Good news for the Australian property sector. In his announcement yesterday that interest rates would stay on hold, Governor of the Reserve Bank Glenn Stevens commented that while household spending is “likely to slow somewhat,” stronger dwelling activity and government spending “will start to provide more support to overall demand soon, and is likely to firm into 2010”.
Stevens is concerned that if the already record low interest rates are allowed to remain they may fuel a housing bubble and destabilize the economy.  The change has been largely due to improvements in Australia’s second largest export market, China.  
Paul Brennan, an economist at Citigroup Inc. in Sydney predicted “The next step will be for the Reserve Bank to begin to withdraw at least some of this accommodative setting,” starting in December with a quarter-point increase”.

Craig James, a senior economist with the Commonwealth Bank of Australia, suggests that Stevens is “certainly not suggesting that rate hikes are imminent.”  “The Reserve Bank will want to ensure the economy can stand on its own two feet — without being propped up by the government — before deciding to lift rates,” James said.
 Stevens also noted that home loan approvals had been solid, with housing prices rising over recent months indicated by increases in the median house price over the eight capitals. However, disturbingly, business borrowing was in decline as companies postponed investment plans in order to reduce debt financing.

Courier mail article. 

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Paul Newall, Raine & Horne Financial Services, advised yesterday of some changes in Bank policies that may severely limit any upturn in the property resale market.

It is no secret that the current market is attempting a very slight upturn driven from the bottom end predominently fuelled by the First Home Buyer (FHB) boost. Approximately 40% of all sales last month were to FHB, with 12,500 subsidy applications received, by the Federal Government, in February. Investors accounted for approximately 10% of purchases.

Many FHB’s have taken advantage of lending policy that has allowed loans of 100% and 95% of valuation.  Last week RAMS removed the 100% loan leaving the St George Bank as the main lender still offering 100% loans.  The major banks who offer 95% loans are now insisting on proof of saving over a period of 3 to 6 months.  Further it is rumoured that some banks will reduce their lending policy to 90% of valuation.  This will effectively neutralise the FHB Boost and stop the market in its tracks.

The fact that the banks and many consumers do not take accout of is the very high cost of rent today.  After paying the highest rents Australia has ever seen there is not much left for many FHB to use to save.  The Banks have to recognise this and view a good rental payment history as a major contributor to the loan application.

The major Banks, who largely caused the Global Financial Meltdown, are now at risk of worsening the situation just so that they can improve their balance sheets and stock price and the Federal Government and Reserve Bank do not seem to be doing anything.

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The troubled NSW economy could spawn a wave of “economic refugees” keen to pursue job opportunities and flattening house prices in South-East Queensland.

RP Data’s research director, Tim Lawless, said NSW was going through a “rough patch”, with the highest state unemployment rate in the country.

Tim Lawless, RPdata, was quoted in an interesting article in the BrisbaneTimes this morning. 

Lawless said “I wouldn’t be surprised if there was a rise in interstate migration coming into Queensland,”

Historically, people moved to Queensland from the southern states because of differential property prices, but these have largely evened out, he said.

But the Sunshine State still offered attractive employment opportunities, particularly in the resources sector.

This is just another factor to add to the current real estate climate for Queensland if it happens.  I hope the State Government infrastructure planning improves over the next five years.

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PRESS RELEASE 14-10-2008 

The CEO of Raine & Horne Queensland Stephen Sharry said `We are delighted with the inclusion of further assistance for first home buyers in the federal governments financial strategy announced today, especially in light of the fact that the benefit will be available immediately”.

This announcement by the Government will further strengthen the market, with Queensland poised to gain even more, following the relief offered earlier this year with the increase in the stamp duty threshold to $500,000.
 The Queensland real estate property sales market has steadied somewhat in recent months and this is seen as further fuel to increase the popularity of the state as being one of Australia’s most affordable areas in which to buy property and raise a family” Mr Sharry added.
The review of the First Home Owners Grant will see the original benefit for established homes doubled from $7,000 to $14,000 and tripled if the buyer proceeds with a newly constructed home. Newly constructed properties must however meet certain energy efficiency and sustainability standards.

