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Off-the-plan sales falling through

Back-to-back interest rate rises have started to hit off-the-plan buyers, with some already moving to offload their unsettled property, according to industry insiders.

Qi Chen, founder of OpenLot.com. au, a listings site for new housing developments said the number of buyers enquiring about selling or nominating another buyer to take over an unconditional off-the-plan contract had surged over the past 12 months.

‘‘We saw a large jump in the number of seller requests in 2022, which had more than doubled compared to 2021. So far, this year is continuing with the same trend,’’ Mr Qi said.

Back in 2021, only 22 per cent of the seller requests on the site were unsettled off-the-plan properties, according to Mr Qi. That rose to 47 per cent in 2022.

‘‘Based on this, we’re anticipating developers could be facing up to 5 per cent of their off-the-plan contracts failing at settlement due to buyers not being able to get finance,’’ Mr Qi warned. ‘‘In this case, the developers will need to find a new buyer to buy this property. Some buyers might be able to get away with a nomination sale if they bought early and the contract price was low. However, some could struggle if the nomination contract isn’t competitive in the resale market.’’

A nomination sale occurs when a buyer nominates another buyer to take over an unconditional off-the-plan contract, which is approved by the developer. This type of sale is usually done at the original contract price.

Diaswati Mardiasmo, chief economist at PRD said with interest rates expected to rise to 4.1 per cent this year, an off-the-plan buyer would face higher borrowing costs than at the time they were conditionally approved by their lender.

‘‘This may prompt the on selling of the contract. Whether or not they will lose the money, this depends on the clauses of the original contract,’’ Dr Mardiasmo said. ‘‘More often than not the deposit is lost, however, it depends on the contract clauses.’’

The risk of failing to qualify for a loan to settle an off-the-plan property has risen as interest rates climb higher than expected, according to Sally Tindall, director of research at RateCity.

‘‘People who might have cleared their bank’s serviceability tests 12 months ago may struggle to pass this same test today as a result of rising interest rates, particularly if they haven’t had a decent pay rise in this time.’’

RateCity estimated that a solo buyer with no dependents and earning $100,000 when they signed the contract could now only borrow a maximum of $582,900 after the recent rate rises, which was $195,100 lower than their borrowing capacity in March 2021.

This assumes a 20 per cent deposit and a pay rise of 2.4 per cent in March 2022 and 3.4 per cent in March 2023.

For a couple with two dependents earning $200,000 at the start, their borrowing capacity has been slashed by $379,700 to $1.077 million or a 26 per cent drop in the maximum loan amount. ‘‘Arguably, the biggest challenge for buyers currently considering an off the plan purchase will be securing credit,’’ said Tim Lawless, CoreLogic research director.

‘‘Borrowing capacity has reduced and demonstrating an ability to service the loan is more challenging, especially when factoring in a three percentage point serviceability buffer.

‘‘Lenders also tend to treat high density housing sectors as higher risk due to the potential for rapid changes in the supply over the term of the loan.’’

The sharp decline in existing home prices in the past year could also drag new home prices lower and leave some off-the-plan buyers with a large shortfall, said Ms Tindall.

‘‘Some borrowers could even find themselves in negative equity before they’ve even stepped foot in the property, making it all but impossible to find finance at all, unless they can find extra cash elsewhere.’’

Anna Porter, a qualified valuer and principal at Suburbanite warned that the burden of higher interest rates and falling values could push many off-the-plan buyers into financial distress.

‘‘I expect there will be a lot of this occurring this year and next. I’ve seen it many times in the past when there’s been market corrections,’’ Ms Porter said.

‘‘The real challenge is interest rates are going up. Even though rents might have increased over the last 12 months, which help investors, higher rates have exceeded that, so they still have very low serviceability.’’

Mark Bainey, chief executive of Capio Property Group said while all the buyers of the company’s developments have so far gained enough capital growth to meet their settlement, the ongoing interest rate rises could start to erase some of those.

‘‘Most of our buyers who purchased during the COVID boom have had enough growth in the property to at least meet the contract price,’’ Mr Bainey said.

‘‘We’re not seeing anyone coming in under contract price so far, but maybe with a couple more rate rises we’ll start to see some of those issues.

‘‘So we’re talking to our buyers a lot sooner than the settlement date. We’re giving them six months’ notice, and we’re actively engaging with them to make sure that they are talking to their banks.’’

Mike Davis, Stockland executive general manager for Masterplanned Communities, said while there was uncertainty around interest rates, structural drivers remained supportive, with a strong labour market, increasing levels of migration, and constrained land supply.

A Mirvac spokeswoman agreed and added that limited new supply and strong resumption of immigration were helping to stabilise prices.

Off-the-plan sales falling through2023-03-08T16:24:35+11:00

Sydney now the priciest Asian city for office fitouts

Sydney has overtaken Tokyo to be the most expensive city in the Asia-Pacific in which to fit out an office. Shortages of skilled resources, material price increases and supply chain disruption are driving inflation in a construction industry that struggled to find enough people even before the pandemic.

The NSW capital, with an average fit-out cost that has risen to $2765 per square metre, has knocked out the Japanese capital – where the average cost of an equivalent project was $2708 per square metre – after five years at the top of the regional list compiled by commercial real estate agency JLL.

