RBA Keeps Interest rates On Hold

reserve bankThe Reserve Bank of Australia (RBA) has spared borrowers an interest rate rise, leaving the cash rate at 4.75 percent in a widely expected move.

The Reserve Bank last increased the overnight cash rate in November 2010 to 4.75 percent from 4.5 percent and most economists still expect a rate rise this year.

“We expect that the Reserve Bank’s decision to leave the official cash rate unchanged at 4.75% today will fuel a new trend emerging where we’re starting to see Australians saving less and borrowing more money for home loans," RateCity chief executive Damian Smith said.

Prior to the announcement the Australian Chamber of Commerce and Industry warned that an official interest rate rise today would "punch a hole" in business and consumer confidence. The chamber’s latest expectations survey, released on Monday, again highlighted the pressures businesses are facing, it said.

"We are particularly concerned about a pre-emptive rate increase, or an early increase," the chamber’s director of economics and industry policy Greg Evans told reporters in Canberra.

"That that could be very damaging and punch a hole in both business and consumer confidence."

Interest Rates on Hold

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Now that the Reserve Bank has decided to place interest rates on hold, we can all  breathe a sigh of relief. But for how long?

The first Tuesday of each month can understandably make home owners and investors a little nervous. May proved to be a false alarm for those who thought that we’d see a further increase in the interest rates of .25%.

Did you know that on average, an increase in the interest rate by .25% is another $60.00 on top of the monthly mortgage? The hardest hit by these rate rises are those families which are single income.

Buying closer into the city isn’t always achievable, as housing affordability has gone down in the wake of 5 years of sustained growth and combined with the RBA’s decision to raise rates in recent months.

We may see families now compromising on space and preferring to purchase townhouses or units – a more european attitude towards home ownership.

The cash rate is now at 4.75%, with most variable interest rate mortgages being charged commercially at 7.83%. The Australian share market rose in response to the RBA’s conservative decision to hold rates steady, the benchmark S&P/ASX 200 index rose 11 points, or 0.23 per cent, to 4897.80, while the broader All Ordinaries added 11.9 points (0.24 per cent) to 4996.60.

Locally in Victoria we’ve seen clearance rates at auction hover at 61% for the past two weeks – thankfully the areas that Chisholm & Gamon specialize in are considered blue chip by many investors and owner occupiers alike.

Our firm sold 36 out of 37 properties listed for auction in March and the 37th property sold today, just missing out on a 100% strike rate for March. Thus, we are continuing to achieve strong sale results and rental returns for our owners.

In a market as balanced as this, it is important to consider carefully all factors before making that next investment – property or otherwise.

Floods and debt leave Queensland banks drenched

banksThe warning by Standard & Poor’s on Friday that it could downgrade the credit ratings of banks with exposure to the Queensland floods shows that the floods will continue to wreak havoc on business for a long time yet.

Share prices of Suncorp and Bank of Queensland fell after the Standard & Poor’s warning, and in the past few weeks companies including Virgin Blue, Woolworths, Macarthur Coal, QR National and Energy Resources Australia have issued profit warnings partly linked to the floods.

But this is just the beginning of profit downgrades as banks, insurance companies, mining companies and retail groups start to tally the direct and indirect impact of the floods and other tough market conditions.

And the decision by the Prime Minister, Julia Gillard, to impose a flood levy will not help consumer confidence. Another levy on top of the imminent mining tax and carbon tax makes people nervous about government policy, and that puts more pressure on discretionary spending at a time when retailers and small businesses can ill afford it. The Gillard spin is that the levy will cost most people less than $1 a week, but the perception is otherwise, and it it is that that drives consumer sentiment.

Australians have curbed their spending since the global financial crisis, but a pile of worries continues to drive down consumer confidence: rising interest rates and fears of more to come if inflation takes off; rising food prices caused by food shortages; rising power bills; higher petrol prices; higher education and health bills; and an impending carbon tax.

The most recent Westpac survey shows consumer confidence fell 13 per cent in the past year. The knock-on effect of weak consumer confidence is weaker retail sales, which has a profound impact across the supply chain. This is already playing out.

In the meantime, the impact of the floods on banks and insurance companies will remain a key focus of credit ratings agencies and investors in the coming profit season.

The Standard & Poor’s warning that it cannot rule out a move to negative ratings in banking will put a blowtorch on the Bank of Queensland and Suncorp. Both arguably have the biggest number of loan customers affected by the floods.

Even before the floods there were concerns that the values of at least 30 per cent of Gold Coast properties were lower than that of their mortgages. House prices are flat, and the property group Mirvac announced last Wednesday that it had made a $215 million provision on zero-margin projects and unsold stock in poorly performing regional markets. Put all that together and you have to wonder whether banks are providing full disclosure of “Gold Coast to Noosa” properties, especially holiday homes.

