There is a way that interest rate movements by the banks could be more fairly controlled, but will the next-elected Federal Government be brave enough to do it?
http://www.apimagazine.com.au/blog/2010/07/is-abbot-or-gillard-brave-enough-to-stop-the-profiteering/
19 May 2010
RBA went too far
Just finished a radio interview in Adelaide and it’s interesting to note that the real estate guys (also on the show) agree that the property market has slowed over the past three weeks. I suspect the RBA has increased rates too quickly… I’ll write on this when I have more time.
10 February 2010
Banks are taking advantage of us
CBA announced its results today – a lazy $6 billion annualized profit! It made for interesting reading. They say that the cost to fund new loans has increased 1.12% since July 2007. This doesn't mean that this new cost level applies to all home loans. Some home loans are funded using facilities established before the credit crisis. Some loans are funded using cash in transaction accounts (paying effectively zero interest).
Now, the Bank has increased home loan rates by a total of 1.04% above RBA rate movements (per http://www.keepbankshonest.com.au/) across their whole portfolio of loans.
It’s been a bonanza for the Bank enjoying huge market share gains – while probably increasing profit margins! It goes to show… we should never believe the banks propaganda... they are making billions!
Note to government: BRING BACK HOME LOAN COMPETITION... please.
03 February 2010
Fixed rates only worthwhile if 7% or below
I have calculated the profit or loss for a fixed rate borrower over the past 20 years at each quarter. I then sorted this data based on the fixed rate at the time the borrower entered into the fixed rate loan and sorted from lowest to highest rate (For example, in Jan 2005 the 3 year fixed rate was 6.60%. A borrower that locked in at this rate was 0.39% better off compared to a variable rate borrower. Therefore, the graph below includes a profit bar of 0.39% at the 6.60% rate interval).
This analysis shows that, based on history, you have a significant chance of being worse off financially if you fix your mortgage when fixed rates are above 7% (to the right of the red line). If you fix when fixed rates are below 7%, you have an even chance of being better or worse off.
30 January 2010
My predictions
Inventor Alan Cox once said “I figure lots of predictions is best. People will forget the ones I get wrong and marvel over the rest.” It was with this piece of advice that I sat down to write this month’s newsletter. I am often asked about where I think interest rates are heading (like I know!!!), what the property market is going to do and so on. Well, I thought I would put all my thoughts on paper. At the end of 2010, I will return to these predictions to see how close I got (and this assessment will be accompanied by another article which says that no one in the world can ever predict anything, or how only the truly intelligent and astute geniuses can make correct predictions – depending on the outcome of my predictions of course)!
Often, I think people can “over analyse” the market when forming predictions. I don’t think you can be too scientific about it. The most accurate predictions are generally those that are made by people that have a good “feeling” for the market and those that operate within that market. After all, it is the behaviour of humans that will ultimately influence the outcomes and humans can be irrational and unpredictable (see, I am already subtly making excuses in case my predictions are wrong).
The property market
The property market performed very strongly in 2009 – much to the surprise of many people. In May 2009, I wrote to all our clients to say that I thought it was the best time in many years to invest – something I have never done before. It seems I was right as Melbourne’s median price jumped 22% in the last 6 months of 2009! I hope that’s a good omen for the predictions in this article.
Most of the gains in 2009 clawed back the property value decline experienced in 2008. Median price values across Australia are now back to (or above) December 2007 levels. REIV (Victoria) released its median price for the December quarter and it came in at whopping $540,000. That equates to an annual compound growth rate of 7.2% p.a. since December 2007 – what GFC? Sydney and Brisbane haven’t performed as strongly as Melbourne, but quality, well-located property has still performed very well.
It’s my opinion that the property market will have another healthy year. Demand will continue to outstrip supply, which will propel prices forward. I think this demand will mainly be supported by:
1. Continuing signs that the economy is returning to good health with unemployment improving. This will boost property buyers’ confidence and they’ll feel more comfortable to enter the market (with some urgency since they have seen prices rise) – particularly “upgraders” in the higher end price brackets.
