This is the first RBA update for this year and as anticipated, the Reserve Bank decided to leave interest rates unchanged this month.

While this respite is welcomed, it is generally accepted that we should anticipate interest rates to increase over the oncoming year but as always there is conjecture as to when interest rates will rise and by how much. Realistically, all prudent borrowers should allow for at least two interest rate rises from the Reserve Bank this year.

Additionally, the Reserve bank will need to take in to account the financial impact to the Australian economy from the recent devastation Queensland has suffered, the consequent increase in inflation and continuing upward pressure on wages from low unemployment. 
 
It will also be interesting to see if the banks make the unpopular decision to again increase their interest rates this year independent of any decisions by the Reserve Bank. Currently, interest rates paid by the banks on wholesale funds borrowed from overseas to lend for home loans in Australia are continuing to progressively increase from last year’s levels. Lenders will need to decide whether they pass on these increased costs to borrowers or absorb some or all of the increased costs to remain competitive. 
 
On a positive note for borrowers, these increases in interest rates are likely to be at least partly offset as competition from lenders continues to intensify and lending policies continue to become progressively more accommodating since the bank’s tightened their lending criteria in the wake of the Global Financial crisis.
 
Importantly, the following positive trends are currently being evidenced in the market.

      - More lenders are again allowing investors to borrow 95% of valuation for their investment loan acquisitions.

      - An increase in interest rate discounts offered to brokers by negotiation from lenders across the market.

      - Second tier lenders are progressively gaining market share from the majors with their competitive and flexible loan
        offers.

The property market in Melbourne is fundamentally in good shape and is expected to continue to record positive capital growth this year, although at a more measured pace than recent years.

In regards to Queensland, there will be some side effects such as:

      - Rents will grow as displaced home owner rent during transition 

      - Re-construction will begin and create a huge demand for tradesmen

      - The Coal Mining Industry will stall for weeks as they safeguard mines that have been flooded 

      - Tourism markets will struggle in the short term
 
      - Supply of new homes will slow as the focus will be on rebuilding

      - Insurance premiums will increase as flood probabilities in areas will change.

Channel 9's Today Show discussed the value of QLD Real Estate after the floods with Dan Molloy from Real Estate Institute QLD, who touches on many of the issues mentioned above. Click here to view this interview. 

Other capital cities and regional areas will show many differing patterns from solid to weak, so ensure you do your research.

Australia continues to record strong population growth and although it would appear that overseas migration to Australia has peaked, total population growth remains well above average. Australia’s rate of population growth of 1.8 per cent per annum is among the highest of any OECD nation.

It seems a forgone conclusion that population growth will continue to create a high level of demand for Australian housing and the undersupply of housing is not likely to be corrected any time soon. Australia's economy is projected to grow by more than 3 per cent during 2011.

I read an interesting report about how Australia compares in the global economy. Click here to read this article.

Markets that are solid may present the astute purchaser or investor with the opportunity to purchase at fair market value now that the progressive increase in interest rate levels undertaken by the Reserve Bank last year has returned the market to more realistic, sustainable levels.

The less frantic New Year period also presents a good opportunity to set your goals, review your requirements and ensure you have your house in order not only for your current finance arrangements but also for your future plans.

As always, I am only a call or email away if you would like to have a chat.

Until next month, keep well.


Best Regards

Gregg Mountford
Negotiator Finance