The stage is set for a November home loan interest rate rise and possibly another rise in mortgage rates in 2007, with a solid rise in consumer prices in the third quarter pointing to inflation pressures in the domestic economy.
An Australian Bureau of Statistics (ABS) report showed the nation's consumer price index (CPI) rose 0.9 per cent in the quarter, for an annual rate of 3.9 per cent. In the June quarter, the CPI rose 1.6 per cent. The median market forecast for the headline CPI was for a rise of 0.8 per cent in the CPI in the September quarter, for an annual pace of 3.8 per cent.
Commonwealth Bank chief economist Michael Blythe said the suggested the central bank would raise rates next month. "Clearly we're still waiting to see what those key underlying measures are, but all indications are that it will be high enough to tick off that November rate rise," he said.
Westpac bank senior economist Andrew Hanlan said the figures confirmed that inflation was a challenge for the economy and the Reserve Bank of Australia (RBA).The RBA's inflation comfort zone for inflation is 2 to 3 per cent. The RBA would likely have to adjust rates following its November 7 board meeting, Mr Hanlan said."We need to see the Reserve Bank nudge things higher and we expect that in November," he said.But depending on how entrenched inflation is in the economy, Mr Hanlan said there is still a risk still that the central bank could raise rates again in February.Mr Hanlan said inflation is being impacted by rising global prices."Those rising global prices are feeding through to the whole pricing chain and we saw that earlier in the week with the producer price index rising quite a bit," he said. RBC senior economist Su-Lin Ong also said the results would put pressure on the RBA to raise rates for a third time this year. "The data and the details today support another hike from the Reserve Bank, most likely in November," she said.
"It (would be) a pretty prudent move given that there are clearly some underlying pressures in the economy." Source AAP
Monday, October 30, 2006
Sunday, October 22, 2006
Home loans grow as UK house prices hit new high.
Mortgage sizes grow as house prices in England and Wales surged an annual 11.5 per cent in October, taking asking prices to a record high, a survey showed today, in a further sign higher borrowing costs have not stifled demand.
The Rightmove house price index showed prices rose 2.0 per cent in October month-on-month, pushing the annual rate to its highest level this year. The figures were not adjusted to take into account seasonal changes in the market.
The asking price for an average house rose to 218,954 pounds (AU$541,232) in October, up from 214,566 in the previous month and beating the previous record of 217,580 pounds set in July.
The Rightmove data is in tune with other surveys showing the housing market shrugging off a Bank of England rate rise to 4.75 per cent in August. Most economists expect benchmark borrowing rates to rise further to 5.0 per cent next month.
"We have never (before) had a sustained low inflation, low interest rate economy combined with widespread home ownership," said Miles Shipside, commercial director at Rightmove, a leading property Web site.
"These unique conditions help push prices higher and higher. However, supply of houses coming onto the market is dropping as prices increase, because fewer home owners can afford to trade up."
Rightmove said the rise in prices was driven by a growing shortage of supply but added many first-time buyers are being priced out of the market given wage rises under five per cent while house price inflation runs above 10 per cent.
Asking prices in London and the southeast continued to lead the pack. Average London prices rose an annual 19 per cent to 335,507 pounds.
City bonuses and a surge in foreign interest have exaggerated gains in London's most desirable boroughs.
Rightmove said the cost of an average home in London's exclusive neighbourhood Kensington and Chelsea.
Source: Reuters
The Rightmove house price index showed prices rose 2.0 per cent in October month-on-month, pushing the annual rate to its highest level this year. The figures were not adjusted to take into account seasonal changes in the market.
The asking price for an average house rose to 218,954 pounds (AU$541,232) in October, up from 214,566 in the previous month and beating the previous record of 217,580 pounds set in July.
The Rightmove data is in tune with other surveys showing the housing market shrugging off a Bank of England rate rise to 4.75 per cent in August. Most economists expect benchmark borrowing rates to rise further to 5.0 per cent next month.
"We have never (before) had a sustained low inflation, low interest rate economy combined with widespread home ownership," said Miles Shipside, commercial director at Rightmove, a leading property Web site.
