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Monday, April 26, 2010

RBA: State governments part of housing problem

RBA Board minutes
• Minutes of the last Reserve Bank Board meeting indicate that the central reason why interest rates rose in April was because they were too low – inconsistent with “trend” economic growth and inflation in line with the medium term target.
• The Reserve Bank has made a pointed reference to the “land usage policies of local and state governments” as a contributing factor to the buoyant housing market conditions.
• “The prospective rise in the terms of trade” – more specifically coal, iron ore and gas prices – was a key factor behind the decision to lift rates. That is, export price increases were more significant than had been previously assumed, adding to the urgency to get rates back to normal.
• The RBA Board minutes reveal that “normal” interest rates are defined as lending rates for housing and business since 1997. Home loan rates are near “normal”, but big business rates remain below normal.

What does it all mean?
• Each time the Reserve Bank Board minutes are published, the picture becomes a little clearer. It is certainly apparent that the sharp rise in commodity prices was the key element causing the Reserve Bank to lift rates in April. In essence, the Reserve Bank hadn’t assumed such a sharp rise in mining and energy prices, and therefore was under-estimating the extent of the prospective income boost to the economy. As a consequence, Board members believed that interest rates needed to get back to normal, sooner rather than later.
• The Reserve Bank has been in a rush to get rates back to normal, and with good reason. The last thing the Bank wants is a re-run of the 2007/2008 period where it under-estimated the resources boom, causing inflation to spike higher.
• The Reserve Bank has pinned part of the blame for soaring house prices on state and local governments. However if anything it is still too polite. Many state governments have lacked the urgency and desire to address the fundamental tightness of housing markets. More land needs to be produced, developers and investors need more incentives and fewer barriers and zoning regulations need to be fundamentally re-thought. Many state and local governments are adopting a ‘business as usual’ posture despite the fact that population growth is at multi-decade highs.
• The Reserve Bank isn’t giving hints on future rate moves. The Bank wants rates back to normal, and it isn’t far away from the objective. CommSec believes that the RBA can afford to wait a month or so before lifting rates again.

What do the figures show?
Minutes from the April 2010 Reserve Bank Board meeting
Key Comments:
“In the view of the Board, with forecasts suggesting that growth in the domestic economy in 2010 would be around trend and that inflation would be around 2½ per cent, consistent with the medium-term target, the level of interest rates in the economy would be expected to be close to average. This remained the underlying rationale for consideration of any adjustment to the cash rate in the current period. Since lending rates were still a little below average, members expected that they would probably need to rise further in the period ahead.
• Buoyant housing market: “Members discussed the factors contributing to the recent strong price growth. On the demand side, population growth was strong, households had confidence about future income growth, and mortgage rates were at below-average levels. At the same time, the supply of new housing was not expanding sufficiently, partly because of the land usage policies of local and state governments and also because of the tightness of finance for developers.”
• Terms of trade: “Recent data for the world economy suggested that the recovery in the major advanced economies was still tentative, but that the expansion in most of Australia’s major trading partners in Asia was proceeding strongly. This was feeding through into significant increases in the prices of resource commodities, including increases in the contract prices for coal and iron ore, which were larger than had been expected a few months ago.”
• “Normal” rates: “The increase in the cash rate in early March had been passed through in full to most variable lending rates. Members noted that lending rates for housing and business were a little below their averages for the period since 1997.”
• Consumers are confident, but not spending: “Household surveys suggested that consumer sentiment had remained at a high level in recent months, though consumers appeared quite cautious in their spending; there had been little growth in retail spending over recent months.”
• Weak commercial building: “The non-residential building sector remained subdued and, abstracting from the surge in construction of educational facilities, new approvals were at relatively low levels.”
• Terms of trade surprise/challenges: “Developments in commodity markets meant that the increase in the terms of trade through 2010 was likely to be substantially larger than forecast in the February Statement on Monetary Policy. This implied strong growth in nominal incomes in the Australian economy over 2010. The increases in coal and iron ore prices, along with the developments in the LNG sector, were also contributing to a strong outlook for investment in the resources sector. Members noted that, while the Australian economy was benefiting significantly from developments in the resources sector, these would also pose challenges.

What is the importance of the economic data?
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?
• There is a simple reason why the ACT is at the top of the state/territory economic rankings – it has handled the demands of a growing population and strong demand for housing. Other states and territories have addressed the problem differently, but less successfully. For more homes to be built, governments need to get back to the planning drawing board.
• Interest rates are destined to rise in coming months, but rate hikes should be less frequent given that the RBA is broadly back where it wants to be.

