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Fire sales unlikely despite greater risk of defaults

The rising risk of mortgage defaults across the country’s biggest housing markets is unlikely to trigger large-scale distressed sales as low unemployment, increasing demand for property and scarce supply will stabilise those same markets, a new PEXA report says.

The risks are increasing as owners in nearly half of all suburbs in NSW, or 181 postcodes, are likely to be at high risk of missing a mortgage payment by May – which the report by e-conveyancing platform PEXA said was the case for households paying up to 60 per cent of their income on mortgage payments.

This was a sharp increase from the three months ended December 2022, when only 118 postcodes were deemed at high mortgage risk.

In Victoria, owners in 74 postcodes – more than one in five suburbs – were at high risk of default, up from 44 in December and in Queensland, property owners across 19 postcodes were predicted to be at high mortgage risk, nearly double the December figure.

But even these scenarios – based on the assumption of a 0.5 of a percentage point increase in the benchmark lending rate by May – would not lead to widespread distress, PEXA head of research Mike Gill said.

‘‘I don’t think this will lead to massive fire sales because we’ve still got very low unemployment in Australia,’’ Mr Gill said.

‘‘For fire sales to occur, you have to see high unemployment where borrowers lose their jobs and they’re forced to make these selling decisions. We’re not seeing that.’’

Stresses on household budgets would hit owners differently, he said.

‘‘It’s more likely that this will be more nuanced, where some borrowers will really struggle to make their repayments and may be forced to sell.’’

AMP Capital chief economist Shane Oliver said there was still a risk that some home owners could be forced to sell as the full impact of the rate rises filtered through.

‘‘The full impact of the interest rate has yet to show up, as the economy slows, unemployment will rise, which could push some homeowners into distress,’’ he said.

Property owners in the more affluent postcodes are expected to face the highest mortgage risk, and PEXA predicts that these areas will account for 40 per cent of all high-risk postcodes across NSW and Victoria.

In Sydney, Northbridge (2063), Dural (2158) and Avalon Beach (2107) are the most at risk as the share of mortgage repayments is set to climb to 71.8 per cent, 71.4 per cent and 69.4 per cent of their family incomes, respectively.

The same trend is predicted across Melbourne, with Balwyn (3103), Balwyn North (3104) and Canterbury (3126) facing the biggest mortgage risk as the portion of repayments is predicted to rise to 74.2 per cent, 71.4 per cent and 70.2 per cent, respectively.

Fire sales unlikely despite greater risk of defaults2023-04-24T16:55:40+10:00

RBA change is coming, like it or not

More people, more input, more cooks in the kitchen. That’s ultimately the price the Reserve Bank of Australia will pay for a couple of years of bad or miscalculated calls, made in response to the pandemic.

Ironically, the review was conceived in the pre-COVID days when the RBA was criticised because inflation was running below its 2 to 3 per cent target range. All the attention is on what has happened since.

When money was flooding into the financial system and the economy, it is now clear the RBA board was too slow to apply the handbrake. The result is the highest level of inflation since the 1990s and an unprecedented 10 straight rate rises that were never going to be popular with ordinary Australians or politicians. No one seems to care that the unemployment rate is around its lowest level in nearly 50 years.

Right or wrong RBA governor Philip Lowe wears the blame. He will be all over the newspapers and nightly television news bulletins, even though markets (equities, bonds, currency) barely blinked. Mr Market saw the review coming, and now says the changes are some way off.

From the market’s perspective, next month’s budget is more material. Treasurer Jim Chalmers needs to set up the books for the next few years, which means finding more money. The economy is finely poised: it would be tempting to throw money around to ease cost of living pressures, although money’s tight and the inflation doesn’t need stoking.

In the meantime, old-head RBA watchers said it was a significant day. The fact that the central bank, which has such a great impact on Australians’ daily life, was subject to such scrutiny made it a historic day.

Lowe and the RBA will be hauled over the coals for what happened a few years ago, even though it was just as much the government stoking the fire that continues to burn today. The critics argue he should be accountable for the combination of low rates, forward guidance, yield curve control, quantitative easing and the term funding facility, which combined to whipsaw the economy and may yet cause a recession.

Of course, Lowe’s monetary policy is just one tool.

Once the commotion passes, we should all still be worried about the rising cost of rent and energy and how both can be addressed. The review doesn’t change that.

The review prompted plenty of thinking about the RBA, its corporate governance, board composition and decision-making. It recognised that in more normal times, the RBA had done well to keep inflation around the midpoint of its 2 to 3 per cent range for the past 30 years.

However, it is the past few years, a wartime for central bankers when no one escaped with a goldilocks path out the other side, that will now shape the direction of Australia’s monetary policy system.

What’s the answer to it all? Get more people involved in the decision-making. A specialist monetary policy board, fewer board meetings and more outsiders sitting around the table.

Reading between the lines, there seemed to be concern about how insular the RBA either is, or has become. Lowe is a perfect example; he’s got a great temperament for the governor’s job, is clearly smart and well regarded by colleagues and peers globally, but he is an RBA lifer and ingrained in current-day practice.

The creation of a new nine-person Monetary Policy Board, widely tipped by pundits, is about getting more rigorous thinking into rates decisions.

The nine people would include the RBA governor, deputy governor, Treasury secretary and six outsiders. The review recommends that ‘‘external members should be able to make a significant contribution to monetary policy setting through expertise in areas such as open economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision-making under uncertainty’’.

So, this specific rate-setting board should mean more challenge and debate to the house view, which appears to have become more entrenched. At the same time the review calls for RBA’s operatives to spend more time with board members, making it a bit of an each-way bet but a good use of what is a big and expensive research team. (The need to spare a day a week or so in the RBA’s offices surely tilts the external board positions towards academics.)