The 14.8 per cent year-on-year jump in average fitout costs across Australia outpaced the 4.5 per cent average growth over the region that took in India, Thailand, Vietnam, Malaysia, Singapore, Indonesia, the Philippines, South Korea, China, Hong Kong, Taiwan, Japan and New Zealand.

The effects of a tight labour market, in particular, were driving up costs in Australia as project volumes surged beyond pre-pandemic levels, said JLL’s managing director for project and development services, Scott McCrossin.

‘‘Across the country, strong client sentiment has driven an increase in project volume over the last 12 months which, in conjunction with regional and global headwinds, have led to significant inflationary pressure on construction and office fitout costs.

‘‘Measures to rein in costs have been slowed by global headwinds such as ongoing geopolitical tensions exacerbating the cost of energy and constraining supply chains already under pressure. Damage from weather events – such as flooding in many regions of Australia in 2022 – have further stressed construction costs.’’

Demand for fitouts is booming as building owners reposition their assets to attract tenants or work with occupiers to boost the attraction of a communal workplace and entice staff back to the office.

The report showed the average fitout cost in Australia last year to be $2662 per square metre. Canberra came a close second to Sydney – and also ahead of Tokyo – with an average cost of $2761, followed by Adelaide ($2703), Melbourne ($2676), Brisbane ($2554) and Perth ($2522).

Fitout cost increases will moderate in the next year, JLL says in the report.

‘‘Further price increases will not be sustainable, and many expect the market in Sydney to normalise and the current rate of price increases to moderate amidst talk of a recession,’’ JLL’s Australia Fit-Out Cost Guide 2022/2023 report said. ‘‘The situation is similar in Melbourne with the market stabilising as pent-up demand washes through and activity starts to slow.’’

Sydney now the priciest Asian city for office fitouts2023-02-27T15:38:20+11:00

The worst of mortgage pain is yet to come

On the face of it, there’s nothing in higher-than-expected inflation data that should halt the rally that has helped the ASX 200 leap 7.5 per cent since the start of the year and put the benchmark index within touching distance of a record high.

Yes, the CPI numbers shocked economists; the headline reading of 7.8 per cent was the highest since 1990 and the trimmed mean measure, which leapt to 6.9 per cent, came in well above the Reserve Bank’s forecast. And yes, the data has all but cemented a 0.25 per cent rate rise when the RBA meets in a couple of weeks.

But bulls will see nothing in Wednesday’s figures to upset the consensus that we are now past the peak of inflation in Australia. Most investors (and the local bond market) already expected the RBA would need to lift rates again in early 2023 before pausing in March or April and then cutting rates in the back half of the year.

On this reading, the New Year rally, which has boosted both big names (BHP is up 8.6 per cent year to date and Commonwealth Bank is up 7.7 per cent) and unloved minnows (Myer is up 41 per cent this year, Nuix is up 35 per cent and Sezzle is up 59 per cent) can theoretically keep running.

But this week’s surprise CPI reading should also serve as a reminder that the inflation story – and the interest rates story that runs parallel – is not over, and the outlook for the consumer is less clear cut than this latest bout of bullishness suggests.

In addition to the latest inflation data, this week has brought a series of analyst notes examining price rises by ASX companies.

On Monday, Macquarie analysts looked at how Domino’s Pizza Enterprises was lifting menu prices by up to 40 per cent in some regions (taking the price of a pizza from its value range to $6.99) as it looked to offset cost increases and shore up the profitability of its franchisees.

On Tuesday, Goldman Sachs initiated coverage on Australia’s general insurance sectors, basing its constructive view on the fact premium increases should underpin an improvement in profit margins.

On Wednesday, Morgan Stanley was one of many banks to comment on Vodafone’s decision to raise prices on its mobile telephone plans by 13 per cent to 18 per cent, following on from similar moves by Telstra and Optus late last year. Macquarie sees the telecommunications sector as being 12 months into a pricing cycle that likely has some years to run.

There is a danger, of course, in extrapolating the experience of any one company, or even one sector to the broader economy. But if nothing else, the above examples suggest that the corporate sector continues to feel the sting of higher input costs and more expensive capital, and consumers will need to pay more if the profit margins are to be maintained. Perhaps this is the tail end of such inflationary pressures, but that’s certainly not clear in sectors such as insurance and telecommunications, which are nondiscretionary items in most households.

But the biggest issue for consumers is the impact of higher interest rates. Although investors in Australia (and in the US) are growing increasingly convinced that the central banks are close to the end of their tightening cycles, it’s remarkable how all the talk of the lag effects of rate rises that so dominated markets just months ago appears to have largely disappeared.

But Jo Masters, chief economist at investment bank Barrenjoey, makes a strong case that for households, the raising cycle remains closer to the start of it than the finish.

The well-documented ‘‘mortgage cliff’’ that confronts thousands of borrowers who will roll off cheap fixed rate loans (averaging about 2.5 per cent) and on to much more expensive variable rates loans (likely somewhere about 6 per cent) has been well documented and much debated.

On Masters’ numbers, this would result in repayments on a 30-year, $500,000 mortgage rising by just over 50 per cent, or $1022 a month.

But she argues it’s also important to recognise that variable borrowers have so far been spared much of the pain of rising rates, largely due to mortgage processing delays.

Barrenjoey estimates average variable mortgage interest rates have only increased about 1.1 per cent so far, compared with the 3 per cent increase in the official cash rates. In other words, just under two thirds of the pain of higher mortgage rates is still to come for variable rate borrowers.

