Thursday, February 11, 2010

Who expects at least one more rate hike? 97% of us. Who expects four? 60% of us.

Westpac's consumer survey:

How much pain an mortgage holders bear? Quite a lot it seems. An extraordinary 93 per cent of householders expect interest rates to climb this year; a surprising 60 per cent expect them to climb four more times.

"I was flabbergasted," says Westpac economist Bill Evans who tacked on a question about interest rate expectations to the latest Melbourne Institute consumer confidence survey.

Four more rate rises of 0.25 per cent would take the Reserve Bank cash rate to 4.74 per cent and take standard variable mortgage rates to between 7.49 and 7.76 per cent. It would add an extra $190 to the cost of monthly cost servicing a $300,000 loan, and an extra $250 to the monthly cost of servicing a $400,000 loan.

Yet the Westpac survey finds we are still overwhelmingly confident... Although the consumer confidence index slipped 2.6 per cent in February, twice as many of us expect our finances to improve in the year ahead as expect them to get worse. More than half of us believe that now is the right time to buy a major household item. Only 22 per cent of us believe it is not.

"It's jobs," says Mr Evans. "We feel we'll keep our jobs and the outlook for getting jobs is improving." Australia's unemployment rate fell from a peak of 5.8 per cent in June to 5.5 per cent in December. The January update out today (THURS) is expected to show it remaining well below that peak.

"There is something that is worrying us - the share market has come off 8 per cent in the past month, and that explains the dip in confidence. But at 117 points when a neutral reading is 100 the index is well into positive territory."

"Even if mortgage rates increase into the sevens they will still be below the nines we remember before the crisis."

Loans for first home buyers slipped 10 per cent in December after sliding 20 per cent in November as the government's First Home Owner boost came to an end.

"It's an exodus of first home buyers," said ANZ economist Alex Joiner. "We expected it, and the heat will continue to come out of the property market for some months."

The grant for first buyers of new homes fell from $21,000 to $14,000 in October and to $7,000 in January.

Over the life of the boost the average size of a first home buyer loan climbed almost 10 per cent from $264,500 to $290,100.

Borrowing for upgraders also fell in December, slipping 2 per cent, suggesting the three rate rises at the end of last year are having an effect.

Loan approvals for the purchase of existing homes fell 7 per cent.

The one bright spot in the figures was loans for investors which climbed a further 2 per cent to be up 17 per cent on the year.

"With equity markets jittery we expect continued interest and growth in property investment," said Dr Joiner. "It is coming not only from local investors but now increasingly from investors overseas."

Non-bank lenders are gaining on banks with approvals by banks down 6.6 per cent in December and approvals by non-banks up 3.5 per cent. But banks remain dominant with 87 per cent of the market, up from less than 80 per cent before the economic crisis took hold.

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