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Weak economy set to spur Reserve Bank cash rate cut on Tuesday

Concern about deteriorating economic growth lies behind the Reserve Bank’s determination to cut interest rates, a move most likely at its first board meeting for the year on Tuesday.

A cut in the bank’s cash rate from 2.5 per cent to 2 per cent would bring the standard discounted home loan rate below 5 per cent, knocking $53 off the cost of servicing a $350,000 loan.

Although the latest official figures show Australia’s unemployment rate falling, the Reserve Bank’s preferred measure shows it continuing to climb.

The bank averages the unemployment rate for each quarter and compares it with the average for the previous quarter.

Board members will be told on Tuesday that over the past year the average unemployment rate has climbed from 5.9 per cent to 6 per cent to 6.1 per cent to 6.2 per cent. The averages mean that abstracted from monthly “noise” there has been no let up in the pace at which unemployment is climbing.

The board will be told economic growth figures released since it last met show the annualised pace of growth slipping from 3.6 per cent to 1.6 per cent in the space of six months.

The bank’s previous forecast of rising economic growth published in November is now regarded as out of date and will be revised when new forecasts are issued on Friday.

No lift in business confidence

Board members will be told that neither consumer nor business confidence has lifted since the budget, as would be needed for economic growth to climb back to its long-term trend.

Retail sales are solid but not spectacular, maintained by discounting and weighed down by low wage growth and rising unemployment.

Inflation provides no impediment to cutting rates. The headline rate is now just 1.7 per cent after the collapse in oil prices. Importantly, the bank expects lower oil prices to continue to weigh down on inflation as they feed through into a myriad other prices, something it did not expect late last year when it looked as if the collapse in the oil price would be less severe.

Rather than focusing on the unexpectedly high rate of so-called underlying inflation in the December quarter, the bank is paying special attention to the rate of inflation on so called “non-tradables” – products that are not internationally traded, which is well down on where it was a year ago, reflecting low wage growth and weak consumer demand.

“Tradables” inflation, the rate on products that are internationally traded, is now negative despite the lower dollar.

The bank is minded to cut its cash rate despite doubts about its effectiveness in boosting the economy. It is concerned that another cut may simply reignite the investor housing market and it fears it could fail in its objective of encouraging businesses and consumers to borrow and spend more. While a boost to the economy from the budget would be preferable, it isn’t likely.

Another impediment is the statement the bank released after its December board meeting, saying “the most prudent course is likely to be a period of stability in interest rates”.

The bank believes that enough has changed since December to release it from the commitment. The oil price has collapsed, economic growth has weakened, and the steam has gone out of inflation.

It believes that if it is clear it has to cut rates, there is little point in waiting. And it is also concerned that if it doesn’t cut when it is clear it should, the Australian dollar will head back up after dropping.

Canada has just cut its cash rate to 0.75 per cent. Denmark has just cut its rate to minus 0.5 per cent. The United States is keeping its rate at 0.25 per cent. An Australian cash rate maintained at 2.5 per cent in the face of these moves would give the dollar support the bank would prefer it not to have.

The final decision will up be made by the nine members of the board, including the newly appointed treasury secretary John Fraser, who will meet in Sydney on Tuesday.

If they decide to keep the cash rate at 2.5 per cent in the face of recent developments, they are likely to indicate they intend to cut it soon, in March. But it is more likely that they will cut on Tuesday.

Peter Martin is economics editor of The Age.

Twitter: @1petermartin

The story Weak economy set to spur Reserve Bank cash rate cut on Tuesday first appeared on The Sydney Morning Herald.

[…]

Home loan rates will rise – so be prepared

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Home loan rates will rise – so be prepared

BorrowingDate October 15, 2014 – 5:12PM (1) Read later

Mark Bouris

Going up: Ignoring rising interest rates is a big mistake.

As economists talk about rising interest rates for mortgages – probably around mid-2015 – it’s worth having a plan for repaying a home loan at a higher interest rate than the rate at which you borrowed. The risk here is pretty basic: you may have budgeted for monthly repayments of around $1700, but two years later the repayments are $2000. Now what?

The risk of defaulting on a mortgage, or going into arrears, is more evident when you consider that first-home buyers who bought a property in the past few years have never experienced rising interest rates. The last time the cash rate went up was in November 2010.