2. Return of property investors. Property investor started to return to the market around August/September last year. However, I believe a lot more will enter the market and create quite a bit of demand.
3. The perennial drivers of demand will continue – such as housing shortage, population growth and so on – these have been covered ad nauseam before.
However, probably the biggest dampener on property price growth will be the tight credit market. This will mean that fewer buyers will qualify for loans (or reduced borrowing capacity) and this will tamper demand. At some level, this is a good thing, as we don’t want property prices to get out of control (which they could in the absence of tight credit).
The Sydney market is an interesting one, as the market has been quite quiet over the past 5 years – although it is now showing signs of life. Maybe the State government’s instability is destroying confidence? Whatever it is, I can’t help thinking that Sydney is a bit of sleeping giant and will take off sooner or later. People that already have a foothold in this market will do very well over the next 3 to 5 years.
I think we’ll see median growth in the range of 8% to 15% p.a. in most well developed property markets.
The share market
I have completely no idea what the stock market will do this year. I think the market over the past 2 years has proved how unpredictable it is. In 2008, the market just kept falling – even if there wasn’t any more bad news, it would still fall! Melbourne-based stockbroker and author, Marcus Padley says that ‘momentum’ will win every time. Forget about fundamentals. It’s all about the market’s momentum. Currently, the momentum in the market is all positive and it’s been pushing the index higher. Will this continue through 2010? My guess is that it won’t. I think the market will have to take a breather at some stage.
Generally, a stock price that is at a recent high point exhibits high risk in that an investor’s downside is significant and the upside is probably limited. Let me explain by example. CBA’s share price is currently trading close to $56. The share price has only been over $60 once for a very short period of time (immediately prior to the GFC). Therefore, how much upside can there be – who knows? However, this time last year, the share price was under $28. Given that it had fallen from $60 (from Oct 2007 to Jan 2009), its downside was limited (because how much more can it fall?) and its upside was significant. Of course that’s easy to say now but the time-tested rule is “buy low, sell high”. Don’t buy when it’s high!
I think that some stocks have got ahead of themselves and for that reason, I think the market might take a bit of a breather. However, I wouldn’t think for one second that I could predict where the index might be at the end of 2010! That’s just as dumb as former US President, George W Bush going on a speaking tour! That said, if you’re a long term investor, who cares what will happen over the next 12 months! Maybe I shouldn’t say that, as it makes this newsletter redundant.
Interest rates
There are now two things we need to consider when thinking about interest rates; what is the RBA going to do and what are the banks going to do. They might actually be influenced by each other.
In terms of RBA rate hikes in 2010, I think it’s unlikely that the RBA will raise rates by more than 1.00% during 2010. I’m predicting that the Cash Rate will be 4.50% to 4.75% by the end of the year. On balance, including lenders rate increases (over and above RBA), I think home loan interest rates will be close to 1% higher than they are today. Therefore, on average, professional package customers will be paying around 6.90% (which is close to the long term average interest rate).
I believe that fixed rates will remain elevated and completely unattractive for the rest of 2010 (unless we experience some unexpected market competition).
One of the concerns for the government and RBA is that they may have lost control of the monetary policy levers if the banks do what they want when it comes to interest rates. This is something they might have to look at, but I don’t think it will have too much effect. The RBA will take the banks’ behaviour into account when it sets the Cash Rate.
Banking & lending
This is a very interesting market to consider. How the banking market evolves through 2010 could have many flow-on effects to other parts of the economy.