This, as well as funding issues and asset quality, have prompted the banking analyst Brett Le Mesurier at BBY to suggest that a merger of the banking businesses of Suncorp and the Bank of Queensland is a good option. He estimates that such a tie-up could produce $800 million in value for the two listed entities.

He says the deal could be structured through a share swap, Suncorp selling its bank to the Bank of Queensland in return for a 52 per cent stake in the merged Bank of Queensland entity.

The Bank of Queensland and Suncorp have asset quality issues that include commercial real estate exposures. Much of Suncorp’s are in the public arena, and the Bank of Queensland’s are coming to light. On December 8 it was forced into a profit downgrade after suffering a $97 million increase in the value of troubled property assets amid a slump in the state’s commercial real estate market, implying that its impaired commercial assets had doubled in less than two months.

Profits for the 2011 financial year are forecast to be between $210 million and $230 million, compared with a previous projection of $220 million to $250 million.

The bank said it would increase bad debt provisions to cover for any losses from falling property prices to as much as $90 million in the first half of the 2011 financial year, significantly higher than its previous forecast of $53 million.

The downgrade came after a three-week review of the bank’s top 250 property exposures confirmed the sector was performing much worse than expected. Queensland’s commercial real estate market was singled out as the main offender, with an acknowledgment that it had suffered impairments to the value of two of its retail shopping centre exposures in the state. It declined to name which ones. It denied that exposure to the struggling high-rise residential property market on the Gold Coast had a role in the downgrade.

Then on Friday it published the prudential disclosure report for November 30, the APS 330, which, Le Mesurier says, shows that not only has the asset quality of its commercial loan exposures deteriorated but so has its residential loans.

If Suncorp and the Bank of Queensland decide to join forces it may be a marriage made in heaven or possibly hell.

Adele Ferguson

Story by Adele Ferguson www.smh.com.au

Tags: banks, disaster, economy, finance, flood, housing, money

Aussie Banks’ “Unique System To Keep Dwelling Prices High”

banksWell reader, I have to say it, today your editor read the most ridiculous article we’ve ever read on Australia’s now-popped house price bubble.

And believe me, that takes some doing.  There’s been a heck of a lot of rubbish written over the years, but the article we read today trumps the lot.

What makes it worse is that it wasn’t written by some half-baked real estate agent or a rabid property spruiker.  No, it was written by someone who many believe is one of the most respected financial journalists in Australia – Robert Gottliebsen.

As his biography on the Business Spectator website points out:

“When it comes to Australian business media, one name is synonymous with trust, integrity and depth of knowledge that surpasses all others, that name is Robert Gottliebsen.  Robert Gottliebsen is an Associate editor for Business Spectator and was the original AFR Chanticleer and founder of Business Review Weekly (BRW) Magazine.”

He’s a commentator that many in the mainstream respect.  Although based on the article he wrote yesterday, he looks to be past his sell-by date.

In his article Mr. Gottliebsen expressed sympathy for a view put forward by Bendigo and Adelaide Bank chairman Rob Johanson.  Mr. Johanson was commenting on proposals by the socialist Green Party to prevent Australia’s banks from raising rates any higher than rate moves by the Reserve Bank of Australia (RBA).

Mr. Johanson said:

“None of us… who can remember trying to buy a house in the 1970s would want to have to go through or go back to that situation for funding.

“With my wife I bought my first house in 1967 and I remember vividly what it was like in the 1970s.  Getting a housing loan from the bank was extremely difficult and as a result house prices were very low because you had to assemble deposits many times current requirements.”

Mr. Gottliebsen then offers his opinion on what makes the current Australian housing market so special:

“It might not be intentional, but in Australia banks have developed a unique system to keep dwelling prices high.  They are liberal in granting housing loans, so there is a strong consumer demand for houses.”

We’re dumbfounded, but we’ll continue:

“By restricting the supply and boosting the demand, banks keep dwelling prices high.  If the Greens’ proposal were enacted and we had further increases in the cost of funds overseas – which many are predicting – then the current high house price arrangement would be blown apart…

“I am delighted that neither the government nor opposition are going down that path.

At least we should be grateful for one thing from Mr. Gottliebsen’s truly mind-blowingly dumb article, and that’s the admission from a mainstream insider that the current housing and banking relationship would be “blown apart” if it wasn’t for house price manipulation by the banks and government.

But of course, it’s too late to worry about that.  As I wrote earlier this week, the house price bubble has already popped and it’ll be blown apart regardless of whether the Greens’ policy gets up or not.