Finder.com.au research says that every 0.25 per cent rise on a $300,000 home loan costs an extra $50 a month in repayments; and in the current finder.com.au Reserve Bank survey, their expert panel predicts interest rates will increase 1.5 per cent in the next two to three years.

Whether you’ve recently bought your first home, or you plan to buy property this spring, here are some tips on avoiding the rising interest rate trap:

Understand that if interest rates rise by 1.5 per cent, it will add around $300 a month on a $300,000, 25-year loan, or around $600 per month for a $600,000 loan. Be honest about your budget before you borrow. Lenders build a margin into your serviceability, allowing for rising interest rates. But those buffers are not credible if you have understated your monthly outgoings. The “stress test” on a mortgage comes down to your household cash flow: if you’re looking for a loan, don’t “shop” to see what the mortgage providers will lend you – start with what you can afford. If you already have a variable rate loan, do your own stress test: write an honest household budget, and then – if you’ve borrowed at 5 per cent – run a scenario with rates at 7 per cent. Find where you are vulnerable. Start an emergency fund and have a contingency plan in the event of you or your partner losing their job. Prepare a plan by knowing the costs of closing-out an unaffordable loan and selling early if you have to. Explore renting options. You can preserve your asset by renting-out the property and living in a cheaper rental, but will it work in your favour? Know your refinancing options. Remember, once variable rates are rising, fixed rates are unlikely to be cheaper than variable; and if you refinance to a fixed rate now, you’ll still need a plan for when it reverts to a variable rate loan (at a higher rate). Investigate a 100 per cent offset account – it could allow you to build an equity buffer before the rates rise.

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[…]

Higher cash payout dampens junk loan market

MUMBAI: The junk loan market has almost come to a halt. Banks are unable to offload bad loans after the Reserve

Bank of India

(RBI) changed the rules on loan sale this August.

The regulator has asked asset restructuring companies (ARCs), which deal in junk loans, to pay more cash for stressed assets — a move that has widened the price that ARCs are willing to pay and what banks demand.

Higher cash payout has prompted ARCs to reduce the valuation of the loan. But this has not gone down too well with the commercial banks. The market for bad loans had revived last year with banks selling close to Rs 50,000 crore of loans to ARCs.

In the first five months of the current financial year, industry experts said banks sold Rs 30,000 crore of bad loans for a consideration of Rs 15,000 crore. But since August, even as Rs 25,000 crore of bad loans were on block, only Rs 1,000 crore could be offloaded for a consideration of around Rs 600 crore.

Bankers said the revised formula in pricing of bad loans has had a big impact. In the revised norms, ARCs have to pay at least 15% of consideration amount in cash while the remaining could be in the form of security receipts (SRs). Prior to this, the structure was 5:95 wherein only 5% of the consideration was in cash and balance in SR. Today, it is 15:85. SRs are like debentures maturing after 5-8 years and ARCs declare their net asset values every year for the purpose of mark to market valuation. There are 14 ARCs, of which Arcil, Edelweiss, J M Financial and International ARC are the most active.

Bankers said that RBI revised the norms based on perception that ARCs are bidding too aggressively to acquire stress assets. In order to ensure ARCs have more skin in the game, it directed ARCs to pay more cash to buy distressed loans. Accordingly, ARCs will now have to subscribe to SRs to the extent of 15% of the consideration amount and pay cash to banks. “This means that ARCs will need higher capital and be very choosy about the assets they acquire and price they pay,” said Siby Antony, MD and CEO of Edelweiss ARC.

Public sector banks are keen to offload distress loans as non-performing assets continue to eat into their profits. However, most banks are unwilling to lower reserve price for the sale of loans.

[…]

Banks offer home loan enticements as property market hots up

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Banks offer home loan enticements as property market hots up

BusinessDate September 22, 2014 – 6:34AM (0) Read later

Business reporter

View more articles from Jared Lynch

Email Jared

National Australia Bank will on Monday start giving borrowers $1000 in an unapologetic marketing tactic.

Banks have started to throw cash at customers again in an effort to win business as spring fever hits the property market and house prices soar.