"These unique conditions help push prices higher and higher. However, supply of houses coming onto the market is dropping as prices increase, because fewer home owners can afford to trade up."
Rightmove said the rise in prices was driven by a growing shortage of supply but added many first-time buyers are being priced out of the market given wage rises under five per cent while house price inflation runs above 10 per cent.
Asking prices in London and the southeast continued to lead the pack. Average London prices rose an annual 19 per cent to 335,507 pounds.
City bonuses and a surge in foreign interest have exaggerated gains in London's most desirable boroughs.
Rightmove said the cost of an average home in London's exclusive neighbourhood Kensington and Chelsea.
Source: Reuters
Thursday, October 19, 2006
Low mortgage interest rates drive gain in new home starts
Low mortgage interest rates are boosting the new home buyers and home building companies. The construction of new privately-owned residences increased nearly six percent last month compared to August, according to a joint report by the U.S. Census Bureau and the Department of Housing and Urban Development. The report also showed housing starts to be 19.9 percent below the August 2005 rate.
New home starts have slowed from the unsustainable levels of the last few years but the market has proven to resilient.
As long a long-term mortgage rates remaining low and there is a continued job growth across most industries the housing marketing will be in good shape, especially at the high end of the market.
New home starts have slowed from the unsustainable levels of the last few years but the market has proven to resilient.
As long a long-term mortgage rates remaining low and there is a continued job growth across most industries the housing marketing will be in good shape, especially at the high end of the market.
Thursday, October 12, 2006
Queensland bank, investment and insurance group Suncorp-Metway looks set to secure one of the largest takeovers in Australian corporate history with its $7.9 billion bid for general insurer Promina Group.
The board of Promina - which owns brands such as AAMI and Australia's Pensioners Insurance Agency - has said it is "favourably disposed" to the conditional offer.
The Brisbane, Queensland based bank, insurance and wealth management group has offered 0.2618 of its shares and $1.80 cash per Promina share, valuing Promina at $7.87 billion.
The news pushed Promina shares into new record territory, with the stock jumping almost 19 per cent to an intraday high of $7.70. The shares were up 66 cents at $7.14 at 1534 AEST.
Suncorp gained 90 cents or 4 per cent to $23.20 by that time.
If approved, it will be the largest takeover in the financial services sector since the Commonwealth Bank's $9.1 billion purchase of Colonial Ltd in 2000.
Outside of that sector, the size of the deal compares with BHP Billiton's $9.2 billion buyout of WMC Resources in 2005.
Both insurers remained tight-lipped about the deal today short of issuing statements confirming the bid, after market speculation about a possible takeover pushed Promina shares more than 6 per cent higher yesterday.
Suncorp has said the merger gives it an expanded national presence, improved geographic diversity and a significant boost to its presence in the wealth management and life insurance markets.
"The proposal is in line with its strategy to pursue value accretive acquisitions which meet its investment criteria, create value for shareholders and enhance earnings per share," Suncorp has said.
The offer brings a sense of confirmation to months of speculation about a round of consolidation among Australia's top four insurers.
However, Suncorp itself was considered one of the more likely takeover targets.
With Promina eager to move ahead with the merger, the companies are progressing with due diligence and negotiations for a formal merger agreement.
But approval from Australian and New Zealand regulators could still remain potential barriers to the acquisition.
CommSec analyst Carlos Castillo has said there are unlikely to be many rival bids emerging from the woodwork with competition constraints likely to keep most players at bay.
"This has been something that's been in the pipeline for quite a while," he said.
"It's (the market) obviously not factoring anyone else coming in and making a bigger offer and trumping Suncorp.
"I think that's pretty unlikely because Suncorp is the one that can extract the most synergies out of an acquisition of Promina.
"Any other potential bidders, if they want to pay more, then they're really going to be doing so for strategic reasons not because they feel they can get more value out of the acquisition than Suncorp."
The move will have ramifications for the broader financial sector with Insurance Australia Group (IAG) - Australia's second largest insurer by earned premium behind QBE - standing to benefit from the transaction.
