Mortgage Rate

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<p><img src="https://counter.theconversation.edu.au/content/63512/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>The big, but completely unsurprising, news this week was the Reserve Bank of Australia cutting the cash rate to an historic low 1.50 percent.</p>
<p>As Vital Signs has been saying for some time, this month was a likely candidate for a cut, once second-quarter inflation was confirmed to be disturbingly low – as it was last week.</p>
<p><a href="/images/2016/08/05/Screen%20Shot%202016-08-05%20at%208.48.39%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/08/05/Screen%20Shot%202016-08-05%20at%208.48.39%20AM.png" alt=""></p>
<p>Australia is faced with extremely low inflation, low effective growth, a squishy labour market, and prudential regulation measures enacted last year partially reigning in the housing market. Given this, it was almost inevitable Glenn Stevens would engineer another cut.</p>
<p>But there were some other figures of note this week. Australian retail trade rose 0.1 percent in June, compared to market expectations of 0.3 percent – further underlining the weak domestic economy.</p>
<p>Adding to that story of gloom, private sector building approvals were down in June, both in absolute terms and relative to expectations. House approvals fell 2.3 percent implying a 5.9 percent drop compared to a year earlier. Apartment approvals fell 2.4 percent, implying a 4.8 percent drop year-on-year.</p>
<p>Chinese manufacturing data was mixed – or perhaps just confusing – with the official Purchasing Managers' Index (PMI) down to 49.9, from 50.0 the month before. Recall that 50 is the break even between expansion and contraction. Meanwhile, the private Caixin index came in at 50.6 in July, up from 48.6 in June. This was the first jump above 50 since February 2015.</p>
<p>Why the difference? The likely answer is that the official government PMI is more relevant for large, state-owned enterprises, while the Caixin index is a better gauge of smaller and medium-size companies.</p>
<p>In the US, payroll processing firm ADP’s latest data revealed a 179,000 increase in non-farm payrolls in July. This was essentially confirmation of the official Bureau of Labor Statistics figures (though on a slightly different scale) of strong job creation in the US. This is further evidence of the likelihood of a rise in official rates by the Fed in the next month or two.</p>
<p>Now, back to Australian interest rates. Lower rates only have a potential stimulatory effect if they are passed on to borrowers by (largely) the big 4 banks. About half of Tuesday’s cut was passed on – with the rest “kept” for bank shareholders.</p>
<p>On Thursday afternoon, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison announced at a press conference that the big 4 banks would have to front the House Economics Committee annually to “explain” their interest rate decisions.</p>
<p>Populist nonsense? Interventionist joke? Meaningless charade? Those are all phrases that come to mind. Turnbull grinned like a Cheshire cat as he described it as a “great opportunity” for the banks. Ho, ho, ho.</p>
<p>I’m no apologist for the banks, but they do have a legitimate argument that their funding costs have been rising. The US money market funds are much harder to tap as they have become significantly more conservative after the Primary Reserve Fund “broke the buck<a href="https://www.investopedia.com/terms/b/broke-the-buck.asp">”</a> during the financial crisis. Deposits now make up about 60% of bank funding, compared to 40 percent in 2007-08 – and those rates have been rising.</p>
<p>Nonetheless, the banks do have a good deal of market power. It’s legitimate for them to use that, unless they are violating competition law. That’s a matter for the Australian Competition and Consumer Commission, not the House Economics Committee.</p>
<p>One final note. To all those people who keep saying “rates have been cut a lot and it hasn’t done any good”: please search my name and the word “counterfactual”.</p>
<p><em><span class="fn author-name">Richard Holden is p</span>rofessor of economics, UNSW Australia and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">here</a>.</em></p>
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Vital signs: only the banks know

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<p>GUEST OBSERVER</p>
<p>Last week, Westpac hoisted its lending rate by 20 basis points in a bid to recover the costs of recent capital raisings. There is speculation other banks will follow. Australia’s non-bank lenders could be winners from such a scenario - but the choice may not be as simple as the lowest interest rate.</p>
<p>The outcome of the Financial Systems Inquiry</p>