Source Craig James, Chief Economist, CommSec

Monday, April 5, 2010

Reserve Bank tipped to raise interest rates today

Home borrowers are expected to be hit with some bad news when the Reserve Bank of Australia (RBA) meets today.

Most economists predict the central bank will vote to raise rates by a quarter of a percentage point at its board meeting in Sydney.

A jump in the cash rate - from four per cent to 4.25 per cent - would see monthly repayments on an average $300,000 home loan rise by $50.

The news for borrowers is expected to get worse, with most experts expecting rates to climb to at least five per cent by Christmas.

This would add $200 a month to average home loan repayments.

Borrowers already copped a rate rise in March, which followed three at the end of last year.

The RBA meets on Tuesday morning and is scheduled to announce its decision at 2.30pm (AEST).

Macquarie Group interest rate strategist Rory Robertson said a strengthening jobs market and Chinese demand for Australian resources added to the case for a rate rise.

"Another hike this month still looks like an 80 per cent probability," he said.

National Australia Bank Ltd has no plans to raise its standard variable interest rate higher than any move the central bank makes to the official cash rate this month.

The Reserve Bank of Australia (RBA) is expected to meet on Tuesday to discuss whether or not to lift official interest rates beyond the current 4.0 per cent.

NAB has reassured customers it won't move rates higher than the RBA and says its strategy of matching the central bank has led to a surge in its mortgage volumes.

Personal banking group executive Lisa Gray says the bank has seen an increase in customers in recent months.

"This has been across a range of products, but particularly personal transaction accounts and home loans," Ms Gray said in a statement on Monday.

Meanwhile, some of Australia's biggest property developers have urged central bank policy makers to reconsider an interest rate rise.

"Each interest rate rise is tantamount to a game of Russian roulette with Australia's housing supply," Urban Taskforce Australia chief executive Aaron Gadiel said in a statement.

He argued that with Australia undersupplied by 200,000 homes, interest rates should not be used to attack housing demand when the problem was actually the undersupply of housing.

"The Reserve Bank has been using increased interest rates as a weapon against home price inflation," Mr Gadiel said.

"Interest rate rises reduce demand for housing, but the origins of this problem lie on the supply side."

Mr Gadiel said developers were also still struggling to secure bank financing for projects.

"Weaker housing demand courtesy of interest rate increases makes it more difficult to demonstrate project viability to a bank.

"Any increase in interest rates undermines demand for housing and boosts the holding costs faced by developers."

Wednesday, January 6, 2010

RP Data – Rismark Home Value Index Release

31 December 2009

Australian home prices rise by +1.1% in November with 11.3% cumulative growth in first 11 months of 2009; results driven by robust gains in Sydney (+11.6% for year) and Melbourne (+17.0% for year).

Based on the residential property database, which is the nation’s largest with over 250,000 sales in the first eleven months of 2009 alone, Australia’s housing market continued to grind out strong gains in the month of November with cumulative double-digit growth recorded in the year-to-date.

According to the RP Data ( National Home Value Index, which is published by the RBA in the Statement on Monetary Policy, Australian home values rose by an indicative 1.1 per cent in the month of November after 1.3 per cent growth in October (October’s initial indicative estimate was 1.4 per cent).*

Over the first 11 months of 2009, Australian home values rose by 11.3 per cent following on from their modest 3.8 per cent peak-to-trough falls in 2008.

The most important story of 2009 has been the extraordinary recovery in the Melbourne and Sydney housing markets. In the three months to end November, home values in Melbourne and Sydney have outperformed most other capitals rising by 4.5 per cent and 3.2 per cent, respectively (see summary tables for more).

Over the year-to-date, Melbourne has been Australia’s best performing capital city outside of Darwin, generating exceptional capital gains of +17.0 per cent. Sydney home values have increased by more than 1 per cent per month with cumulative growth of 11.6 per cent.

In the first 11 months of 2009, most of the other capital cities have performed strongly with Darwin (+17.9 per cent) leading the way, followed by Canberra (+10.9 per cent), Brisbane (+6.9 per cent), Perth (+6.5 per cent) and Adelaide (+5.7 per cent).

According to Christopher Joye, managing director of Rismark International, “At the end of 2008 most forecasters were predicting substantial house price falls in the following 12 months. Almost all of them were proven wrong. Australia’s housing market has surprised on the upside with impressive double-digit capital gains in the year-to-date.

The inability of most analysts to get close to divining Australia’s housing market trajectory during the GFC and in the recovery since, combined with the many misconceptions one typically hears about housing, illustrates just how poorly understood the sector is.” Research Director Tim Lawless suggests that the November results highlight that the Australian market may be less sensitive to interest rate rises and the removal of Government stimulus than many would have thought.