"If this takeover goes ahead then it's hard to see anyone being able to buy IAG without further competition concerns being raised unless they're an offshore person who has no participation in the market at the moment," Mr Castillo said.
Deutsche Bank analyst James Coghill has said the disruption a merger is likely to cause Promina and Suncorp would improve IAG's attractiveness in the medium-term.
"In terms of alternative bids, we see limited scope given competition constraints for IAG, and lower synergy potential from QBE, Wesfarmers and Allianz," Mr Coghill said.
"Furthermore, both QBE and Allianz have the ability to acquire offshore at more attractive multiples."
Bank of Queensland managing director David Liddy has said the merger is good news for his bank.
"It's a positive from our point of view, we stick to the view that we are a bank and what we are trying to do is get more Bank of Queensland customers in Queensland," he said.
Mr Liddy has said the regional bank performed well after Suncorp's $1.26 billion acquisition of general insurance business GIO from AMP in 2001.
Source: AAP
The board of Promina - which owns brands such as AAMI and Australia's Pensioners Insurance Agency - has said it is "favourably disposed" to the conditional offer.
The Brisbane, Queensland based bank, insurance and wealth management group has offered 0.2618 of its shares and $1.80 cash per Promina share, valuing Promina at $7.87 billion.
The news pushed Promina shares into new record territory, with the stock jumping almost 19 per cent to an intraday high of $7.70. The shares were up 66 cents at $7.14 at 1534 AEST.
Suncorp gained 90 cents or 4 per cent to $23.20 by that time.
If approved, it will be the largest takeover in the financial services sector since the Commonwealth Bank's $9.1 billion purchase of Colonial Ltd in 2000.
Outside of that sector, the size of the deal compares with BHP Billiton's $9.2 billion buyout of WMC Resources in 2005.
Both insurers remained tight-lipped about the deal today short of issuing statements confirming the bid, after market speculation about a possible takeover pushed Promina shares more than 6 per cent higher yesterday.
Suncorp has said the merger gives it an expanded national presence, improved geographic diversity and a significant boost to its presence in the wealth management and life insurance markets.
"The proposal is in line with its strategy to pursue value accretive acquisitions which meet its investment criteria, create value for shareholders and enhance earnings per share," Suncorp has said.
The offer brings a sense of confirmation to months of speculation about a round of consolidation among Australia's top four insurers.
However, Suncorp itself was considered one of the more likely takeover targets.
With Promina eager to move ahead with the merger, the companies are progressing with due diligence and negotiations for a formal merger agreement.
But approval from Australian and New Zealand regulators could still remain potential barriers to the acquisition.
CommSec analyst Carlos Castillo has said there are unlikely to be many rival bids emerging from the woodwork with competition constraints likely to keep most players at bay.
"This has been something that's been in the pipeline for quite a while," he said.
"It's (the market) obviously not factoring anyone else coming in and making a bigger offer and trumping Suncorp.
"I think that's pretty unlikely because Suncorp is the one that can extract the most synergies out of an acquisition of Promina.
"Any other potential bidders, if they want to pay more, then they're really going to be doing so for strategic reasons not because they feel they can get more value out of the acquisition than Suncorp."
The move will have ramifications for the broader financial sector with Insurance Australia Group (IAG) - Australia's second largest insurer by earned premium behind QBE - standing to benefit from the transaction.
"If this takeover goes ahead then it's hard to see anyone being able to buy IAG without further competition concerns being raised unless they're an offshore person who has no participation in the market at the moment," Mr Castillo said.
Deutsche Bank analyst James Coghill has said the disruption a merger is likely to cause Promina and Suncorp would improve IAG's attractiveness in the medium-term.
"In terms of alternative bids, we see limited scope given competition constraints for IAG, and lower synergy potential from QBE, Wesfarmers and Allianz," Mr Coghill said.
"Furthermore, both QBE and Allianz have the ability to acquire offshore at more attractive multiples."
Bank of Queensland managing director David Liddy has said the merger is good news for his bank.