<p>The background to Westpac’s move lies in recommendations by the Financial System Inquiry that the capital base of Australian banks should be increased to an “unquestionably strong” level and that there should be a narrower gap in different mortgage lending requirements between institutions.</p>
<p>As a result Australian banks have considerably increased capital levels this year by approximately $16 billion.</p>
<p>However, higher capital levels and bank stability may come at additional costs, even if trade-off theory suggests greater bank and system resilience would normally equal lower funding costs. That’s because bank investors have high dividend expectations, so this means the costs of boosting capital may be passed onto borrowers.</p>
<p>Capital levels are likely to increase further as regulators seek to narrow the gap between the practices of the big banks and smaller lenders, and amid their increasing concern at Australia’s house prices. In particular, large banks are expected to increase capital required under their internal risk weighting models for mortgages.</p>
<p>Will non-bank lenders grow their mortgage books?</p>
<p>Non-bank lenders provide mortgage loans with comparable features but unlike banks are exclusively funded from wholesale markets and not from consumer deposits.</p>
<p>As a result, banks face minimum capital requirements enforced by the Australian Prudential and Regulation Authority to protect depositors, while non-bank lenders are unregulated and may more freely choose their funding mix and hence have lower funding costs.</p>
<p>This often implies lower capital ratios for non-banks than banks. Raising capital levels for banks only may have an impact on the balance between bank and non-bank competitors.</p>
<p>The following chart shows the counts and total assets of banks and non-bank lenders in Australia over time:</p>
<p><a href="/images/2015/10/19/image-20151018-25135-1sqzbqr.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2015/10/19/image-20151018-25135-1sqzbqr.jpg" alt=""></p>
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<p>The size of non-bank lenders ($120 billion) is much smaller than the size for bank lenders ($3.8 trillion) and has shrunk in relative terms over the past years. This may suggest that Australians fail to really consider this sector to finance their homes despite competitive mortgage rates from non-bank lenders.</p>
<p>There are many reasons for this – convenience may be one of them as banks are able to offer a larger product range and cover most financial needs of consumers, and consumers prefer to bank with a single institution.</p>
<p>The small size is a great disadvantage as relative fixed costs are higher for small firms than for the major banks.</p>
<p>Should you choose a bank or non-bank to finance your home?</p>
<p>Consumers seeking mortgage finance for a property – either a new borrowing or refinancing of an existing loan – can choose between a large number of banks and non-bank lenders, along with hundreds of loan products.</p>
<p>Comparison websites generally rank lenders and products according to the most obvious criterion – the interest rate. Non-bank lender often provide the cheapest terms. But the lowest rate loan is not necessarily the best loan.</p>
<p>The choice between bank and non-bank lender can be important if you want to use an offset facility. Offset facilities are not always included and they can expose borrowers to lender risk.</p>
<p>Having savings in an offset facility means that in effect the lender owes you money. Banks are much less risky in this regard because they benefit from government guarantees as well as greater scrutiny that are tied to the bank status.</p>
<p>Non-bank lenders are excluded from such guarantees and furthermore may have a greater exposure to market instability.</p>
<p>During the global financial crisis non-bank lenders (especially overseas firms) that were funded through capital markets, rather than customer deposits, were challenged as wholesale funding markets dried up. Some failed and total volumes shrank between 2009 and 2013 (see chart above).</p>
<p>Still, it is likely that more Australians change to non-bank lenders in the future. Changing a lender is easy as mortgage brokers often provide the legwork, plus exit fees have been considerably reduced since new laws came into effect on 1 July 2010 limiting mortgage exit fees to the lender’s losses directly connected to the borrower exiting the loan early.</p>
<p>Are non-bank lenders dangerous to our system?</p>
<p>Low volumes mean non-bank lenders are currently of no systemic concern to the economy and regulators. However this may change in the future as volumes shift and grow for non-bank lenders.</p>
<p>New market participants enter as new non-bank loan platforms are developed. One example is internet-based peer-to-peer lending.</p>
