WA has experienced a drop in new home sales during May 2010 as growing interest rates continue to dampen demand for housing.

According to the HIA. new homes sales fell a seasonally adjusted 6.4 per cent to 8,024 units in May following a 6.2 per cent rise the month before.

This was the lowest number of new homes sales since February 2010.

Private house sales fell 5.9 per cent in the month while sales of multi-units slid 11.6 per cent.

HIA chief economist Harley Dale said new home sales had flattened recently as interest rate rises started to crimp demand.

The Reserve Bank of Australia (RBA) lifted the cash interest rate by a quarter of a percentage point to 4.5 per cent in May, its sixth increase in seven months.

“There is no sustained upward momentum in new home sales in 2010 because higher interest rates and concerns over the threat of further rate hikes are dampening demand,” Dr Dale said in a statement.

Dr Dale said the rebound in the building of new residences was set to stall by the middle of 2011.

NSW experienced the most significant increase in sales of detached new homes in May, up 13.6 per cent, while South Australia rose 2.1 per cent.

Queensland had the largest drop in sales, down 12.3 per cent, Western Australia was down 10.7 per cent and Victoria fell 8.5 per cent.

ANZ has put out a statement that it is not intending to cut mortgage broker commissions despite recent reports in the media.

According to the spokesperson from ANZ bank,  newspaper report shave taken bank representative comments out of context, referring to May 2008, when all of the majors reduced broker commissions.

ANZ has confirmed its commitment to the broker channel stressing that it would engage the broker channel before making any changes to commissions, however the bank did stop short of giving The Adviser a concrete guarantee that it would not change broker commissions within the next 12 months.

The spokesperson for ANZ said the bank was constantly reviewing the economics of the mortgage broking industry, especially following the impact of the global financial crisis.

“If we were to propose any changes to broker commissions in the future we would talk directly to brokers and not go through the media,” the spokesperson said in reference to the report in The Australian.

ANZ has written significant mortgage business via the broker channel over the last 12 months. The bank was only narrowly beaten by CBA as the preferred lender in The Adviser’s Third Party Banking Report - Major Lenders.

Connective principal Murray Lees told The Adviser that the industry was unlikely to see any of the majors cut commissions, as current commission levels are easily sustainable for the longer term.

Banks believe that consumers prefer a relationship with a mortgage broker as compared to going directly to the bank.   They do not wish to damage the mortgage broker channel in any way.

Another Aussie lender has come out with interest rate reductions on their home loans.  This further intensified the already existing competition in the Australian Mortgage industry.

Mortgage manager National Finance Club announced yesterday that it would cut up to 30 basis points off some of its fixed rate products.

Starting this week, NFC will cut  0.21 per cent off its two year fixed rate and 0.3 per cent off its three year fixed rate – taking them to 7.2 per cent and 7.46 per cent respectively.

The company’s managing director Andrew Clouston said the rate reductions on the company’s fixed rate home loans reflected NFCs  commitment to offer the best possible interest rates, combined with high levels of service for mortgage brokers.

“For borrowers looking for more certainty in their cashflow, fixing a portion of their mortgage and leaving the remainder on our standard variable rate of 6.96 per cent can provide some protection against further interest rate rises,” Mr Clouston said.

“In particular, these competitive fixed rates offer greater flexibility for investors to tailor a loan to lock in repayments required and better suit their appetite for interest rate risk.”

Over the last two months, all four majors have  cut the interest rates on their fixed rate home loans, with ANZ the first major bank to introduce rate cuts back in May 2010.

The body which groups world central banks has expressed a concern that world banks which have a lot exposure to commercial property transactions may be facing losses in the future.

“Despite the improvement in banks’ balance sheets, several factors raise doubts about the sustainability of bank profits,” said the Bank for International Settlements (BIS) in its annual report.

Excessive exposure to commercial real estate may cost banks dearly as this sector is not doing very well in many parts of the world.

Commercial property values in the United States have dropped further by another third from their peak and rates of overdue loan payments have risen to more than eight per cent, said the Basel-based bank.