"It's a positive from our point of view, we stick to the view that we are a bank and what we are trying to do is get more Bank of Queensland customers in Queensland," he said.
Mr Liddy has said the regional bank performed well after Suncorp's $1.26 billion acquisition of general insurance business GIO from AMP in 2001.
Source: AAP
Reverse Mortgages. Are they a cause for concern for our aged?
vphSeveral consumer groups are calling for better protection for aged homeowners being sold reverse mortgages to fund their retirement.
Australia's ageing population are mostly asset rich but cash poor. And most have one asset that has doubled or trebled in value in the last few years, and that’s the family home.
Reverse mortgages have been available in the US for decades, and some banks tried to market them in Australia in the nineties with limited success.
Their time and need has now come, as the cash strapped baby boomers head to retirement with little superannuation or other assets to support them in retirement.
In 2004, about $250 million was lent through reverse mortgages. Last year, it was $650 million. According to Kieran Dell, executive director of the industry body Senior Australians Equity Release Association of Lenders (SEQUAL), that's just the beginning.
"It wouldn't surprise me if it exceeded a billion dollars in this calendar year," he says, adding that it could reach up to $5 billion in the next few years.
"You won't see the rump of those baby boomers hitting retirement and then spending their superannuation for another 10 years. So it's going from a small base but it is growing very fast."
But the Australian Consumers Association has called for regulation of the sector, concerned that pushy selling practices could put them in an unfair position.
Launched during the boom when house values were screaming up, many property markets are now falling while interest rates are rising.
"Reverse mortgages are an emotive issue," says Denis Orrock, the general manager of InfoChoice.
"Slogans such as 'nothing to pay till you die' hardly aid the industry's quest for recognition as a legitimate financial tool for senior citizens."
Horror stories from Britain of aged pensioners being evicted from their homes as their reverse mortgage debt exceeded the homes' value stalled the market here in the 1980s. Yet new demographics and lifestyle considerations are pushing more people to consider going back into debt.
Life expectancy is longer, lifestyle expectations are higher and Australia's ageing population needs more money to live on. There are a lot of retirees who own their own homes and many who are under-funded for retirement. People leaving the workforce now have an average of only $125,000 in super, so borrowing against the family home can look like an attractive option.
But in doing so, borrowers take on a major risk. In an environment of sluggish property growth and higher interest rates, the debt compounds rapidly and may leave once-secure home owners with little to call their own or pass on to their beneficiaries.
Depending on how the funds are accessed, Centrelink may assess the money under the income test and reduce the age pension.
Any mortgage broker can sell a reverse mortgage, whether or not they submit to an Australian Securities and Investments Commission-approved dispute resolution system such as the Banking and Financial Services Ombudsman. Sales are commission-based, which means the bigger the loan, the greater the broker fee. Commission figures are closely guarded, but those the ACA knows about average from 1.2 to 2.3 per cent. If there is a combination of an upfront commission and a trail fee, the inital fee may be 0.7 to 1 per cent and the ongoing trail 0.2 to 0.4 per cent.
"You don't want a situation where inappropriate advice is given by a broker or a planner because of the size of the commission they're earning," says Nick Coates, an ACA senior policy officer.
In the absence of regulation, best practice in the area is guided by a voluntary industry code developed by SEQUAL, which represents about 95 per cent of providers. It requires members to include a no-negative equity guarantee in their contracts. This is meant to ensure that no one will lose their home over a reverse mortgage.
Because it's a voluntary code, a proven breach doesn't carry the force of law. The penalty is expulsion from SEQUAL or, as Dell puts it "a public relations disaster".
But the equity guarantee is not iron-clad. It is conditional on a borrower meeting all the terms and conditions of the loan, which may include, for example, maintenance and regular home valuations at the borrower's cost.
"We still have concerns that there are ways in which the contracts can avoid a no-negative-equity guarantee if the customer was found to be in default," Coates says.
"If you hadn't done some simple administrative tasks like paid your council rates or reported on the state of your property each year you could technically be in default, which means they could reserve the right to say the [guarantee] doesn't apply.