<p>Australians may adapt to this new regime and take on new technologies offered and seek the lenders providing the cheapest funding. Consumers generally do not care about the lenders’ own funding and may arbitrage the differences in mortgage rates by shifting the business from regulated banks to unregulated non-banks.</p>
<p>A concern may arise if non-bank lending is successful and to become a large player that is systemically important. In such a scenario the government would be well advised to consider regulating the industry.</p>
<p>Such regulations may include minimum lending and funding standards with the mission to protect de facto consumer deposits via offset accounts and to ensure the credit supply in economic downturns when wholesale funding markets are constrained.</p>
<p>We may be some time away from such a scenario in light of the increasing dominance of bank lenders.</p>
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<p><em>Harry Scheule is a<span style="line-height: 1.3em;">ssociate professor, Finance, UTS Business School</span><span style="font-weight: bold; line-height: 1.3em;">, </span><span style="line-height: 1.3em;">University of Technology Sydney and author for <a href="https://theconversation.com/profiles/harry-scheule-3573" target="_blank">The Conversation</a>.</span></em></p>
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Rising mortgage rates - is it time to refinance your home loan?

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<p><span style="line-height: 1.3em;">GUEST OBSERVER</span></p>
<p><span style="line-height: 1.3em;">As lenders seek to wind back their level of investment lending, competition in the owner occupied space has started to heat up. </span></p>
<p><span style="line-height: 1.3em;">Many lenders were starting to offer some “very competitive” owner occupied home loans in a bid to pick up more of this business. </span></p>
<p><span style="line-height: 1.3em;">Over the past few months, many of Australia’s lenders have made significant changes to their investment product pricing and policy in a bid to curb their level of investment lending growth. </span></p>
<p><span style="line-height: 1.3em;">But just because many of Australia’s lenders are actively trying to reduce their level of investment activity, doesn’t mean to say they are not hungry for business – quite the opposite.</span></p>
<p><span style="line-height: 1.3em;">Australia’s lenders are just as hungry for business as they ever were and because the Australian Prudential Regulation Authority has told them to limit their level of investment lending growth, the lenders have been forced to turn their attention to owner occupiers.</span></p>
<p>M<span style="line-height: 1.3em;">any of Australia’s lenders are currently offering owner occupied borrowers a raft of incentives including, interest rate discounts, cash back offers and fee waivers. </span></p>
<p>In the 20 years I have worked in financial services, I have never seen the level of lender competition we are witnessing now. Regardless of whether people are looking to buy a home or refinance their current property, they can be guaranteed of securing an incredibly competitive home loan deal.</p>
<p><span style="line-height: 1.3em;">For those borrowers who have been in the same home loan product for a while, now may be a good time for them to give their mortgage a much needed spring clean. </span><span style="line-height: 1.3em;">A good de-clutter never goes astray and often borrowers uncover financial aspects of their life that need some reassessment or to be changed altogether. </span></p>
<p>Borrowers who give their home loan a spring clean may realise that they are in the perfect position to refinance their mortgage.</p>
<p><span style="line-height: 1.3em;">Refinancing may allow borrowers to repay their home loan sooner and ultimately achieve their next financial goal sooner. </span></p>
<p><span style="line-height: 1.3em;">Further, refinancing can be a great way for borrowers to lower their mortgage repayments, consolidate their debt and even access equity in their home.”</span></p>
<p><em>John Flavell is chief executive officer <a href="https://www.mortgagechoice.com.au/" target="_blank">Mortgage Choice</a>.</em></p>
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Competition for owner occupied business heats up: Mortgage Choice's John Flavell

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<p>GUEST OBSERVER</p>
<p>If you’ve owned your home for a number of years, it’s likely you’ve racked up some impressive gains in home equity – that’s the difference between the property’s market value and the balance of your home loan.</p>
<p>This means there’s a whole stash of cash just waiting to be tapped into either through a home loan refinance or a loan top up. While it’s tempting to spend up big, treating your home as an ATM isn’t healthy. We share some smart, sensible, and downright frivolous ways to use your home equity.</p>
<p><strong>Smart moves</strong></p>