The undertones were that the board wasn’t functioning properly, either because it didn’t have the right people or the right information. Lowe defended his board at a press conference yesterday, saying discussion around the boardroom table was robust and not dominated by himself.

It’s all well and good to have more people in the room on rates decision day, but it does not mean the board will function more efficiently or come to better decisions.

But big boards do not necessarily mean better outcomes. Corporate Australia is littered with poor boards and ‘‘jobs for the directors club’’ type attitudes that ruin what can be otherwise good businesses.

Often the bigger the board, the more constipated the decision-making process. The other scourge is chairmen roping in old mates and colleagues from other boards.

Ultimately, whether a separate and bigger Monetary Policy Board works will depend on who is on it. It was a logical and welcomed decision to create the separate board, and clear rate-setters of the governance-type matters that tend to dominate board meetings.

The review recommended a transparent appointment process, starting with advertised expressions of interest. External members would be appointed for five years, and up to another year depending on the circumstances.

There would also be fewer board meetings; eight not 11. And the governor would have to front the press following each meeting to explain the board’s decision, with more emphasis on the expected path of inflation and the labour market. That shouldn’t prove too onerous. External board members would also be required to make one public address each year.

The idea of more communication is conceptually good, although post-meeting press conferences can be a double-edged sword. We’ve seen Federal Reserve chairman Jay Powell mix his messages in a live setting, which can leave the market with more questions than answers.

Fewer meetings mean more time between rates decisions and arguably more punting and reading the crystal ball for fixed income investors. There could be more focus on monthly/quarterly economic data, to fill the information void between meetings.

Market economists liked that there could be more briefings, as it should (in theory) help them with their forecasts. They also probably like that there would be an unattributed published vote after each policy decision.

Other parts of the review said RBA should work more closely with the government/ Treasury, although it remains to be seen how. The review said fiscal and monetary policy should be set separately, however the RBA and Treasury needed to ‘‘have a good understanding of the intentions of the other and informs better policy choices’’. The two institutions are already close, but the review said their co-operation should include increased information sharing on risks, scenarios and policy constraints, and some joint scenario analysis.

Lowe was gracious at his press conference, although it was clear he did not love all the recommendations. For example, he bristled at any notion rates decisions were his alone and thinks it’s important to be careful with the number of public messages out of the RBA to ensure consistency and stability.

Lowe said he would leave his reappointment to the RBA top job in the Treasurer’s hands. He said he would be happy to go around for another term if asked. If not, he said he would find another way to contribute to society.

The fact that the RBA was subject to a 294-page review and there were 51 recommendations suggests change is on the cards.

Next week’s CPI reading could be material to the situation. Economists are tipping a number just shy of 7 per cent.

For all the focus on Lowe, in the near term the real attention should be on Chalmers and the budget. That’s the real showstopper for the economy.

a.macdonald@afr.com 

RBA change is coming, like it or not2023-04-24T16:53:10+10:00

How wealthy are you compared with others?

Income and assets Who counts as rich? ABS data holds the answer.

At what point does someone earn so much money, they can be described as rich? It’s one of the perennial debates in Australian politics, and it is poised to emerge again this year as Labor faces more questions over the future of the so-called stage three tax cuts.

The package includes an increase in the threshold for the top 45 per cent tax bracket from $180,000 to $200,000 (as well as a flat 30 per cent tax rate on all incomes between $45,000 and $200,000).

Proponents of stage three say it addresses bracket creep and improves the efficiency of the tax system, while opponents argue it overwhelmingly benefits high-income earners.

They also point to the significant hit to the budget: about $18 billion in the first year and $254 billion over 10 years.

Much of the debate has centred on whether someone who earns more than $180,000 is rich.

What is a ‘normal’ income in Australia? | The median Australian employee earned $65,000 in 2022, according to the Australian Bureau of Statistics.

Half of all employees earned less than this, while the other half earned more.

This figure captures both full-time and part-time workers. If we look at these groups separately, the data shows the median full-time worker earned $78,800 in 2022, while the median part-timer took home $32,400 last year.

Incomes have increased steadily over the past few decades amid growth in the Australian economy.

In 1975, the median employee earned $6448 a year. In the 47 years since then, wages have grown by about 5 per cent annually, taking median employee income to where it is today.

What about the top 1 per cent? | Each year the Australian Taxation Office publishes a breakdown of the taxable income distribution of workers.

It shows that in 2019-20, the most recent year for which data is available, the median taxpayer – the person at the 50th percentile – reported a taxable income between $60,326 and $61,264.

About half of all taxpayers earned less than this, while the other half earned more. If your taxable income was $131,501 or higher, then you earned more than 90 per cent of other Australians. If you earned more than $253,066, you took home more than 99 per cent of taxpayers.

About 5 per cent of taxpayers had incomes above $180,000.

The data, which covers the nation’s 11.39 million taxpayers, is presented in percentiles. For example, a person in the 10th percentile earns more than 10 per cent of workers, while a person in the 90th percentile earns more than 90 per cent of workers.

The data is also presented in the interactive table above.

What about gender? | The data also reveals the extent to which men dominate higher-paying jobs.

Of the 10 per cent of taxpayers who earned more than $131,501 in 2019-20, about 70 per cent were men. Women made up almost 60 per cent of the 20 per cent lowest income earners.

Which industries have the highest incomes? | Mining industry workers are Australia’s top earners, with the median employee in the sector taking home $54.90 an hour in 2022.

