Equity finance mortgages, just released from the Adelaide Bank could make property ownership easier, but analysts warn it could boost house prices because it fuels demand without addressing supply.
The announcement came just a day after economic analysis released by the Federal Labor Party claimed housing affordability across the nation was in crisis.
The loan product allows home owners to borrow as little as 75 per cent of the value of their home, after putting up a 5 per cent deposit.
The other 20 per cent will be covered by what is called an equity finance mortgage or EFM.
The borrower pays no interest or principal repayments on this 25-year mortgage, but when they sell the house, the bank gets 40 per cent of the total capital gains. On the upside, if the house declines in value, the bank absorbs up to a maximum of 20 per cent of the losses.
The loan effectively allows people to buy a house up to 25 per cent more expensive than is possible under a traditional home loan.
Adelaide Bank chief general manager, banking, Stephen Small said the bank, and its partner Rismark International had been developing the product for about four years.
"The EFM is an ideal home loan for a first-time buyer lacking the full finances required for entry into the home-owner market," Mr Small said.
"If and only if the property increases in value will the lender be entitled to a share of the capital gains."
If the house loses value, and the bank absorbs 20 per cent of the capital loss, it was effectively a negative interest rate, Mr Small said.
He said the new loan would allow people to buy homes up to 25 per cent more expensive and cut 20 per cent off the cost of their mortgages.
CommSec senior financial analyst Carlos Castillo said that if such loans became widespread, the effect would likely be an increase in house prices.
"If it does become more widespread it does mean there is more demand for properties and people can afford to pay more than in the past," Mr Castillo said.
"I don't think it's outside of the realms of possibility that rather than increasing affordability and keeping house prices where they are, that house prices might just ratchet up by the amount of the benefit that comes from this type of product."
Mr Castillo said this would only happen if other banks took up the product and it became widespread.
"History suggests that if this product does find a market out there then it wouldn't take too long for other players to . . . replicate the product."
Rismark managing director Christopher Joye said the key target market were people who were priced out of the home ownership market, those who already had a mortgage but wanted to free up income, or those who wanted to buy a larger home.
Real Estate Institute of Australia president Mark Sanderson said anything which helped people get out of the renting cycle and into home ownership was welcome.
Australian Consumers' Association spokesperson Nick Coates said consumers needed to make sure they knew what they were signing up for.
"As shared appreciation mortgages become more widely available the things that consumers need to watch on them are how much interest they pay on them," he said.
"By that I mean what it is at the end when you work out how much the house has appreciated.
"The critical thing there is you are satisfied with the valuation and you believe the valuation reflects the value of your house."
Herald Sun
Thursday, March 29, 2007
Wednesday, March 28, 2007
Finance Markets expect mortgage interest rates to rise on wage increase pressures.
The Reserve Bank of Australia's suspicion that wage pressure is accelerating is being confirmed by economic data, placing more pressure on interest rates.
The Australian bank bill futures market yesterday put the chance of a rate rise at the next Reserve Bank board meeting at 50 per cent, while a rate hike in the next 12 months is considered a certainty.
Early assessments by private sector economists suggest that March quarter inflation will push the annual rate higher, rather than lower as expected.
The RBA set interest rates to keep inflation between 2 and 3 per cent.
The Australian Industry Group's March quarter manufacturing survey, out next month, shows rising cost pressures on business.
AIG chief economist Tony Pensabene said yesterday that companies were also pushing up selling prices, although profit margins were still being eroded.
"Skill shortages and shortages of labour generally are putting pressure on companies to deliver wages either to reward or retain staff. There are also clear signs that the drought is having an impact on supply chains, and that has put some pressure on particular food sectors.
The AIG survey is consistent with the findings of the National Australia Bank and the ACCI business surveys.
The monthly NAB survey shows that both wages levels and spare capacity are at levels to raise concern at the Reserve Bank.
It shows the average wage rise increased from 4.5 to 4.75 per cent in the second half of last year, and moved to 5.25 per cent in both January and February.