National Australia Bank will on Monday start giving borrowers $1000 in an unapologetic marketing tactic aimed at increasing its share of Australia’s $1.3 trillion mortgage market without cutting interest rates, which are at historic lows.

It comes as Treasurer Joe Hockey said he was “hesitant” for the government to take action to rein in spiralling property prices, with the median Australian home price surging 11 per cent in the past year. Instead, he said it was up to the Reserve Bank and bank regulator, the Australian Prudential Regulatory Authority, to adopt limits on mortgage lending to cool an overheating property market.

“I am naturally hesitant to have government in any way interfere in the market. But, of course, we are in some challenging times when it comes to monetary policy,” Mr Hockey said. “The Reserve Bank needs to be mindful of some of the domestic challenges, and the quite limited massive growth in real estate prices in parts of Australia. I say that because it’s primarily in pockets of Sydney, pockets of Melbourne and, to a lesser degree, in Brisbane.”

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SBI cuts home loan rates 5-15 bps, offers uniform rate

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State Bank of India (SBI), the country’s largest lender, on Tuesday cut its home loan rates by 5-15 basis points to a uniform rate of 10.15%, making its loans the cheapest in the market for all new home loan customers.Irrespective of the quantum, women customers will get home loans at 10.10%. General customers can avail loans at 10.15% irrespective of the loan amount.Existing customers of the bank can avail of the rates after paying a nominal switch fee.One basis point is equivalent to one-hundredth of a percentage.Earlier, male customers could borrow up to Rs 75 lakh at 10.30% and women customers at 10.25%.A senior SBI official said, “We have lifted the slabs and made the rates uniform irrespective of the quantum of the loan. We will charge a nominal fee for existing customers who want to switch to the new schemes.”Experts said with corporate loan demand not reviving, banks are sitting on huge pile of cash which is forcing them cut rates on retail loans. SBI itself has excess cash of Rs 84,000 crore.With the Reserve Bank of India reducing the amount of money that banks are mandated to hold in government bonds in its monetary policy announced on August 5 and hopes corporate recovery dimming with the latest Supreme Court ruling cancelling the coal block allocation, retail loans will continue to be the focus of most banks, experts said.HDFC and ICICI Bank, the two other big players in the home loan market, recently cut rates to attract retail customers. HDFC, the second-largest mortgage lender, cut home loan rates to 10.15-10.65% for new salaried and self-employed professionals for loans up to Rs 75 lakh. The special rates are applicable for loans applied before August 31, and the first disbursement availed on or before September 30. For self-employed non-professional, HDFC charges higher rate of 10.25-10.75% for loans up to Rs 75 lakh.Earlier this month, ICICI Bank announced a single rate of 10.15% for all floating rate home loans up to Rs 5 crore for salaried individuals. For self-employed individuals, floating rate interest 10.15% for loans up to Rs 75 lakh and 10.35% for loans from Rs 75 lakh to Rs 3 crore. Women customers can get 10.10% for loans up to Rs 25 lakh.The new rate of interest is effective from August 14 for loans sanctioned up to August 31. The bank has also launched a 10-year fixed rate home loan product at 10.25%. […]

RBI to conduct frequent term repos for flexible cash management

By Neha Dasgupta and Suvashree Choudhury

MUMBAI (Reuters) – The Reserve Bank of India (RBI) said it would conduct more frequent term repos but retained the overall borrowing limit for lenders, in a bid to make borrowing more flexible without injecting additional liquidity into markets.

Bond markets barely moved on the measures, with the 10-year benchmark 2024 bond and the overnight cash rates broadly steady from levels before the announcement.

By issuing more frequent term repos, the RBI addresses a key complaint by banks, which had said irregular auctions of these cash-for-loan transactions had made it difficult to manage near-term cash needs.

Term repos are loans the RBI extends to banks, for which government bonds act as collateral for a specified period of time.

RBI Governor Raghuram Rajan said earlier this month the central bank would conduct shorter-duration repos, and issue them more frequently, but has ruled out increasing the amount of cash injected.

The central bank strives to ensure a certain level of cash shortage as part of its strategy to curb inflation.

“When you look at the announcements, there has been nothing new announced except for some flexibility on term repos,” said Jayesh Mehta, country treasurer and managing director at Bank of America Merrill Lynch in India.

