Big Four Aus Banks Credit Rating downgraded

Moody's last night downgraded the AA1 rating of Australia's big four banks to AA2, "relecting our view of the Australian banking system's structural sensitivity to conditions in wholesaly funding markets," according to Moody's senior vice-president Patrick Winsbury.
Australian banks are amongst the biggest users of wholesale funding, meaning they borrow huge amounts of money from abroad to make up the shortfall between what Australians deposit and what they want to borrow.
The subdued outlook for credit has reduced their funding needs, and the banks are taking steps to reduce reliance on wholesale funding.

Rate Rises begin to bite

The Herald Sun reports that:
"ANZ Banking Group boss Mike Smith has revealed his growing concern at how rising interest rates are affecting the ability of some consumers to repay their loans.
He said yesterday poor credit quality was a concern because people were not paying off their credit cards.
Mr Smith's comments on ABC television follow Westpac chief Gail Kelly who, earlier last week, acknowledged a rise in consumer arrears, but said it was not at a level to cause the bank a loss.
Mr Smith said poor credit quality at this time was strange because it normally occurred during periods of rising unemployment.
He said it now appeared to be seasonally related, noting a little bit of a situation where people were going on holidays and not repaying the monthly debt on their credit cards.
"But I think that interest rates are beginning to hurt a little bit now, so the recent rises are beginning to bite," he said, adding that the Queensland floods had contributed to the issue."

Regarding exchange rates, Mr Smith said the Aussie dollar would continue to rise.
"I think we will see it move through $1.10 and get even stronger than that," he said.
"I can't see anything that will knock it off the perch because it's not only the strong Australian dollar, it's also the weak US dollar.
"When you think about what is happening in the States, I can't see them increasing rates for at least 18 months."

CBA cuts loan rate

The CBA has launched a fee-free standard mortgage at a rate of just 7.24%! Currently Westpac charges 7.86%, ANZ 7.8%, and NAB 7.67%.
Long live competition!

Rates on Hold this Month

The Reserve Bank has left the official cash rate on hold at 4.75%. Given the dramatic fall in value of house sales that followed the unexpected rise in November, this is good news indeed for owners of houses in Australia.

Commonwealth Bank Ups the Ante

In a move almost forcing a government response, the Commonwealth Bank followed the RBA's announcement of a .25% rate rise with an immediate .45% rise! The banks say they have to do this because of the cost for them to borrow money, but then they declare huge profits so it's hard to accept their argument.

There is much debate between the politicians on how to prevent this, but no action. Wayne Swan said last month that he was "looking at tougher powers to increase banking competition".

Banks are not like retail shops. Bank customers can't just walk into the shop next door when the shop they normally use raises its prices. Bank customers own mortgage for many years and moving to another bank involves large fees that are difficult to quantify in advance. There is no point moving your account unless you can be sure the other bank is going to keep their rates lower for long enough to cover those moving fees.

Surely the simplest solution is just to forbid banks from charging more than the actual cost of doing the paperwork when mortgage holders move their accounts elsewhere. Then a bank would have to try to retain its customers, instead of just milking them.

Interest Rates Up

Rather against expectations, Reserve Bank increased interest rates today. It will be interesting to see how this affects house prices.

Big Drop in Home Lending

The Daily Telegraph reports that "the traditional spring surge of new home buyers has failed to materialise, raising fresh doubts over the predicted revival of Sydney's wilting property market. The number of new mortgages actually fell 0.3%, compared to 10% spring increases seen in other years.
Compared to September 2009, new mortgage sales declined by 20%.
These figures released on Monday just might have influenced the Reserve Bank in their decision to leave interest rates on hold for another month.

RBA leaves Rates on Hold

Slightly against the expectations, the RBA has left interest rates on hold this month. It remains to be seen whether the banks will follow the treasurer's directive to comply!

Interest Rates

The central bank lifted its cash rate by a quarter of a percentage point to 4.5 per cent, its highest level since the end of 2008. The move was tipped by a majority of economists after surges in consumer price inflation and house prices in the March quarter.
An interesting comment wsa made on one of the related chat pages, by someone suggesting foreign buyers are pushing up house prices - "Interest rate rises only punish hard working (Australian) families - they don't deter overseas buyers because they don't borrow here". And indeed they make it more attractive to put their money into Australia.

Housing Investors Take Up Slack

So says SMH BusinessDay today. "Investors are being lured back into the market through the prospect of higher rents and price growth, helping to pick up the slack from departing first-home buyers. Investors are taking a bigger share of the market, 31% compared to last year's low of 24%.investors are taking a bigger share of the market, 31% compared to last year's low of 24%. RP Data's Tim Lawless attributes this partly to investors being able to negatively gear their interest payment, whereas other buyers are being scared off by the continuing interest rate rises.
This investor interest is despite rents rising more slowly than expected, actually flat in Sydney last month, according to ANZ. Average rental yield fell across all capital cities to 3.2% in December, down from 3.48% in June last year. However Ray White Beecroft's property management department is continuing to raise rents, and having no problem renting vacated properties at higher rents than the previous tenant was paying.