Firstly, I think we will continue to see many changes in credit policy as lenders try and manage their growth and mortgage books. On the whole, I think that credit policy will become tighter – meaning it will be more difficult to get a loan. The main driver behind this credit policy tightening is banks wanting to control the amount and quality of new mortgages. They can do this by price (i.e. increase interest rates so less borrowers’ ask for money) or credit policy (make it harder to get a loan approved). I think Westpac has witnessed the level of negativity created by trying to manage volume by price. Changing credit policy is a lot more covert way of managing volume – it doesn’t have the added ill effect of putting customers offside, like Westpac did. I predict that each lender will have a turn at tightening and relaxing credit policy, as they manage their way through 2010. Therefore, if you are going to apply for a loan this year, it is important for you to ascertain what appetite your chosen lender has to lending money (are they in a tight or relaxed phase?)... or engage an expert (us) to do it for you.
Secondly, I believe that we’ll see more effects of the lack of banking competition. The thing that is dampening the effect of lower competition at the moment is the relative differences in growth between CBA/Westpac and NAB/ANZ. NAB and ANZ haven’t grown (particularly in terms of mortgages) as fast as Westpac and CBA. Therefore, these two lenders are still hungry for business and this is creating some competition. However, because it is easy for any of the Big 4 to obtain more business, this quasi-competition won’t last for long. Therefore, I think we’ll see lenders continue to control the market price (interest rates), which is very concerning to me both as a borrower and an advisor.
Rental market
Due to the higher First Home Buyer grants in 2009, a higher than normal amount of first home buyers entered the property market last year. That means that renters will probably remain renters in 2010 (as anyone planning to buy a home this year was probably financially enticed to buy it last year). As such, I think the demand for rental properties will be strong and as such, we should see some rental growth, but nothing extraordinary.
Economy
It appears that the economy is on the mend. For the most part, over the last 2 years, many people kept their jobs. Their income stayed the same. However, interest rates and petrol prices were much lower. Whilst peoples’ confidence might have taken a battering, their financial positions actually improved (as they had more cash in their pockets). What we experienced was very much a confidence-led slowdown. Therefore, as confidence returns, we should be back on track. However, the economy is a complex animal and I don’t pretend to understand it fully. However, my feeling is that we’ll see the economy recover its health this year.
An interesting exercise
There you go. For what it’s worth, this is what I think will happen this year! Maybe it’s provided you with some food for thought. If nothing else, it will be in interesting exercise to see how close my predictions will be.
Often, I think people can “over analyse” the market when forming predictions. I don’t think you can be too scientific about it. The most accurate predictions are generally those that are made by people that have a good “feeling” for the market and those that operate within that market. After all, it is the behaviour of humans that will ultimately influence the outcomes and humans can be irrational and unpredictable (see, I am already subtly making excuses in case my predictions are wrong).
The property market
The property market performed very strongly in 2009 – much to the surprise of many people. In May 2009, I wrote to all our clients to say that I thought it was the best time in many years to invest – something I have never done before. It seems I was right as Melbourne’s median price jumped 22% in the last 6 months of 2009! I hope that’s a good omen for the predictions in this article.
Most of the gains in 2009 clawed back the property value decline experienced in 2008. Median price values across Australia are now back to (or above) December 2007 levels. REIV (Victoria) released its median price for the December quarter and it came in at whopping $540,000. That equates to an annual compound growth rate of 7.2% p.a. since December 2007 – what GFC? Sydney and Brisbane haven’t performed as strongly as Melbourne, but quality, well-located property has still performed very well.
It’s my opinion that the property market will have another healthy year. Demand will continue to outstrip supply, which will propel prices forward. I think this demand will mainly be supported by:
1. Continuing signs that the economy is returning to good health with unemployment improving. This will boost property buyers’ confidence and they’ll feel more comfortable to enter the market (with some urgency since they have seen prices rise) – particularly “upgraders” in the higher end price brackets.
2. Return of property investors. Property investor started to return to the market around August/September last year. However, I believe a lot more will enter the market and create quite a bit of demand.
3. The perennial drivers of demand will continue – such as housing shortage, population growth and so on – these have been covered ad nauseam before.