There is clearly some serious catch-up to come. And this will be exacerbated by rate rises in response to still-strong inflation numbers; Masters is holding to her forecast that the RBA will lift by 0.25 percentage points in both March and February, taking the cash rate to 3.5 per cent.

But while official rates might only have 0.5 per cent to rise, Masters estimates the average mortgage rate will rise 1.5 per cent between now and June, and then a further 0.4 per cent in the second half of the year.

For a 30-year, $500,000 variable loan, repayments have risen $300 a month since the RBA started tightening last May. But those repayments are forecast to rise a further $565 over the course of calendar 2023, which Masters estimates is equivalent to a 6.4 per cent squeeze on disposable income.

This helps to explain the robust retail sales figures we’ve seen, both in official data and results from the likes of JB Hi-Fi.

That resilience has also been underpinned by the $260 billion of savings that was built up during the pandemic. But Masters says the savings rate has fallen from 11.2 per cent of disposable income in the March quarter of 2022 to 6.9 per cent in the September quarter.

Barrenjoey expects this rate will fall to 4.4 per cent in the June quarter of 2023 before stabilising.

‘‘This means households have $4 billion to lean on over the first half of this year – much less than the $7.8 billion in the second half of calendar 2022 and $14.3 billion in the first half – but then will need to rely on income growth to support any rise in consumption, particularly given our expectation that house prices will still be falling.’’

Income growth and population growth should offset this a bit, but Masters’ forecast is for consumption growth to slow to just 1 per cent through 2023, compared with a forecast 5.7 per cent in 2022.

To be clear, none of Masters’ analysis runs counter to the idea that inflation and interest rates have peaked or are close to it, so the New Year bulls may not necessarily be wrong.

But investors would do well to realise that the pressures on consumers will take a while to fade yet. Prices in some sectors will keep rising and the big jump in mortgage rates is yet to hit.

The worst of mortgage pain is yet to come2023-02-09T09:52:21+11:00

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?2023-02-09T09:51:07+11:00

THE 30-MINUTE CHAT THAT COULD SAVE YOU $30,000

Refinancing Lucy Dean outlines exactly what you need to do to get a better mortgage rate.

Australian borrowers are refinancing at record rates as mortgage repayments race higher, pushing homeowners to the brink. However, experts are reminding borrowers of the power of a phone call with their current lender before they jump ship.

A big bank borrower with a $1 million owner-occupier loan, currently paying 5.86 per cent, would save $29,801 over three years if they managed to negotiate a 1 percentage point cut, RateCity analysis shows.

A smaller, 0.25 percentage point cut, would still be worth it – saving $2500 in the first year and $7466 over three years.

It’s really just a matter of picking up the phone and being prepared to wait for a little while to get through to a real person, says managing director at Pure Finance, Brendan Dixon.

‘‘In 2022 we did 489 [home loan] reviews for clients, and the average discount we negotiated was 0.26 per cent, which worked out to be $101.65 per month, per customer,’’ says Dixon.

‘‘In terms of the scope of savings, it depends on how big their loan is, and how bad their interest rate is. But I would say it would be pretty easy – if they took a loan out two years ago – to be saving thousands rather than hundreds.’’

This is what you need to do and say to have your best shot at saving.

Get your ducks in a row

Understand what product and interest rates you have | Before you go toe-to-toe with your lender, you want to know the product you have. If you’re on a variable offset product, then you need to be looking at what the variable offset product is at your current bank and what they are advertising to new customers,’’ Dixon says.

That new customer offer will generally be what you’re aiming for. Once you’ve found your current rate and the bank’s leading rate, you can work out the premium you’re paying as a result of being a loyal customer.

Your interest rates should be on every statement, but many borrowers only receive those every six months. That means you may need to log in to your online banking and grab your interest rate from there.

Find your lender’s best deal, and other lenders’ best deals | You’ll also want to look at what other lenders are offering for variable offset loans.

Ideally, you will have two or three rates from other lenders that would apply to your loan, says RateCity research director Sally Tindall. When it comes to the phone call, don’t be afraid to name-drop them, she says. It shows your lender you’re serious and prepared to move.

Understand your loan-to-value ratio | Your loan-to-value ratio (LVR) simply reflects how much of the property you’ve paid off, and is given as a percentage.

For example, someone who has paid off 20 per cent of their loan will have an LVR of 80 per cent.

‘‘The percentage that you borrowed is important. If someone only just took out a loan [with a 10 per cent deposit], they’re not going to get as good a discount as someone who bought a few years ago and has got more equity,’’ says Dixon.

You can figure out your LVR by finding the value of your property and comparing it with your loan balance.

So, if you were to hop online, you could punch in your address to an online valuation tool like Domain. Then it’s a matter of heading to your online banking portal and looking at the loan balance.

If you found your property was worth $1 million and you had a loan balance of $700,000, then you’d know that you have an LVR of 70 per cent.

The lower your LVR, the easier it will be to negotiate.

Check this is worth your time | Glen James, former financial adviser and host of the My Millennial Money podcast, had a rate review in late 2022, and under his new interest rates, he will be saving $380 a month across his two mortgages.

He generally uses a mortgage broker, but for the purposes of his podcast he wanted to see what it was like negotiating with his two lenders directly.