Real Estate Sector Overheating

So says Gail Kelly, Chief Executive of Westpac. She is particularly concerned about what is happening in Melbourne, where prices have jumped 19% over the last year. She predicted that the Reserve Bank would raise interest rates again. The RBA prefers managed growth and wants to stop the development of housing or other bubbles.
In the meantime funding costs, that surged during the Global Financial Crisis, remain above the RBA adjustments and will not return to pre-crisis levels. Westpac is making sure that their lending rates are priced to reflect this.

Housing Market Cooling?

The SMH has an article headed "Housing Market shows signs of cooling". Frequent rate rises and the end of the first home owners' boost "appear to have broken the back of the NSW housing market". New figures show lending in January fell to its lowest point in more than 10 years. Only 667 NSW residents took out new construction loans in January, down from a peak of 1270 last September. Only 472 loans were issued to buy new houses, down from twice that a few months earlier. Loans to buy established houses fell from 19,100 in March last year to 10,041 this January.
A key sentence in the article is "it is understandable there would be a period of consolidation after the past year's phenomenal run", says Savanth Sebastian of CommSec.
The proportion of Australians agreeing that "now is a good time to buy a dwelling" fell from 62% in September 2009 to 42% this month.
The long term trend of fewer people living in each dwelling has gone backwards for the first time in decades, as young adults stay at home longer, and more people share accommodation.

Australia's Recovery "is Fragile"

The SMH BusinessDay reports that Ken Henry, head of the Treasury, is concerned that Australia's recovery is largely due to the stimulus, and is at risk as the stimulus measures are withdrawn.
So where has the strong growth figures come from? Peter Martin of the SMH points out that 25% growth in capital spending by business happened in the ACT! The statistic includes a 36% increase in purchases of passenger cars, and a 43% increase in purchases of four wheel drives! Those 48,000 extra passenger cars and 25,000 extra four wheel drives have inflated the growth figures nicely, and prompted yesterday's interest rate rise, but are they really doing anything for Australia's financial recovery?
It's actually quite frightening to Google "recovery fragile" and seeing how widespread these concerns are, not just the obvious ones like Greece and the UK, but also India, China, and many others.

Building Sector response to Rate Rise

A survey shows that half of the commercial building and construction sector could take their financing away from the banks and look to private syndicates or offshore for future funding.
Mark Beattie of Davis Langdon said "Given current lending policies and a rising interest rate environment, it is difficult to see how the construction industry can pick up quickly, as the benefits from the federal government's stimulus package start to fade".
A developer is quoted as saying smaller companies are forced to pay at least 4% above a normal residential loan as charged by the banks.

Interest Rates Raised

As widely expected the Fed raised interest rates 0.25%, with markets confident further increases will follow, targeting probably 4.75% to 5% by year end.

Buyers Beware!

The Money magazine of the Sydney Morning Herald has a powerful article about the risks of buying into property at the present time! Interest rates are rising, and lots of first home owners are already coming under mortgage stress. Of 251,000 houses purchased under the first home owner scheme in the 18 months since the government introduced it, almost 40% are experience some mortgage stress, with 30,000 of them in "severe" mortgage stress!!
Severe stress is defined as those who are behind on their repayments and are trying to sell or refinance or are being forced to foreclose.
A report by Demographia says "the median-income household would be expected to pay more than 50% of its income to service a new mortgage on a median-priced house in Sydney".
Fujitsu expects interest rates to increase 0.75% this year, which would increase the number of households reporting stress from 40% to 47%.

Australian Mortgage Funds are being closed

Commonwealth Bank's plans to close two troubled mortgage funs have sparked concerns that many other frozen funds across the sector may soon follow. Colonial First State has been hit by rising lending losses in its underlying investments, which have wiped out its ability to pay distributions of the fund. The CEO Brian Bissaker states "the logical conclusion is to give investors their money back as soon as they can while the fund is a going concern". It may take four years for investors to be fully paid out and Mr Bissaker could not guarantee that investors would get all their money back.
In a separate article in SMH Business Day, Carolyn Cummins reports that CFS Retail Property Trust and Commonwealth Property Office Fund are both confident that the worst of the global financial meltdown is behind them and that vacancy rates and shop sales will move into positive territory this year.

Interest Rates NOT RAISED

To most people's surprise and in defiance of most predictions, the Reserve Bank did NOT raise interest rates this afternoon!
In the flurry of postings explaining this the dominant reason seems to have been that business confidence was quite badly damaged by last month's rise. Obviously the Reserve Bank decided all those first home buyers now having problems with their mortgages needed a break!

Rate Rises Spooking Buyers

AFG, Australia's largest mortgage broker, says buyers are rapidly deserting the housing market as interest rates creep up. AFG sold $1.5 billion worth of loans last month, which was the fourth consecutive fall, comparing with $2.9 billion in September 2009. That of course was the month when the Reserve Bank started the progressive raising of interest rates, which is almost certain to happen again tomorrow.

Inflation Fears leading to Interest Rate Rise

The SMH today says "a rise in interest rates next week is a virtual certainty". CPI rose 0.5% nationally (0.6% in Sydney) in the last quarter 2009, mostly due to fruit, house prices, rents, beer, holiday travel and accommodation. Petrol was down, as were computers, televisions, and pharmaceuticals.
The CEO of the Australian Industry Group called on the Reserve Bank to leave rates unchanged.