Which Way for Mortgage Rates as Homeowners feel Mortgage Stress

Mortgage stress and loan repayment arrears are becoming a growing reality for Australian Homeowners in New South Wales, Victoria & Queensland.

A growing number of mortgaged homeowners are feeling the pinch and mortgage payment arrears are rising to 2 percent in some areas of Australia. Whilst this is still tiny compared to what has happened in the US, it should be a red flag to the RBA when considering any further rate rises. In fact some are now believing that the next interest rate move could be lower.

What percentage of income creates mortgage stress?

All I know is that the old standard when we had many single income families in Australia, in the 1960's to the1970's that it was hard to get a mortgage without 20% deposit, and that 30% of your gross income on your mortgage was the limit you could go for.
This had the effect of suppressing real estate values.

And don't forget that income tax was at higher rates than it is today, so meant the average family was always squeezed. The other thing that happened in that era was constant wage increases and that soon made mortgages easier to cope with. That is just not part of the landscape these days. Successive Governments have opted for tax cuts as a way of moderating inflation and improving cash-flows on a household level.
So wage increases are few and far between in this period, and much more gradual than in those days. The result is that people who swallowed more they can chew today, have to put up with many years of indigestion in what we call mortgage stress.Its not something that we get into and inflation takes us away from anymore. Its around a lot longer.

The other big change is real estate value increases. In the sixties and seventies we saw a lot of home value appreciation, but for the passed four years we have seen little by way of property price rises, and some areas we have seen house prices fall recently, and it can make the pain of mortgage stress a lot harder to cope with. When property values slide backwards, it can give you that sinking feeling, especially if you find yourself underwater, meaning that the debt is larger than the equity of the property.

The Reserve Bank of Australia Moves interest rates in Mysterious ways.

My view is that the RBA rate rise in November was one rate rise too many, and many on the RBA are beginning to see that this was the case. That's we are getting interest rate rise talk, without the action.

Will we see a rate rise or a rate drop next time?

Earlier in the year my bank manager asked me if I wanted to re-fix my mortgage as it came out of a very attractive fixed rate. They thought they were doing me a favour. I told them no, because I could not see how a rate rise was possible. Well, my variable rate is still under where the fixed rate would have been set, and variable rates could go lower. Now some brave traders are betting on the next move in interest rates to be lower down in Australia. More about that below.

The reasons Lower Interest rates may happen

There were plenty of reasons for this, and they all have resurfaced now because they never went away. They are weak house prices and housing demand, slow wage growth, low retail spending, a shift to saving over spending that is seeing savings rise. Also the Euro debt crisis is yet to be behind us, and the US could double dip into another recession.

Currencies traders are starting to bet that Interest rates will fall in Australia.

Most economists say that one or two rate rise are possible later in the year. But some currency traders are now betting that the next rate movement by the RBA will be down, not up.
So any homeowner trying to sell a home right now, any home buyer looking at buying a home soon, and any real estate agent or mortgage broker wanting more business would be praying that a rate drop will come to pass.

What will happen to homeowners if mortgage rates don't fall?

If interest rates don't go lower, but rise instead, borrowers with only average-size mortgages in Sydney and Melbourne will be on the verge of ''mortgage stress''. And homeowners with mortgages that are bigger than average could be in for a lean ride. The experts say that a household is under mortgage stress once home loan repayments take up more than 30 per cent of gross income, according to some. But they are talking about two income families. It would make more sense for people know what their maximum mortgage repayments should be as a percentage of their net incomes.

Part of the problem here, is how much other debt are these people carrying, and how they are affected with other price increases. That includes petrol, electricity, gas and food. All are rising way faster than inflation and that has to be making it harder for all home buyers and mortgage holders to cope with mortgage payments.

Source: Mr Mortgage

Mortgage Lenders: New Mortgage Lending Rules to hurt home loan lenders



Mortgage lenders and community bankers across the US are lobbying lawmakers over proposed new federal home loan credit rules as the end on the discussion period looms.

The new mortgage rules seek to reduce risk-taking on mortgage lending, but mortgage lenders say the guidelines could hurt small banks and would be bad for credit markets. The Securitized Lenders rules are part of the recently passed Dodd-Frank "Wall Street overhaul bill".

Mortgage Securitization and home loan lending Rules under contention

Now US finance regulators need to establish guidelines for originators of securitized loans, to prevent the problems that lead to the US financial meltdown.
One of the key aims of the legislation is to reduce risk-taking.
The legislation proposes to do that by enforcing mortgage lenders/originators to hold a 5 percent stake in any debt instrument pooled in the secondary market.

Will small banks leave mortgage lending?

Many people believe that making the lenders partly responsible, and tied to the home loan outcomes will see many banks leave mortgage lending, fearing the consequences of being saddled with "hurt money".

The fear is that many home buyers will be denied access to mortgage credit should mortgage lenders leave the housing market.

Is the 20% down & equity rule too harsh or a healthy safety lending margin?

The law gives an exemption for mortgages deemed to be safe enough and gave regulators the task to define such suitable loans.
Regulators have proposed an exemption for the so-called qualified home loans when borrowers make 20 percent or more down payments or equity in the home for refinance purposes.
Some believe that this should be reduced to 10 percent as 20% would kill home loan lending and home values would sink lower still.

Source: Mr Mortgage

Housing Market-Australia needs to reduce the cost of land for new homes to improve housing affordability

Is increasing land supply the real key to bring down house prices?