‘‘I think it was about no more than half an hour [on the phone] per lender,’’ he says.

While it was more than worth his time, he notes that it doesn’t make sense for all borrowers to call up their lenders.

For example, if you’re in the middle of a fixed-rate period, then you’re not going to be able simply to reduce your rate.

And if you took out the loan or refinanced in the last six months, there’s ‘‘probably limited scope’’ for your bank to budge on your rate, he says.

But if you haven’t moved, purchased or had a rate review for more than a year, there’s a fair chance you’re on a higher rate than a new customer, Tindall adds.

‘‘For example, an owner-occupier who took out a CBA basic variable loan just 12 months ago is likely to be paying 0.42 per cent points more than what the bank is offering new customers today,’’ Tindall says.

‘‘On a $1 million debt, this translates into more than $4000 in extra interest over the next year alone.’’

If you have a mortgage broker, adds James, it’s a good idea to speak to them before you make any moves as they may be able to save you a lot of hassle.

Your broker can put through the rate review on your behalf and save you the rigmarole, and should also be able to present a stronger case as they’ll have a better understanding of what a borrower like you could get elsewhere.

And if your lender doesn’t end up moving, a mortgage broker will also be able to help you refinance successfully.

Pick up the phone

It’s go time. Generally, you’ll just call the main number of your bank and navigate through the phone menu to the existing home loan customer line.

Some banks will allow you to email them or message them as well.

As Tindall notes, you have a good chance of landing a better rate. With a record $19.5 billion refinanced in November, banks are keenly aware that their customers aren’t afraid to move.

‘‘As a result, the banks are in the mood to negotiate, particularly if they think you might be a flight risk,’’ she says.

State your case, be specific and ask for the retentions team | Once you’re speaking to a human, it’s a matter of telling them you’re reviewing your home loan interest rates and are considering refinancing.

‘‘Some banks have got a retention department, but generally it’s existing loan accounts queries, or general queries [that you speak to first],’’ Dixon says.

‘‘So, you can say, ‘Hey, I noticed you’re advertising 4.79 per cent for new customers, I’m paying 5.25 per cent, why is that? I’ve also noticed Bank A and Bank B are offering 4.79 per cent, what can you do to keep me?’’’

If other banks are offering even lower rates than your lender’s best rate, it’s worth noting – but don’t get your hopes up about achieving that.

Then, you ask to speak to someone who can help. It may be the person you’re already speaking to, but you may be put through to the retention team, or the pricing team.

‘‘Their role [in the retention team] is to try to stop you from leaving, so you’re speaking to the perfect person,’’ Dixon says.

Staff in the retention team will generally be authorised to approve larger interest rate reductions than those on the immediate frontline, James says.

If your first point of contact, generally at the existing home loan customer line, isn’t being helpful (or they’re not offering a big enough discount), you can also ask to speak to the manager.

Ask for, and then weigh up, a cashback | Rather than, or in addition to, a reduction, your lender may offer you a cashback as a sweetener to stay.

You can also ask for one. This is particularly useful if your bank hasn’t lowered your rate as much as you were hoping.

‘‘Once your lender comes to you with an offer, you don’t normally have a counter, but it’s definitely worth trying,’’ Dixon says. Try something like this: ‘‘Look, it’s still pretty far from what your competitors are offering. Can you do any better? Otherwise, I think I’m still going to leave. Or, can you throw in a cashback for me?’’

Other lenders will offer cashbacks to lure you. The trick is ensuring that the cashback, which range from $2000-$6000, isn’t covering up a bad, long-term deal, Dixon says.

‘‘It’s a marketing tool by the banks. They might say, ‘Our interest rate is 5 per cent, our cashback is $5000,’ and then you have the second bank saying, ‘Hey, our interest rate is 4.7 per cent, but we’re not offering a cashback.’’’ It’s up to you (or your broker) to do the maths.

Call in the cavalry | James says if you’re still not getting quite what you want, you say: ‘‘Will something in writing from my mortgage broker help with the pricing request?’’

That’s when – if you have a broker – you go to them and ask if they can put something on their letterhead with your name and details, listing a couple of other lenders available.

‘‘I’ve done that before in the past, I’ve emailed them a letter,’’ James says.

Pull out the big guns | If that doesn’t work, you should be prepared to move, the experts agree. ‘‘If they still don’t budge, you can opt to play hard ball by asking for a mortgage discharge form,’’ Tindall says.

‘‘That could be enough to call their bluff. By this point, you should have the bank begging you to stay but if you’re still unhappy with the rate – well, you’re halfway to refinancing anyway, so you may as well go the whole hog and get yourself a decent rate cut.’’

You can do the refinancing process yourself, or engage a mortgage broker.

Get the best deal

Dixon says there’s at least a 90 per cent chance of success for borrowers tilting at a lower rate, particularly if their loan is one year old or more.

But not all existing lenders will go as low as their new customer interest rate.

‘‘There will be some lenders that will give the advertised interest rate when asked … but you need to have the conversation to find out. Different lenders have different retention policies, and they can change during the year,’’ he says.

The discount you can get will also depend on how much you’ve been overcharged.

Let’s say the advertised interest rate is 4.89 per cent, and you’re on 5.3 per cent. There’s a good chance you’ll get a reduction. But if your interest rate is 4.99 per cent, your lender will be less inclined to shave off that 0.10 per cent because you’re already close to the advertised rate.

