Keeping An Eye On Housing And Interest Rates In 2019
While stock pickers give their guidance for the S&P/ASX 200 (INDEXASX: XJO) in 2019, it’s important to take a look at what is going to drive the Australian stock market.
Drivers both domestically and from abroad
How our domestic economy runs in 2019 will directly impact our local share market but we also feed off strength from offshore markets such as the US who lead the rest of the world.
Australia is not in the same position as the US who is in a defined tightening cycle, meaning interest rates are rising.
The US central bank, the Federal Reserve, raised the target range for the federal funds rate by 25 basis points to 2.25-2.5% during its December meeting, its fourth hike of 2018.
Furthermore, the Federal Reserve foresees two more rate hikes in 2019.
Rates in Australia aren’t necessarily rising
The last interest rate hike in Australia was November 2010 and our last rate cut was August 2016.
Our interest rate has been at 1.5% since August 2016 and while the expectation is for Australia to follow suit with the US and start raising interest rates, we may not be ready.
The US economy was experiencing growth, lower unemployment levels and signs of inflation, which forced its central bank’s hand to begin their tightening cycle (rising interest rates).
Australia’s economy is experiencing positive signs of growth, unemployment and inflation but not yet to the same degree that warrants a rate hike according to our central bank, the RBA.
Snippets from the RBA’s December statement
The RBA’s Governor Philip Lowe in the December monthly statement said: “The Australian economy is performing well.
“The central scenario is for GDP growth to average around 3½% over this year and next, before slowing in 2020 due to slower growth in exports of resources.”
He added: “The outlook for the labour market remains positive. The unemployment rate is 5%, the lowest in six years.
“With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely.”
He also said: “Inflation remains low and stable. Over the past year, CPI inflation was 1.9% and in underlying terms inflation was 1¾%.
“Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual.
“The central scenario is for inflation to be 2¼% in 2019 and a bit higher in the following year.”
Housing market is key in 2019
Housing is very important for our domestic economy due to the ripple effects it has within our economy.
There is also the lender, the valuer, the mortgage broker, the real estate agent, the advertising, the tradesmen, the gardener, the insurance… the list goes on.
Let’s use an example of a person who bought a $1 million property with a $200,000 deposit ($200,000 equity, $800,000 debt).
If that house increased to $1.05 million in value, assuming the debt is the same, the equity component increases to $250,000, increasing the wealth by $50,000.
This person is a lot more likely to book a holiday, dine out at a restaurant, or pay to get their car washed.
If the housing market continues to fall, the wealth effect reverses and it can reach further across our economy than you may think.
Our central bank keeps a keen eye on housing
With housing being a large driver of our domestic economy, the RBA knows it must be well-informed on the state of the housing market to make policy decisions.
Lowe said in the December monthly statement: “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low.
“Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend.
“The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed.
“Growth in credit extended to owner-occupiers has eased to an annualised pace of 5–6%.
“Mortgage rates remain low, with competition strongest for borrowers of high credit quality.”
The much-anticipated report from the Royal Commission has been met with mixed reactions from different groups and stakeholders. But the ultimate question is, will it really benefit borrowers in the end?
Arthur Moses, president of the Law Council of Australia, said the recommendations will have a far-reaching impact on the banking and financial services sector and will ensure that consumers will be treated fairly.
Amongst the 76 recommendations made by Royal Commission is the ban on trail commissions starting July next year. Over the next three years, mortgage brokers will be shifting to a consumer-pays model.
While this recommendation is intended to make sure that clients’ best interests are protected, some think this would only cater to the pockets of big banks.
Mortgage & Finance Association of Australia CEO Mike Felton said the Royal Commission’s recommendations put the broker channel at risk and will likely impair competition and damage access to credit.
A consumer fee-for-service model will mean brokers and smaller lenders will no longer be able to compete on a level playing field with major banks, he said.
“This sort of fee would see consumers deserting brokers, cutting access to smaller lenders and driving consumers into the branches of the major lenders. This will increase bank power, and make getting access to a home loan harder and more expensive for home buyers,” Felton said.
