Interest rate and rent rises over 2011: a comparison

Low rental vacancy rates, rising rents, healthy immigration and robust competition between tenants are excellent market conditions for the one in seven Australian tax payers who own an investment property.

On the flipside, it is a highly undesirable situation for tenants. Many have gone through or are in the process of inspecting rental property after rental property as one of scores of hopeful applicants, bidding fiercely for a roof over their head, enduring regular rent rises and preparing for the increasing cost involved with not being their own landlord.

Mortgage Choice spokesperson Kristy Sheppard says, “RP Data recently reported capital city rents increased by 4.2% in 2010 and commented that they are expected to rise by 7% this year*. To put this into real terms, in Sydney it equates to an extra $33.60 on the average weekly rent of $480 for a house and $30.80 on the average weekly rent of $440 for a unit**.”

“Then consider that it looks likely we’ll see interest rate rises of around 0.5% by the end of 2011. For a 30-year $300,000 principal and interest home loan at 7% – by no means the lowest rate available – this equates to $23.47 extra on the required weekly repayment of $460.29.

“Times are tougher financially for both tenants and mortgage holders but at least the latter group has an asset to show for that money spent. Also, those who are investment property owners can, and often do, up the rent they charge to compensate for their repayment rises.

“No wonder Mortgage Choice’s studies show rising rents are greatly influencing many Australians to become property owners. It was the number two motivation for our 2011 Future First Homebuyer Survey respondents, all of whom were planning to buy before February 2013. 42% of our 2011 Recent First Homeowner Survey respondents agreed, having bought in part because increasing rents made owning a property more attractive than renting.

“When it comes to home loan approval criteria these days, some lenders now consider rental history as genuine savings. Also, a number have increased the amount they will lend to 95% of the purchase price and several are dropping their fixed rates, which is good news for borrowers who need the peace of mind that comes with locking in a guaranteed steady repayment level.

“Those debating being a tenant versus a homeowner should note that although rents will rise this year we’re also likely to see interest rate and property price rises. This makes the choice more complicated, requiring focused planning and a thorough investigation into the long term benefits.”

Home loan repayment guide (based on a 30-year P&I loan at 7%)

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* RP Data Rental Review December 2010 Quarter

** Australian Property Monitors Rental Market Report December 10 Quarter

Tags: housing, news, property, property management, rent, rentals

RBA calls big four’s bluff on rate rises

Glenn StevensTHE Reserve Bank has dismissed claims by the big four banks that their costs are climbing faster than the cash rate.

In a submission to the Senate banking inquiry the Reserve says the banks’ funding costs have moved ”broadly in line with the cash rate” since the middle of last year.

The submission is at odds with inferences drawn from the RBA’s board minutes, suggesting it believed over-the-odds rate rises were justified.

”Most of the increase in the major banks’ funding costs occurred during 2008 and early 2009, at the peak of the dislocation in markets,” the submission says. ”Since mid-2009 the major banks’ overall funding costs are estimated to have moved broadly in line with the cash rate, reflecting offsetting factors.”

Deposits have become more expensive for banks relative to the cash rate, as has wholesale funding, but at the same time the cost of short-term debt has been falling, resulting in a steady cost of funds relative to the cash rate for over a year.

Regional banks’ funding costs have been increasing faster.

The statement suggests the RBA does not believe the claim made by the Commonwealth Bank on Melbourne Cup day that it lifted its mortgage rate 45 basis points instead of 25 because of an increase in ”wholesale funding and retail deposit costs”.

Submissions from the big four are yet to be published on the inquiry website.

The RBA said the big banks’ total funding costs had climbed 90 to 100 points above the cash rate since the first rumblings of the financial crisis in mid 2007. But they had more than made up for that by lifting their mortgage rates 120 points beyond the cash rate over the same period.

The RBA expects the big four’s wholesale costs to rise from here on as cheaper long-term loans expire and are replaced by more expensive ones. But it expects the higher cost to be modest, ”around 5 points over the next year”.