White-collar workers in the financial services and professional services industries were the next best-paid employees, earning about $50 an hour. Utilities workers and public servants rounded out the top five, with hourly rates just shy of $50.

Hospitality workers and retail workers earned the lowest salaries, recording median hourly rates of $25.80 and $28.80 an hour respectively.

How do the states compare? | The large differences between industry wages are a major driver of the income gaps we see between some states.

Residents of the ACT are the best-paid, with the median full-time worker earning a salary of $93,600 – thanks to the territory’s concentration of well-remunerated public sector workers. About 42 per cent of ACT workers are public sector employees, compared with 16 per cent nationally.

The next best-paid employees were in the Northern Territory, which also has a large public sector, and Western Australia, which is home to a well-paid mining-sector workforce. Tasmania is the poorest jurisdiction, with a median full-time salary of $70,200 – about $23,000 less than the ACT.

What’s a ‘normal’ amount of wealth? | While incomes are a key driver of financial comfort, wealth is arguably the more relevant measure of a person’s material wellbeing.

To get an idea of ‘‘normal’’ levels of wealth, we can look at annual estimates of household wealth, compiled by the ABS.

The data shows the median household had a net worth of $579,200 in 2019-20.

This figure captures the total value of assets such as real estate, shares and superannuation, and deducts a household’s liabilities such as credit card debt and home loans.

The data reveals huge differences between the wealthiest households and the poorest ones. In 2019-20, a household at the 90th percentile of the distribution – that is, a household that is richer than 90 per cent of households – had a net worth of $2.26 million.

A household at the 10th percentile was worth just $36,900, or 61 times less. How does Australia compare internationally? | While there are large disparities between the rich and the poor, Australia is still comfortably one of the world’s wealthiest countries.

Australian household incomes are the seventh-highest in the OECD – a club of mostly wealthy countries – while mean household net worth is third-highest, behind only the United States and Luxembourg.

The average household in the OECD has a yearly disposable income of $US30,490, compared with $US37,433 in Australia. Average household net wealth in the OECD sits at $US323,960, about $US200,000 below the wealth of the average Australian household.

How wealthy are you compared with others?2023-04-12T09:45:17+10:00

MORTGAGE CLIFF LOOMS LARGE, BUT HOW STEEP COULD IT BE?

Home loans Fixed-rate borrowers have been insulated from 10 straight RBA interest rate increases. But with credit worth $350 billion close to expiring, the impact could be profound, writes Michael Read.

Up to 880,000 Australian households will need to find hundreds, or even thousands, of dollars more each month when their fixed-rate periods expire this year and the rock-bottom interest rates they’ve enjoyed since the start of the pandemic become a thing of the past.

Until now, these borrowers had been insulated against 10 back-to-back rate rises from the Reserve Bank of Australia that sent variable mortgage rates rocketing.

Households servicing a $550,000 mortgage – the average size of a loan issued between 2020 and 2022 – will face an $891 increase in monthly repayments, and highly indebted households are on the hook for an even larger increase. Someone with a $1 million mortgage would have to fork out an extra $1620 each month.

The ‘‘fixed rate mortgage cliff’’, as it has come to be known, is one of the big challenges for the Australian economy this year, and how these households cope will be critical to whether the country can avoid a sharp downturn.

At the height of the pandemic, interest rates fell to record lows as the RBA tried to prop up the economy amid forecasts of a once-in-a-generation recession.

As part of its policy response, it provided banks access to cheap three-year fixed rate credit, which they then offered borrowers in the form of ultra-cheap, fixed-rate home loans.

The low rates led to an explosion of fixed rate borrowing and refinancing, and many households locked in their rates for two to three years.

Some borrowers entering the property market also took comfort from assurances by RBA governor Philip Lowe that interest rates were unlikely to increase until 2024. The governor has since apologised for the guidance.

At their cheapest point in May 2021, the average new fixed rate loan for a term of three years or less was 1.95 per cent, compared with a new variable rate loan of 2.8 per cent, RBA data shows.

As a result, borrowers took a gamble that interest rates were unlikely to fall further by locking in the lower rate, and by mid-2021 about 45 per cent of new loans being written were fixed, compared with just 5 per cent today.

Over the course of 2020 and 2021, Australian banks lent $394 billion to borrowers in fixed mortgage commitments. Fast-forward to this year, and 880,000 fixed loans written at rock-bottom interest rates are set to switch to much higher variable rates.

According to the RBA, about $350 billion – or half of all fixed rate credit – mortgages will expire this year. This is what is sometimes referred to as the ‘‘mortgage cliff’’.

The remaining 38 per cent of fixed rate credit, which includes about 450,000 loan facilities, will expire next year and beyond.

The pain will be felt most acutely between now and September, when one-third of fixed-term credit will expire, and affected households will be forced to absorb the 350-basis point increase in the cash rate over the past year.

Just how much extra they will need to fork out will depend on what their fixed rate was and whether they roll on to a competitive variable rate.

But regardless of the scenario, they are looking at a 3 percentage point to 4 percentage point increase in their home loan rate, and borrowers who took out mortgages larger than $615,000 will cop a monthly repayment increase of more than $1000.

A household with a $750,000 loan will have to find an extra $1215 per month – or $280 per week – when their loan switches to a variable rate.

This assumes they had locked in a 2.48 per cent interest rate for three years, which is the average, outstanding fixed rate, and refinance to a competitive 5.58 per cent variable rate upon maturity.

Borrowers who took on a $1 million mortgage – not uncommon for new borrowers in Sydney or Melbourne – will cop a $1620 increase in their monthly repayments, or $374 per week, based on these assumptions.