"Most financial institutions when questioned about that say, we're reasonable and won't apply it. Sure, they may well be reasonable but it still provides a gap for those that aren't reasonable. There's no guarantee."
The products are complicated, and many borrowers have trouble understanding all their ramifications. Dianne Carmody, general manager, Banking and Financial Services Ombudsman, says it has received only a small handful of complaints relating to reverse mortgages from SEQUAL members but all related to borrowers misunderstanding the terms and conditions.
Paul Gillett, a solicitor with the Consumer Legal Service in Victoria, has had many calls from clients who don't understand the products. "They're a relatively new product and people are prone to misunderstanding their nature," he says. "The negative side is that providers may be taking advantage of people in this regard."
SEQUAL's code requires people to consult a lawyer, and strongly encourages them to seek licensed financial advice and to talk to their beneficiaries as well. The association argues that making financial advice mandatory could actually disadvantage certain people. Some consumer groups agree, concerned that unscrupulous planners may push higher loan amounts or products people don't need. In addition, the financial advice would be yet another cost borne by the borrower.
With reverse mortgages, it's a case of borrower beware. "The borrower needs to understand the structure of the loan, the impact it may have on future equity and the impact it will have on their estate,'" Orrock says. "They also need to ensure that they only draw down the amount they require and not be coerced into taking a large lump sum.
"The lenders should at all times provide the borrower with an accurate picture as to how the loan will perform under conservative conditions moderate property growth and a higher interest rate environment. This will ensure the borrower can understand the concept of capitalisation of interest.
"Finally, the borrower needs to seek independent legal and financial advice."
Impact on Centrelink benefitsThe first $40,000 is not counted as an asset for 90 days. If the money is placed into a bank account, it is subject to the deeming provisions of the income test. Where more than $40,000 is borrowed, the amount in excess is counted as an asset with the $40,000 being counted after 90 days. If the whole amount is immediately spent, the rule will not apply unless the funds are spent on assets or an income stream. Where the loan is drawn down on a regular basis there is no effect on the income. Some reverse mortgage providers offer regular payments by holding the proceeds of the loan in an offset account. The balance of the account is classed as an asset and subject to the deeming provisions but the interest charged on the loan may be reduced.
Source: The Institute of Chartered Accountants in Australia
Australia's ageing population are mostly asset rich but cash poor. And most have one asset that has doubled or trebled in value in the last few years, and that’s the family home.
Reverse mortgages have been available in the US for decades, and some banks tried to market them in Australia in the nineties with limited success.
Their time and need has now come, as the cash strapped baby boomers head to retirement with little superannuation or other assets to support them in retirement.
In 2004, about $250 million was lent through reverse mortgages. Last year, it was $650 million. According to Kieran Dell, executive director of the industry body Senior Australians Equity Release Association of Lenders (SEQUAL), that's just the beginning.
"It wouldn't surprise me if it exceeded a billion dollars in this calendar year," he says, adding that it could reach up to $5 billion in the next few years.
"You won't see the rump of those baby boomers hitting retirement and then spending their superannuation for another 10 years. So it's going from a small base but it is growing very fast."
But the Australian Consumers Association has called for regulation of the sector, concerned that pushy selling practices could put them in an unfair position.
Launched during the boom when house values were screaming up, many property markets are now falling while interest rates are rising.
"Reverse mortgages are an emotive issue," says Denis Orrock, the general manager of InfoChoice.
"Slogans such as 'nothing to pay till you die' hardly aid the industry's quest for recognition as a legitimate financial tool for senior citizens."
Horror stories from Britain of aged pensioners being evicted from their homes as their reverse mortgage debt exceeded the homes' value stalled the market here in the 1980s. Yet new demographics and lifestyle considerations are pushing more people to consider going back into debt.
Life expectancy is longer, lifestyle expectations are higher and Australia's ageing population needs more money to live on. There are a lot of retirees who own their own homes and many who are under-funded for retirement. People leaving the workforce now have an average of only $125,000 in super, so borrowing against the family home can look like an attractive option.