Additionally, your chances of getting an interest rate that is lower than your current lender’s best rate – say a competing bank’s leading rate – are fairly slim. But it’s worth asking – the worst they’ll say is no, and they may say yes, saving you the switching fees.

Where to next?

Either you got what you wanted, or maybe it’s time to move and save more.

As noted earlier, a borrower with a $1 million loan with a big four bank and 5.86 per cent interest rate could save $29,589 over three years if they moved to the average 4.84 per cent interest rate offered to new customers, RateCity found.

However, if they were to refinance with a new lender to a 4.50 per cent interest rate, they’d save $39,336 over three years – including switching costs.

‘‘The sharpest rates are typically reserved for new customers, no matter how good your negotiating skills are, so it’s worth considering refinancing,’’ she says.

The good news is, if you’ve made it to this stage, you understand your positioning in the market and will have a better idea of who would be willing to take you on and what your chances of success actually are.

‘‘If you own less than 20 per cent of your home, at today’s values, you might find you’re in ‘mortgage prison’, unable to refinance,’’ says Tindall. ‘‘That’s because most new lenders will charge you lenders mortgage insurance even when refinancing, which could potentially negate any savings you might make from switching banks.

‘‘Conversely, if you’re an owner-occupier and own over 30 or even 40 per cent of your home, then you’re in the box seat when it comes to rates. Use it to your advantage.

THE 30-MINUTE CHAT THAT COULD SAVE YOU $30,0002023-02-09T09:48:06+11:00

Housing slump from US to China adds risks to global economy

Shaky property markets across much of the world pose another risk to the global economy as higher interest rates erode household finances and threaten to exacerbate falling prices.

Reports last week have shown the US housing slump stretched into a fifth month, China’s home sales slide continued, and price declines persisted in Australia and New Zealand. In Britain, prices are now in their worst losing streak since 2008.

Sliding home values threaten to undermine consumer confidence and weigh on household spending, which had been a rare bright spot for the global economy last year. Investment too could take a hit as developers scale back projects in response to falling prices, waning demand and higher borrowing costs.

In the past three housing busts, inflation-adjusted house prices have retraced about half of their previous gains, according to Oxford Economics. Prices have risen about 40 per cent around the world since 2012 and the consultancy said in an October report that in a worst-case scenario, housing market weakness could knock global economic growth to around zero this year.

In the US, last year’s run-up in mortgage rates cast a chill on the housing market, leading to the worst annual drop in sales of previously owned homes in more than a decade.

That strain is set to continue during the US Federal Reserve’s campaign to tackle inflation.

Policymakers raised rates by a quarter percentage point at the conclusion of a two-day gathering last week, to a range of 4.5 per cent to 4.75 per cent.

China’s new-home sales tumbled 32.5 per cent in January from a year earlier, preliminary data from China Real Estate Information showed.

The prospect of ongoing weakness in China’s property market is a potential headwind to Nomura’s otherwise upgraded view of this year’s growth prospects, economists led by Ting Lu wrote in a January 31 note. They cited the official narrative that ‘‘housing is for living and not for speculating’’ and declining prices as brakes on speculative demand.

In Britain, Nationwide Building Society said the average home value has fallen for five months in a row. A jump in mortgage rates and the tightest cost-of-living crisis in a generation is squeezing the spending power of home buyers, putting the cost of property out of reach to more people.

‘‘The overall affordability situation looks set to remain challenging in the near term,’’ said Robert Gardner, Nationwide’s chief economist.

The average two-year fixed-rate home loan jumped to a 14-year high of 6.65 per cent in October. Mortgage rates have come down from their peak to well below 6 per cent, but home buyers and households renewing their deals are still facing painfully high monthly repayments.

Prices continued to fall in Australia and New Zealand last month, with the slide likely to continue as neither property market has yet felt the full brunt of last year’s spike in interest rates.

Many New Zealand households are on fixed-rate mortgages that have yet to roll over to a new, higher rate. As a consequence, economists are predicting house prices will fall further and will be at least 20 per cent below their late-2021 peak by early 2024.

In capital city Wellington, prices have already fallen 18.1 per cent from a year earlier, CoreLogic data show. In the largest city, Auckland, prices are down 8.2 per cent.

It’s a similar story in Australia, where a spike in loan repayments for those whose mortgages switch to higher variable rates this year is set to weigh on consumption, according to a report by Bloomberg Intelligence.

Repayments on 15 per cent of home loans could jump by more than 80 per cent when their ultra-low fixed rate expires, analysts Mohsen Crofts and Jack Baxter said in the report. They estimate the hit to household income will be the equivalent of 2.2 percentage points of retail sales.

One bright sign is coming from Hong Kong, which is seeing glimpses of a housing recovery as the border with mainland China reopens. New-home sales in the city may surge more than 50 per cent this year, buoyed by pent-up demand from mainland buyers, according to Bloomberg Intelligence.

Housing slump from US to China adds risks to global economy2023-02-09T09:46:54+11:00

APRA ready if home loans choked

Australian Prudential Regulation Authority chairman John Lonsdale says he is open to changing bank rules on home loans if the economy deteriorates to ensure banks do not ‘‘choke off’’ credit and make the fall in house prices worse.

But the new head of the banking regulator was confident banks had sufficient capital buffers to withstand falls in house prices that economists predict could hit 20 per cent from their peak amid the fastest pace of interest rate rises in a generation.

