Welcome to this month’s Dominion Finance monthly newsletter as we move into a new age of the Reserve Bank, with a new Governor and the RBA board now only meeting eight times a year instead of eleven. This will mean that this is the last monthly newsletter as we will move to the RBA’s new schedule.
As always banks and economists are split on whether there was going to be another rate rise this month. Inflation is down to levels the RBA are after, however unemployment is lower than they would like. Some people need to lose their job for the greater good of us all apparently.
The RBA has acknowledged that inflation is moderating, and the burden of mortgage interest payments reached a record high in May. The latest data from the Australian Bureau of Statistics revealed a decline in retail sales, indicating ongoing pressure on consumer spending. Though this is affecting the younger people in the community more than the older generations who are still happily spending.
What will be interesting in the coming months will be the number of houses and units hitting the market. Normally, of course, the real estate market is busy in spring and summer when the weather is warmer and gardens look their best, but there is some thought that with increasing interest rates more homeowners may no longer be able to afford their mortgage or investment properties and coast houses are putting too much pressure on the family budget.
The repayments for a $600,000 loan per month at 2.25% are $2293, whereas the monthly repayment for the same loan at 5.85% is $3539, a difference of $1246 per month or almost $15000 per year after tax. That is a lot of extra cash that must be found each year.
As we have talked about previously, lenders assess potential clients at their serviceability rate which is usually 3% higher than the standard variable rate. This ensures borrowers will have capacity to maintain paying their home loan in the event of rate rise. Though what we often encounter is borrowers will purchase or lease a new car and make other significant purchases within the first twelve months of obtaining their home loan.
The issue with people selling their homes and joining the rental market, and investors selling their investment properties is that this puts more pressure on the rising rents, which is one of the contributing factors to the increasing inflation rate.
Recent economic reports from the United States show that their economy is not going into recession, which is great news for us and the rest of the world. It’s the old saying, “when the US sneezes the rest of the world catches a cold”.
Hopefully the impacts of the war in Ukraine, Covid-19, and related issues are abating and the economy will settle down in the near future.
Until next month, enjoy the last month of winter
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.10 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.00 per cent.
Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.
The information provided in this newsletter is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial advice. Before acting on any information in this newsletter, you should consider its appropriateness in relation to your personal situation.
