Australian's Repossessed: Foreclosures on the Rise

Foreclosures in New South Wales set to rise to a record this year after the central bank increased rates twice in the past two months to a 12-year high.

Banks are in the middle of their third mortgage rate increase this year and that's pushing more Australian families out of their homes.

Mortgage payments are increasing at least 2 1/2 times faster than household incomes. Lenders including Commonwealth of Australia Bank Ltd. and National Australia Bank Ltd., the nation's biggest, have raised loan rates three times this year, boosting the average monthly mortgage payment by more than the average annual increase in wages.

We're only now really starting to see a situation where defaults arise because people aren't able to meet their payments.

The Reserve Bank of Australia last week increased its benchmark borrowing cost for the fourth time in seven months to 7.25 percent to cool inflation that grew at its fastest pace in 16 years in the fourth quarter.

Banks are charging more as the global credit crunch raises funding costs after investors fled debt markets, as fewer residential mortgages are being granted after funding costs are increasing in the wake of the U.S. subprime market's collapse.

Global financial turbulence and the peculiar exposure of the Australian financial system which is heavily dependent on foreign markets for funding, and this leads to the banks having to charge more.

A situation in Sydney's West recently saw one mortgage holder owed A$600,000 and received bids of no more than A$330,000 when his property went to auction.The seller had previously refinanced, adding more debt to the A$475,000 or so he borrowed to buy the house. Some people are just walking away from their properties: the equity's halved in many cases.

Housing affordability dropped to the lowest in at least 33 years in December, as average disposable incomes stayed below the amount needed to qualify for the median home loan for the fifth- straight quarter, according to an index compiled by the Housing Industry Association and the Commonwealth Bank.

Repossessions in New South Wales rose 1.6 percent to 5,454 last year, according to figures from the state's Supreme Court. Victorian repossessions increased to 2,720 in the year to June 30 and have tripled in the past four years, according to the state government.

The actual number of mortgage defaults may be four times the repossession figures, which only include seizures and sales approved by the Supreme Courts of New South Wales and Victoria.

Rising borrowing costs are pushing more families into housing stress, with some 1.1 million Australians paying more than 30 percent of their income in rent or home-loan costs. In fact, Australians are paying the second-highest mortgage rates in the developed world.

Simon Turner simon@marquetteturner.com.au

Some Gloom but NOT all Doom: Australia's Outlook

Home buyers have been squeezed by rising property prices and a string of interest rate hikes, and this is having a knock-on effect to tenants too.

So could the property bubble burst? That is now a real possibility. The 0.25 per cent rate rise of this week will push more Australian families into housing stress, and whilst many will cope many will not. This will force many to sell up, many for whatever they can get.

That trend is already evident in the outer suburbs of many Australian cities, particularly Sydney. So property prices, in some suburbs, might well fall further in the months ahead.

Is it all gloomy though? Another rate rise could attract a flood of hot money into this country.
Australia’s interest rates are already substantially higher than those in America, Japan and many other countries.

So foreign investors are likely to find relatively safe, interest only, investments very attractive indeed. This will, once again, strengthen the $A, which will help to ease inflationary pressures in Australia. But this will be relatively slow.
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None of this, though, will help sustain property prices, particularly in the outer suburbs.

One factor might, however, and that is a strong migration program.

Western Australia and Queensland are still keen to attract more migrants. The two big resource States still need many more people to fill the gaps in their workforces. Those shortfalls are restricting development, in those places. But neither New South Wales or Victoria are likely to benefit much from that.

High house prices are already forcing people out of Sydney, and the current slowdown, in the manufacturing sector is likely to limit job opportunities in Victoria and South Australia.

So while the outlook is gloomy for some, it's not all doom.

Simon Turner simon@marquetteturner.com.au

Straight Talk: Economic Round-Up Blow By Blow

The Reserve Bank says inflation will be worse than almost everyone expected.

Equity prices plummet. The Aussie dollar rises. Respected economists run round like headless chooks squawking "more rate hikes to come!"

Financial markets dramatically mark up the chances that the next rate hike will be in March. Businesses plan their price hikes. Unions think harder about how to protect the bruvvers and sisters.

Ordinary people - whose inflation expectations were already elevated - grimly recalibrate their household budgets.

The government says all this was the Liberal Party's fault. John Howard hits the international speaking circuit. Peter Costello leaves for a supposedly lucrative overseas job. Malcolm Turnbull flips between saying "look what Labor has already delivered" and "there is no problem, inflation is still in the target band".

What about the blame that should be sheeted home to the Reserve itself? It is the agency with formal responsibility for controlling inflation, a responsibility that, after initial scepticism by its then leader, it embraced warmly.It is the organisation that after a long intellectual struggle was given by financial deregulation, including the flexible exchange rate, the technical ability to control inflation. It is the mob that was given salaries sufficient to attract and retain what it saw as the "best and brightest" of Australia's economists.

To read more from Henry Thornton, simply click on the link.

Lock Your Home Loan: Shield Yourself From Further Rises

Home owners should look at locking in the interest rates on their mortgages as the banks get set to raise home loan and business rates.

NAB, the Commonwealth Bank and ANZ have all responded to the tightening global credit market by lifting their variable home loan rate in excess of the Reserve Bank's last raise in December.

Federal Treasurer Wayne Swan has urged Australian banks to take into account the financial pressures that people will face as interest rates get set to rise, although he recognises that the rise in variable mortgage rates is a direct result of the US sub-prime crisis and not directly the fault of the banks.

Marquette Turner believes that there is more hurt to come as the US sub-prime crisis works its way through the financial systems, therefore a shift away from variable home loans is a reflection of uncertainty and caution.