The RBI said it would conduct 14-day term repo auctions four times during a two-weekly reporting cycle, or every Tuesday and Friday, from Sept. 5.

The central bank will also conduct 3 to 4-day term repo auctions but only from Sept. 5 to 12.

To further manage liquidity conditions starting next month, the RBI said it could also auction overnight variable rate repos, while saying it could also choose to sell part of the government’s cash balances.

(Reporting by Neha Dasgupta and Suvashree Dey Choudhury; Additional reporting by Swati Bhat; Editing by Rafael Nam and Richard Borsuk)

Banking & BudgetingFinanceReserve Bank of IndiaRBI Governor […]

Stagnant puddle

are wasting the Federal Reserve’s largesse. The central bank has swollen the cash balances at financial institutions with quantitative easing, but has not even kept pace with nominal .

The numbers are stark. Since March 2008, the has increased its holdings of Treasury and federally backed mortgage securities from $700 billion to $4 trillion. To pay for these, it mostly printed money. More technically, it provided banks with $2.7 trillion of new reserves, according to St. Louis Fed data.

The banks didn’t use the funds to stimulate the economy. Commercial and industrial loans, the principal driver of sustainable expansion, have increased by about 12 per cent, to $1.7 trillion. Consumer debt has jumped 44 per cent, but accounts for a smaller piece of the pie. The banks could have afforded such slow paces of loan growth, well below the 16 per cent increase in nominal GDP, without any help from .

Rather, the Fed’s money-printing accounts for the extra cash on banks’ balance sheets. Their holdings of cash, according to Fed data, have increased by 779 per cent to $2.8 trillion over the past six years. For banks, that does not mean piles of crisp new bills, but the balances at the Fed do pay a 0.25 per cent interest rate. Meanwhile, banks now lend out just three-quarters of their deposits, compared with more than 100 percent in March 2008.

The central bank’s purchases may not have contributed directly to economic growth. Still, they have been good for bank profits, because the cash at the Fed earns a little interest income without needing any equity backing, according to the Basel technique of calculating capital strength. QE has also helped keep up financial asset prices, as the ample supply of ready cash probably encouraged banks to increase their investments in longer-term government and so-called agency securities by 63 per cent, to $1.8 trillion.

On the other hand, the Fed’s intervention has not been the inflationary disaster feared by monetarist economists. Funds kept in the central bank’s isolation ward do not infect the economy with wage and price increases.

If the Fed wants banks to push money out into the real economy, it should stop paying them for cash deposits. Instead, it could start charging. A negative 0.5 per cent interest rate on reserves might encourage lending. It might also stimulate higher inflation.

[…]

Fitch Affirms KeyCorp Student Loan Trust 2005-A (Group I) Sr Notes; Upgrades Subs; Outlook Stable

NEW YORK–(BUSINESS WIRE)–

Fitch Ratings affirms the senior notes at ‘AAAsf’ and upgrades the subordinate notes to ‘Asf’ from ‘A-sf’ issued by KeyCorp Student Loan Trust 2005-A (Group I). The Rating Outlook remains Stable for both classes.

KEY RATING DRIVERS

High Collateral Quality: The trust collateral consists of 100% Federal Family Education Loan Program (FFELP) loans. The credit quality of the trust collateral is high, in Fitch’s opinion, based on the guarantees provided by the transaction’s eligible guarantors and reinsurance provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest. On March 24, 2014, Fitch affirmed the U.S. sovereign rating at ‘AAA’ and assigned a Stable Outlook.

Sufficient Credit Enhancement: Credit enhancement (CE) is provided by overcollateralization (OC; the excess of trust’s asset balance over bond balance), excess spread, and for the class A notes, subordination provided by the class B notes. As of February 2014, senior and total parity are 105.96% and 100.38% respectively, inclusive of the Reserve Account. The trust can release excess cash as long as a 100.00% total parity is maintained, exclusive of the Reserve Account.

Adequate Liquidity Support: Liquidity support is provided by a Reserve Account, currently funded to its floor of $438,781.

Acceptable Servicing Capabilities: KeyBank N.A. is the Master Servicer, with the Pennsylvania Higher Education Assistance Agency (PHEAA) and Great Lakes Educational Loan Services, Inc. (Great Lakes) acting as Sub-Servicers. In Fitch’s opinion, KeyBank N.A., PHEAA, and Great Lakes are acceptable servicers of FFELP student loans.

