Australian Residential Property Prices Increasingly Unaffordable
Though it may be far easier to find a job in Australia, it is expected that being a home owner is expected to become more difficult.
As Australia moves into an environment of declining unemployment, house prices and interest rates are rising, and some analysts say this points to signs that house prices are going to become increasingly unaffordable during the next few years.
Last week the results of housing surveys that were released suggested that residential property prices may rise by as much as 20 per cent during the next three years in cities such as Adelaide, Perth and Sydney, with other state capitals expected to post more moderate growth.
Whilst property prices continue to rise, many economists are predicting that the unemployment rate will decline to as low as four per cent, and interest rates may even exceed even nine per cent.
Rob Mellor, managing director of BIS Shrapnel says that the strong economy, low unemployment and robust growth in incomes is expected to produce steady growth in residential property prices.
“The big risk is affordability, that’s the part of the equation that certainly suggests over the next three years affordability will become a major issue.” Mr. Mellor said.
Strong migration trends and tight housing supply were a drivers for growth in residential property prices in Sydney, whilst the impact of the resources boom were expected to drive property prices in Perth Mr. Mellor said.
“Affordability will deteriorate as we go to a higher interest rate environment by 2013, It will deteriorate back to the sort of poor affordability that we had during 2008, when interest rates got to 9.5 per cent. So it’s certainly a negative.” he said.
Mr. Mellor says that affordability will continue to remain a serious issue as mortgage payments as a percentage of income rises.
“It will be a critical issue over a three year period, we do expect interest rates to rise in 2011/12. They’ll probably be back at around 8.3 per cent or so by June 2012 and more like 9.1 per cent by June 2013.” He said.
According to data released by the Australian Bureau of Statistics (ABS), nearly 50,000 full time jobs were created in September, keeping the unemployment rate at 5.1 per cent.
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Australian Mortgage Borrowers Struggle To Pay Home Loans
The results of a new survey suggest that mortgage borrowers are scrapping their holiday plans in order to concentrate on paying off their home loan.
According to the results of the latest Bankwest/Mortgage and Finance Association of Australia (MFAA) home finance index, more than half of those polled were sacrificing a number of everyday necessities in order to absorb the cost of higher interest rates.
“With interest rates higher than last year, many mortgage holders seem to be holding back on their spending,” Bankwest retail chief executive Vittoria Shortt said.
The survey polled over 1,000 property owners across the country, and found that over half said they ate out less, whilst just under half said they were cutting costs at home and taking packed lunches to work.
42 per cent of respondents said they were either scrapping their holiday plans altogether or considering cheaper holiday options. 40 per cent of those polled said they were now purchasing food in bulk.
“There is a clear move to more thrifty spending for many Australian households,” Ms Shortt said.
Australians seeking to cut their costs have implement measures ranging from selling unused items to seeking additional work and reducing insurance payments and superannuation contributions.
“Although some of the cost cutting strategies may seem extreme … it’s actually down to principals of good financial management,” MFAA chief executive officer Phil Naylor said.
“Borrowers can’t avoid rising interest rates, but they can minimise the impact by considering making an extra mortgage repayment with extra funds that would have otherwise been used for things like holidays.”
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Australians Inflation Expectations Rise
The results of a survey suggest that consumer inflation expectations increased sharply during October as worries persist over the state of the global financial system.
The Melbourne Institute Survey of Consumer Inflationary Expectations showed the median expected inflation rate rose to 3.8 per cent in October, from 3.1 per cent the month before.
The percentage of consumers who expect that inflation will remain within the Australian central bank’s target range of between 2 to 3 per cent declined to 15.1 per cent from the 19.0 per cent recorded during September.
“While we expect inflationary pressures to build up over the next 12 months, this month’s jump in inflationary expectations … came as a surprise,” Melbourne Institute research fellow Michael Chua said in a statement on Tuesday.
The view however is not universal amongst all Australians, with the inflation expectations amongst professionals and managers declining marginally to 3.3 per cent from 3.4 per cent in September.
“We are living in more uncertain times and this is showing up in the dispersion of views among the respondents,” Dr Chua said.
The consumer price index (CPI) which is the official measure of inflation increased by 0.6 per cent during the June quarter, well below what the 1.0 per cent economists had been forecasting.
Economists had been forecasting an annual inflation rate of 3.4 per cent, with the actual rate of 3.4 per cent.