<p>Use equity to renovate your existing home – Quality home improvements can add to your lifestyle; save on the cost and hassle of relocating to a new home, and best of all the renovations can increase the market value of your home.</p>
<p>Invest in a rental property – Using your home to grow wealth? Now that’s a smart move. Tapping into equity may even mean you don’t need to save for a cash deposit.</p>
<p><strong>Sensible – with strings attached</strong></p>
<p>Consolidating personal debt – If you’re juggling a few credit cards, a personal loan and maybe a car loan, consolidating the lot into your home loan can streamline your finances. It means just one monthly repayment to manage, and as home loans usually have a lower rate, you’ll save on interest costs.</p>
<p>But – and it’s a big but – you could be turning short term debts into a long term debt and end up paying more than necessary in long term interest. Use the savings on monthly repayments to make extra home loan repayments and keep a lid on interest costs while you whittle away the loan.</p>
<p>ME’s 10<sup>th</sup> biannual <em>Household Financial Comfort Report </em>shows that more households ‘paying off or owning a home’ reported to be drawing on their home equity to ‘pay off debt’ and ‘to make ends meet’ during the first half of 2016.</p>
<p><strong>Think twice</strong> </p>
<p>Here today, gone tomorrow purchases – using home equity to fund a round the world vacation, a new designer wardrobe, or any purchase with no real lasting value calls for some serious soul searching. Not only will you be whittling away precious equity, you are adding the cost of long term interest to the purchases.  </p>
<p>The time may come when you really need that equity for must-haves rather than luxuries. So think twice and weigh up other finance options like, say, a personal loan, which will allow you to pay off big ticket purchases buys in just a few years.</p>
<p><em><span lang="EN-US">Patrick Nolan is head of home loans for industry super fund-owned bank ME. You can contact Patrick <a href="https://www.mebank.com.au/personal/home-loans/home-loans/" target="_blank">here</a>.</span></em> </p>
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The good, the bad and the ugly of dipping into home equity: Patrick Nolan

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<p>GUEST OBSERVER</p>
<p>With an RBA rate rise looming and big banks already hiking rates across fixed rate home loans, it seems the rock bottom rates of 2016 are now a thing of the past for property buyers.</p>
<p>All four big banks have now slammed home borrowers with rate rises in the past couple of weeks, joining another 14 lenders who have pushed up variable rates out of cycle this month alone. </p>
<p>The big banks have a history of higher than average interest rates - so far, since 2009, all the big banks have increased rates by more than the RBA did two times each (except NAB, who did it once.) They also all held back a full RBA rate cut 7 times a piece (although ANZ only did it 6 times.)</p>
<p>There are a couple of reasons for these recent rate hikes - the excuse the banks have given is that cost of funding is getting higher, so loan rates need to increase as well. </p>
<p>The likelihood of an RBA rate increase sometime next year is also a consideration, particularly for fixed rate offers, as banks factor that into current rates that they won’t be able to adjust for the next two years or more. So for the rest of this year at least, it seems rates will only be pushed higher.</p>
<p>Investors will have it particularly tough, with APRA breathing down the necks of lenders after investment loans spiked toward the end of 2016. CommBank, which grew its investment loan portfolio by 8.02 percent over the last 12 months, has already started tightening criteria for lending to investors by dropping LVRs and limiting refinancing loans.</p>
<p>In fact, <a href="https://mozo.com.au/" target="_blank"><span>Mozo</span></a> data shows that the average big banks interest rate premium on variable rate investor loans has doubled in the last year.</p>
<p>So things are looking gloomy for borrowers hoping to get a foot on the property ladder with a low rate loan, especially since big bank loans now account for 85% of the investor loan market, and 81 percent of owner-occupier loans.</p>
<p>That means now, when record low rates seem to be squarely behind us, is the time for new borrowers to really do their research into what offer is going to work best for their budget, and for those already paying off a mortgage to re-evaluate their situation and decide if it’s worth refinancing to lock in a good deal while they’re still around.</p>
<p><em><span>STEVE JOVCEVSKI</span> is a property investment and h</em><em>ome loan negotiator at </em><em><a href="https://mozo.com.au/" target="_blank">Mozo.com.au</a>.</em></p>