But quite frankly we find it extraordinary that not only would a banking executive claim it was terrible that people had to “assemble deposits” to buy a house, but it’s equally bizarre that a so-called respected journalist would cheer the fact that Aussie banks have “a unique system to keep dwelling prices high.”

Clearly they prefer how the market is rigged right now.  Where those – we’ll assume – such as Mr. Johanson and Mr. Gottliebson who bought their homes in the 1960s and 1970s and who have benefited from two decades of loose bank lending and cheap credit feel weak at the knees at the thought of house prices returning back to their pre-boom levels.

Much better for house prices to remain high, for banks to be “liberal in granting housing loans”, and for current homebuyers to be paying 60% or 70% of their income in interest to the banks… banks such as Bendigo and Adelaide Bank.

I mean think about it.  Think about the difference.  In the 1960s or 1970s buyers would have saved a deposit.  They would have had money sitting in a bank account accumulating interest.

Importantly, they would have been debt free.  And, they would have had savings set aside for a rainy day or to put down as a deposit for a house.

Today, buyers are bribed and suckered in to the market by banks such as Bendigo and Adelaide Bank thanks to artificially low interest rates and taxpayer funded giveaways such as the first home buyers bribe.

And rather than having a healthy bank balance of savings for a rainy day or for a deposit, well, they’ve already got a house so they don’t need a deposit, and with 60% or 70% of their income going on mortgage repayments they don’t have a bean left to put towards savings anyway.

They’re living the life of a pauper, but at least they’re doing it in style… if that’s possible!

But don’t worry guys, because apparently in Australia “banks have developed a unique system to keep dwelling prices high.”

Don’t you believe it.  The market has cracked and the baby-boomers who thought they could profit at the expense of youngsters going deeply into debt will soon find the smile wiped off their faces.

Perhaps Gottliebsen’s name used to be synonymous with trust, integrity and depth of knowledge, but not after that article.  We thinks it’s time for Gottliebsen to hang his head in shame and hang up his boots to let someone with a bit of common sense take over.

Story by Kris Sayce http://www.moneymorning.com.au

Tags: banks, economy, finance, housing, loans, news, property, real estate, research, value

Big four banks caught out over costs

banksThe big four banks have fattened their margins while complaining about being squeezed, new figures reveal.

As Parliament prepares to debate legislation forcing banks to lift rates by no more than the Reserve Bank, figures from the Australian Prudential Regulation Authority indicate the average rate paid by the big banks on money they borrowed rose by less than the official cash rate.

”It means we have been complaining about the wrong thing,” said Richard Denniss, the director of the Australia Institute, which analysed the figures.

”Whereas we have been angry about banks not moving in lock step with the Reserve, we should have been concerned their actual costs weren’t even keeping pace with Reserve Bank increases,” he said.

The figures show that while the Reserve cash rate rose 1.36 percentage points between the June quarters of last year and this year, the average rate paid by the big banks rose 0.88 points.

The lower rate would have been because rates on some of the funds banks borrowed went up more slowly than the Reserve cash rate.

”It’s like making hamburgers. If meat accounts for a third of your costs and the price of meat goes up 10 per cent, you shouldn’t be expected to put the price of hamburgers up 10 per cent,” Dr Denniss said.

The Australian Bankers Association confirmed the calculations were correct but said they did not reflect the banks’ actual cost of funds.

”To be honest we can’t work this out,” said its chief executive, Steven Munchenberg. ”Performing the same calculation we get the same result but I know it is not right because if it was we would have been being beaten to a pulp with this by the government and the opposition.”

The Treasurer, Wayne Swan, said separate Reserve figures showed that over four years the net interest margin of the big banks had ”fluctuated in a relatively narrow range”.

”This makes it clear there is absolutely no justification for any bank to move above the Reserve Bank,” his spokesman said. ”We are working on reforms and we won’t let the big banks off the hook.”

The Greens said they would seek to limit profiteering on credit card surcharges, in addition to legislation that would restrict ATM fees and require banks to offer ”tracker rate” mortgages linked to a rate rather than variable as is the case now.

The government package due next month is expected to make bank account numbers as portable as mobile phone numbers.

At the moment the first digits of so-called BSB numbers identify the name and branch of the bank in the same way as the first digits of mobile phone numbers originally identified the carrier.

If the numbers became portable this information would lose meaning but switching would become simpler. The system would require new technology and the government is concerned this should not add to costs.

The consumer group Choice has discussed the proposal with senior ministers and MPs from all sides and found it well received. The system could be extended to superannuation accounts.

Story by Peter Martin ECONOMICS CORRESPONDENT www.domain.com.au

Tags: banks, economy, finance, marketing, news, property, real estate, research

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