Homeowners servicing a $500,000 mortgage will see their repayments increase by $810 per month, or $187 per week.

Overall, the RBA estimates that 90 per cent of the fixed rate loans rolling off this year or next will have to wear mortgage repayment increases of at least 30 per cent.

After the switch happens, about 25 per cent of fixed rate borrowers will spend more than 30 per cent of their income on their mortgage, the central bank says.

Economists are divided whether the looming, fixed-rate mortgage cliff will mark the start of a sharp economic slowdown or represent a blip on the radar.

Because of the magnitude of the shock, the RBA said in its October Financial Stability Review that it expected an increase in home loan arrears in the period ahead as some borrowers struggled to meet higher repayments.

Westpac CEO Peter King warned in February that almost half of the bank’s $471 billion in outstanding home loans were likely to breach their original serviceability assessments, which tested customers’ capacity to deal with a 3 percentage point rate rise.

The roll-off comes as households are already under pressure. Consumer prices have been increasing at their fastest pace since the early 1990s (although there are signs that these pressures have now peaked) and real wages are at their lowest level in a decade.

The RBA estimates that two in five borrowers with small mortgage buffers (ie less than three months of payments) have fixed rates or are investors with loans in place before 2021.

But a range of factors suggests that households are well placed to manage the roll-off.

The RBA says it is possible fixed rate borrowers kept liquid savings elsewhere, meaning they are less vulnerable than they appear.

The household sector has also accumulated $300 billion in excess savings since the onset of the pandemic, which should at least partly cushion the blow, though these savings mainly sit with wealthy, older people.

Borrowers are also more likely to be in work than at any time in recent history, thanks to Australia’s stellar labour market and near-50 year low jobless rate of 3.5 per cent. Fixed rate borrowers have also had more time than variable rate borrowers to restructure their household budget in anticipation of higher repayments, and also time to build up a savings buffer. However, borrowers with split loans would have already experienced higher repayments on the variable portion of their mortgages.

For their part, the banks say they are ready to help customers struggling to meet repayments.

Westpac’s chief executive said there were tools that banks could use to nurse customers through hardship, including restructuring repayments, and putting borrowers on to interest-only loans.

Banks are also experimenting with extended loan terms that make it easier for customers to repay loans as interest rates climb further, as well as to borrow more upfront.

National Australia Bank’s subsidiary, Ubank, has said it would extend a 35-year mortgage previously offered only to new buyers to those looking to refinance. This would reduce monthly repayments, but end up costing customers much more over the life of the loan.

The federal government’s MoneySmart service says borrowers experiencing hardship should contact their bank as early as possible. Banks must respond to a hardship request within 21 days, and MoneySmart says borrowers should consider selling their home if their circumstances are unlikely to improve.AFR

MORTGAGE CLIFF LOOMS LARGE, BUT HOW STEEP COULD IT BE?2023-04-05T11:27:14+10:00

Rental shortfall forces property investors to sell

Residential property More than one in four landlords are considering selling their investment properties and quitting the rental market, writes Duncan Hughes.

Sam Collis is debating whether to keep struggling with three mortgages for two investment properties and his home, or to sell a property and ease the financial stress from interest rates rising faster than rental income.

It is a question asked by increasing numbers of property investors struggling to make ends meet after buying investment properties when rates were at record lows and rental payments easily covered costs.

‘‘I could be heading towards selling if it gets much worse,’’ says Collis, a Victoria-based father of three children aged 10 to 15, who has had his properties valued ahead of a possible sale.

‘‘I sometimes walk into the supermarket and wonder whether I can afford a packet of chips. But the problem of selling now is that it would be a knee-jerk reaction that I’d probably regret in five years when markets improve,’’ he says.

The number of investment properties on the market across private treaty and auctions has jumped from about 20 per cent – 25 per cent of the monthly total to more than 30 per cent, says CoreLogic, which monitors property markets.

It peaked at 35 per cent in 2021, which was a bumper year for property sales because of record-low interest rates.

One hundred per cent of suburbs with house rental markets and more than 97 per cent of suburbs with unit markets in Melbourne and Sydney are cashflow negative, which means there is more cash leaving the property in higher costs than being received in rents, CoreLogic research shows.

‘‘Landlords have been pushing rents higher to offset the rising cost of debt, but there is a limit to what the market can absorb, and we are close to that now,’’ says Tim Lawless, research director of CoreLogic. ‘‘Rental price growth is slowing.’’

A Sydney property investor with a $1.2 million house for rent and $960,000 loan is spending about $30,000 a year more in costs than received in rents, forcing increasing numbers to sell their properties.

Rent rises of about 9 per cent a year to a median monthly value of $3200 are failing to offset the 15 per cent fall in the property’s value and rising interest rates, which are around 30 to 44 basis points higher than for an owner-occupier, analysis by CoreLogic, which monitors markets, shows.

A basic variable rate for owner-occupiers is 5.39 per cent and 5.69 per cent for investors, a difference of 0.30 per cent, says RateCity, which monitors interest rates.

The gap expands to 0.44 per cent for discounted variable. In Melbourne, the annual shortfall for a median investment property worth about $900,000 is $22,000 as prices fall 11 per cent and rents rise by about 8 per cent, analysis shows.

‘‘Increased compliance costs, reduced landlord rights and ability to manage their properties, increasing interest rates and falling property prices means landlords are leaving the market,’’ says Andrew Kent, president of the Australian Landlords Association.

Negative gearing, which allows a tax deduction if expenses exceed income, can only be claimed once a year, adds Lawless.