Mr Sharry concluded “Our group welcomes this move to help young families into a home and the lowering of interest rates this week also, will see those with a mortgage better placed to be able to service their repayments”
    

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The Federal Government has kept its election promises and rewarded the working families that largely delivered them out of the wilderness and into government. The centrepiece of the budget, tax cuts, was set last year as part of the election. Wheres it can be said that the budget overall is an “honest effort” on the part of Swan, it probably misses a huge opportunity to be tougher however Swan has delivered a real “crowd pleaser” and used the surplus politically strategically. Some of the income testing add-backs in FBT, negative gearing and salary sacrifices which come into effect in 2009 and will have little impact on the investment property market.  The budget commits $2.2 billion to help home buyers and property investors in some way.

Promises to tackle the housing affordability crisis have been partly addressed. The effective increase in income to a family on a combined family of $70,000, with children, will be around 4%.  This will improve one component of the affordability index for this market segment.

The new National Rental Affordability Scheme will receive $623 million, which the government estimates will create up to 50,000 new rental properties. This is an ambitious statement which will see the accountants and investment advisors looking at the detail and working their excel spreadsheets until late in the night to come up with a financial model for investors that may assist to attract some back into the market.

In an attempt to lower the cost of building new homes, $512 million has been allocated over five years for the Housing Affordability Fund. Depending on how, when and where this is directed it may help to reduce housing costs which are increasing with inflation and impacted on by the labour shortage. 

A “First Home Saver Accounts” will be established with an allocation of $1.2 billion over four years to assist first home buyers. This is a real winner as it will assist with a culture change particularly amongst the young who will be educated to save rather than spend.

There will also be funding of $100 million over the next four years for the construction of 600 new homes for homeless people across the nation.

On a personal note with Real Estate professionals, the increase in luxury vehicle tax will certainly boost the second hand luxury car market and question carefully which new car to buy next.

It is difficult to see how the budget is going to control inflation over the medium term.  The world is paying Australia a windfall for our coal and iron ore, largely by China, which will see an estimated additional $60 billion received. This has also been recognised with Queensland gaining an increase in export infrastructure funding. The receipt of this  will impact on spending and the labour market.  Comments that unemployment will increase are also hard to understand as everything points to the opposite and indeed inflation generating pressure on the labour market may result in further increases in wages. 

Overall the budget has exceeded expectations with a balance of benefits and spending cuts that will have a short-term impact on inflation which should keep interest rate rises at bay for a period.  Assistance for home buyers has been minimal however at least recognised and when combined with tax cuts should assist part of the community to enter the housing market. The main issue is that the budget will produce some optimism and in these uncertain times a positive outlook along with good fiscal and monetary policy management is what is needed. 

The four budget papers include an enormous amount of detail. I will provide further comment after it is assessed further.

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One of the greatest fallacies perpetrated throughout the housing affordability debate is that the release of land, house/land packages and units should be aimed at first home buyers.  The release of land/houses/units is about balancing the supply demand imbalance holistically for everyone.  If we have balance between supply and demand then prices will stabilise and affordability will be a cyclical issue and not structural. continue reading »

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I am not an economist however understand the basics of our financial system.  The Reserve Bank is concerned about inflation and increased consumer spending and consumer debt.  By increasing interest rates, the bank has made it more difficult for those that have mortgages, particularly lower income earners and made it more difficult for new home buyers to enter the market. 

This has the effect of turning potential home buyers towards more consumer spending on cars and large goods such as LCD and plasma TV sets as the vision of home or property ownership fades into the distance.  This then has the effect of reducing savings and worsening inflation.  If the RBA use the same logic they will increase interest rates further because of the inflation that they have caused by their increases thereby worsening the cycle.

At some stage Government and the Reserve Bank need to review exactly what tools they have at their joint disposal and come up with sophisticated strategies that address all the issues and the fundamentals of our economy. Surely the RBA has other methods of controlling consumer debt other than using the old fashioned method of continually increasing interest rates.  Maybe they actually do have some persuasive powers that they could use with Government and the banking system instead of hitting everyone over the head with more costs.