‘‘We watch housing very, very closely, as it affects the banks we regulate and it is very important in the Australian economy,’’ Mr Lonsdale told The Australian Financial Review in his first media interview since succeeding Wayne Byres at APRA in November.

‘‘Two-thousand-and-twenty-three will be challenging. But we have done a lot of work over a long period of time to make sure the banks and the system is safe and stable – and we have a safe and stable financial system.’’

Money markets are expecting a quarter percentage point rate rise on February 7, and another increase on March 7, before the Reserve Bank pauses ahead of a possible final rate increase by mid-year. This could push the 3.1 per cent cash rate to 3.85 per cent, a level not reached since 2012.

Meanwhile, capital city house prices are expected to fall over the first half of this year, after dropping 7.1 per cent last year. Leading economists expect a further fall of about 8 per cent, resulting in a top-to-bottom fall of 15 to 20 per cent. Mr Lonsdale said capital levels built up by the banks since the financial system inquiry and the ongoing focus on lending standards would allow banks to cope with a fall of this magnitude.

‘‘We have built a very strong capital framework that provides a lot of buffer in the system. At the heart of it is the ‘unquestionably strong’ reforms, which we are embedding,’’ he said.

‘‘Second, is pursuing very sound lending standards, and we have been doing that for a few years.

‘‘That has set the system up – if you look at prudential metrics right now, they look very good. We have strong capital, strong liquidity and credit standards are very good. We sail into 2023 in a good position from a system point of view, and entity point of view.’’

Mr Lonsdale reiterated a warning to the banks that they should not seek to appease the bond market by refinancing long-term ‘‘tier II’’ bonds at more expensive market interest rates, given it is designed to protect depositors and make the banking system more stable.

As APRA scrutinises high levels of household debt, Mr Lonsdale declined to say whether indebtedness should form part of the RBA’s thinking as it considers an appropriate peak cash rate.

‘‘Interest rates and monetary policy is an issue for the [central] bank,’’ he said. ‘‘In terms of indebtedness, it is certainly a factor we look at very, very closely because it is important to the stability of the system. But I don’t want to go any further on that.’’

Mr Lonsdale said he was comfortable with current controls on bank lending for housing, but if the economy were to deteriorate he would be open to changing the macroprudential policies to ensure banks do not ‘‘choke off credit’’, which could exacerbate house price falls.

Declaring APRA’s macroprudential settings – including the ‘‘serviceability buffer’’, which requires banks to assess new loans at a rate 3 per cent higher than prevailing market rates – the right policy at this time, he said the regulator would consider readjusting its rules to respond to lower credit growth or house prices.

This would ensure credit continued to flow in the face of more aggressive official rate rises to reduce inflation, and as hundreds of billions of dollars of fixed-rate mortgage reverted to much higher variable rates.

‘‘As I sit here before you now, we think the macroprudential settings – including the serviceability buffer, which is just one of them – are appropriate,’’ he said. ‘‘But if the facts change, our views might change too.’’

APRA lifted its serviceability buffer, which banks apply to ensure customers can cope with future rate rises, to 2.5 per cent from 2 per cent in mid-2019, and then to 3 per cent in October 2021. The RBA has raised rates by exactly this amount since May.

But markets now expect that after a few more cash rate rises, the RBA could start easing rates early in 2024. Any reconsideration of the serviceability buffer would show APRA was also preparing for rates to peak.

‘‘It is very much a trade-off,’’ Mr Lonsdale said about setting buffers. Their main focus was protecting bank depositors by ensuring lending standards were strong.

But buffers would be counterproductive if they were so restrictive that they made it tougher to buy houses even as prices fell, adding to systemic risk given big bank lending was so concentrated in mortgages.

‘‘We knew things were going to become more difficult [when we increased the buffer in 2021],’’ he said.

‘‘But at the same time, we have got to balance not choking off credit – there is a difficult balance there that needs to be struck.’’

In a wide-ranging interview, Mr Lonsdale detailed other key focus areas for APRA this year, including lifting governance standards in the superannuation sector, bolstering ‘‘operational resilience’’ including cybersecurity defences after the Medibank attack, and strengthening disclosure rules for banker pay.

Its supervisory and policy priorities, including around climate change, will be released later this week.

Other priorities for APRA this year include more intense supervision of the superannuation sector, an area where APRA has come under criticism since the royal commission.

‘‘We are going to improve investment governance of super, on stress testing, valuation and liquidity management,’’ Mr Lonsdale said.

After APRA’s ‘‘climate vulnerability assessments’’ last year found banks strong enough to withstand growing stresses from climate-related issues, he said climate ‘‘will be a key plank of supervision priority this year’’.

Another obvious focus is operational resilience, after APRA-regulated Medibank Private suffered a loss of trust from a devastating cyberattack. He flagged potential regulatory action against the health insurer when the findings of reports into the incident become clearer.

‘‘On Medibank, their reviews are under way, and we will have a look at those reviews – the important thing is they get to the root cause of issues and remediation takes place, and we will look at enforcement if we need to,’’ he said.

He also warned banks not to forget the lessons of the Hayne royal commission. It was their lack of attention on risk culture that was the ‘‘root cause of what went wrong’’ and he said APRA would continue to conduct risk culture surveys of banks and boardrooms to ensure higher standards are maintained.