Tenants are responding to rising prices and falling supply by increasing numbers sharing rental properties, a reversal of what happened during COVID-19, and choosing units, which are usually cheaper.

There are more than 2 million property investors in Australia, which is about 8 per cent of the population, the Australian Taxation Office says. About 70 per cent of investors own a single property.

Investors are bailing out of the market despite national residential property rental vacancies remaining about 1 per cent with capital weekly asking rents around 21 per cent over the past 12 months, says SQM Research, which also monitors property markets.

Tight markets are under increasing pressure from a surge in demand from rising immigration, the return of foreign students and more people moving back to the cities after COVID-19.

More than one in four NSW landlords are considering selling their investment properties and quitting the rental market, according to a survey by the Real Estate Institute of NSW (REINSW).

‘‘Changes to tenancy laws and lack of consideration for landlords’ rights are overwhelmingly cited as the reason investors are leaving in favour of other investment opportunities,’’ says Tim McKibbin, REINSW chief executive.

Louis Christopher, SQM’s managing director, says there are signs the rental crisis is easing in Canberra, Darwin and Hobart.

Christopher asks: ‘‘Could we be seeing some light at the end of the tunnel for our national rental crisis?

‘‘Perhaps for some cities and regions. But we still remain very concerned for the situation in Melbourne, Sydney and Brisbane where most international arrivals land first,’’ he added.

Cate Bakos, a buyers’ agent, adds many older investors are deciding ‘‘it’s time to cash up and retire’’ amid concerns landlords could be hit with caps on rent rises and restrictions on negative gearing,

But Nerida Conisbee, chief economist for Ray White Real Estate, says the proportion of investors selling at its auctions has fallen from a peak of 28 per cent to 21 per cent in the seven months to February.

‘‘The number of investors selling at auction was far higher in the months prior to when the downturn began and in the months following than it has been in the past six months,’’ says Conisbee.

‘‘Fewer are selling now given that prices have come back, but also because rents have risen so much, thereby providing a buffer for higher mortgage costs,’’ she says.

There might be an increase in sales of investment properties no longer providing enough of a return, she says.

‘‘If so, given that fewer investors are buying, it will result in even more pressure on rents,’’ she says.SI

Rental shortfall forces property investors to sell2023-03-21T09:13:17+11:00

Apartment rents up $11,000 in a year

Apartment rents have surged over the past year, delivering income windfalls of up to $11,000 for investors across suburbs gaining the most.

The sharp rental increases – with 57 suburbs rising more than 20 per cent – have come as vacancies hit a new low of 0.9 per cent across the combined capital cities during February, CoreLogic data shows.

They also reflect rising demand for the cheaper, high-density sector as renters trade space for affordability, said Corelogic research director Tim Lawless.

‘‘Rental affordability pressures may be forcing a transition of demand towards higher-density rental options, where costs tend to be lower,’’ he said.

‘‘Additionally, the strong rebound in foreign student and international migrant arrivals would be adding to rental demand, particularly in inner-city precincts as well as areas close to universities and transport hubs.’’

Suburbs in Sydney’s inner south, eastern suburbs and inner west dominated the list of the top 10 biggest gainers, led by the Sydney-Haymarket-The Rocks area, where unit rents climbed 27.8 per cent or $211 a week to $969 – a $10,972 annual rental gain.

Meanwhile, apartment rents in the Waterloo-Beaconsfield, Kingsford, Redfern-Chippendale and Arncliffe-Bardwell Valley areas rose more than 27 per cent, or $171 a week on average.

Melbourne topped the areas with the fastest rate of rent rises for apartments over the year, climbing 38 per cent and adding $168 to a $612-a-week rental.

Five other inner-city areas also notched up more than 21 per cent annual rental gain, including South-bank, Carlton, Docklands, North Melbourne and South Melbourne.

In Brisbane, the Margate-Woody Point area north of the central business district, and four other inner-city areas including Kangaroo Point, West End, Spring Hill and Fortitude Valley all recorded more than 20 per cent rental increases in the past year.

However, rental growth for houses has slowed as worsening affordability and the higher cost of living weighs on tenants’ budgets.

‘‘We have already seen some evidence that rental growth is topping out, especially in the more expensive low density sector, where rental growth was much stronger through the pandemic,’’ said Mr Lawless. ‘‘This easing in rental growth has nothing to do with a supply response or less overall demand – it probably has more to do with renters reaching a ceiling on what they are able or willing to pay.

‘‘With rental growth substantially outstripping incomes over the past few years, it is likely more renters will be looking for alternatives to ease their rental payments.’’

Canberra posted the sharpest slowdown in house rents, easing from a 10.5 per cent annual increase at the height of the pandemic to just 0.8 per cent over the year to February.

In Sydney, house rents stabilised at 8.9 per cent annual growth during the past three months, slower than the pandemic high of 10.2 per cent. All the other capitals except Melbourne posted slower gains for houses in recent months.

But with vacancy rates staying around record lows, rents were likely to continue to rise at least through the rest of the year, Mr Lawless said.

‘‘Over the short to medium term, the rental supply outlook is looking pretty glum,’’ he said. ‘‘From a new dwelling perspective, approvals are at their lowest level in more than a decade.’’

Private-sector investment, another indicator of rental supply, was also still going backwards, as investment home loan numbers had been declining since early last year, Mr Lawless said.

‘‘Against this scenario of limited new rental supply, demand looks set to rise further, based on the influx of overseas arrivals,’’ he said.

Kent Lardner, founder of data provider Suburbtrends, said vacancies were likely to fall further as rental demand continued to outpace supply.

‘‘The rental supply in the near to medium term is alarming. Building approvals are well below population growth rates,’’ he said.