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NAB Australian House Price Survey Suggests Sentiment Weak
According to the results of a new survey, prices of houses located in Australian capital cities are set to remain weak.
The survey which was commissioned by National Australia Bank found that the average expected annual price rise 1.5 per cent during the September quarter.
The results are similar to the result obtained during the June quarter survey, but down significantly from the 6.0 per cent expected average rise recorded during the March quarter survey.
House prices in Canberra posted the highest expected gain of 5.0 per cent, whilst Brisbane posted the weakest expected gain of just 0.1 per cent.
According to the results of the survey, houses with a price of less than $500,000 were expected to post the biggest rise in prices, whilst those with a price tag in excess of $2,000,000 were expected to appreciate by the least.
Overseas buyers were expected to account for 5 per cent of existing property purchases and 7 per cent of new development sales, down from 9 per cent in both segments during the June quarter.
Rising interest rates and access to credit were listed as the top reasons for constraining demand, although current prices levels and economic uncertainty were also significant.
The survey results suggest that residential property was the best performing category, with all other categories performing only reasonably.The survey also found residential rents were expected to rise by “around 2.5 per cent” over the coming year on average across Australia.
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Contraction In Bank Lending Prevents Australian Economy From Over Heating
According to the Reserve Bank of Australia, a contraction in lending to both businesses and households has prevented the Australian economy from boiling over as a result of the resources boom.
Central bank deputy governor Ric Battellino acknowledged the challenges presented in maintaining control of inflation as the economy expanded and growth rates increase from the current 3.25 per cent to as much as 4 per cent over the next couple of years.
Mr. Battellino said that the central bank felt reassured by the slowdown in growth of household credit.
As a result of the global financial crisis, business credit has declined by 4 per cent during the past year, though this has not had the effect of weakening the level of economic activity Mr. Battellino said.
Speaking at a business event in Brisbane Mr. Battellino said that the appreciation of the Australian dollar to that of near parity with the US dollar had taken some of the pressure of the need to raise interest rates, but added that currency movements were only one of the factors that the central bank takes into account when setting them.
He however renewed the warning given by RBA governor Glenn Stevens that the central bank would have to tighten interest rates should economic growth proceed as forecast.
“Earlier this year the Reserve Bank board returned official interest rates to a level that is consistent with lending interest rates being close to their average levels. Having done so, we have been comfortable to leave official interest rates unchanged in recent months. However . . . if economic conditions evolve as currently expected, it will be likely that higher interest rates will be required at some point to ensure that inflation remains consistent with the medium-term target.” he said.
Last week the central bank held the official cash rate steady, but the comments by the deputy governor will reinforce market expectations of tighter interest rates during the coming year.
It is believed that the central bank may tighten interest rates by as much as 100 basis points, adding 1 per cent to the current cash rate of 4.5 per cent and increasing standard variable mortgage rates to above 8 per cent.
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Australian Central Bank Surprises Market By Holding Interest Rates Steady
The Australian central bank, the Reserve Bank of Australia shocked financial markets when held the official cash rate steady at 4.5 per cent and describing its current position on monetary policy as “appropriate for the time being.”
Many analysts had been predicting that the RBA would raise interest rates by 25 basis points in light of the solid Australian trade surplus and an unemployment rate of just 5.1 per cent.
Indeed the speculation that rates would rise had driven the Australian dollar to a near two year high against the US dollar.
Glenn Stevens, central bank governor, justified its decision, citing a high level of uncertainty in financial markets, and the expectation of slower growth rates across the global economy during the next year, and in particular in the US and Europe.
“The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The board regards this as appropriate for the time being. If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.” Mr. Stevens said in a statement
“Inflation has moderated from the excessive pace of 2008. The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term.” He added
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Australian Banks Fight Back Against Criticism Over Independent Rate Hikes
Australian lenders are fighting back against criticism that their lending rates may be increased beyond the scope of the official rise in interest rates undertaken by the Reserve Bank of Australia, which could take place as early as next week.
The central bank issued a statement which said that lenders in Australia over the last couple of years had made enough profits to be able to absorb the increased cost of funding which resulted from the global financial crisis.
The statement was largely viewed as a warning to lenders not to increase their standard variable mortgage rates beyond the RBA’s next rate increase.
Mark Joiner, chief financial officer of NAB said that lenders continued to face funding cost pressure, despite the central bank’s warning that there was no need for banks to pursue independent rate hikes.