However, probably the biggest dampener on property price growth will be the tight credit market. This will mean that fewer buyers will qualify for loans (or reduced borrowing capacity) and this will tamper demand. At some level, this is a good thing, as we don’t want property prices to get out of control (which they could in the absence of tight credit).
The Sydney market is an interesting one, as the market has been quite quiet over the past 5 years – although it is now showing signs of life. Maybe the State government’s instability is destroying confidence? Whatever it is, I can’t help thinking that Sydney is a bit of sleeping giant and will take off sooner or later. People that already have a foothold in this market will do very well over the next 3 to 5 years.
I think we’ll see median growth in the range of 8% to 15% p.a. in most well developed property markets.
The share market
I have completely no idea what the stock market will do this year. I think the market over the past 2 years has proved how unpredictable it is. In 2008, the market just kept falling – even if there wasn’t any more bad news, it would still fall! Melbourne-based stockbroker and author, Marcus Padley says that ‘momentum’ will win every time. Forget about fundamentals. It’s all about the market’s momentum. Currently, the momentum in the market is all positive and it’s been pushing the index higher. Will this continue through 2010? My guess is that it won’t. I think the market will have to take a breather at some stage.
Generally, a stock price that is at a recent high point exhibits high risk in that an investor’s downside is significant and the upside is probably limited. Let me explain by example. CBA’s share price is currently trading close to $56. The share price has only been over $60 once for a very short period of time (immediately prior to the GFC). Therefore, how much upside can there be – who knows? However, this time last year, the share price was under $28. Given that it had fallen from $60 (from Oct 2007 to Jan 2009), its downside was limited (because how much more can it fall?) and its upside was significant. Of course that’s easy to say now but the time-tested rule is “buy low, sell high”. Don’t buy when it’s high!
I think that some stocks have got ahead of themselves and for that reason, I think the market might take a bit of a breather. However, I wouldn’t think for one second that I could predict where the index might be at the end of 2010! That’s just as dumb as former US President, George W Bush going on a speaking tour! That said, if you’re a long term investor, who cares what will happen over the next 12 months! Maybe I shouldn’t say that, as it makes this newsletter redundant.
Interest rates
There are now two things we need to consider when thinking about interest rates; what is the RBA going to do and what are the banks going to do. They might actually be influenced by each other.
In terms of RBA rate hikes in 2010, I think it’s unlikely that the RBA will raise rates by more than 1.00% during 2010. I’m predicting that the Cash Rate will be 4.50% to 4.75% by the end of the year. On balance, including lenders rate increases (over and above RBA), I think home loan interest rates will be close to 1% higher than they are today. Therefore, on average, professional package customers will be paying around 6.90% (which is close to the long term average interest rate).
I believe that fixed rates will remain elevated and completely unattractive for the rest of 2010 (unless we experience some unexpected market competition).
One of the concerns for the government and RBA is that they may have lost control of the monetary policy levers if the banks do what they want when it comes to interest rates. This is something they might have to look at, but I don’t think it will have too much effect. The RBA will take the banks’ behaviour into account when it sets the Cash Rate.
Banking & lending
This is a very interesting market to consider. How the banking market evolves through 2010 could have many flow-on effects to other parts of the economy.
Firstly, I think we will continue to see many changes in credit policy as lenders try and manage their growth and mortgage books. On the whole, I think that credit policy will become tighter – meaning it will be more difficult to get a loan. The main driver behind this credit policy tightening is banks wanting to control the amount and quality of new mortgages. They can do this by price (i.e. increase interest rates so less borrowers’ ask for money) or credit policy (make it harder to get a loan approved). I think Westpac has witnessed the level of negativity created by trying to manage volume by price. Changing credit policy is a lot more covert way of managing volume – it doesn’t have the added ill effect of putting customers offside, like Westpac did. I predict that each lender will have a turn at tightening and relaxing credit policy, as they manage their way through 2010. Therefore, if you are going to apply for a loan this year, it is important for you to ascertain what appetite your chosen lender has to lending money (are they in a tight or relaxed phase?)... or engage an expert (us) to do it for you.
