Fixed vs Variable… the vast majority prefer to move with the market.

Over the past few months there has been a great deal of speculation about interest rates and whether we are likely to see another rate rise from the Reserve Bank any time soon.  Prior to the most recent RBA meeting, most economists were tipping an August rate rise.  The first Tuesday of August is when the RBA would have the June quarter CPI data to deliberate upon and, so the train of thought went, higher inflation would lead to a further rate hike.

Well the economic news flowing through has generally been anything buy buoyant.  Growth in retail spending has been well below average, the housing market is depressed, the mining boom hasn’t translated to a thriving economy beyond the resources sector and consumers are saving at a rarely seen pace.

Based on their latest statement, the RBA appears to be much more inclined to look through any rises in inflation in order to let consumers regroup and hopefully spark some life back into the economy outside of the resources sector.

The vast majority of borrowers seem to agree, with just 5.9% of new housing finance commitments being on a fixed basis.  Cast your mind back to late 2007 / early 2008, when interest rates were tightening and the consumer mind set was quite positive,  the proportion of fixed rate loans were up close to a quarter of all commitments.

That trend towards fixed rate loans is clearly visible in the above graph.  The majority would have been on three year terms and these terms are now rolling through their expiry period.

The fixed loan ‘echo’ can now be seen as a clear upswing in the number of home loans being re-financed.  On a quarterly basis, refinanced loan volumes for owner occupiers are up 16.2% over the year to May compared with a 5.2% decline in new home loan originations.

The growth in fixed rate loans peaked between November 2007 and March 2008 when the average three year fixed term mortgage rate was as high as 8.95% and inflation was well outside of the RBA’s target range resulting in expectations of further interest rate increases.  With the major banks now becoming ultra competitive to attract re-fi customers, advertised bank variable rates are now around the low seven percents – so the attraction to re-finance from a higher rate is quite compelling.  Throw in the fact that exit fees are generally covered and the option makes even more sense.

Other monthly highlights from the recently released housing finance data were:

  • 4.4% increase the number of owner occupier commitments
  • 6.2% increase in the number of commitments for dwelling construction
  • 4.6% increase in the number of commitments for new dwellings
  • 4.1% increase in the number of commitments for established dwellings
  • 17.2% increase in the number of first time buyer commitments – first home buyers still comprise a lower than average proportion of the owner occupier market at just 15.4% of all housing finance commitments
  • 4.4% increase in the value of investor loans

At face value, the rises outlined above look like a positive turnaround in lending activity, however the improvements are off a low base and we will need to see several consecutive months of improving data before we consider this a sign of a recovering housing market.

In the context of other indicators which are also levelling (transactions volumes have shown some improvement since Jan/Feb, the rate of value decline has slowed since the start of the year, the number of homes available for sale has levelled and the number of new listings being added to the market has tapered).   These are all good signs that housing market conditions may be stabilising at the macro level.  In balance, consumer confidence has fallen markedly over the last year; until consumers get back into a mindset more geared towards spending rather than saving we can’t expect any recovery in the housing sector.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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2 Responses to Fixed vs Variable… the vast majority prefer to move with the market.

  1. Commercial Property Botany July 20, 2011 at 9:26 am #

    We can still not say that its stable already, monitoring and looking how the data dance as days go by is a good involvement in particular with the rates.

    Peter

Trackbacks/Pingbacks

  1. Consumer Confidence Slows Real Estate Market | Brock Harcourts | South Australia Real Estate - August 3, 2011

    […] “Growth in retail spending has been well below average, the housing market is depressed and the mining boom hasn’t translated to a thriving economy beyond the resources sector and consumers are saving at a rarely seen pace”, says RP Data. […]

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