‘‘Based on my analysis of building approvals over the last five years and comparing those to population growth, around 95 per cent of suburbs nationally will have inadequate rental supply in the coming years.’’

Apartment rents up $11,000 in a year2023-03-15T10:51:12+11:00

The key to unlocking your mortgage prison

Fixed rate loans If you’re at risk of negative equity or being turned down when your mortgage term ends, it may be worth refinancing now, writes Lucy Dean.

Fixed rate borrowers whose terms are ending within the next 12 months have been urged to assess whether they will be able to refinance at the end of their term or be better off renegotiating their loan today.

Borrowers face their bank’s revert rate when their fixed term ends, but this rate is ‘‘often horribly uncompetitive’’, says RateCity research director Sally Tindall.

Borrowers with less than 20 per cent in equity may also have to pay lenders’ mortgage insurance to refinance, while those in negative equity may be unable to refinance, she warns.

Another challenge is that lenders are required to stress test borrowers’ capacity to pay off their mortgages with an added 3 percentage points, meaning borrowers need to prove they can handle an effective 9 per cent interest rate if they want to refinance.

RateCity analysis finds an average buyer who bought a house in Sydney in July 2021 for $1.3 million with a 20 per cent deposit would have 17 per cent in equity today, with the median price having fallen to $1.2 million. But if the median price falls to $1.1 million in December this year, as per ANZ’s forecasts, they’d have only 11 per cent. The same buyer in Melbourne, purchasing in July 2021 for $957,000, would have 17 per cent equity today, and 12 per cent by December.

But if the Sydney buyer had a 10 per cent deposit in July 2021, they’d have only 6 per cent equity, falling to negative 1 per cent by December. In Melbourne, they’d have 7 per cent today and 1 per cent in December.

‘‘Falling property prices and soaring mortgage rates mean some people could find they can’t refinance when their fixed term wraps up because they’re in mortgage prison,’’ says Tindall.

”If you are on a fixed rate and think you might end up in mortgage prison, do a quick health check on your finances to make sure you’re on solid ground.’’

She says borrowers who owe more than 80 per cent of the value of their property could be in hot water.

Those who owe less than 80 per cent, but are brushing up against that threshold, should ask whether they’d be better off breaking their fixed term early to access the current fixed rates before projected RBA increases push rates higher, or property price falls nudge borrowers into that equity danger zone.

‘‘Owning less than 20 per cent of your property isn’t an automatic sentence to mortgage prison. It just means your new bank might charge you lenders’ mortgage insurance,’’ says Tindall.

‘‘That might be something you’re happy to pay to refinance, particularly if you’re only just a fraction under the required deposit.

‘‘That said, if your equity is close to zero, or in negative territory, you’ll be hard-pressed to find a bank willing to take you on at all.’’

Brendan Dixon, managing director at Pure Finance says it’s a tough time for borrowers, but proactive mortgage-holders can still find decent home loan products via a rate review with their current lender, or refinancing with another institution. This goes for both variable rate and fixed interest borrowers.

Dixon gives the example of a borrower with a fixed rate of 2.5 per cent, with the fixed term ending in June 2023.

The lender currently offers a variable rate of 5.54 per cent for existing customers, as well as a 5.59 per cent three-year fixed rate.

But if the Reserve Bank of Australia were to raise interest rates another three times, that borrower could expect this variable rate to reach 6.29 per cent by the time their fixed loan ends.

So, the borrower has a choice. Keep the existing 2.5 per cent interest rate and revert to a 6.29 per cent variable interest rate, or break their current fixed rate to lock in the 5.59 per cent fixed rate the lender has on offer.

Assuming this borrower has a $750,000 loan, they’d incur $5700 in interest charges by breaking the fixed rate three months early.

But by locking in that 5.59 per cent fixed rate now, rather than potentially 6.29 per cent in June, they’d be paying 0.7 per cent less in interest, and saving $5250 per year.

‘‘This is approximately $15,000 in interest savings over the three years, minus the added interest paid to break the fixed rate early of $5700, meaning a net benefit of $9300,’’ says Dixon.

He’s had a few clients choosing to break their low fixed rate product earlier to fix rates at the current offer, rather than risk a higher rate down the track. ‘‘This was based on perceived longer-term savings.’’

For example, clients Jonathan and Sophia broke their three-year fixed rate of 2.49 per cent in January, before it was due to expire in April. Then, they refixed with the same lender at 4.74 per cent for one year.

They paid additional 2.25 per cent interest from January at a cost of $4286 over three months. However, by fixing at 4.74 per cent rather than 5.45 per cent, they’re saving $5410 over the year, or $1124 after accounting for the $4286 in extra interest.

‘‘All the [interest rate] predictions have changed since January, and in hindsight, maybe they should have fixed longer,’’ says Dixon.

He says borrowers approaching the end of their fixed term should start looking at their options, whether that involves using a mortgage broker or comparison website.

Then they need to start collecting all the information available, including variable and fixed rates at their lender and other rivals, as well the ramifications of breaking their fixed term.

‘‘It’s not quite as easy to work out, but [look at] the cost of re-fixing at today’s fixed rate, versus fixing in say three, four or five months when your fixed rate expires, and working out whether it’s cheaper to lock in a higher interest rate now,’’ he says. SI

The key to unlocking your mortgage prison2023-03-14T09:31:15+11:00

Tug of war between heart and finances

Downsizing Clinging on to the family home even though your finances are tight? This is what you should consider, writes Michael Hutton.

You own the family home, are enjoying retirement and your children moved out years ago. But your home is showing signs of wear and tear, and you are struggling physically and financially to maintain it. Perhaps now is the time to consider downsizing to a smaller property and rearranging your finances.

