Essential Economic Update

Financial Markets Update

The debt market continues to improve with competition certainly present between the banks when good transactions are presented. This marks a distinct difference in appetite from lenders in 2008/9 and first quarter 2010. In addition new lenders are re-emerging reducing the stranglehold that the big 4 have had on the market over the past two years.

Residential Property

With interest rates expected to rise, researchers anticipate that house price growth will (temporarily) slow to low single digits in 2011. Nonetheless, in the absence of a major economic downturn, a critical shortage of housing may see house prices and rents grind ever higher and housing affordability and availability will become major social and political issues in the decade ahead.

In saying that, CBA's recent road show to global banks (the majority of the Big 4’s money comes from overseas) highlighted their concern with the Australian residential property market and household debt level (mirroring some local buyers concerns). The view expounded by CBA to allay these fears were:

• Shortage of supply. (Supply of housing has remained at the same level since 1986!);
• The RBA conducted a study indicating that the households with the most debt have the most income and can therefore afford to repay these liabilities unlike the US example; and
• Unemployment is relatively low with strong signals it will break the 5% barrier shortly.

However, this global presentation has obviously not calmed nerves with the recent news release that Fitch rating agency, advised that it’s probing the potential impact of a spike in mortgage defaults or drop in house prices on the portfolio of Australian residential mortgage-backed securities and the various banks that its agency rates. They advised that "Over the last few months, Fitch has received numerous enquiries as to the sustainability of Australian residential property prices and the possible impacts of a correction,” said Ben McCarthy, managing director for Australia.

An estimated 60 per cent of Australian banks’ loan books is secured by residential property, leading pundits and international investors to question the sustainability of house prices.

The market anticipates that this report will have a negative effect on the banks and a likely outcome will be that even if the property 'bubble' does not burst, it may likely be viewed as a bubble by the overseas market and they will therefore price their margins at a higher rate to reflect this risk.

In saying that, last months RBA statement advised that although there had been ‘‘some upward drift’’ in the rate of arrears on housing loans, it remained ‘‘fairly low overall’’. The financial position of the housing and business sectors remained sound, the RBA said, with loan impairments and losses mainly concentrated in the business loan portfolio, in particular for commercial property loans. Households were not having trouble servicing their debts, however. ‘‘Despite being more indebted, households’ debt-servicing ability is currently strong, supported by ongoing income growth,’’ the RBA said.

Commercial Property

Office fundamentals are set to improve from a relatively favourable starting position. With the market re-calibrated to a risk averse post-GFC environment, it is expected that there will be healthy returns as confidence restores. For the retail sector, despite fundamentals suggesting moderate under-valuation, investor conservatism and interest rate headwinds will see a lingering ‘fear discount’ on asset prices for a little while yet.

Total commercial real estate investment transactions rose almost 30 percent in Q1, 2010 compared to the previous quarter. This was the strongest quarterly result in over three years. Retail assets continue to attract the interest of investors as better-than-forecast economic conditions continue to provide support to retail spending. JLL figures show that national retail investment sales for the first quarter of 2010 equated to about 90 percent of the total retail property sales volume for 2009.

On average, yields appear to have stabilised for prime assets, with a number of June 2010 valuations showing capitalisation rate compression for well-leased prime assets.

One should take the above factors into account when considering whether to fix your existing current or future rates and consider applying for or increasing your credit line facilities in the event that bank lending criteria or bank appetite to lend becomes stagnant or diminished.

If you wish to discuss the above further, please do not hesitate to contact Dean and please note the new website and company details below.


Charter Finance Institute
t: 02 9363 2747
m: 0414 999 402
f: 02 9327 7880
e: dean@charterfinance.com.au
w: www.charterfinance.com.au
a: Suite 3 / 2A Mona Road, Darling Point NSW 2027


Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.