October, which together have added an estimated $300 in monthly repayments to borrowers.
Housing Industry Association senior economist Ben Phillips predicted housing affordability will sink to new lows in the coming year as interest rates rise and the nationwide shortage swells to 200,000 homes.
”Negative signs are already appearing in the new homes market with both building approvals and home lending figures down over 2010,” he said.
Rising costs for loans shrinks the number of would-be purchasers of homes. That in turn saps the demand for the new construction of homes, although substantial numbers of would-be buyers are estimated to be avoiding the supercharged market in which prices jumped 20 per cent in the year to March.
Mr Phillips said higher interest rates wouldn’t help the increase the supply of housing stock called for in the Henry Tax Review released this week. The government either shelved or rejected recommendations including the introduction of a land tax and reductions to negative gearing deductions.

RBA ‘out of its depth’

Leanne Pilkington, general manager of Sydney real estate agency network Laing+Simmons, said the rising interest rates confirmed that ”the RBA is out of its depth when it comes to devising measures to control an overheated housing market.”
Blaming the imbalance between housing supply and demand, Ms Pilkington said, ”Interest rate increases are clearly having no impact on dampening inflated residential property prices, particularly in New South Wales.”
Victorian property developer Villawood Properties labelled the RBA’s rate move ”impetuous” saying the demand in the Melbourne market is already slowing and further rate rises could trigger a housing collapse.
”With much of the demand in the current market fuelled by foreign investment, the Federal Government’s recent proposed restrictions will assist to ease demand on its own – without the need for today’s rate increase,” said Villawood Properties executive director, Rory Costelloe.
”Should the RBA continue to push rates skyward Melbourne’s strong property market is likely to experience a housing collapse.”
Melbourne led home price rises in the past year among capital cities, rising almost 28 per cent in the year to March, the Australian Bureau of Statistics reported yesterday.
The government has tightened requirements on foreign buyers last month in response to anecdotal reports of a flood of overseas money coming into the local real estate market.

Impact felt

Australasia’s largest real estate and property group, Ray White, said the central bank’s interest rate strategy was finally having an effect on residential sales.
The Ray White Group’s Australian business grew by 8 per cent in April, compared with a year earlier.
”This was the slowest increase on (the) previous year’s results since the economic downturn of late 2008,” said Ray White Joint Chairman Brian White.
”Judging by our April results, it looks as if the interest rate increases are having an impact on activity in the Australian residential market,” the company said in a statement.

czappone@fairfax.com.au

Australian mortgage holders are a third time unlucky this year, after the Reserve Bank board today lifted interest rates by 0.25 per cent. It is the third rate rise in as many months.
Mortgage holders will be disappointed with the increase. After being told by the Reserve Bank Governor, Glenn Stevens, that rates were getting close to normal levels, borrowers would have been hoping the pace of rate rises had slowed. Today’s 25 basis point rise takes the official rate to 4.50 per cent.
It is the sixth increase since September and means mortgage holders are now paying about $300 a month extra for their mortgages than they were in the middle of last year, says Domain.com.au blogger and property author Carolyn Boyd. "There were a lot of mixed signals this month that may have had mortgage holders thinking they were in for a break. While inflation last week came in higher than expected, consumers have been spending less at the shops."
Until today’s decision, mortgage holders on variable interest rates were paying about 7 per cent to their lenders. The rates that borrowers pay to their financial institutions are expected to normalize at about 7.5 per cent to 7.75 per cent by year’s end. That could signal there are still one or two more rate rises to come before Christmas.