Is it still a good time to buy a new home, anyway?

This could still be a good time to buy a new home.

Despite the two recent rises, Australia’s interest rates are still relatively low.

And Australia’s population is growing at rates not exceeded since the 1950s and 60s.

That matters. It means house prices are not likely to slump, anytime soon.

High levels of demand for housing will, of course, protect the value of your investment.

Analysts agree on one thing, at least.

Home construction in most Australian capitals still lags well behind unsatisfied demand.

There are other good reasons to buy now, if you can, too.

In all likelihood, home prices will never be lower than they are now.

Indeed, the Statistician reports that the price of established homes, in Australian capitals. rose by an average of 6.2 per cent, in the 12 months to the end of September.

That’s remarkable, at the time of a global economic crisis.

The Bureau also reports that building approvals, throughout Australia, rose by 11.7 per cent over the same time, on a seasonally adjusted basis.

However the Housing Industry Association insists that this recovery is simply not strong enough to make a serious dent in the nation’s housing backlog.

“It is encouraging to see signs of a lift in new home building,” its chief economist, Harley Dale, said.

However, new construction is still not growing at the rate required to satisfy a rapidly growing population.

A word of caution, though.

Prepare your case well, before you ask for a loan.

Banks, rattled by the global economic crisis, are taking a harder look at loan applications than they once did.

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Rate rises:the new pattern

Two small rate rises in two months.  That’s starting to look like a pattern.

The Reserve Bank board is, clearly, more comfortable raising interest rates, than it is either reducing them, or keeping rates on hold.

Yet the bank’s Governor, Glenn Stevens, readily admits that core inflation has  been falling, over the past year  – and should continue to moderate.

He did that in a statement announcing the second rise, also of 25 basis points

He said, too, that a rising exchange rate should “dampen price pressures.”

These hardly appear to be the kind of circumstances in which rate rises are either urgent or necessary.

But, according to Mr Stevens, they are “prudent.”

That case can be made.

And as the Treasurer, Wayne Swan, admits, interest rates have been at “emergency” levels, not previously seen in the past 50 years.

Mr Stevens has admitted, though, that he is worried by recent house price rises.

The two rate rises, with the risk of more to come, won’t help there.

Indeed  they are likely to discourage young families, that had been thinking of building a new home.

Australia’s population is still increasing faster than the rate of new home construction. That, in itself, puts pressure on house prices.

The ANZ bank chief, Mike Smith has criticised the first  rate rise, saying the Reserve Bank should not have acted until after Christmas.

The two rises will increase the home loan repayments required from Australian families, with a $300,000 mortgage, taken over 25 years, by about $92 a month.

That’s a big bite from family budgets.

And Mr Swan’s assertion that this family would still be $662 a month better off than it was when interest rates last peaked won’t provide a lot of comfort.

The big four banks all announced yesterday that they would be passing on the latest rate rise in full.

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Reserve Bank raises rates again – and explains

The Reserve Bank Governor Glenn Stevens made the following statement, when he announced, at 2.30 pm today, that the bank was raising its target interest rate by 25 basis points, to 3.5 per cent.

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.5 per cent, effective 4 November 2009.

The global economy has resumed growth.  With economic policy settings likely to remain expansionary for some time, the recovery is likely to continue during 2010 and forecasts have been revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia’s Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia’s trading partner group, growth in 2010 is likely to be close to trend.

Sentiment in global financial markets is much better than earlier in the year. Nonetheless, the state of balance sheets in some major countries remains a potential constraint on their expansion.

Economic conditions in Australia have been stronger than expected and measures of confidence have recovered. Some spending has probably been brought forward by the various policy initiatives. With those effects now diminishing, these areas of demand may soften somewhat. Some types of capital spending are likely to be held back for a while by financing constraints, but it now appears that private investment will not be as weak as earlier expected. Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending are also starting to provide more support to spending. There have been some early signs of an improvement in labour market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.