But in doing so, borrowers take on a major risk. In an environment of sluggish property growth and higher interest rates, the debt compounds rapidly and may leave once-secure home owners with little to call their own or pass on to their beneficiaries.
Depending on how the funds are accessed, Centrelink may assess the money under the income test and reduce the age pension.
Any mortgage broker can sell a reverse mortgage, whether or not they submit to an Australian Securities and Investments Commission-approved dispute resolution system such as the Banking and Financial Services Ombudsman. Sales are commission-based, which means the bigger the loan, the greater the broker fee. Commission figures are closely guarded, but those the ACA knows about average from 1.2 to 2.3 per cent. If there is a combination of an upfront commission and a trail fee, the inital fee may be 0.7 to 1 per cent and the ongoing trail 0.2 to 0.4 per cent.
"You don't want a situation where inappropriate advice is given by a broker or a planner because of the size of the commission they're earning," says Nick Coates, an ACA senior policy officer.
In the absence of regulation, best practice in the area is guided by a voluntary industry code developed by SEQUAL, which represents about 95 per cent of providers. It requires members to include a no-negative equity guarantee in their contracts. This is meant to ensure that no one will lose their home over a reverse mortgage.
Because it's a voluntary code, a proven breach doesn't carry the force of law. The penalty is expulsion from SEQUAL or, as Dell puts it "a public relations disaster".
But the equity guarantee is not iron-clad. It is conditional on a borrower meeting all the terms and conditions of the loan, which may include, for example, maintenance and regular home valuations at the borrower's cost.
"We still have concerns that there are ways in which the contracts can avoid a no-negative-equity guarantee if the customer was found to be in default," Coates says.
"If you hadn't done some simple administrative tasks like paid your council rates or reported on the state of your property each year you could technically be in default, which means they could reserve the right to say the [guarantee] doesn't apply.
"Most financial institutions when questioned about that say, we're reasonable and won't apply it. Sure, they may well be reasonable but it still provides a gap for those that aren't reasonable. There's no guarantee."
The products are complicated, and many borrowers have trouble understanding all their ramifications. Dianne Carmody, general manager, Banking and Financial Services Ombudsman, says it has received only a small handful of complaints relating to reverse mortgages from SEQUAL members but all related to borrowers misunderstanding the terms and conditions.
Paul Gillett, a solicitor with the Consumer Legal Service in Victoria, has had many calls from clients who don't understand the products. "They're a relatively new product and people are prone to misunderstanding their nature," he says. "The negative side is that providers may be taking advantage of people in this regard."
SEQUAL's code requires people to consult a lawyer, and strongly encourages them to seek licensed financial advice and to talk to their beneficiaries as well. The association argues that making financial advice mandatory could actually disadvantage certain people. Some consumer groups agree, concerned that unscrupulous planners may push higher loan amounts or products people don't need. In addition, the financial advice would be yet another cost borne by the borrower.
With reverse mortgages, it's a case of borrower beware. "The borrower needs to understand the structure of the loan, the impact it may have on future equity and the impact it will have on their estate,'" Orrock says. "They also need to ensure that they only draw down the amount they require and not be coerced into taking a large lump sum.
"The lenders should at all times provide the borrower with an accurate picture as to how the loan will perform under conservative conditions moderate property growth and a higher interest rate environment. This will ensure the borrower can understand the concept of capitalisation of interest.
"Finally, the borrower needs to seek independent legal and financial advice."
Impact on Centrelink benefitsThe first $40,000 is not counted as an asset for 90 days. If the money is placed into a bank account, it is subject to the deeming provisions of the income test. Where more than $40,000 is borrowed, the amount in excess is counted as an asset with the $40,000 being counted after 90 days. If the whole amount is immediately spent, the rule will not apply unless the funds are spent on assets or an income stream. Where the loan is drawn down on a regular basis there is no effect on the income. Some reverse mortgage providers offer regular payments by holding the proceeds of the loan in an offset account. The balance of the account is classed as an asset and subject to the deeming provisions but the interest charged on the loan may be reduced.
Source: The Institute of Chartered Accountants in Australia
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