You’ve long resisted the urge to move to another property – whether that be downsizing to a smaller home or moving into an aged care facility. Spending your twilight years in the family home has been the goal. It’s not just a property you own – it’s your home, full of family memories and a haven for spending quality time with children and grandchildren in the years to come.

Unfortunately, the sentimentality of the family home may conflict with financial reality.

You are not alone. There are many older people across the country who are living alone or with their partner in valuable, equity-rich family homes. While they may be living in a property worth millions of dollars, they are living frugally – the classic asset-rich, cash-poor dilemma.

Another scenario may be that you also have minimal investment income and are perhaps relying on the government age pension to finance your daily life. You’ve realised that properties don’t remain pristine on their own. You need to spend time, money and effort on upkeep, otherwise it can become poorly maintained or, in some cases, dilapidated.

If you can relate to all or even part of this scenario, you could probably live a more comfortable life by downsizing.

Should you decide to put sentimentality aside to sell the property and move into a smaller but more manageable and lifestyle-appropriate property, you might have a large sum of money left over to invest in other things.

If that’s the case, you may be able to contribute up to $300,000 for each partner into super as part of the downsizer contributions scheme, while the remaining balance could be invested in a personal investment portfolio.

If you are under 75, you might be able to put a further $330,000 (indexed) each of non-concessional contributions into super.

Your financial situation will then be much more liquid, meaning you’re better able to spend your hard-earned money living out your preferred lifestyle rather than having it tied up in a single property.

With the recent increase in income thresholds to $90,000 for singles and $144,000 for couples for the Commonwealth Seniors Health Card, you may still qualify for this valuable concession. Admittedly, though, you may end up missing out on the age pension because of the assets test and your new investment position.

Consider a widow living in a run-down, four-bedroom Sydney house worth $4 million. She might consider selling the house and buying a pristine $2 million apartment instead.

Of the remaining $2 million, perhaps $300,000 or more could be placed into super and the remaining $1.7 million or so invested into a personal investment portfolio of liquid investments such as shares and managed funds. If she drew from the portfolios at 5 per cent per annum, that would equate to $100,000 a year to spend.

In this scenario, minimal personal tax will likely be incurred after franking credits and capital gains discounts are taken into account.

Additionally, there will be much more cash to live on than relying on the government age pension of about $26,000 per annum for singles and $40,000 per annum for couples. This would also remove her from the government system and the need to routinely provide information. Stringent Centrelink gifting restrictions would no longer be applicable.

Not only that, but she might find herself living in a property that is much more pleasant and manageable in terms of upkeep. In this example, wealth has been rearranged from 100 per cent lifestyle (and illiquid) to 50 per cent lifestyle and 50 per cent investment (and liquid). This is a much better ratio.

Through downsizing, you’re more effectively able to address both financial and lifestyle considerations.

While you might be saying goodbye to the home in which so many meaningful memories have been made, you are also freeing up the property for a young family for whom it might now be better suited.SI

Michael Hutton is wealth management partner at HLB Mann Judd Sydney.

Tug of war between heart and finances2023-03-14T09:21:22+11:00

Banks look to adopt ChatGPT as an aid for customers: Microsoft

Customers calling up their bank may soon have inquiries answered with the help of ChatGPT.

Lenders in Australia and the US are preparing to deploy the groundbreaking technology to prompt call centre workers on what questions to ask, and the appropriate letter to dispatch to the customer when the conversation is done.

The chatbot will help employee decision-making by creating background materials to make conversations with business customers more productive. Investment banks could use it to construct pitch books based on conversations recorded on Microsoft Teams.

In January, it was reported that Microsoft had invested $US10 billion in OpenAI, the start-up behind ChatGPT. ChatGPT has more than 100 million users, making it the fastest-growing software application of all time.

This has set the tech world abuzz about ‘‘generative AI’’, which uses ‘‘foundation’’ data models – which draw on a vast quantity of uncategorised data – to allow the chatbots to answer questions in detail in a way that is easy to access.

The Australian Financial Review

explored the initial use cases in banks for ChatGPT’s artificial intelligence (which is being integrated into Microsoft’s Bing search platform and a range of services provided to corporate clients) with Microsoft corporate vice president of worldwide financial services Bill Borden.

He met banks and superannuation funds in Melbourne and Sydney last week, when a major topic of conversation was ChatGPT.

‘‘That is where people are getting really excited, around experience interfacing with frontline workers or the customer service area,’’ Mr Borden said. ‘‘When you think about the response, you can start creating off the dialogue and engagement [with customers]. You can start thinking about modelling activities, and what the approach or response should be. You can solve a problem – and create materials to actually follow up.

‘‘That is where OpenAI and ChatGPT can start to augment the processes.’’

Together with its Azure cloud and popular desktop software, which is used by all the major banks, Microsoft is developing ‘‘outcomes-based AI’’ to enhance consumer experiences and improve productivity.

This time last year it bought Nuance, a developer of conversational AI and ambient intelligence, which allows call centre workers to use biometrics to identify customers and prompt conversations.

Mr Borden points to a relationship banker using Teams or Office talking to a client. New chatbots can give the banker direction on actions, after analysing the customer mood, he says. They will also deliver insights to corporate bankers providing a full view of the company they are about to call and a list of actions to ensure the call is proactive.

It will be up to banks to work out thorny questions on disclosure and ethical application of the AI technology.

As it develops ‘‘industry clouds’’ tailoring its AI services to specific industries, Mr Borden says security, compliance and controls are important in financial services, and banks can access Microsoft’s in-house ethicists to advise on use cases in the market.

