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Market Outlook
In this installment of the Aussie Market Outlook we’ve asked John Symond for his expert opinion on some of the important issues influencing the housing market this quarter.
The Reserve Bank of Australia (RBA) just increased interest rates. Many people are predicting another one or two rate rises early next year. What are your predictions?
The Australian economy is still performing extremely well compared to other economies. The RBA has recently indicated that Australia’s inflation rate is expected to rise above their targeted range. If this eventuates we may see another interest rate increase. However I believe that the RBA
will be extremely cautious in raising interest rates on the account of:
1. The US economy appears to be heading into recession,
2. The US subprime mortgage crisis continues to have a negative impact upon global markets, and
3. Australia also has to manage the impact of our recent increased interest rates.
It’s a very difficult job that the RBA has and I believe that if interest rates do rise the increase will be minimal.
On top of the recent RBA rate increase, there is speculation that the banks and other lenders may increase rates above the RBA’s increase of 0.25%. Why is that happening?
The primary cause is that the price of money in global markets has increased. The credit markets, particularly in the US, have suffered substantial losses on account of what’s termed subprime loans. These subprime loans were made to very credit-poor borrowers who subsequently have defaulted. This has caused many institutions to lose billions of dollars. As a result, ratings agencies and institutions are carefully assessing risk with all forms of credit lending and subsequently the cost of money has increased. This impact has been more pronounced in the US market, and unfortunately the price increase has spread globally so Australian banks and non-banks have had to pay a higher price for borrowing funds from the wholesale markets. This may eventually cause a slight increase to mortgages in Australia but there is good news for normal home loan borrowers. They are the least impacted from the fallout of the credit crunch and, hopefully, no major pricing increases should eventuate on account of the credit crisis.
There has been some talk in the media about possible changes to the assistance the state and federal governments offer first home buyers. How do you think the federal and state governments can positively impact the affordability of homes for first time buyers?
There are many problems that have contributed to the current affordability crisis. One of the main drivers has been the shortage of land releases by state governments and the huge cost of connecting services to new releases, most of which are being borne by the purchaser. Years ago, the cost of providing services such as water, gas and electricity was borne by the state and local
governments and paid for from our taxes. Today, all these costs have mostly been transferred to the land developer who, in turn, passes them onto the first home buyer. In some states the cost of these services is in the vicinity of $100,000 to $150,000 per block. This is a huge impost as this is added to the real cost of land. Another driver of the affordability crisis is that many first home buyers are being priced out of the market by investors and second or third time buyers.
One possible solution that I suggested to both federal parties prior to the election is to offer first home buyers tax concessions over a five year period subsequent to buying their property. This would provide an average net benefit of $4,725 a year for the first five years after purchase. Providing this assistance to first home buyers would have an additional benefit of freeing up existing dwellings for the rental market which would help alleviate the rental squeeze. For more information about this scheme, go to www.aussie.com.au/John_Symond_paper.htm
Many people tend to lose control of their finances over the holiday period. What are some simple tips to help me better manage my finances and avoid a financial hangover in the New Year?
The festive season often brings an extra drain on our finances. It’s all about having the right type of credit for your needs so that you don’t pay more than you have to. If you are making a lot of purchases for less than $3,000 you are probably better off using a credit card. Look out for a low rate credit card with interest free days, like the Aussie MasterCard®. Don’t be tempted by expensive store cards or promotional balance transfer offers that revert to the higher ‘cash
advance’ interest rates.
A personal loan is a good choice if you are looking at spending more than $5,000 or are already in debt and thinking about consolidating. Aussie has recently launched personal loans with interest rates that are lower than most credit and store cards. With fixed rates and flexible repayment options a personal loan is a good way of taking control of your finances. You know how much you need to repay each month and are locked into repaying the debt over anything from one to seven years. Consolidating this type of debt into a home loan is a trap that ¬many people fall into, which proves to be very expensive over the life of the loan.
Ask John Symond: send us your own questions and we’ll publish the best ones – and John’s answers – in the next
Market Outlook.
Mail to:
Ask John Symond
Locked Bag 19
ROYAL EXCHANGE NSW 1225
Or email
askjohn@eaussie.com.au
DISCLAIMER: The above contains general opinion only and should not be relied on as financial or legal advice. We recommend that you obtain expert advice where necessary, as we have not taken into account your circumstances.