The Reserve expresses concern about an easing in lending standards before the crisis, saying it led to housing stress, particularly in ”parts of south-west Sydney”.

Story by Clancy Yeates and Peter Martin

Tags: banks, economy, finance, interest rates, money

Reserve chief: no more rate rises for now

interest ratesThe man who sets our interest rates has good news for summer: we can relax. Rates are not going up again ahead of Christmas and probably not until well into the new year.

The plain message, delivered three times during his three-hour grilling by the Parliament’s economics committee, appears designed to reassure shoppers, borrowers and retailers put on edge by the outsized mortgage rate increases imposed by the big four banks on top of his Melbourne Cup day lift in the cash rate of 25 basis points.

The Reserve Bank governor, Glenn Stevens, came close to defending the banks in his testimony, saying if he had to choose between ”banks with good profits and banks with no profits” he would ”choose the former every time”, and that his board expected the banks to top up their margins when it took the decision.

Asked why the bank expected wider margins he said the members ”just read the newspapers”.

The extra imposts would not hurt because the Reserve Bank would be more gentle in its own decisions to compensate.

”When we were raising rates in 2007 and 2008, we raised by less than we otherwise would have. We cut by more subsequently and we have raised by less since, because of the recognition of these shifts in margins,” Mr Stevens said.

”The question is whether all those people with a mortgage are paying seriously higher rates than they should be from an economic management point of view. What I am saying is that I do not think they are, because we pretty much offset the change in the margins.”

The governor also poured cold water on moves to increase competition in banking ahead of an announcement by the Treasurer, Wayne Swan, expected next month.

”In many areas it is probably the case that more competition is always better for consumers, but in banking more competition is good to a point – but beyond a point more competition pushes down lending standards and banks end up lending money to people who really should not get it,” he said.

Bank margins had fattened in the last two years but were still much better than ”10 or 15 years ago”.

”We are arguing about a small backtrack a little way back up that curve,” he told the committee.

The profits of the big four banks were ”good” but ”many Australian corporates would be looking to earn those kinds of rates of return, not just banks”.

Asked about the outlook for interest rates, Mr Stevens said ”at the moment most commentators do not anticipate and market pricing do not anticipate any further near-term change by us for quite some time”.

”I think that is probably a reasonable position for them to have based on the information we have,” he added.

There would probably be some more rate rises ”next year and maybe a little bit more after that” but it was ”unlikely there will be anything from us imminently – I think that is probably a reasonable expectation of people just now”.

The Australian dollar slumped US1¢ on the governor’s words to US97.16¢ as futures traders wound back their expectations of future interest rate rises, cutting the implied probability of a rate rise before May from 74 per cent to 42 per cent.

Mr Stevens said while he did not want to get into ”political debate” Australia’s government debt did not worry him at all. ”I have never felt in recent years that the size of the public debt that we have outstanding is a material problem,” he said.

Tags: banks, economy, finance, interest, money, mortgage, rates

Banks gatecrash spring property season with interest rate rises

XmasIT’S not just the Christmas spirit that greedy bank bosses have ruined – Melbourne’s property market is also suffering from super-sized interest rate rises.

The weekend auction clearance rate limped to 61 per cent as rain and more home loan pain thinned crowds and cautious buyers refused to pay inflated prices.

The sluggish results followed NAB and Westpac joining the Commonwealth and ANZ’s giant rate hikes above the Reserve Bank’s Melbourne Cup move.

Real Estate Institute of Victoria spokesman Robert Larocca said the banks had gatecrashed the normally buoyant spring season.

“Their action has reduced confidence with home buyers and created uncertainty at the busiest time of year,” Mr Larocca said.

The Commonwealth lifted standard variable rates by 0.45 percentage points, the NAB (0.43), ANZ (0.39), and Westpac (0.35) compared with the RBA’s 0.25 per cent rise, adding $70-$90 a month to a typical $300,000 loan.