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The low rate mortgage party is over for property buyers: Mozo

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<p><span>GUEST OBSERVER</span></p>
<p><span>At the start of a new year many of us make a number of resolutions that we wish to integrate into our lives.</span><br><br><span>These resolutions can often include a commitment to eat better, exercise more or be better with our finances.</span><br><br><span>Whether you’re aiming to become a better saver, or you’re wanting to save for a home deposit, the key is to not let your resolution fall flat.</span><br><br><span>There are a few easy steps everyone can follow to ensure any financial resolutions become a reality.</span><br><br><strong>1.  </strong><strong>Set a goal </strong><br><br><span>The key to saving more money is setting a financial goal that is specific and realistic.</span><br><span> </span><br><span>You can have a large goal in mind, such as buying a home, but you should also break it up into smaller goals that will be easier to achieve.</span><br><span> </span><br><span>If your goal is to save more money, give yourself a dollar figure and a target date to achieve that by, as this will keep you accountable. </span></p>
<p><span>Savings calculators are helpful tools that can assist you in working out how much you can save a month and how long it will take for you to reach your savings goal.</span><br><span> </span><br><span>You should review your goals at least once every six months to track how you’re doing. If you find that you are not making much progress, rather than giving up, make changes so that you can achieve your goals.</span><br><span> </span><br><strong>2.  Set up a budget </strong><br><br><span>Mr Flavell said a budget was an essential factor in achieving any financial goal.  </span><br><span> </span><br><span>By creating a budget, you will have full control of your finances as you will know how much you are spending and saving.</span><br><span> </span><br><span>Tracking where your money is going also allows you to make clear decisions about your purchases, see what expenses you can potentially cut back on, and plan your spending ahead of time.</span><br><span> </span><br><span>A budget did not have to be too complicated.</span><br><span> </span><br><span>It can be a simple document such as a spreadsheet, where you note down your income and all your expenses for the month.</span><br><span> </span><br><span>The trick is to review and update it regularly to make sure it always aligns with your current financial or personal situation.</span><br><span> </span><br><strong>3.  Review your spending </strong><br><br><span>You can boost your savings significantly by cutting back on certain expenses, or finding more affordable options.</span><br><br><span>Look at your current contracts – like gym memberships and or your phone contract and see if there are easy ways for you to reduce the amount you spend each month. Call your gym up and ask for a discount, or research your phone provider options online and see if there is a cheaper supplier on the market.</span><br><span> </span><br><span>While you may only save a few dollars here and there, not only does every cent count, but every cent takes you one step closer to your end financial goal.</span><br><br><strong>4.  Reduce debt </strong><br><br><span>Another great way to reach your financial goal faster is to pay down your existing debt.</span><br><span> </span><br><span>The Christmas period is an expensive time of the year, so you have probably racked up debts on your credit card.</span><br><span> </span><br><span>When you get your credit card bill, aim to pay these off completely or minimise them as soon as possible. You should also try and pay more than the minimum amount, which is typically 2 percent of your closing balance, to avoid paying additional interest.</span><br><span> </span><br><span>When you pay off your debts, you free up your cash flow. This means you have more money in your back pocket each month that you can put towards your financial goals.</span><br><span> </span><br><strong>5.  </strong><strong>Shop around for better deals </strong><br><br><span>Now that you know how much you’re saving and how to potentially increase your cash flow, the next step is working out the best place to put your money.</span><br><span> </span><br><span>If you want your money to work as hard as possible for you, you need to ensure you are saving it in the right location.</span><br><span> </span><br><span>Get online and research the various options provided by Australia’s lenders. By doing your research, you will see what term deposit facilities or savings accounts will offer you the greatest return on your dollar. </span><br><span> </span><br><span>Before making any final decisions however, speak with your bank or your local broker to ensure it is the right financial move for you and your end goals.</span></p>
