Shutdown could harm US economy

Financial markets are taking the partial shutdown of the US government in their stride in hope of a swift political breakthrough.

Australian shares ended Wednesday's trading session 0.2 per cent higher, while the Australian dollar was modestly lower at around 93.5 US cents.

US Congress failed to reach a compromise on its budget ahead of the US financial year-end on September 30, prompting the shut down that sent about 800,000 public servants home without pay and left only essential government services open.

Bank of America Merrill Lynch economist Saul Eslake said, if the shutdown lasts a few days, there should be only a minor impact on the world's largest economy.

Longer than that and the consequences become more significant. If it extends to a couple of weeks it could reduce US growth in the December quarter by 0.5 per cent.

Any longer could wipe out all growth in the quarter.

The bigger concern will be if the US Congress doesn't agree to lift its debt ceiling by the middle of this month, risking default for the first time.

'If Congress isn't able to resolve this impasse before the US hits the debt ceiling, one of the possible consequences could be a fall in the US dollar and further unwelcome (upward) pressure on the Australian dollar,' Mr Eslake told ABC radio.

'The Reserve Bank clearly wants a lower exchange rate and is quite frustrated about its inability to fulfil that.'

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.5 per cent at its monthly board meeting on Tuesday.

But RBA governor Glenn Stevens said a lower currency would assist in rebalancing growth in the economy.

Economists believe that after slashing the cash rate to an all-time low, the central bank will be reluctant to cut much further.

National Australia Bank has pushed back its expectation of a further rate reduction to February 2014, rather than next month.

But NAB still expects economic growth to slow to around two per cent by the end of the year, and well below trend at around three per cent.

This will put pressure on employment and with the new federal government shedding public servants the jobless rate could hit 6.75 per cent in the second half of 2014.

The rate was 5.8 per cent in August.

'With the big picture still unmoved, we continue to see a cut coming but right now there is no rush,' NAB group chief economist Alan Oster said in a note to clients.

The improvement seen in confidence, retail spending, manufacturing and house prices since the August interest rate cut failed to extend into August building approvals, which fell by a larger than expected 4.7 per cent.

Housing Industry Association chief economist Harley Dale said, while approvals are still trending higher, the recovery has been too slow and too narrow geographically.

'This has been the case for some time and the situation simply isn't changing,' Dr Dale said in a statement.

source: skynews.com.au

Paying off home loans faster

It seems that Australian homebuyers are heeding the advice that has been handed out by banks and financial advisors. That is, to keep paying the same repayment amounts even if interest rates drop.

The Reserve Bank of Australia (RBA) still has concerns over the amount of household debt in Australia; there is some surprising data about the rate of home loan repayments.

Peter Mozo, Data Head at Mozo said, “Data from the Australian Bureau of Statistics found the refinancing slowed during 2009 but, it has been building back towards a peak.

So, even as the value of property is falling or, stagnating, debt remains high for those who bought into the market when housing was more expensive. Yet, recent research from the RBA has found that more and more borrowers are paying more than the minimum repayments required to their home loans.



Whether this is due to economic uncertainty and job insecurities isn’t known. But, it is fair to assume that the old saying ‘make hay while the sun shines’ is making sense for those who do not have job security. These people are continuing to make payments that were established when interest rates were higher, rather the decreasing the minimum repayments and pocketing the rest.

If a bonus is earned, it is deposited into the home loan rather than spending it, using it to fund renovations or, investing in something else. This has meant that up to 30 per cent of those ahead in their repayments have a buffer of two years. This means, that if things were to take a turn for the worse financially, the household would have up to two years to recover before that surplus was eroded and further repayments would need to be made.

“Over the last four years, people who have had their mortgage for 10 or more years tend to have more equity in their home loans than previously,” said Steve Jovcevski, Home Loan Expert at Mozo.
Home ownership remains key of financial success

Further research from Nielsen found that 68 per cent of home borrowers stated their financial goal was to pay off their home.

Some industry experts are concerned that sinking all available ‘extra’ cash into a home loan does not promote a balance financial plan, many Australians view outright home ownership to be a critical measure of their financial success.

In the same Nielsen survey, on 13 per cent of home borrowers said their top goal was to save for retirement. This means, that adding additional cash into superannuation is taking a back seat over paying off the family home.

There is concern that this will create a generation that is asset rich but, cash poor when it comes to retiring age.

This is despite a home not being able to generate any income in retirement apart from when it is sold, meaning future retirees could find themselves debt-free but cash poor.

Overall, this trend to be ahead in home loan repayments is further indication that Australia was developing a culture towards saving, rather than borrowing. The Deputy Governor of the RBA, Philip Lowe said, “The rate of savings in Australia has increased and is back to the level it was in mid 1980s.”
Refinancing to pay off a home loan sooner

There has been a trend in the refinancing of home loans in the wake of the rate deceases. In the mid 2000s, borrowers who had over extended often sought refinancing to lower interest rates in order to meet repayments.

Now, borrowers are refinancing to access the lower interest rates, but are making repayments over and above the minimum. If the household had budgeted for a higher repayment when interest rates are high, they are continuing to make repayments at that rate.

source:  bigpondmoney.com.au