Inflation has been declining for the past year. In underlying terms, inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought. Headline CPI inflation on a year-ended basis has been unusually low because of temporary factors, and will probably rise somewhat over the coming year. Both CPI and underlying inflation are expected to be consistent with the target in 2010.

Housing credit growth has been solid and dwelling prices have risen appreciably this year. Business borrowing has been declining as companies have sought to reduce leverage in an environment of tighter lending standards. For many business borrowers, increases in risk margins are still coming through. The decline in credit has been concentrated among large firms, which have had good access to equity capital and, more recently, to debt markets. Share markets have recovered significant ground.

The Board noted that the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures. Nonetheless, growth is likely to be close to trend over the year ahead and inflation close to target. With the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

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Why your finances will remain under pressure

You can expect your family’s finances to remain under pressure for some time yet.

That’s the central message to emerge – for millions of Australians – from Wayne Swan’s mid year review of his budget.

Although Mr Swan now says Australia’s unemployment rate will peak – during the global economic crisis – at 6.75 per cent – instead of the 8.5 per cent he tipped in May – he also admits that another 105,00 people will find themselves out of work, before the crisis passes.

That’s because the nation’s economic growth will still be low in the years ahead, even though it, too, is likely to be stronger than originally expected.

Mr Swan said the Australian economy is now expected to grow by 1.5 per cent this financial year and 2.75 per cent in the following 12 months.

By current world standards, those would be exceptionally good results.

But growth of at least 4 per cent is still needed each year, to absorb each new crop of school leavers into the nation’s workforce.

West Australians, employed on front line work in the State’s mining industry, are now starting to work overtime again.

But many other Australians are still working short hours each week.

That, too, puts a big strain on family budgets.

Australians are facing many other pressures on their incomes, too.

Reverses in terms of trade will leave a $55 billion hole in Australia’s export earnings, this financial year.

That, in turn, is expected to produce a record fall in company profits, this financial year.

So company dividend cheques are likely to be slim.

And – as if all of this was not bad enough – the Reserve Bank is now clearly in a rising cycle, in its interest rate settings.

The bank has made no secret of its concern over rising house prices.

It won’t be comforted, either, by new figures the Bureau of Statistics has produced showing that the weighted average of established  in Australia’s capital cities rose by 4.2 per cent in the September quarter and 6.2 per cent over the year.

Economists are divided in their predictions of the Reserve Bank’s likely decision, at its board meeting today.

Some expect a rate rise of 25 basis points.  Others are predicting a 50 basis point rise.

Of course, the bank could also leave rates untouched this month.  But that would be a surprise.

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Rate rise:a good bet?

Tomorrow will be a big day for your finances, even if you don’t bet on the Melbourne Cup.

At 2.30 pm, just half an hour before the big race begins, the Reserve Bank will deliver its decision on Australia’s interest rates.

Most economists expect the bank to announce a rise of either 25 or 50 basis points, at that time.

However a decision to leave rates untouched is also possible, especially as there has been some evidence of house prices easing slightly, over recent weeks.

For a family with a $300,000 mortgage, the smaller rise would increase monthly repayments by $50.

The bigger rise would see repayments increase by $100 a month.

The bank aims to keep Australia’s underlying inflation rate in a 2-3 per cent range, over the course of the business cycle, when it sets rates.

Figures released last week showed that the nation’s so-called headline inflation rate, indicated by the consumer price index, rose to 1.5 per cent in the 12 months to the end of September.

BankWest economist, Alan Langford, said that rise, alone, was not enough to guarantee a 50 basis point rise.

The Treasurer, Wayne Swan, also insisted last week that Australia’s inflation is still “moderating.”

And the ANZ Bank Chief, Mike Smith, criticised the Reserve Bank, saying its recent rate rise of 25 basis points had come too early.

The best economic news last week, though, came with the announcement that the US economy had grown by 3.5 per cent in the September quarter.

New figures, on retail sales, are due to be released this week.  These are expected to show that Australia’s shopkeepers are still enjoying relatively strong sales.

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