RATING SENSITIVITIES

Since the FFELP student loan ABS relies on the U.S. government to reimburse defaults, ‘AAAsf’ FFELP ABS ratings will likely move in tandem with the ‘AAA’ U.S. sovereign rating. Aside from the U.S. sovereign rating, defaults and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch’s published stresses could result in future downgrades. Likewise, a buildup of CE driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.

Fitch has taken the following rating actions:

KeyCorp Student Loan Trust 2005-A (Group I):

–Class A-2 affirmed at ‘AAAsf’; Outlook Stable;

–Class B upgraded to ‘Asf’ from ‘A-sf’; Outlook Stable.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–‘Global Structured Finance Rating Criteria’ (May 24, 2013);

–‘Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria’ (May 17, 2013).

Applicable Criteria and Related Research:

Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria – Effective Apr. 7, 2011 to Apr. 3, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=616766

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826992

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Security Upgrades & DowngradesFinanceFitch RatingsFFELPKeyCorp Contact:

Fitch Ratings

Primary Analyst

Harry Kohl

Associate Director

+1-212-908-0837

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Committee Chairperson

Steven Stubbs

Senior Director

+1-212-908-0676

or

Media Relations

Alyssa Castelli, +1 212-908-0540

alyssa.castelli@fitchratings.com […]

Rising mix and match mortgages

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Increasingly savvy home-owners splitting mortgages into fixed and floating loans as rates start to rise, banks say.

Until recently, the most popular rate for those wanting to fix was the one-year rate. Photo / Greg Bowker

More mortgage holders are opting to split their home loans into fixed and floating rate portions after the recent cash rate increase, say banks.

The Reserve Bank increased the official cash rate from 2.5 per cent to 2.75 per cent this month after years of holding it at a record low, prompting banks to increase their floating and short-term home loan rates.

Westpac head of retail banking Ian Blair said there had been a trend towards people fixing their mortgage rates in the last 12 months and the activity had increased in the last month or so.

“People began thinking about it more when they came back from their post-Christmas holiday.”

Until recently, the most popular rate for those wanting to fix was the one-year rate but that had switched in the last week and data showed one, two and three-year fixed rates were now equally popular at the bank.

“A lot was going into the one-year fixed rate but now we are seeing customers spreading it.”

Blair said a trend that had emerged since the last time rates rose was a decision to mix and match the floating and fixed rates.

He believed that was being driven by better products and people having a better degree of financial literacy than what they might have in the past.

It’s a change that has also been noted at rival bank ASB. Shaun Drylie, general manager of products and strategy at ASB said people were opting for more partial fixed and floating splits.

“People are starting to box the field rather than putting it all on the nose.”

Banks have seen their loan books heavily weighted towards floating mortgages in recent years, bucking the past trend of most lenders being on fixed loans.

In the past, around 70 to 80 per cent of bank mortgages were on fixed rates.

Blair said he had little doubt the market would return to where it was in the past with high levels of fixed-rate mortgages.

“We are not there yet … but I think we will get back to levels we were at in the late 2000s.”

That posed problems for the Reserve Bank as changes to the official cash rate typically took around 18 months to have an impact.

Blair said it was not for him to say if the Reserve Bank’s policy would be effective, but fixed rates had already started moving up.

“Six months ago, people were able to get a one-year fixed rate in the late fours.

“Even if they come out of that fixed rate into another fixed rate there will be a jump.”

Blair said very few people were choosing to fix on long-term rates a year ago.

Mark Brown, a fixed-interest fund manager at Harbour Asset Management, believes it will take at least six months before the full impact of the cash rate increase will be felt by mortgage holders.

Brown said that timeframe was based on a judgment of how people were feeling going into the increase.

“The economy is in such a good shape, people are confident about their jobs,” he said. “I’m not sure it will change things a whole lot [straight away].”

Cash used to lure custom

Banks have ditched free electronic devices in favour of cash in a bid to attract new customers.

Ian Blair, head of retail banking at Westpac, said cashback offers had become popular across the banks since competition heated up after the ANZ/National bank merger.