Simon Turner simon@marquetteturner.com.au

Scrooge: Will the RBA Lift Rates Before Christmas?

Homeowners could yet face a pre-Christmas interest rate rise from commercial banks, after evidence they are in their strongest market position for nearly a decade.

While the funding squeeze on wholesale money markets has forced non-bank lenders to lift their prices, banks, with their large deposit bases, have been keeping prices low in an attempt to steal customers.

Figures from the Australian Bureau of Statistics show the strategy has paid off, with the market share of banks, by value of loans extended, rising to 84.9 per cent in October, the highest in seven years.

As banks continue to hold regular weekly internal meetings to set their standard variable mortgage rates - which so far have remained unaffected by the credit squeeze - some economists think a move before Christmas is likely.

The chief economist at Deutsche Bank, Tony Meer, said banks were likely to put rates up by between 10 to 15 percentage points above the official rise in interest rates last month.

An economist at JP Morgan, Helen Kevans, is tipping a rise of between 10 to 25 percentage points above movements by the Reserve Bank.

"It is becoming increasingly likely that major Australian banks will attempt to alleviate the current pressure on their spreads by passing on the significant rise in funding costs to borrowers," she said.

The prospect of higher rates, along with the official rise last month, has already deterred some new borrowers.

And even if the RBA keeps rates on hold before Christmas, they could still spoil the New Year by increasing them before 31 December. Marquette Turner believe the latter to be more likely

Simon Turner, Marquette Turner

Interest Rates Remain Unchanged

Yesterday morning the Reserve Bank of Australia (RBA) announced that the official cash rate will remain at 6.75%.

The renewed volatility of international financial markets, concerns about the US economy and uncertainty about the likely path of fiscal policy and labour costs here in Australia are acceptable reasons for delaying any further rate hike.

The RBA Board warned, however, that rates may rise early in the new year, due to its concern about the outlook for inflation

Recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity. Inflation on a year ended basis, as measured by the CPI and underlying measures, is likely to be above 3 per cent in the first half of 2008, and to decline somewhat thereafter. Simon Turner

Banks to Increase Cost of Home Loans in Addition to Rate Rise

Not content with the interest rates rise, the cost of home loans is set to increase further with the major banks likely to lift their rates by a further 0.25 per cent in the next month or two

Despite today releasing record profits of $4.4 billion (up 18 per cent) the National Australia Bank has warned today that it couldn't keep absorbing the price pressures that have been added to its own cost of borrowing which, in turn, is used to fund the mortgages it offers.

NAB was the first major lender to lift its home loan rates yesterday in line with the Reserve Bank's quarter of a percentage point increase in the overall cash rate.

But it appears almost certain that NAB's home loans - and that of the other leading banks - will go up again before or just after Christmas.

Thus, regardless of the party that forms our next Government, they will be looking down the barrel at the daunting issues of housing affordability and the increasing financial tightness that families are feeling.

Simon Turner

Rate Rise the Cost of Australia's Economic Success?

The latest rate hike is ultimately to keep inflation incheck, and what one might just describe as the cost of Australia's great economic success.

Therefore, additional rate hikes will almost certainly be needed. The only way to avoid a series of rate hikes is for the incoming government to aggressively trim its spending programs.

Whilst this should be the immediate priority for the new government, regardless of whether it's in Coalition or Labor colours, moderate spending promises are more likely during the final stages of the election campaign. Simon Turner

Interest Rates Rise With More Likely

In line with most forecasts the Reserve Bank of Australia yesterday lifted interest rates by 0.25%. The decision lifts the RBA’s cash rate to 6.75% and will mean an extra $68 per month on an average $400,000 mortgage.

Governor Glenn Stevens was clear in his statement that the strength of Australia’s economy is operating close to the limits of its capacity. Hawkishly, however, he pointed out that there are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist, thus suggesting too much growth rather than not enough.

Commonwealth Bank senior economist John Peters says the statement suggests the RBA sees all the risks to the economy being on the side of too much growth, rather than not enough.
“It’s a hawkish statement that signals they’ve got a pretty firm tightening bias in place,” Peters says. “It points to stimulus coming from all corners; high capacity utilisation, consumers are spending, lowest unemployment in three decades, governments are spending as well, and new dwelling investment has started to become a positive factor and will make a bigger contribution as time goes on.”

The key question now is not if there will be another rate rise, but when. Such strong economic conditions could mean that more rises are on the way, perhaps as soon as December. Given that the RBA has increased interest rates twice in the last three months, it would be unwise to suggest that yesterday’s rise will be 2007’s last. Simon Turner

Crunch Time - Will Interest Rates Rise on 7 Nov?

November 7 is the day when the Reserve Bank of Australia [RBA] announces the outcome of its decision as to whether there is a new official cash rate. Most analysts think the RBA will have to raise rates by at least 25 basis points. Marquette Turner Managing Director, Michael Marquette is inclined to agree that a rate rise prior to the 2007 is a high possibility but also points out that the sheer size of the debt burden of Australians should be a bigger cause of concern than by any single headline interest rate number.

Steve Keen, Associate Professor of Economics at the University of Western Sydney recently stated:

''At 160 per cent of GDP we are now faced with the highest level of private debt in the nation's history - twice what applied during the Great Depression, and one and a half times the previous record, which was set during the Melbourne land boom and bust of the 1880s-90s,'' he says.

''This is the biggest [credit] bubble we have ever had. Interest payments alone are now consuming 15.5 cents in every dollar of household disposable income.''

Michael Marquette