<p><span><em>John Flavell is chief executive officer <a href="https://www.mortgagechoice.com.au/" target="_blank">Mortgage Choice</a>.</em></span></p>
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Make your financial resolutions a reality this year: John Flavell

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<p>SPONSORED POST</p>
<p>Property owners can claim a tax deduction for interest paid on a loan used to buy an investment property, but not on a mortgage used to buy their own home.</p>
<p>Boutique lender CSC Home Loans has developed Mortgage Down to help investors maximise tax deductions and minimise non-tax deductable interest by optimising the way their property debt is structured.</p>
<p>“Mortgage Down allows the property investor to pay off their home loan sooner and create equity in their own home faster. This gives the property owner more opportunity to create additional investments,” says Mortgage Down group marketing director Venn Williams.</p>
<p>Under a tax ruling from the Australian Taxation Office PR2015/2, the loan structure allows investors to reduce the interest rate on their non-deductable principal and interest home loan and increase the interest rate on their deductable interest-only investment loan.</p>
<p>“If you own your own home and have an investment property, then you could qualify for a home loan rate beginning with a 2,” Williams says.</p>
<p>The average interest rate for a standard variable owner-occupied mortgage from a bank was 5.4 percent in May 2016, according to the Reserve Bank of Australia.</p>
<p>A 1 percent reduction in the interest rate charged on a $250,000 home loan taken over 25 years would save the borrower $43,468 over loan’s term and cut the time to repay the debt by 4 years. A 2 percent drop in the rate would save $84,640 and let the borrower repay the loan 6 and a half years sooner.</p>
<p>The higher interest rate charged on the investment loan means the investor may be able to claim a larger tax deduction.</p>
<p>The innovative loan structure is available to Australian residents who own their home and either already have an investment property or are about to buy one.</p>
<p>The product offers other features such as an o set account, redraw facilities and debit cards. Usual borrowing conditions apply. </p>
<p><span>To download a free ebook on new financial year taxation tips for property investors,</span><a href="http://propertyobserver.com.au/forward-planning/tools/ebooks-and-webinars/55208-new-financial-year-tax-planning-tips-for-property-investors" target="_blank"> click here</a><span>.</span></p>
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Optimise the way your property debt is structured

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<div>Having recently listed on the securities exchange, Australian Finance Group (AFG) now opts to release its aggregate mortgage data on a quarterly basis, having previously released monthly figures.</div>
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<div>The figures for the September 2015 quarter, which are not seasonally adjusted, revealed a +16% year-on-year increase in mortgage volumes.</div>
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<span>Mortgage volumes have increased by more than +68% over the past three years, which may be partly reflective of changes in market share. </span><br><br><strong><span style="text-decoration: underline;">Average mortgage size soars</span></strong><br><br><div>Significantly the average new mortgage size in Australia has soared further from $433,000 to $471,000 over the past year.</div>
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<div>Unsurprisingly, the main driver of the gains has been the average size of mortgages sold in New South Wales which has jumped by more than $60,000 over the past year, and has soared from $454,000 to $584,000 over the past three years. </div>
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<div>Over the past year the average mortgage size also increased significantly in Victoria (+$34,000), Queensland (+$24,000), South Australia (+$30,000).</div>
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<div>There were also increases over the last year in Western Australia and the Northern Territory, but these resources states saw declines in their respective average mortgage sizes in Q3 2015.</div>
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<div><strong><span style="text-decoration: underline;">Investor market share declines</span></strong></div>
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<div>Perhaps the most significant aspect of this release was the very sharp drop in investor market share.</div>
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<div>According to AFG the investor share appears to have stabilised in recent months at around 32 to 33% of the mortgage market.</div>