Australia's housing market is a key driver of the domestic Australian economy. This article attempts to shed light on the true cause of our high home prices and that over priced land is the the real cause of our our over priced homes.

The case for massive land development for new home construction

New homes not only provide work for hundreds of thousands of construction workers and tradies, they are the main customers of hardware, timber, roofing, and concrete industries.
Once a new home is built there is a flow on demand for cabinetry, curtains and blinds, kitchen equipment, stoves and appliances, furniture, tiles and carpets, landscaping and out door living, with patios, sheds, swimming pools and spas. Yes, its big business and it drives much of the big ticket retail spending in Australia.

This is the type of spending that has stopped in recent months, and the reasons are obvious, New home sales are down, especially in flood affected Queensland.

Is Housing Australia's biggest asset?

The housing market has a $4.2 trillion capitalised value

Housing construction is at a 12 month low, and that theretail sector is having the worst period in 20 twenty years, we can quickly see that the two powerhouses of Australia's domestic economy are connected, and that when new home sales fall, so does retailing.

In fact I would say that there is also a smaller connection with established home sales and retail sales of house hold items, simply because moving home creates new needs for home buyers that these retail sales satisfy.

The problem for Homeowners credit over supply is being reigned in.

In case you haven't noticed f you are a homeowner, expect to see your home values shrink. SInce the 1970's House prices have risen above inflation and income growth. The main driver was the baby boomers buying their first home, their second home and until recently, investment properties.

Many baby are now slowing down, and are cashing in to downsize, become grey nomads or retire. In the future these homeowners will move to retirement villages and nursing homes.

Average home prices in Australian capital cities fell 2.1 per cent in the March quarter, according to the Australian Bureau of Statistics.
This will continue as baby boomers leave the housing market, sell off their investment properties and hit the road as grey nomads. Their spending patterns will change dramatically once this occurs.

The impact of the GST on House Prices

The GST and first home owners grant was a major driver inflating house prices
The worst thing that the Howard Government did to house prices was the GST. Besides lifting house construction prices instantly, it also drove many older small builders out of building and into early retirement.

That was followed by the First Home Owners Grant, which added fuel to the home prices inflation fire.

Many people point to the First Home Owners Grant as the problem for raising house prices. They forget that this was brought in because of the GST to compensate the first home buyer for increases in the cost of building a home, brought on by the GST.
One or the other would have increased prices of all homes, The two together created a boom for real estate sales that rippled through the past decade. That caused the interest rate hikes we have to wear now.
When you consider that this was at the same time as the last wave of the baby boomer effect in 2002, a perfect storm for inflation was created. Now the new first home buyers have to pay for all of that, and many are not interested in homeownership. They have better things to do with half their take home pays.
After all, renting is cheaper, and you can invest the difference in a liquid investment, and with the recent figures of falling house prices and the Reserve Bank of Australia's  constant threats to raise interest rates, its easy to understand why new home buyers are being over cautious.

Land inflation the hidden cost of new homes, not construction costs

As I have been saying for some time, GST have increased new home costs, as have the increased requirements in building codes around Australia. But these have added little to the cost of a new home. The main cost increases have been due to land cost increases and Government charges on land development.The drivers for those increases ate the First Home Owners Grants at the same time of land development shortages and deliberate scarcity sales tactics by land developers.

In the year 2000 a block of land was around $70,000 [or less]. In 2010 the cheapest block on the Sunshine Coast was $294.000. Yet land was not supposed to have GST on it!If you leave things to the "free market" you will get ripped off.

Some say that Australian houses are ''overvalued'' and should be halved. I don't believe that homes in Australia are over value is nearly as high, or that house prices will fall much more than they have already. But they are too high right now.
But our house prices being the world's highest, does not make sense, given our abundance of land. Our home values are above that of Hong Kong. But we have abundant land and Hong Kong is a tiny island and has land scarcity. Can you see something wrong with this?

Housing demand is elastic. It depends on the home prices.

Can you remember when people were saying we were 200,000 home short of what we need?Well what happened to all those house buyers? They have evaporated
Some would argue that house affordability is driven by interest rates, others by supply and demand, others by incomes.
I believe that these are silly arguments. As we in Australia have abundant land on which to build, it does not make sense that land prices are too high and in short supply.

Government needs to step in and ensure Land is developed to exceed housing demand if it wants homes to be affordable.

We cannot expect private enterprise to fix this, because land developers benefit by high prices, and high prices are driven by scarcity, which they use to keep prices too high.
Also we can't expect builders to build homes before they have house buyers, with the purpose of lowering house prices. That would not make sense.
What is required is a Government plan to oversupply the residential housing land market, for sale at half the current prices and restrict the size of homes, rather than have covenants for ever larger homes.
This will boost home building, and mean that first home buyers will choose a new home over an established one, and this will reduce established home prices. So interest rates will have little effect and affordability will not be a limiter.
We are spending too much on homes and banks are getting the biggest benefit, because the proportion of our wages are been received by banks.

The solution to Housing Affordability and reviving the building industry is halving land prices.

The solution is to bring home prices down over the next 5 years, and the way to do that is to massively oversupply the amount of land available to build on at half the price currently offered. This policy would ensure that mortgage stress is a thing of the past and that housing affordability is never an issue for new home buyers.
Source: Mr Mortgage