“The strong November results were achieved despite the 25 basis point lifts in the official cash rate in October and November as well as the wind back of the boost to the First Home Owners Grant which was halved on the first of October. First home buyers have been trending down since peaking in May ’09 and the gap is being filled by upgraders and investors who are much less sensitive to rate rises and the level of stimulus.”

Christopher Joye said, “first time buyers have been fading from the market and the withdrawal of the boost has yet to have any discernible impact on price growth. The key driver of Australian housing demand in the latter half of the year appears to have been upgraders and investors. We expect this trend to continue in 2010.”

He said that as mortgage rates normalise to around 7-8 per cent, house price growth will taper back to more modest single-digit levels in 2010. Since many borrowers did not reduce their mortgage repayments in 2008-09 when the RBA cut rates by circa 40 per cent, household balance-sheets should be well positioned to absorb higher costs.”’s Tim Lawless agreed stating that value growth in Australia’s residential sector is likely to be more subdued than what was recorded in 2009.

“2009 has been both an exceptional and surprising year for Australia’s property market.”

“Looking forward we would expect market conditions to moderate into 2010 as interest rates continue move back to a neutral setting and the remainder of the Government stimulus is rolled back. The primary driver of growth will continue to be an under supply of housing coupled with extraordinary housing demand fuelled by population growth,” he said.

Market dynamics

The median Australian home price in all capital cities over the three months to end November was $439,800 (including houses and units). If we include all regions across Australia (i.e. not just the circa 40 per cent of homes located in capital cities), the national median dwelling price is $395,000. (Note: that these are the ‘middle value’ or 50th percentile median prices based on the pooled sales over the last three months.)

The median Australian house price in capital cities is $470,000 while the median unit price is $390,000.

The most expensive houses, based on median price, are in Sydney ($550,000), followed by Canberra ($535,000), Darwin ($501,000), Melbourne ($486,400), Perth ($485,000), Brisbane ($449,850), Adelaide ($372,000) and Hobart ($330,000).

Sydney has the most expensive unit market with a median price of ($417,000). This is followed by Melbourne ($402,500), Canberra ($390,000), Perth ($385,000), Brisbane ($375,000), Darwin ($357,000), Adelaide ($310,000) and Hobart ($270,750).

In the month of November, detached houses (+1.0 per cent) have underperformed units (+1.3 per cent).

Over the three months to end November, unit values (+3.1 per cent) have also shaded houses (+2.9 per cent).

And in the year-to-date, units (+12.5 per cent) have materially outperformed houses (+10.9 per cent) presumably due to the influence of the first time buyers’ boost.

National rental yields tapered slightly in November with the gross annualised rental yield for units being 4.9 per cent while house yields are lower at 4.1 per cent.

* This data is indicative and subject to revision. It is typically based on approximately 30-40 per cent of the total population of expected home sales. RP Data ultimately collects roughly 100 per cent of all property sales via its license agreements with every State and Territory Government Valuer General and Land Titles Office. This is reflected in subsequently reported index results (ie, in the months preceding the current indicative period).

**The median price is the 50th percentile observation based on all pooled home sales over the three months to end November 2009. This is different to the medians reported by other parties for several reasons. First, where appropriate it includes all property types (ie, not just detached houses, like the ABS). Second, the median value reported by the likes of APM is calculated using a ‘stratification technique’, which is different to the simple 50th percentile observation used here. RP Data-Rismark’s previously reported ‘median values’ must also be interpreted differently. These are the index values attributable to the RP Data-Rismark ‘hedonic index’, which was originally based at inception on median automated property valuation estimates (ie, the median of a statistical valuation of all capital city homes). The change in the index value over time reflects the underlying capital growth rates generated by residential property in the relevant region. These growth rates are not influenced by capital expenditure on homes, compositional changes in the types of properties being transacted, or variations in the type and quality of new homes manufactured over time. The RP Data-Rismark ‘median values’ are not, therefore, the same as the ‘simple median price’ associated with all homes sold during a given period. In future, we will report simple median prices to avoid any further confusion.

Source- Rp Data

Sunday, December 13, 2009

New mortgage values to slump by $14 billion

Higher interest rates and the end of the first home buyers' boost will blow a $14 billion hole in the mortgage market next year, experts have warned.

The value of all new home loans was expected to fall by $14.4 billion in the 12 months to September 2010, down 8.8 per cent from the same period a year earlier, a report by independent consultants Market Intelligence Strategy Centre (MISC) says.