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<div>Notably investor market share for Q3 2015 of just 33% was well below the 3 year average of 38%.</div>
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<div class="separator">This once again implies that APRA's advisory speed limit of +10 per cent annualised credit growth in relation to invetsment loans will be comfortably met in due course, and the housing market story going forward will largely be one of to what extent owner-occupier loans pick up the slack.</div>
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<div class="separator"><strong><span style="text-decoration: underline;">Westpac taps the market with raising</span></strong></div>
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<div class="separator">This morning Westpac went into a trading halt and announced that it would be tapping investors for a $3.5 billion renounceable entitlement offer in order to bolster its capital position, while noting in a separate announcement to the ASX that it will be whacking 20bps onto its home loan and investment loan rates, effective from November.</div>
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<div class="separator">It is widely expected that the other retail banks will follow suit in due course in respect to mortgage rates.</div>
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<div class="separator">This move seems likely to be a game changer for cash rate futures markets, with another interest rate cut from the Reserve Bank as soon as next month already considered by some to be an each way bet.</div>
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<div class="separator">If Thursday's employment data is weaker than expected then a rate cut in November may become more likely than not.</div>
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<div class="separator">AFG noted in its release that many borrowers consider further rate cuts to be increasingly likely, with fixed rate mortgages declining to just 11.3% of total loans processed for the quarter, which is the lowest level for more than three years. </div>
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<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Average mortgage size soars: Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>Mortgage rates in Australia have fallen sharply from around 8 to 10 per cent since 2008.</p>
<div>So it's reasonable to expect that housing rental yields would be considerably lower too.</div>
<div> </div>
<div>At the nadir, though, gross rental yields across the combined capital cities had sunk to below 3½ per cent, which is clearly far too low (and that's a gross figure). </div>
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<div>Here's an interesting chart from CoreLogic today, showing combined capital city yields tracking back quite quickly towards a rather more sustainable 4 per cent. </div>
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<div>Sydney has done some of that lifting, but with more pressure on its rental market the main driver has been Melbourne, with gross rental yields rising from near-record lows of 3.1 per cent in February 2018 to 3.6 per cent. </div>
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<div>Click <a href="https://2.bp.blogspot.com/-e8HYLNBoDoE/XHh_JygJXNI/AAAAAAAAuxY/aMPH6jBgzuQpI94mLAipxCfUG5l1kkXGACLcBGAs/s640/Yields.jpg" target="_blank">here</a> to enlarge</div>
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<div><img src="https://2.bp.blogspot.com/-e8HYLNBoDoE/XHh_JygJXNI/AAAAAAAAuxY/aMPH6jBgzuQpI94mLAipxCfUG5l1kkXGACLcBGAs/s640/Yields.jpg" width="640" height="414" data-original-height="538" data-original-width="829"></div>
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<div><em>(Source: CoreLogic)</em></div>
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<div>There has been a wide variation of results across markets, with demand largely coming from the bottom up thanks to first home buyer stimulus, but the upper quartile of the market seeing far fewer transactions on tight lending standards.<br><br>Negative equity hasn't featured too much in Australian housing in recent years, but with tighter credit holding down markets in Perth, Darwin, and some other regions, this is starting to become a factor of concern, especially as some borrowers are forced off interest-only mortgages.<br><br>Noted CoreLogic on the second wind for the Perth and Darwin downturn:<br><br>'This renewed downwards pressure on home values coincides with a softening in labour market conditions, with weaker housing market results likely compounded by credit scarcity.'</div>
