FIRST-home buyers are flooding into the market thanks to falling interest rates and slumping home prices.
But investors are shunning cheaper homes because they fear prices could fall further.
Read the full article here: http://www.news.com.au/heraldsun/story/0,21985,25014496-5013926,00.html
Today’s cut will save a mortgagee with a typical 30-year, $300,000 home loan about $170 in monthly repayments if the lender passes on the full amount. Over the life of the loan, the savings will total about $61,272.
”There was a significant deterioration in world economic conditions late in 2008,” said RBA Governor Glenn Stevens in a statement accompanying the cut. ”The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world.”
The RBA has now lopped four full percentage points off its cash rate since it changed tack and began cutting rates last September. The cash rate has not been this low since 1960, according to Bloomberg data.
The rate reduction comes hours after the Federal Government announced a $42 billion stimulus plan aimed at keeping the economy out of a recession. The spending includes some $12.7 billion in cash payments and $28 billion on new infrastructure projects including roads and schools.
“What they have done is certainly enough, put together with the fiscal package,” said Michael Blythe, chief economist for the Commonwealth Bank. ”Policy setting in Australia is very stimulative, although we are quite likely to see rates lower” in the first half of 2009.”
Double boost
The central bank said it had taken into account the additional government spending.
”The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the RBA said in its statement.
Today’s RBA cut matched market expectations.
The Australian dollar initially jumped, rising from 63.5 US cents to 64 US cents after the RBA move. The benchmark ASX200 share index was recently 1.2% up for the day, easing from 1.4% higher shortly before the RBA release.
More cuts to come
The fact the RBA assessed the likely impact of today’s stimulus package indicates the bank may have been considering a bigger cut, said JP Morgan economist Helen Kevans.
Ms Kevan expects another 50 basis point cut when the RBA board next meets in March to complete the central bank’s current easing cycle.
Today’s RBA’s rate cut follows the Federal Government’s revision of growth forecasts for the economy. The Rudd Government expects Australia’s growth to slow to 1% this fiscal year to 0.75% next year - one of the few economies to continue to expand.
The RBA said Australia remains relatively strong.
”Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers,” the RBA’s Stevens said.
”Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand.”
The Reserve Bank indicated it had more scope for cutting rates as inflation eases.
”Inflation has begun to moderate and, given recent developments, it is likely to continue to decline,” the RBA’s statement said.
Consumer prices fell by 0.3% in the December quarter, its first reduction since 1997, according to statistics released last week.
Three-year bond futures fell 0.085 points to 97.035, while 10-year bond futures shed 0.045 points to 95.870.
Australia’s central bank will hold off on further rate cuts until at least February, according to its December meeting minutes, allowing time for recent rate cuts to work their way through the economy and spur growth.
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Paul Castran
More than 40,000 unlucky people have been caught out in a fixed mortgage rate trap, having taken out their loan at the highest fixed interest rates in a decade, denied any saving from the recent cuts and confronting costly break fees if they decide to refinance.
Figures from the Bureau of Statistics show 43,632 borrowers signed on to new fixed home loans between March and September, when lending rates were at a decade high. The official cash rate has since fallen by a full 3 percentage points.
According to the research group Infochoice, someone who took out a fixed loan of $500,000 in March would now be paying $800 more a month than if they had opted for a variable rate.
But borrowers looking to refinance face a difficult choice: continue to pay a higher interest rate, or incur thousands of dollars in penalty fees for breaking their fixed contract.
“It’s not just all about the rate,” the head of Infochoice, Shaun Cornelius, said. “There are all sorts of conditions attached to the exit fees. They can be quite expensive.”
While fees vary, borrowers who cancel their loan within the fixed period are typically forced to compensate their lender for the “economic cost” of breaking their contract. This is the difference between the interest the borrower would have paid the lender and the prevailing interest rate. As interest rates fall, this gap is becoming ever wider, meaning it may already be too late for fixed borrowers to save by refinancing.
On top of the economic cost fee, all four major banks also charge an upfront fee, ranging between $300 from ANZ and $900 from NAB, for breaking a fixed loan. Administrative and establishment fees are also charged by the new lender.
Read the full article from Jessica Irvine and Ehssan Veiszadeh of the Sydney Morning Herald here:
Paul Castran