"This will reflect a slower return of investor lending and still strained funding, which will restrict small-lender activity, as well as further rate increases," the MISC report released on Monday said.

An MISC spokesman said the $14.4 billion decline, if realised, would be the largest total fall since 2003, when the value of all new home loans written backpedalled by about $35 billion.

The bulk of the contraction was expected to take place in the December and March quarters, before the housing market returns to growth in June next year.

"The bottom of the market will not be reached till the March 2010 quarter," the report said.

"MISC believes this quarter will see the lowest point in new mortgage demand for the 2010 year and that June and September quarters will show positive growth, albeit still far les than 2009 experience."

The Reserve Bank of Australia (RBA) has lifted the cash rate at its past three meetings to 3.75 per cent, and market economists anticipate further rate hikes in 2010.

Data from MISC, which conducts research on behalf of the banks, found the value of all new home loans written fell by 5.9 per cent in the September quarter.

It was the first contraction in five quarters as lending was negatively influenced by tighter lending criteria, higher loan-to-valuation ratios and increased rates on fixed rate home loans.

The MISC report also said that rising house prices had eroded the effect of the boost to the first home owner grant, which ends on December 31.

The federal government grant currently provides $10,500 for those buying a home and $14,000 for those building a home or buying a new home

Source: Money
14/12/2009 7:30:00 AM

Thursday, December 10, 2009

NAB lays down challenge to other majors

NAB has thrown down the gauntlet to the other two majors, after raising its variable mortgage rate by just 25 basis points – in line with the Reserve Bank.

The bold move from NAB flies in the face of some other majors who have been citing higher funding costs as a driver for moving their rates above the official cash rate.

Westpac was the first bank to move after the RBA announcement, upping its standard variable rate by 45 basis points.

From today, NAB customers will pay a standard variable rate of 6.49 per cent compared to Westpac’s 6.76 per cent, which equates to a saving of $51 per month on a $300,000 mortgage.

NAB’s decision to raise rates by the same amount as the Reserve Bank has opened up the biggest mortgage rate gap between the majors on record.

Lisa Gray, group executive NAB personal banking, said the last time there was such a wide gap between the majors was “decades ago.”

“We are determined to be competitive, to offer our customers a better deal and attract new customers to NAB. 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.

“NAB has offered the cheapest standard variable interest rate amongst the major banks for the past six months and the new rate of 6.49 per cent p.a. is likely to remain unbeaten amongst the major banks.

“We have been very considered with this announcement given funding costs and the cost of raising deposits continues to fluctuate and is expected to increase further. However we believe that improving our reputation and relationships with our customers and the community is core to the long term sustainability and success of our business.”

Friday, 04 December 2009 Source REB

Thursday, November 12, 2009

RBA lifts rates by 25 basis points

Reserve Bank Board meeting

• The Reserve Bank (RBA) has increased interest rates for the second consecutive month, lifting the cash rate from 3.25 per cent to 3.50 per cent.
• The RBA said “it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.”

What does it all mean?
• The Reserve Bank certainly hasn’t sought to frighten the horses with the latest rate hike. All and sundry had expected a move of 25 basis points and the Reserve Bank didn’t disappoint. At this point in the cycle, a move of 25 basis points strikes a nice balance – it edges the cash rate back to more normal levels without threatening the economic recovery. There has been little change in the wording or tone of the statement, suggesting that the RBA will continue to lift rates in 25 basis point increments.
• It is far from certain that rates will rise again in December. The Reserve Bank has never lifted rates for three consecutive months, although it did cut rates five consecutive times late last year and early this year in the midst of the global financial crisis. While the Governor did warn that he wouldn’t be timid in removing monetary stimulus, the Reserve Bank has already lifted rates twice at a time when other central banks are solidly on the sidelines. In addition inflation continues to ease, especially once housing is stripped out, and the firmer currency will assist in keeping inflation contained over the next 6-9 months. We expect the next tranche of rate hikes in February and March 2010.
• A year from now the cash rate will most likely be around 4.50 per cent – a level that will make the Reserve Bank much more comfortable. While a cash rate around 5 per cent has been regarded as a ‘neutral’ monetary policy setting in the past, this may prove too high if the Aussie dollar remains close to, or above, US90 cents. A strong currency not only leads to lower prices of imported goods and lower inflation but makes it tough for exporters and tourism.