NAB chief economist Jeff Oughton warns that the survey figures are typically about a percentage point higher than the official national wage price index, but they underscore the rising wage pressure.
Both the NAB and the AIG surveys show companies are running out of spare production capacity. These surveys are the only direct measure of how closely the economy is approaching the limits of its capacity and are closely followed by the Reserve Bank. The NAB survey shows business is operating at a record 83.9 per cent of its capacity.
The latest ACCI-St George survey shows that in the December quarter wage and other cost pressures were at their highest level since the survey began in 1994.
However, the business surveys show that cost pressures are not fully reflected in sales prices. The NAB survey shows retail prices are only rising at an annual rate of 1.9 per cent. Both AIG and ACCI surveys show a moderate lift in selling prices.
Westpac inflation expert Anthony Thompson said the headline rate of inflation for the quarter was likely to be 0.8 or 0.9 per cent, compared with the December quarter's 0.1 per cent fall in consumer prices.
"Petrol prices have ratcheted higher, whereas early in the quarter it had looked as though they might fall by an average of 4.5 per cent."
He said a very preliminary estimate suggested the core inflation rate for the quarter might rise from the December quarter's 0.5 to 0.7 per cent.
"Domestic demand, particularly from consumers, is proving extremely resilient to last year's rate hikes."
The monthly inflation index compiled by the Melbourne Institute and TD Securities shows that, excluding volatile items and housing rent, price pressure in February was the most intense in the past four years.
Source: The Australian
The Australian bank bill futures market yesterday put the chance of a rate rise at the next Reserve Bank board meeting at 50 per cent, while a rate hike in the next 12 months is considered a certainty.
Early assessments by private sector economists suggest that March quarter inflation will push the annual rate higher, rather than lower as expected.
The RBA set interest rates to keep inflation between 2 and 3 per cent.
The Australian Industry Group's March quarter manufacturing survey, out next month, shows rising cost pressures on business.
AIG chief economist Tony Pensabene said yesterday that companies were also pushing up selling prices, although profit margins were still being eroded.
"Skill shortages and shortages of labour generally are putting pressure on companies to deliver wages either to reward or retain staff. There are also clear signs that the drought is having an impact on supply chains, and that has put some pressure on particular food sectors.
The AIG survey is consistent with the findings of the National Australia Bank and the ACCI business surveys.
The monthly NAB survey shows that both wages levels and spare capacity are at levels to raise concern at the Reserve Bank.
It shows the average wage rise increased from 4.5 to 4.75 per cent in the second half of last year, and moved to 5.25 per cent in both January and February.
NAB chief economist Jeff Oughton warns that the survey figures are typically about a percentage point higher than the official national wage price index, but they underscore the rising wage pressure.
Both the NAB and the AIG surveys show companies are running out of spare production capacity. These surveys are the only direct measure of how closely the economy is approaching the limits of its capacity and are closely followed by the Reserve Bank. The NAB survey shows business is operating at a record 83.9 per cent of its capacity.
The latest ACCI-St George survey shows that in the December quarter wage and other cost pressures were at their highest level since the survey began in 1994.
However, the business surveys show that cost pressures are not fully reflected in sales prices. The NAB survey shows retail prices are only rising at an annual rate of 1.9 per cent. Both AIG and ACCI surveys show a moderate lift in selling prices.
Westpac inflation expert Anthony Thompson said the headline rate of inflation for the quarter was likely to be 0.8 or 0.9 per cent, compared with the December quarter's 0.1 per cent fall in consumer prices.
"Petrol prices have ratcheted higher, whereas early in the quarter it had looked as though they might fall by an average of 4.5 per cent."
He said a very preliminary estimate suggested the core inflation rate for the quarter might rise from the December quarter's 0.5 to 0.7 per cent.
"Domestic demand, particularly from consumers, is proving extremely resilient to last year's rate hikes."
The monthly inflation index compiled by the Melbourne Institute and TD Securities shows that, excluding volatile items and housing rent, price pressure in February was the most intense in the past four years.
Source: The Australian
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