Secondly, I believe that we’ll see more effects of the lack of banking competition. The thing that is dampening the effect of lower competition at the moment is the relative differences in growth between CBA/Westpac and NAB/ANZ. NAB and ANZ haven’t grown (particularly in terms of mortgages) as fast as Westpac and CBA. Therefore, these two lenders are still hungry for business and this is creating some competition. However, because it is easy for any of the Big 4 to obtain more business, this quasi-competition won’t last for long. Therefore, I think we’ll see lenders continue to control the market price (interest rates), which is very concerning to me both as a borrower and an advisor.
Rental market
Due to the higher First Home Buyer grants in 2009, a higher than normal amount of first home buyers entered the property market last year. That means that renters will probably remain renters in 2010 (as anyone planning to buy a home this year was probably financially enticed to buy it last year). As such, I think the demand for rental properties will be strong and as such, we should see some rental growth, but nothing extraordinary.
Economy
It appears that the economy is on the mend. For the most part, over the last 2 years, many people kept their jobs. Their income stayed the same. However, interest rates and petrol prices were much lower. Whilst peoples’ confidence might have taken a battering, their financial positions actually improved (as they had more cash in their pockets). What we experienced was very much a confidence-led slowdown. Therefore, as confidence returns, we should be back on track. However, the economy is a complex animal and I don’t pretend to understand it fully. However, my feeling is that we’ll see the economy recover its health this year.
An interesting exercise
There you go. For what it’s worth, this is what I think will happen this year! Maybe it’s provided you with some food for thought. If nothing else, it will be in interesting exercise to see how close my predictions will be.
18 January 2010
The government wears some blame for higher home loan rates
On the back of CBA’s profit estimate (nearly equating to $6bn p.a.!), the Federal government MUST withdraw all support immediately. The Federal government has guaranteed all bank customer deposits and has provided the banks access to a loan guarantee (to help them fund new and existing loans to customers). Clearly, the banks no longer need this support and providing it only makes them bigger and stronger and reduces competition. It’s this lack of competition that has allowed them to increase rates above official RBA rate increases. At a bare minimum, the government must withdraw all support NOW (something they should have done months ago). They haven’t done so and therefore I hold the government partly responsible for the banks arrogance and rate hikes. Wake up Mr Rudd – your action is needed to re-cultivate competition in the Australian market. There is always a time lag with these things so I think we haven’t seen the worst of this lack of competition yet... stay tuned for more bad news.
14 January 2010
Banks again shopping higher rates
Aussie banks are again complaining about an increase in the cost of funding home loans. This time they are blaming new liquidity rules imposed by the regulator (APRA). Frankly, I find it impossible to trust the banks’ rhetoric anymore. Given the huge market share and market power that the GFC has delivered them, it’s very difficult to appreciate if they are being honest or they are just finding new reasons to hike up rates in unsuspecting borrowers. The sceptic in me makes me think the latter is probably true. If they do this again, all customers must complain to their banks. We need to send a message that customers still hold the ultimate power.
01 January 2010
Start planning for the new year
Many people take the beginning of the New Year as a cue to set some goals for the next 12 months. After you have had a break from work and celebrated Christmas your head should be nice and clear and ready to start planning. It’s a great time as we generally get a better perspective of our lives and what’s important to us. Set aside one hour and write down a one page plan (or list of goals). I like to divide the page into 4 sections and use the following headings: Personal (e.g. your fitness, weight, work/life balance, etc.), Family (e.g. holidays, ‘date night’ with partner, etc.), Financial (e.g. income, net worth, etc.) and Business/Career. Under each heading, set some goals relating to this heading. This should aid in balancing out financial and non-financial goals. More soon...
New Year Financial Planning Checklist
New Year Financial Planning Checklist
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