Interest rate decision and past cycles
• The Reserve Bank has lifted rates for the second straight month – the first back-to-back rate hike since March 2008. The cash rate was lifted by 25 basis points to 3.50 per cent. Rates had stood at a 49-year low of 3.00 per cent before the decision in October to lift the cash rate.
• The first rate hike in the new cycle occurred six months after rates were last reduced back in April 2009. There were six rate cuts in the last cycle with the cash rate cut from 7.25 per cent to 3.00 per cent. Interestingly the previous tightening cycle in 2002 also began six months after the final rate cut was delivered.
• If banks pass on the interest rate increase in full then repayments on a 25-year $300,000 home loan will increase by $46.21 a month. Even with the rate hike, monetary policy is still clearly expansionary. The Reserve Bank has previously indicated that the “normal” or neutral cash rate is around 5.00 per cent. A neutral cash rate means that monetary policy is neither expansionary nor contractionary.
• The Reserve Bank has now adopted a “tightening” bias. That is, the RBA has indicated that further rate hikes are likely in coming months: “it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.”

What are the implications for interest rates and investors?
• Around a third of people rent, a third of people own their homes outright and a third of people are buying homes. But over time, the proportion of home owners with a mortgage has been rising. So the community is far more interest rate sensitive. Still, when rates were coming down in 2008, many home buyers elected not to cut their loan repayments. So with interest rates still historically low, there will be negligible effects on the economy. But the Reserve Bank must be careful when lifting rates in 2010 – arguably it went too far with rate hikes in 2007 and early 2008.
• The Reserve Bank will continue to ‘normalise’ rate settings over 2010 – that is, lift rates to more ‘normal’ levels in line with more ‘normal’ economic conditions.
• Apart from Australia, only Israel and Norway have lifted interest rates. The longer that Australia effectively ‘goes on its own’ in lifting rates (at least compared with major economies) the higher the Australian dollar is likely to go, constraining earnings for globally-focussed companies. The Reserve Bank has continued to highlight that the Aussie dollar will act as a dampening influence on tourism and export sectors and constrain inflation.

Source Craig James, Chief Economist, CommSec

Thursday, October 29, 2009

Global warming may heat up Tree Change markets

A Parliamentary report on global warming released this week highlights the uncertainty surrounding coastal property markets. Some prospective Sea Changers may become Tree Change converts.

Tree Change properties, often considered the poor cousin to Sea Change properties, may be given an unexpected boost, with a recent Parliamentary report highlighting potential issues associated with properties located close to the water due to global warming. The report, released this week by the House Standing Committee on Climate Change, Water, Environment and the Arts and titled ‘Managing our coastal zone in a changing climate’ suggests that a one centimetre rise in sea levels could lead to at least one metre of erosion on the shoreline, making coastal properties vulnerable to flooding, erosion, high tides and surging storms.

The implications for coastal property markets around Australia are likely to be far reaching, particularly for properties within 3km of the ocean and less than six metres above sea level:

• Insurance companies are likely to reassess the value of premiums on potentially affected properties;
• Coastal property owners may be slugged with additional charges aimed at funding the works associated with coastal remediation and risk mitigation (or it may be the broader community that funds these activities)
• New development in areas that are subject to potential inundation may be blocked or face large hurdles associated with planning and development approval
• Existing homes may actually rise more in value due to new supply constraints

In all likelihood, the values of coastal properties will continue to rise despite the heightened uncertainty that surrounds coastal markets. Ultimately, most owners and buyers will choose lifestyle and prestige over the more practical considerations raised in the report.

There will, however, be a portion of the market that turns away from the coast and look towards higher ground. ‘Tree Change’, where buyers move from the city to a rural location, has been gathering momentum for some time. Hinterland markets and agricultural regions close to the capital cities have become more popular due to the high prices of properties located near the water and the increasing demand from baby boomers who are winding down or approaching retirement. The increased uncertainty surrounding coastal markets is likely to propel demand for these regions even higher.

Traditionally, Tree Change buyers have been attracted to the larger land areas that rural locations offer together with the tranquility and privacy that comes naturally in these locations.

Some of the most popular Tree Change markets in each state are highlighted in the graphs and tables below. All have seen a considerable reduction in sales volumes that is synonymous with lifestyle markets around Australia. Apart from Tasmania’s Derwent Valley and Victoria’s Yarra Ranges, all have seen a reduction in the median house price over the last year. The most popular Tree Change markets are generally those that are within commuting distance to a capital city or major centre

Over the longer time period, however, growth in house prices has been fairly consistent with most markets analysed recording a reasonable rate of growth over the last five years. The Blue Mountains in New South Wales is the exception with house prices still lower than what they were when the market peaked in 2004. Such a poor performance over the last five years is likely to be viewed as an opportunity by many prospective buyers who can still take advantage of relatively low prices in a Tree Change market that is within commuting distance to the Sydney CBD.

Information supplied by Rp data