‘‘I don’t see it fading at all. There is a legacy of the royal commission we have certainly built into our supervision. We have a much clearer sense of accountabilities of executives operating in banks, of who is accountable for what, and the FAR [Financial Accountability Regime] will embellish that if it gets passed by the parliament.’’

APRA will also this year complete remuneration rules, to standardise bank disclosure of pay.

APRA ready if home loans choked2023-02-09T09:45:42+11:00

Housing slump from China to US poses a growth risk

Shaky property markets across much of the world pose another risk to the global economy as higher interest rates erode household finances and threaten to exacerbate falling prices.

Reports this week show the US housing slump stretched into a fifth month, China’s home sales slide continued, and price declines persisted in both Australia and New Zealand.

Sliding home values threaten to undermine consumer confidence and weigh on household spending, which was a rare bright spot for the global economy last year. Investment too could take a hit as developers scale back projects in response to falling prices, waning demand and higher borrowing costs.

In the US, last year’s run-up in mortgage rates cast a chill on the housing market, leading to the worst annual drop in sales of previously owned homes in more than a decade. That has put pressure on prices.

That strain is set to continue during the Federal Reserve’s campaign to tackle inflation. Policymakers are widely expected to raise rates by a quarter percentage point at the conclusion of a two-day gathering today (AEDT), to a range of 4.5 per cent to 4.75 per cent.

In the world’s No. 2 economy, China’s property slowdown is showing few signs of abating, even as authorities ramp up efforts to revive the industry. New home sales tumbled 32.5 per cent in January from a year earlier, preliminary data showed this week.

Officials have taken steps to ease financing to cash-strapped developers, unwinding a deleveraging campaign that triggered a wave of defaults and dragged on growth.

Local authorities have also stepped up efforts to stimulate home buying, including by cutting mortgage rates and easing down-payment requirements. Such steps are unlikely to boost sales until mid-year, according to Bloomberg Intelligence analyst Kristy Hung.

Ongoing weakness in China’s property market is a potential headwind to Nomura Holdings’ otherwise upgraded view of this year’s growth prospects, economists let by Ting Lu wrote in a note on Tuesday. They cited the official narrative that ‘‘housing is for living and not for speculating’’, and declining prices as brakes on speculative demand.

Prices continued to fall in Australia and New Zealand in January, with the slide likely to continue as neither property market has yet felt the full brunt of last year’s interest rate spike.

Many NZ households are on fixed-rate mortgages that have yet to roll over to a new, higher rate. As a consequence, economists are predicting house prices will fall further and will be at least 20 per cent below their late-2021 peak by early 2024.

In Wellington, prices have fallen 18.1 per cent from a year earlier, CoreLogic data shows. In Auckland, prices are down 8.2 per cent.

It’s a similar story in Australia, where a spike in loan repayments for those whose mortgages switch to higher variable rates this year is set to weigh on consumption, a Bloom-berg Intelligence report says.

Repayments on 15 per cent of home loans could jump by more than 80 per cent when their ultra-low fixed rate expired, analysts Mohsen Crofts and Jack Baxter said in the report. They estimate the hit to household income will be the equivalent of 2.2 percentage points of retail sales.

Housing is even cooling in Singapore, which has been more resilient than many other markets.

Housing slump from China to US poses a growth risk2023-02-09T09:44:04+11:00

Financial Planning Message – December 2022

As 2022 draws to a close we are reminded of the recent period of intense volatility in capital markets and the reality that a global recession is likely next year.

 

Markets are pricing in a lower probability of a recession in Australia.

 

This in turn will depress corporate earnings and valuations across all asset classes and significantly increase default rates among high-risk borrowers.

 

The correction to valuations is likely to be more severe during this economic cycle due to valuations starting from elevated levels compared to previous corrections.

 

We are also yet to experience a high number of fixed loans move from fixed interest rates of sub 2% to levels of 5%+ prevailing rates, something in the order of $500bn are due to mature in mid to late 2023.

 

This will no doubt impact the already depressed property market in Australia.

 

All the major banks and APRA are keeping a close eye on this development as we progress into 2023.

 

As inflationary pressures persist ( highest in 40 years ), geopolitical tensions and tight labour supply, the  central banks are forced to aggressively press on with higher interest rates and keep for much longer.

 

The RBA has so far moved the cash rate from .1% in March 2022 to now 3.1%, markets are now pricing in another two .25% increases in early 2023 before a potential pause to evaluate the impact on inflation.

 

The Federal Reserve was pricing in a rate increase of just 1% in December 2021, it is remarkable that their view now is that it is likely to peak at approximately 5.25%.

 

Consequently, 2023 is poised to exert added stress to highly leveraged borrowers, specifically those that have acquired property / equities in 2021 / 2022, are now in nil or negative equity positions.

 

It is worth noting that during this business cycle, we have had an explosion of companies that have become addicted to cheap debt, on the other hand, these same companies are not generating sufficient cashflow to support increased interest payments.

 

Clearly, there will be consolidation particularly in property related businesses in 2023.

 

There are no doubt significant headwinds for Australian households and the economy in general as we enter 2023.