In European countries like Ireland and Britain, commercial property prices have also lost almost half of their original values .

“Losses on European bank balance sheets are expected to mount over the next few years,” it said, noting that some banks have in fact been rolling over loans rather than inducing foreclosures, a move that is delaying recognition of losses.

Beyond losses in commercial properties, some banks are also highly exposed to sovereign debt risks, said the BIS.

Refinancing needs of governments may be difficult to meet in the short future.

Many international banks including Citigroup, UBS and Royal Bank of Scotland suffered from massive writedowns and losses during the financial crisis as as result of their exposure to sub-prime home loans.

According to BIS,  losses or writedowns reported by banks reached 1.306 trillion dollars by April 2010.

But new capital injected – mostly by governments through special rescue funds – almost matched these losses, reaching $US1.236 trillion ($1.41 trillion).

The central bank body noted that allowing greater flexibility of exchange rates could be “particularly useful in discouraging short-term capital inflows associated with carry trade dynamics.”

While the BIS did not specify countries in its report, advanced economies in Europe and North America have been calling on China in particular to allow the renminbi to float more freely.

Exports could become more expensive with an appreciation of the local currency, making their industries less competitive.

“Nevertheless, currency appreciation is usually an important mechanism to reorient demand towards domestic sources,” said the BIS.

On June 22, China took its first step towards honouring a vow to let its currency float more freely, allowing the yuan to strengthen to 6.7968 against the dollar.

That was the strongest appreciation of the yuan since policymakers freed the renminbi from an 11-year-old peg in July 2005 and moved to a managed floating exchange rate.

The BIS groups more than 54 central banks, including China’s.

Based on all indicators coming  from the Australian Property Market – demand is beginning to slow and clearance rates are nowhere near where they were a couple of months back.

According to RP Data’s Rismark Home Value Index, residential market activity has slowed significantly in the last few months.

In April, house values in the capital cities increased by just 0.1 per cent, while unit values increased by 0.5 per cent.

Whereas  in March 2010, house values had climbed 1.3 per cent and units climbed 1.4 per cent.

There are other indicators excluding property prices to suggest that demand is down.

Home Loan Numbers is one such indicator. Mortgage numbers continue to fall, as does consumer sentiment, interest rates are 150 basis points higher than their recent lows, dwelling approvals fell by 14.8 per cent during April and auction clearance rates continue to trend down.

Given the market results it is likely that the rate of property value growth during May 2010 will  be soft and this trend is likely to continue until at least the time of the spring selling season when market activity historically begins to rebound.

Certainly vendor expectation error (discounting) and time on market will increase further due to the slower market conditions.

The National Australia Bank chief financial officer Mark Joiner believes that the financial crisis had removed effective competition in home lending within Australia.  This has contributed to the Commonwealth Bank and Westpac  windfall gains arising from the transition to a new global accord on bank capital.

Mr Joiner said adoption of the Basel II accord in 2008 had doubled the industry’s average return on equity (ROE) for a home loan from about 22 per cent to a stunning 45 per cent.

The sudden windfall arose because Basel II enabled banks to hold less capital against more secure home lending due to lower historical loss rates.

“I find the national sport of bank bashing a bit ironic because it tends to focus on fees and the passing on of higher funding costs, when the real windfall relates to neither of those issues,” Mr Joiner told The Australian.

“There are super profits in mortgage lending because the banks, with the transition to Basel II, took more than half the capital off the table and the margins never adjusted down to reflect that.”

But he predicted home lending ROEs would revert to past levels, helped by planned federal government reforms to cut expensive mortgage exit fees, making it easier for clients to switch banks.

NAB’s critics will say Mr Joiner’s blunt commentary directly serves the bank’s interests, and invites government intervention to reinvigorate competition.

But NAB’s numbers man further raised the stakes, endorsing BHP Billiton chairman (and former NAB chief executive) Don Argus’s criticism in March that the nation’s top banks had become giant building societies.

“If you get a 45 per cent ROE in home lending, why would you do anything else, particularly when the industry is looking at a period of constrained balance sheet growth?” Mr Joiner said.