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<br>Perth's median price has fallen by about 20 per cent over a downturn now spanning more than 4½ years.<br><br><div><img src="https://1.bp.blogspot.com/-5wxI9592SwI/XHjwAsnWzuI/AAAAAAAAuyM/074mg4IqR4o3KHA-SG1XvyuEwjozIgyxQCLcBGAs/s640/Perth.jpg" width="640" height="408" data-original-height="842" data-original-width="1316"></div>
<br><div><em>(Source: CoreLogic)</em></div>
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<div><em><em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em></em></div>
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Rental property yields recovering: Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>Over the past few weeks three of the four major banks in Australia have announced that they are going to be increasing variable mortgage rates. </p>
<p>While there has been a lot of adjustments to mortgage rates over recent years, the big difference with the latest announcement is that the higher mortgage rates are going to affect owner occupiers. </p>
<p>Most of the previous mortgage rate changes announced by the major banks have only affected investors and those with interest only mortgages.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/9/7/KUSH1.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/9/7/KUSH1.jpg" alt=""></p>
<p>Many of the smaller regional banks have pushed mortgage rates for owner occupiers higher over recent months citing higher short-term funding costs. </p>
<p>Although until now the major banks had resisted making an adjustment to mortgage rates it seems they too have had their hand forced by higher funding costs.  The above chart highlights the cost of short-term funding to banks (the three-month bank bill swap rate) and it clearly shows that the cost of short-term funding has increased.  It currently sits at 2.26% compared to the official cash rate which remains unchanged at 1.5% since August 2016.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/9/7/KUSH2.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/9/7/KUSH2.jpg" alt=""></p>
<p>Short-term funding costs have certainly risen recently however, it is also interesting to look at the composition of funding to Australia’s banks. Short-term funding is not an insignificant part of the funding profile (slightly more than 20%), although the share of funding from short-term debt has fallen over recent years as domestic deposits have increased. </p>
<p>There are other ways to handle higher short-term funding costs rather than lifting mortgage rates but that would likely mean cutting dividends which lenders seem reluctant to want to do or reducing deposit interest rates which would likely see a further reduction in the primary funding source: domestic deposits.</p>
<p>From a housing market perspective the timing of the announcement of higher interest rates is an interesting one. </p>
<p>After many years of strong value growth, Sydney and Melbourne housing is now well embedded in a downturn.  Tighter credit conditions, higher mortgage rates for investors and interest-only borrowers and reduced affordability have already led to the falls of -5.6% from the peak in Sydney and -3.5% from their peak in Melbourne.  This has occurred so far without higher interest rates for owner occupiers paying off principal and interest however, that is about to change.</p>
<p>The timing of the hikes to mortgage rates is also interesting in that it has been announced right at the beginning of the Spring Selling Season.  Although spring, in my mind and according to the data, is somewhat overhyped as a good time to sell, more stock does typically become available for sale over the period and buying activity typically increases. </p>
<p>The other usual occurrence at the beginning of spring is that lenders offer enticing mortgage rates to the market to jostle for market share.  By contrast this year, major lenders are announcing higher mortgage rates.</p>
<p>Higher mortgage rates have already driven a slowing of demand for investors over the past year.  Although the magnitude of the mortgage rate increases announced is fairly small (around 15 basis points by each lender) it is likely that the higher mortgage rates will impact on housing market sentiment. Furthermore it may end up further exacerbating the declines which are already occurring in Sydney, Melbourne, Perth and Darwin and the slowing of value growth being experienced elsewhere. </p>
<p>Overall this move seems likely to lead to a continuation of the currently weak housing market conditions over the coming months and may weaken the market further.  From the lenders perspective, clearly they realise that the housing downturn is becoming entrenched (particularly in Perth and Darwin, but more recently in Sydney and Melbourne) and they are doing what they can to maintain profitability in the face of lower mortgage volumes.</p>
<p><em><span>CAMERON KUSHER</span> is a property research analyst for CoreLogic</em></p>
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