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Monday, April 27, 2009

RBA Governor: Confidence the key

Reserve Bank Governor Speech: “The Road to Recovery”
· The Reserve Bank Governor has also mentioned the ‘R’ word – recession. But while he thinks that the economy is experiencing the first recession in 17 years, Glenn Stevens has been actively stressing the positives as well as the negatives.
· The Governor says that the best thing Australians can do is “to maintain confidence in ourselves and the prospects for our country over time.” Stevens noted further: “Optimism, combined with an awareness of risk, is a fundamental strength.”
· Glenn Stevens has unveiled the “Super Six” – six reasons for Australians to be optimistic about the future.
What does it all mean?
· The Reserve Bank Governor gets it. Hopefully other public officials will also eventually get it. That is, it’s all about confidence. While Australia has been dragged into recession by the global economy, the important point is to highlight the positive factors that will drive the economy forward in coming years.
· This is one of the most important speeches delivered by the Reserve Bank Governor, providing a clear and balanced assessment of just where we are at present and where we are going. It is a speech deserving to be read closely and reported widely.
· Glenn Stevens is no gloom and doom merchant. While the global economy may be a gloomy place, he sees plenty of reasons to be positive, not negative. The fact that the Governor is focussing on the opportunities ahead as well as the risks is incredibly encouraging.
· It may come to be known as the “Super Six” – Glenn Stevens’ six reasons to be upbeat on Australia’s economic future. Political stability, strong banking sector, solid public finances, sensible policy, openness to trade & investment and exposure to Asia are regarded as factors that few other countries can emulate.
· All Australians should celebrate the fact that we have a central bank governor with such pride in our economy. It is a sense of pride that all holding public office should emulate.
· While upbeat about Australia, the Governor has not minced words about the crisis imposed on Australia, referring to the ‘mess’ in the financial systems of the US, UK and Europe.
What did he say?
Selected Comments:
· Confidence: “Turning closer to home, Australians cannot do a great deal to make these improved international conditions come to pass. But we can maximise our chances of benefiting from a new international expansion.
· The first thing is to maintain some confidence in ourselves and the prospects for our country over time. We cannot achieve effortless prosperity either on the back of ever‑escalating mineral prices or simply by bidding up the prices of our houses. It is as well to realise that. But as I have said on previous occasions, Australia’s genuine long‑term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.”
· Reasons for the global recession: “The weakened ability of the financial institutions to provide credit to industry is one of the factors at work, but in my judgment a bigger one is the decline in confidence, and the sudden and widespread aversion to risk, among firms and households all over the world. It seems that everyone, everywhere, having seen the instability in financial systems in September and October 2008, and consequently feeling poorer and fearing bad times ahead, simultaneously decided to pull back their own spending, curtail their expansion plans and reduce their debt.”
· Domestic recession: “Whether or not the next GDP statistic, due in early June, shows another decline, I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession.”
· Recession: “Most of the time, economic activity expands, as population growth, increasing wealth and aspirations to higher living standards lead to more demand, while a growing workforce, higher productivity and technological innovation push up supply capacity. That is the normal situation for an economy. But every so often – on average about once every seven or eight years, but not regularly enough to predict with accuracy – a set of conditions arises that sees demand weaken for a while, output decline and unemployment rise. That is a recession. Usually, though not always, inflation tends to fall as a result of such episodes.”
· The Super-Six: “I suggest that Australia has a very good chance of offering an economic setting in which the following conditions hold.
· First, political stability remains assured – something becoming a bit less common.
· Second, the Government does not own, and has not had to give direct financial support to, the banking system. Australia will be free of the difficult governance and exit strategy issues that such support is raising in a number of countries.
· Third, public finances remain in very sound shape, with modest debt levels and a medium‑term path for the budget back towards balance. Without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, Australia should be able to articulate such a path more effectively than most.
· Fourth, sensible policy frameworks – both macroeconomic and microeconomic – remain in place; the financial regulatory system is strong and tested.
· Fifth, we remain open for trade and investment, and have a capacity to deploy both our own and other people’s capital carefully and profitably.
· Finally, there is an exposure to, and an engagement with, an Asian region that still has the most dynamic growth potential in the world, where hundreds of millions of people will for decades to come be seeking rising living standards.
· There are rather few countries that have the potential to offer so attractive a proposition to international capital, and to their own citizens, over the years ahead. It is a proposition that, if pursued sensibly and consistently, offers the most secure basis for confidence in Australia’s future. It is such confidence that, more than anything else, will help to drive us along the road to recovery.”
· How does the global economy recover? The Reserve Bank Governor says that the “mess” in the US financial system needs to be sorted out; monetary & fiscal policies need to provide support; exit strategies need to be employed; and that global imbalances need to be addressed.
What are the implications for interest rates and investors?
· The Reserve Bank Governor’s optimism on the future certainly doesn’t appear to be laying the groundwork for future rate cuts. The latest RBA Board minutes highlighted the significant amount of stimulus being applied, and the Governor is indirectly highlighting the same in his speech.
· The Reserve Bank Governor believes that the economy is in fundamentally strong shape with the main risk being a further erosion of confidence.