Pure Finance founder Brendan Dixon said banning broker commissions will only boost the profits and be an advantage to big banks.
“On top of this, how will low-income-earning Aussies afford a fee for a mortgage broker to get a cheaper deal? They won’t, but the rich will (if there are any brokers left),” he said.
However, some industry experts expressed hope that the recommendations will put an end to the over-the-top credit restrictions that have been in place for more than three years.
Property Investment Professionals of Australia (PIPA) chairman Peter Koulizos said these limitations have already started putting the economy in jeopardy.
“Solid borrowers, who should have no problem securing finance under normal credit conditions, are getting knocked back for silly reasons such as spending $50 on Uber Eats on a Friday night,” he said.
Mortgage industry is playing an important role today to meet the people’s needs. The industry is constantly engaged in making changes and bringing new ways to assist people in some of their most important personal and financial decisions. The industry is involved in making changes to suit people’s requirements keeping in mind their financial conditions. Along with conventional fixed rate products mixtures of typical adjustable rate mortgage products, interest-only and payment option type ARMs, high LTV financing and FHA products have been introduced. This expansion and variety in the products is intended to help larger number of people to qualify for the home ownership. There is a fair competition among the lenders to provide customers with the best rates staying within the boundaries of State law. Customer satisfaction is paid maximum importance today. This trend has helped the borrowers belonging to all levels as the positive affect is now reaching people on a wider range. People have got the opportunity to take advantage of a wide range of products available in the current market. This has raised the buying process with a greater mass being able to participate in the program. But with this positive feature there has been a recent trend of increase in the number of fraud cases in the industry which is a growing problem in the industry today.
According to the Royal Commission, the number of fraud cases in the mortgage has increased over the recent years. Mortgage companies have been using false documents and getting them signed by borrowers. Many of them have even charged high interest rates and borrowers have been making such high interest payments due to lack of awareness on recent market trends.
It is found out that an average homeowner in Australia has to pay $1250 more in sub-prime mortgage industry. Sub-rime mortgage are offered to high risk borrowers who may have been rejected by other lenders. In recent years this industry has seen a considerable growth with a lot of consumers getting qualified for this loan. Consumers who face difficulty with the credit market are generally availing this loan. But, this growth has simultaneously given rise to predatory lending affecting the most vulnerable lenders. This kind of abusive lending is generally directed to the lower income and minority borrowers. Generally the elderly homeowners with reduced incomes become the target of these sub-prime home equity lenders as they often have considerable amount of equity in their homes. The most harmful practice begins with a loan based on the home equity rather than on borrower’s ability to repay. These borrowers often fail to repay and the lenders acquire the borrower’s home equity and ultimately the borrower loses his home through foreclosure or by signing a deed to the lender in lieu of the foreclosure. There are some other kind of abusive practices which are illegal under various federal or state laws.
Considering the growing rate of predatory lending in the mortgage industry, the Royal Commission has decided to have an audit service for protecting homeowners from abusive lending practices. But borrowers should also be aware of such unlawful activities and keep themselves away from such lenders.
Borrowers should consider some preventive measures to protect themselves from predatory lenders. They should not go by the rates that lenders often advertise. These rates are in fact, much lower than the actual fees charged by such lenders. The lenders advertise such low rates just to lure consumers so that they can approach them for loans.
Borrowers should demand a written copy of the fees that they keep paying to the lender on a monthly basis. This is because lenders often provide an estimate of fees at closing and later they charge higher fees pretending that they have forgotten to include these charges. But keeping the proofs of such documents will help borrowers in case of any discrepancies in the mortgage process.
If there is a rise in rate in the market during the time period between the application and closing, the lenders charge higher rate to borrowers. On the other hand if the rate falls downwards, the lenders try to ignore it and the borrowers are deprived of the advantage of the lower rate. So, the borrowers should monitor the market during this period.
The borrowers should try to keep a track of all the documents involved during the process and ask for proper clarifications wherever they have a doubt. Going this way will minimise the problems of being cheated by the mortgage companies to some extent. The borrowers should try to consult an Attorney or a professional known to the borrower and get the documents verified by them.