Mr Larocca said confused buyers and vendors no longer knew when rates would rise and by how much, as banks increasingly moved out of step with Reserve Bank changes.

The Greens will try to force the banks to limit rate hikes to official adjustments for two years under proposed legislation to be introduced into Parliament this week.

Greens Leader Bob Brown said he hoped to get Opposition support from Joe Hockey.

Mr Hockey said he was “not about any controls” on the banks themselves and would instead introduce legislation this week to stop banks telegraphing rate shifts to rivals through the media.

Auction clearances were marginally up compared with 59 per cent the weekend earlier. Most of the 328 properties that passed in did so on vendor bids.

The results follow four months of clearances around 68 per cent.

Story by Karen Collier, Ben Packham –

Tags: auction, banks, economy, interest rates, marketing, news, property, real estate

Further big housing price rises unlikely

House PricesNot so long ago investors were hearing warnings to expect less spectacular returns from shares, but now the same warning applies to housing.

After a decade of strong gains, including pre-tax returns averaging 21 per cent per annum for stocks in the S&P/ASX 200 in the five years to December 2007, investors were being warned routinely that they should not be getting their hopes too high for the future.

The argument was based on earnings fundamentals.

Earnings yields on Australian stocks were higher at the end of 2007 than for almost all of the time since the early-1990s recession, but further big gains in share prices depended on big rises in corporate profits continuing year after year.

Since the end of 2007, thanks in large part to the global financial crisis (GFC), the S&P/ASX200 has lost investors and average of six per cent annually.

Even in the absence of the GFC, the warning would have been appropriate – outsized increases in share prices and profits cannot continue forever and it would be a mistake to assume they might.

It is a warning that translates easily to the housing market at the moment.

The latest figures from the Australian Bureau of Statistics (ABS) show established house prices rose by 0.1 per cent in the September quarter.

Annual growth is still a strong-looking 11.5 per cent, but virtually none of that was in the most recent quarter and the latest half-year has accounted for only about one fifth of the increase over the whole year.

There is plenty of debate about whether or not the housing market is in a bubble.

The most recent salvos in the verbal battle have been fired by prominent investment manager Jeremy Grantham and the Real Estate Institute of Australia.

Last week, in a newsletter, Grantham reiterated his view that Australia’s housing market was in a bubble.

That assessment is based largely on his observation that housing prices have risen sharply relative to household income.

“The problem is that we live in a mean-reverting world (ie a world where things tend to return to their average level) where all of these things eventually change,” he said in the newsletter.

“In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable,” he said.

This latest assertion of Grantham’s view was met with a sharp riposte from the Real Estate Institute of Australia (REIA) on Monday, which dismissed Grantham’s opinions as “outrageous”.

REIA president David Airey repeated an earlier argument from his institute that “if Australia was in the midst of a so-called housing bubble, then we have been there for some time”, saying median price relative to incomes have been “relatively stable for the past ten years”.

What is often missing from this debate is an acknowledgement that housing is a financial asset.

The income to be derived from an investment and its expected growth rate can be used to gauge its value, in the same way a share or a bond can be valued.

The REIA’s own figures show rental yields – making an allowance for expenses but not for income tax – in the capital cities have been steady around three per cent for six or seven years, as strong rental growth has roughly matched price rises.

Ongoing rapid capital gains over the long term will depress rental yields to unrealistic levels, unless there is matching rapid growth in rents, which would in turn make rental accommodation unrealistically expensive.

So while it is debatable that the housing market is in a bubble, there is a strong argument that prices are already so high that another run of price rises measured in double-digits is highly unlikely.

Investors will most likely just have to get used to lower returns from rent and capital gains than they have enjoyed in recent years.

A run of big price rises could still happen, of course, if investors throw caution to the wind and buy in at lower and lower yields.

But if prices do undergo another boom, the argument that there is no housing bubble will become truly unsupportable.

By Garry Shilson-Josling, AAP Economist

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

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