The merger in 2012 sparked an advertising drive from ANZ’s competitors, with offers of free TVs, mobile phones and tablets.

But cash appears to now be king with three of the major banks offering deals. Blair said ultimately people wanted to decide for themselves what the money was spent on.

Blair said mortgage holders had also got more savvy demanding better rates, features and flexibility.

“In years gone by home loans were quite homogenous – people didn’t question what the rate was. Now there is a lot more discussion around the rate, features and flexibility.”

NZ Herald

[…]

Home loan affordability worsens

Home loan affordability worsened across most of New Zealand in February as median prices rose and interest rates started rising, the Roost Home Loan Affordability reports show.

A 3.2% rise in the national median house price in February from January drove most of the deterioration. The Reserve Bank’s decision to raise the Official Cash Rate by 0.25% on March 13 is expected to further worsen affordability this month.

Banks are passing on the increase to floating mortgage borrowers and averaged fixed mortgage rates have risen 0.6% in the last seven months in anticipation of the Reserve Bank’s tightening. The Reserve Bank’s imposition of a speed limit on low deposit mortgages in October has also cooled activity and prices in the housing market in recent months.

But banks remain keen to lend to those with deposits of greater than 20% and brokers report banks returning to the market for those with deposits of less than 20% as the dust settles after the high Loan to Value Ratio (LVR) speed limit’s introduction five months ago.

“Some banks have returned to offering deals to those with higher LVRs and a broker can help borrowers navigate between the banks for the best deal,” said Roost Home Loans spokeswoman Colleen Dennehy.

The Roost Home Loan Affordability reports show national affordability worsened to 58.7% in February from 57.0% in January after the national median house price rose to NZ$415,000 from NZ$402,000. Average floating mortgage rates were unchanged in February from January, but up a couple of basis points from a year ago. They are expected to rise around 25 basis points in March.

The Roost Home Loan Affordability reports for February showed affordability for regular home buyers worsened in 17 cities, including all of Auckland, Wellington and Hutt Valley, Christchurch and Queenstown. Affordability improved in 7 cities, including Nelson, Dunedin and Tauranga because of lower median house prices.

It remained toughest for first home buyers on the North Shore in Auckland. It took 103.0% of a single median after tax income to afford a first quartile priced house on the North Shore in February, up from 101.6% in January.

Fixed mortgage rates, which more than 50% of new borrowers now use, have risen around 25 basis points since mid December and are rising again in March. The Reserve Bank is forecasting it will raise rates by 2.5% or 250 basis points by early 2017.

Housing affordability has become a major economic and political issue over the last year. The Reserve Bank and Government agreed on a toolkit of ‘macro-prudential’ controls in May that would see the central bank impose limits growth in high LVR mortgages and force banks to hold more capital. Central and local governments are also moving to address housing supply shortages. The Reserve Bank’s speed limit was applied on October 1 and it said in its March quarter Monetary Policy Statement it appeared to have worked to reduce house price inflation by around 2.5 percentage points.

For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was an worsening in affordability in 20 of the 24 regions covered.

It took 48.1% of a single first home buyer’s income to afford a first quartile priced house nationally, up from 47.3% a month earlier. The most affordable city for first home buyers was Wanganui, where it took 21.8% of a young person’s disposable income to afford a first quartile home. The least affordable was the North Shore of Auckland at 103%.

Any level over 40% is considered unaffordable, whereas any level closer to 30% has coincided with increased buyer demand in the past.

For working households, the situation is similar, although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 38.4% of their after tax pay in February to service the mortgage on a median priced house. This is up from 37.3% the previous month.

On this basis, most smaller New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group. This household is assumed to have one 5 year old child. For first-home buying households in the 25-29 age group (which are assumed to have no children), affordability nationally worsened to 23.2% of after tax income in households with two incomes required to service the debt, up from 22.8% the previous month. The lower quartile house price rose to NZ$280,000 from NZ$275,000 the previous month.

Any level over 30% is considered unaffordable in the longer term for such a household, while any level closer to 20% is seen as attractive and coinciding with strong demand.

First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.

Roost Home loan affordability for typical buyers

General/New Zealand Report: http://www.interest.co.nz/property/home-loan-affordability

[…]