 

Accordingly, extreme caution and sound strategies need to be implemented for the year ahead, including but not limited to :-

  • Be clear on what and who matters given the many conflicting sources of information and ‘investment opportunities’ across the media.
  • Understand your portfolio and position appropriately taking into account your forward plans and risk / return / management costs.
  • Review cashflows and eliminate unnecessary lifestyle costs in light of higher interest rates in 2023.
  • Let’s not forget managing your tax position, this is always relevant be it during your working life, in retirement ( with respect to investments) or as part of your estate plan.
  • Focus on what can be controlled / influenced as opposed to factors over which we have no control or influence.
  • Make incremental ‘dollar cost savings’ as opposed to taking a significant position when investing.
  • Diversification and history are our best friends, reflect and actively rebalance asset allocations.
  • Consider Dividend Reinvestment Plan ( DRP) in light of the attractive valuations.
  • Confirm borrowing / refinancing options well before due dates and explore potential savings across relevant lenders – competition appears to be intensifying across the major lenders.
  • Insurance is always important, however potentially critical during extreme business cycles as are likely to unfold in 2023. It is not desirable to execute forced sales at depressed values.

 

In closing, we would like to take this opportunity and thank you for placing trust in AMCO since inception 26 years ago and making our Integrated Wealth Management practice what it is today.

 

We are aware of the challenges you are facing during these uncertain times and are there to advise and navigate all matters with professional care and promptness.

 

It is vital that fundamental mistakes are prevented during these critical periods, hence the need for sound advice.

 

From the team at AMCO, we wish you and your loved ones good health, peace of mind and prosperity in the year ahead.

 

Merry Christmas.

 

 

Danny D. Mazevski 

Chartered Tax & Financial Adviser

FIPA   CTA  FTMA  MBA (Un.NSW/SYD)  Dip.FS   JP

Financial Planning Message – December 20222022-12-22T08:01:23+11:00

Worst is yet to come for housing market

Property Talk about prices hitting bottom may be optimistic.

Predictions that the housing market will soon bottom out are premature because the worst effects of higher interest rates are yet to come, experts say.

The recent rise in auction clearance rates and improvement in the drivers of inflation had prompted some industry insiders to say the housing downturn was about to end and that prices would fall by smaller amounts.

Auction clearance rates climbed to 58.8 per cent, a 12-week-high, last weekend, CoreLogic says. Ray White data showed the number of bidders had risen to 2.5 per auction since touching bottom last month.

‘‘I think we are close to the bottom,’’ said Ray White chief economist Nerida Conisbee. ‘‘With inflation drivers improving and markets feeling more confident about the outlook, it does look like the housing downturn may be over sooner than expected.

‘‘The chances of a sustained downturn and giant declines in prices look to be steadily dissipating.’’

Ms Conisbee said there had been a decrease in petrol prices, and supply chains seemed to be moving a bit quicker in the past seven weeks.

‘‘With inflation starting to pull back, so too does the need to raise interest rates.’’

But AMP chief economist Shane Oliver said the recent rebound in clearance rates was not an indication of a stabilising market.

‘‘There were bounces in clearances in the 2011 and 2017-19 property down cycles that did not signify imminent upswings,’’ Dr Oliver said. ‘‘I suspect the bounce in the last few weeks reflects the combination of bargain hunters and vendors lowering their prices as it has come on lower volumes and interest rates are still rising.

‘‘I continue to see average home prices falling 15 per cent to 20 per cent top to bottom, with the low most likely in the second half of next year after the RBA stops hiking and starts cutting rates, which is not expected until the second half of next year.’’

While the auction clearance rates lifted in the past few weeks, they were still below the benchmark where prices could rise again, said Nicola Powell, Domain’s chief of research and economics.

‘‘I think talk of the market bottom is a bit optimistic,’’ Dr Powell said. ‘‘Yes, we have seen clearance rates stabilise in recent weeks, but they are still below 60 per cent, which is a level that indicates price inflation. At the current level of 58 per cent, it indicates that prices are still going to fall.’’

Despite some encouraging signs, the worst of the downturn was far from over, said ANZ research senior economist Felicity Emmett said.

‘‘I think it’s very premature to be calling the bottom of the housing market when many participants in the market would hardly have even felt the impact of rate rises yet,’’ Ms Emmett said.

‘‘It takes a little while for the rate rise to flow through to mortgage repayments. The May rate rise probably didn’t result in higher mortgage repayments until late June or July.

‘‘With more rate rises expected, it’s really hard to see property prices bottoming out until at least the cash rates have stabilised.’’

ANZ expects interest rates to peak later this year at 3.35 per cent, which will slash borrowing capacity by 30 per cent.

‘‘That is really going to limit how much people can take to an auction or private sale,’’ Ms Emmett said. ‘‘I don’t think there’s any getting away from that, that’s why we think the downturn has a lot longer to run.’’

ANZ is predicting Sydney house prices to fall 20 per cent peak-to-trough, while Melbourne, Adelaide and Hobart are each expected to decrease by 17 per cent, Brisbane, Perth and Darwin will fall 12 per cent each, and nationwide there would be a a 17 per cent decline.

The market could bottom out earlier if the RBA were pause its tightening, said SQM Research managing director Louis Christopher.

‘‘I think we are getting closer to a rate pause where the RBA just sit on their hands for a few months … it’s got everything to do with inflation,’’ Mr Christopher said.

‘‘If we were to see the RBA pausing at the next meeting or the one in October, that could improve confidence and stimulate the housing market,’’ he said.

Worst is yet to come for housing market2022-08-30T14:09:49+10:00