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The following article by Jack Guttenberg may give further insight into the American sub-prime lending market and the variety of products available. 

Should stated-income loans be banned?

Rising foreclosure rates warrant probe

Monday, August 20, 2007
Jack Guttenberg

A stated-income loan (SIL) qualifies a borrower using the income the borrower states, as opposed to the income the borrower can document. With an SIL, the lender agrees not to verify the income the borrower states on the application.As one might expect, SILs are priced higher than fully documented loans, and the foreclosure rate is also higher. With overall foreclosure rates reaching uncomfortably high levels, SILs have emerged as a possible weak point in the underwriting process. Regulators and legislators have been considering whether they should bar SILs or limit them in some way.Why SILs? Singling out SILs for special regulatory treatment is a little strange on the face of it, since they are only one of a spectrum of alternative forms of documentation that have developed in the marketplace. Ranked by restrictiveness, furthermore, SILs stand immediately below full documentation, and above all the others.While lenders don’t verify income on an SIL, they do verify assets and employment. On a “no ratio” loan, income is not reported at all; on a “stated income/stated assets” loan, both income and assets are stated; on a “no income/no assets” loan, neither income nor assets are reported; and on a “no doc” loan, nothing is reported, including employment.These alternative forms of documentation are priced even higher than SILs and have higher foreclosure rates, but have not attracted the same attention. No doubt, the reason is that SILs are the most common type of alternative documentation, and may account for as many loans as all the others put together. The Borrowers Protection Act of 2007, introduced in the Senate by Sen. Charles Schumer, D-N.Y., declares that “A statement provided by the borrower of the income … of the borrower, without other documentation … is not sufficient verification for … assessing the ability of the consumer to pay.” This would leave lenders free to employ less restrictive forms of documentation, including no documentation requirements at all.

Restricting SILs would be costly. The SIL was itself a response to limitations of the underwriting system. Many prospective home buyers have the income to afford a mortgage, but can’t meet the standards of full documentation.

Full documentation generally requires that applicants show that the income they claim was actually earned in each of the two prior years. This is usually done by presenting W-2s or tax returns for two years. Self-employed borrowers usually have the most trouble meeting this requirement, and stated-income loans were originally designed to deal with them, but other legitimate cases quickly emerged.

Many applicants with incomes from salaries can’t meet full-doc requirements. They may not have held their position long enough, or their latest increase in salary may not be reflected in documents covering past income.

If a married couple pools their incomes and one has a much lower credit score than the other, the full-doc rule is that the lower score is the one used. Stated income allows the partner with the higher score to claim all the income, which appears reasonable in most situations, especially in community property states where husband and wife share legal right to each other’s incomes.

Full-documentation rules are backward-looking; forecasts of future changes in income are not accepted, no matter how well grounded they may be. This means, for example, that the low-paid medical resident who, barring a catastrophe, will triple her salary in three months, can declare only her current salary with full documentation. Using a SIL, however, the resident can declare her future income.

The Rap on SILs: The valid rap on SILs is that some borrowers, without any realistic basis for expecting a rise in income, lie about their current income and take loans they cannot afford. This irrational behavior of some borrowers may be encouraged by rational behavior on the part of rapacious loan officers or brokers, who get paid only if a loan closes and have no interest in what happens afterwards.

Because borrowers with high credit scores are much less likely to be irrational in their financial affairs, lenders place a lot more weight on credit scores of SIL borrowers than of full-doc borrowers. SILs will not be available to borrowers with very low credit scores, and if they are available, the price difference between good credit and poor credit is much larger on SILs than on full-doc loans.

The federal financial regulatory agencies looked at SILs in their analysis of problems in the subprime market and concluded that they “should be accepted only if there are mitigating factors that clearly minimize the need for verification of repayment capacity.” Since the rules governing SILs are part of the mosaic of underwriting rules in which everything depends on everything else, there are always mitigating factors. In effect, the agencies elected to go through the motions but not to do any harm. Hopefully, our legislators will elect to do the same.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. 

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