‘‘It has to be part of it. We are very focused on responsible AI,’’ he said.

‘‘We have policies and procedures, including on openness and inclusiveness and transparency, built into the products. As we deliver them, we have conversations about how we built it and how we think they should deploy it.’’

As ChatGPT also raises questions about the accuracy of material used to generate answers, including its limited understanding of Australian political history, banks will have to determine what source material is drawn upon and whether customers should be informed.

‘‘That is the learning journey we are on,’’ Mr Borden said. ‘‘Machine learning has been used in decision-making, from thinking about credit decisioning and other [applications]. It is not new.

‘‘Now it is a question of what more you can do, and what will be the approach around policies and governance to ensure it is open, inclusive and understands bias. These are all conversations we have with customers around how to think about using the technology.’’

Microsoft’s ‘‘intelligent cloud’’ division, which includes Azure, generated $US21.5 billion in revenue over the quarter ending December 31, up 18 per cent. The area makes up 40 per cent of revenue.

Asked whether some banks would be willing to pay more in data centre costs to access the models, Mr Borden said cost savings always depended on a bank’s overall tech strategy.

‘‘Will there be savings? Sometimes yes or no, depending on what your strategy is around applications,’’ he said. ‘‘Are you retiring applications, or are you just moving them? And how are you phasing in optimisation?’’

Westpac has a broad contract with Microsoft for a range of cloud services. Other majors banks use it to varying degrees, often part of hybrid cloud strategies that also include Amazon Web Services and Google.

Banks look to adopt ChatGPT as an aid for customers: Microsoft2023-03-14T09:18:52+11:00

Investors pare back RBA rate path on slowdown

Underwhelming gross domestic product and inflation figures prompted financial markets to temper their expectations of interest rate rises by the Reserve Bank ahead of a further slowdown in activity.

Economic growth advanced 0.5 per cent in the December quarter, missing forecasts of 0.8 per cent, as inflation and higher interest rates cooled demand. The annual rate of gross domestic product growth slowed to 2.7 per cent, from 5.9 per cent.

The Australian dollar initially dropped to its lowest in two months but rebounded 0.3 per cent to US67.48¢ after China posted it’s highest monthly gain in manufacturing activity in February in more than a decade.

The $A is often used as a proxy for Chinese growth because of the countries’ strong trade links.

China’s manufacturing purchasing managers index rose to 52.6 last month from 50.1 in January, according to the data, after COVID-19 restrictions were lifted late last year. It was the highest reading since April 2012 and beat forecasts of 50.6.

The non-manufacturing gauge, which measures activity in the services and construction sectors, rose to 56.3 from 54.4, better than a projected rise to 54.9. A reading above 50 indicates expansion from the previous month, while below indicates contraction.

In Australia, the weaker-than-expected GDP and inflation result prompted interbank futures to pare back the scale of interest rate increases. They indicate the Reserve Bank of Australia will lift the cash rate to 4.2 per cent, down from expectations of 4.3 per cent before the report’s release. This would mean at least three more rate increases. On Monday, bond traders had wagered the terminal would hit 4.4 per cent.

Financial markets indicate a 96 per cent chance the RBA will lift the cash rate by 0.25 of a percentage point to 3.6 per cent at its next policy meeting on March 7.

Three-year government bond yields, which reflect interest rate expectations, dropped 13 basis points to 3.5 per cent. They had jumped a whopping 44 basis points in February, the largest monthly gain since August.

Economists said the softer data was unlikely to derail the RBA rate outlook. ‘‘We expect the RBA to remain focused on accelerating labour costs,’’ said Andrew Boak, chief economist for Australia at Goldman Sachs.

He noted nominal unit labour costs had accelerated to an annual rate of 7.1 per cent, far above the pre-COVID-19 decade average of 1.6 per cent, and that would keep upward pressure on CPI.

‘‘We believe the RBA has more work to do to mitigate the risks to broader inflation as global peer central banks continue to lift interest rates,’’ he said.

Goldman Sachs maintained its forecasts of a 0.25 percentage point increase at each of the next three RBA meetings to a 4.1 per cent terminal rate by May.

Other reports released yesterday showed the monthly indicator of consumer prices rose 7.4 per cent in the year to January. The household savings ratio recoiled to a five-year low of 4.5 per cent, from 7.1 per cent in the September quarter.

‘‘The reduction in the savings rate to close to below its pre-pandemic average means the outlook for spending from here is more aligned with growth in household disposable income rather than savings accumulated during the pandemic,’’ said Gareth Aird, head of Australian economics at CBA.

‘‘The very pessimistic levels of consumer sentiment imply the tailwind on the economy from pent-up savings does not have much further to run.’’

CBA expects GDP growth will slow by more than the RBA anticipates over 2023 and the jobless rate will rise above the central bank’s forecast. It also anticipates inflation to recede more quickly than the RBA projects.

Mr Aird forecasts two quarter-point increases to the cash rate before easing policy later this year.

A separate report showed a slight improvement in manufacturing health, which may suggest the economy remains on track for a soft landing in 2023. The seasonally adjusted S&P Global Australia Manufacturing Purchasing Manager’s Index edged up to 50.5 in February, from the neutral level of 50 last month.

‘‘None of the forward-looking indicators are pointing to a recession,’’ said Warren Hogan, an economic adviser at Judo Bank. ‘‘The results support the notion that economic activity is holding up in early 2023.’’

He expects the cash rate to rise to between 4 per cent and 4.5 per cent.

Investors pare back RBA rate path on slowdown2023-03-08T16:27:14+11:00