“Australia should have a balanced economy; not a big skew to mortgage or business lending.”

NAB had the opportunity to bulk up its flagging retail business by securing St George or Bankwest. But Mr Joiner said the bank could not vie for St George because its takeover currency, its own scrip, was sagging, due to a large conduit exposure.

On Bankwest, he said the Perth-based lender’s then British parent, HBOS, wanted immediate repayment of $15 billion to $20bn in wholesale debt.

Meanwhile, NAB’s underweight mortgage lending business, half of which comes from business bank referrals, became even more constrained, due to the brand’s association with the affluent, older market segment — not the growth segment of first-home buyers.

When added to an underperforming back office and a poor flow of business from the broker channel as CBA and Westpac exercised their market power, it was no surprise that the home-lending book stagnated.

This week a number of mainstream lenders including a bank have reduced significantly their fixed home loan interest rates.  This move is a clear indication that the prognosis for future interest rate direction is down rather than up.

In the last four weeks, four of the big five have slashed basis points from their fixed rate mortgages.

Yesterday, CBA announced it would cut more than 40 basis points off some of its owner occupied and investment home loan fixed rates.

According to AMP chief economist Shane Oliver, the recent fixed rate reduction reflects a decline in the longer term sale of bond yields.

“The cost of long term yields has come down, and as such, the banks are passing this reduction on to their customers,” he told The Adviser.

Mr Oliver believes the RBA may pass on another rate increase later this year before stabilizing and even reducing the rates.

“Originally I had expected rates to hit 5 per cent by the end of the year, but we have now revised this forecast down to 4.75 per cent,” he said.

At present, lenders are offering some of the best deals on fixed interest rate home loans in recent years.

Loan Market national operations and risk manager Ivan Karamatic said the majors’ recent rate cuts had meant the fixed rate market had suddenly become highly competitive.

Some of the current fixed rate offers are cheaper than the rates offered on variable home loans.

Oliver Hume Real Estate is expecting that the number of units to come up for sale in Melbourne over the next 18 months will double to 28,000.  This is due to an increase in the number of new apartments and units currently being built

Jamie Kayheads up the apartment division at Oliver Hume Real Estate Group.  He has expressed to  The Australian that the ‘the established inner-city housing market has become out of reach of upwardly mobile young home buyers’, and that demand between the $400,000 and $650,000 price bracket is being met by one- and two-bedroom apartment projects in suburbs such as Richmond, South Yarra, Abbotsford, Brunswick and St Kilda.

Jamie added that while investors will continue to be a force in the Melbourne market, future demand would be driven by owner occupiers and that demand would also spill over to the suburbs.

Based on Figures provided by AFG Mortgage Aggregators, just over 15% of all mortgages their members wrote during May 2010 were for people looking to upgrade their home.

AFG Mortgage Index shows that the largest proportion of mortgages (38.0%) were arranged as home loan refinances to either consolidate debts, obtain access to extra funds or save through a cheaper rate.  This was closely followed by 36.7% for investors and 9.9% for first home buyers. The 15.4% of upgraders is the lowest recorded for a year, and significantly lower than the 18.0% average for the last six months of 2009 before the rate rise cycle started to bite.

Investors remain the main players in our property market, with the proportion of mortgages sold to them – 36.7% – much the same as last month’s peak of 36.9%.

Mark Hewitt, General Manager of Sales and Operations for AFG says: “May was very much a month of two halves for us. We started the month with strong demand, particularly from investors, but the May rate rise, combined with all the other worrying economic news, really took all the heat out of the market. I have just spent the past week meeting many brokers from around the country and the feeling is one of deepening concern. After a period of rebuilding confidence and return to normal market conditions last year, people are feeling quite uncertain about the state of the economy.”

Only 2.9% of applicants opted for a fixed home loan.  The others prefer to enjoy the flexibility of a variable rate home loan.

Mortgage sales in Queensland and Victoria were more robust than in other states, registering month on month increases of 15% and 9% respectively.