Tuesday, April 21, 2009

Now is best time to fix loans

Borrowers are enjoying generational low interest rates but should consider switching at least a part of their home loan to a fixed mortgage, a leading mortgage broker says.

Loan Market Group executive director John Kolenda said now was the best time to fix a home loan even though the Reserve Bank of Australia (RBA) was expected to further cut interest rates."The best time is always that window before variable rates reach the bottom," Mr Kolenda said."If the variable rates bottom out and fixed rates start to hedge up, then they (consumers) miss the boat and it is going to cost more."ICAP senior economist Adam Carr said it was a "fantastic time" to fix the rate on a loan."What is your downside - the reality is even if the RBA cuts a few more times, banks are not going to pass all of it now," Mr Carr said."The risk is that you miss the swing and you are going to be caught out."Westpac offers a three-year fixed rate loan at 5.39 per cent compared to their standard variable rate at 5.91 per cent.Between September and April, the RBA has lowered the cash rate by 4.25 percentage points to three per cent, a 49-year low, in a bid to stimulate the local economy.Commercial banks have passed on most of the cuts to official interest rates but three of the four big banks passed on less than half the RBA's cut of 25 basis points to the cash rate on April 7.National Australia Bank left their rate unchanged.Mr Kolenda said borrowers could split their mortgage into fixed and variable components."With fixed rates, there is a certainty of knowing what your monthly payments are," he said."If you take a part-variable loan, you get the added benefit that whatever extra payments you make, you can just pile that into the variable-rate component and get that down as quick as you can."Mr Carr said when the RBA started raising the cash rate, the movement to a neutral monetary policy stance - with a cash rate around five per cent - would be swift.Borrowing rates, variable and fixed, would move accordingly, he said."When they go up, they are going to go up pretty quickly because it will be one-way traffic," Mr Carr said."Banks will need to fix that as they will need to hedge against that themselves."

(4/21/2009)brought to you by aap

Friday, April 3, 2009

Property Value Index Release

Released 31 March 2009

For expanded Media Release click here to view the PDF document (160kb)
Residential Property Market Back in Black as Property Values Bounce Back
The release today of the RP Data-Rismark Hedonic Property Value Index heralds some exciting news for the Australian residential market. According to the latest monthly indices, property values are experiencing a recovery from the modest 3 per cent falls seen in 2008. The findings confirmed that over the first two months of 2009, national dwelling values increased by 1.1 per cent with most of the capital gains coming in February (refer attached tables).
RP Data National Research Director Tim Lawless believes this turnaround in market conditions has largely been created by mortgage rates being at their lowest levels since 1970 and as a result, providing a significant boost to affordability. Mortgage rates peaked at 9.6 per cent in August 2008, and have fallen to 5.8 per cent with the prospect of more cuts when the RBA Board meets this coming Tuesday.
According to Christopher Joye, CEO of Rismark International, “The recovery in prices over the last quarter has been driven by the 40 per cent reduction in mortgage rates, the boost to the first home owners grant, the Government’s fiscal stimulus and a significant housing shortage. It is now clear that the boost to the first home owners grant has been one of the Government’s most successful policy measures - this price strength will hopefully encourage developers back into the market.
“The resilience of Australia’s housing market has also been underpinned by our robust banking system, which CBA recently reporting that its 90-day mortgage default rate was a stunningly low 0.38 per cent.
“Despite doomsday rhetoric from some, housing finance volumes have been strong with AFG disclosing that approvals in February 2009 were the best seen since November 2007.
“The improvement in home values in 2009 following modest 3 per cent falls in 2008 highlights the absurdity of the sensationalist predictions by one or two economists in 2008 that prices would fall by 30-40 per cent.
“These index results also vindicate statements last week by the RBA that it expects to see a measured recovery in Australia’s residential property market,” Mr Joye said.
The latest ABS housing finance data suggests real estate investors have yet to make a return to the property market. The value of investment loans has not been this low since 2002, reflecting the low level of investor confidence across all asset-classes.
RP Data’s Mr Lawless suggests the prospect of positively geared property is likely to lure more investors back into the market.
“More and more, properties are showing ‘positive cash flow’. In fact, assuming an 80 per cent loan to value ratio home loan and a discounted 5.4 per cent interest rate, investors in apartments are likely to find that rental income goes a long way towards covering mortgage repayments across every capital city.
“Another interesting dynamic over the last year has been the reversal of the ‘two tiered’ market that was evident between 2003-07.
“During this period affluent areas had a tendency to perform best as the financial services industry boomed. At the same time, the mortgage belts suffered from low sales volumes and declines in values. South West Sydney was a classic case in point - in today’s market it is the opposite. The top 10 per cent of homes in Sydney and Melbourne are off by more than 12 per cent while more affordable homes around the $450k mark have recorded price growth.
“People sometimes forget that homes worth more than $1 million account for less than 5 per cent of all sales. Their performance has therefore little impact on the broader housing market where 80 per cent of all sales occur within the $200k to $600k price bands” Mr Lawless said.