Two conversations have dominated my phone calls this week from my own clients...
- If you are buying … “Have you heard about the property bubble and the impending recession in Australia”?
- If you have your own home loan .. “Have you heard about the increase in interest rate by Westpac .. and what does it mean for me”?
Sydney median house price has risen by 55% since Jun 2012 after having had sluggish growth for the previous 10 years. Over the property cycle Sydney has simply come back to its long term trend (in Sept last year). It has since risen ABOVE that trend line. If Sydney property price corrects (by coming back to trend) that is not a bubble. Sydney clients are quite astute with property and currently one third of those are buying outside of Sydney and half of those are in Brisbane. As much as the media loves a negative story, there is no bubble and there is no recession. If you wait to buy in Brisbane for prices to fall you will be very disappointed. As soon as the Sept 2015 median house price figures are published I will write in more detail on this.
On the Westpac increase, here is a summary of the background of the last 3 months
- The official Reserve Bank cash rate is at 2% and will stay low for the foreseeable future to foster sustainable growth
- Although price growth in Sydney and Melbourne has been strong other capital cities are more varied
- Regulatory measures are helping to contain (future) risks
- APRA has required the 5 majors (Westpac, CBA, NAB, ANZ, Macquarie) to raise more capital, to hold in reserve, to protect against future risks
- APRA has told all other banks that they will be required to raise more capital UNLESS they restrict growth in investor lending to 10% per annum
This has created a price difference for owner occupied and investor loans of approx. 0.3%pa, and this week Westpac raised it’s “standard variable” rates by another 0.2%pa
Interestingly I was told “anecdotally” at a recent meeting of brokers with one of the five majors that the cost of this additional capital was of the order of 0.5%pa
This now puts the initial 0.3% applied to investors and now 0.2% applied to all Westpac borrowers into perspective.
In that context the thought of refinancing away from Westpac would seem like an impulsive reaction if all banks are dealing with similar costs. As most commentators agree – other banks will now likely follow the Westpac move.
There are also commentators concluding that if the banks all “raise their rates” by 0.2% - it is then much easier for the Reserve Bank to cut interest rates again.(The Financial Review p 2 Oct 15th)
The “game” – if I can call it that – is how the Reserve Bank can cut rates to the rest of the economy without cutting housing rates any further It’s possible that the Reserve is giving itself room to cut rates by up to a further 0.5% without further stimulating housing.
What can you do? And more importantly what should you do in the current circumstances?
Firstly I would stay calm – your interest rate on your home loan is very low by historical standards. And by comment from the Reserve Bank, will stay low for a considerable time.
Secondly I would acknowledge that some of the issues in play by the regulators are intended to maintain the strength of the Australian financial system – that is a good thing. You can’t change them – but you can feel comfortable that the changes are intended to be helpful to our economy.
Most importantly – variable home loans are priced with two levers – the headline or “standard variable rate” which applies across all loans and the “personal discount” that is applied to your rate and is written in your own loan documents – and applies to your loan for the life of the loan
Banks CAN change either of these levers (it’s in your loan agreement)
- The “standard variable rate” – can be changed by making a public announcement
- The “personal discount” – can be changed BUT only by your bank writing to you individually. History shows that banks are very reluctant to take this personal approach
In my opinion, your best approach is to stay variable and obtain the largest discount you can for the life of the loan.
As always I'm here to help...No question is too small for my time..
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