“I don’t think this really has been worked through by the Treasury or the RBA as to what the cost (to banks) is yet,” Mr Joiner said.
Mr. Joiner added that the war for deposits had begun to ease which has had the effect of relieving some of the pressure. Mr. Joiner did point out that margin pressure from international sourced funding remained.
Steven Munchenberg chief executive of the Australian Bankers Association says that official interest rates were just one factor banks take into account when setting their own variable interest rates.
“Thirty cents in every dollar lent by Australia’s major banks has to be raised from overseas investors,” he said. “The cost of that money has remained high and volatile and is not controlled by the Reserve Bank. Banks have a responsibility to look after their customers and banks tell me that individual pricing decisions made on interest rates are not made lightly.”
The consensus expectation is that lenders will raise their interest rates by at least 15 basis points above the official rates hike. Such a rise would mean Australian mortgage rates would stand at close to 8 per cent.
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CBA Adds Voice To Warnings That Interest Rates Will Be Hiked
Australian banking major, and the nation’s largest mortgage lender CBA has joined the chorus warning that Australian households and businesses could face the prospect of higher interests, which could be tightened by the central bank as early as next month.
The Sydney based lender says it believes that the Reserve Bank of Australia (RBA) will hike official interest rates by 25 basis points when it meets on October 5th, which will mean that interest rates will stand at 4.5 per cent.
Over the last couple of weeks, the central bank has placed considerable emphasis on how quickly it expects the economy to grow over the next year, and has issued warnings that inflation was likely to rise if economic growth remained unchecked.
Michael Blythe, CBA’s chief economist says that a central bank decision to hike interest rates in October would be the first of a number of rate hikes which will be executed over the following months.
CBA is forecasting that official interest rates are likely to rise to 6 per cent by the end of 2011.
CBA joins its rival NAB and a raft of other economists, all of whom now believe that a central bank rate hike next month is inevitable.
“There is a lot of momentum building up in the economy at the moment, which suggests that rates will have to be raised. Especially given that the bullish commentary and overtones from the RBA, it sounds like they are priming the market that they are going to take the step and move rates,” Mr Blythe added. We think there is more to come after an October move as well. The big issues really for the RBA are the inflation risk and having an economy that is running close to full capacity.” Mr. Blythe said.
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NAB Warns Of Rate Hike
Australia’s fourth largest bank NAB warned mortgage borrowers that they should be prepared for a hike in interest rates next month.
NAB says it now believes that the central bank will tighten interest rates by 25 basis points, lifting the official interest rate to 4.75 per cent when it meets on October 5th.
Not all analysts believe that rates will rise next month, but there is broad consensus that interest rates will be hiked before the end of the year. Alan Oster, chief economist from NAB said that the central bank’s tone in recent communication suggests that a rate hike is imminent.
“Until recently, RBA officials seemed to be signalling that interest rates were around average and growth was close to trend. There are now enough straws in the wind for us to believe that the tightening phase may well begin sooner, rather than later, and probably before the next inflation reading in later October.” Mr. Oster said.
Higher interest rates has prompted NAB to raise its forecast for the Australian dollar.
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HSBC Predicts Five Rate Hikes By The End Of 2011
Global banking giant HSBC has upgraded its Australian economic growth forecast, but also says it expects that interest rates will rise by at least 100 basis points during 2011.
On Tuesday the banking giant predicted that the Australian economy would expand by as much as 4.1 per cent during 2011.
Despite the optimistic outlook for the economy, the buoyant outlook was tempered by the prediction that interest rates may have to be raised by 100 basis points to keep inflation under control.
HSBC’s growth forecast exceeds many of the official predictions, which have the economy pegged at growing between 3 and 3.5 per cent.
Paul Bloxham an economist with HSBC said that economic expansion in Australia would primarily be driven by a booming resources sector, which was set to deliver Australia a revenue or income windfall.
“It’s been clear for a while that while Australia weathered the global financial crisis better than most, but the economy’s resilience continues to surprise. Global fears of a double dip notwithstanding, there are few clouds on the Australian horizon. The economy is benefiting from soaring structural demand for raw materials. For the resources sector, things look resplendent with commodity prices around historic highs and very strong investment in the mining sector expected over the next couple of years.” Mr. Bloxham said
HSBC is forecasting that the central bank will undertake on 25 basis point rate hike before the end of 2010, and a further four rate hikes of 25 basis points during 2011, which would mean official interest rates by the end of next year would be at 5.75 per cent.