Finance Market Update – 28 February 20
Competition for refinances is fierce with banks offering thousands of dollars in cashback to get you in the door, but it could cost you more in the long run. We talk about these marketing tactics and the virus in this fortnights update.
The house always wins
The big banks are offering thousands of dollars in cashback offers to refinance your home loan, but it could cost you more than what you get in the long run.
In the last update we talked about how the differential in rate between new and existing borrowers was up to 40 points and thousands of dollars over the life of the loan, that banks were giving favourable rates to win new customers and keeping rates higher for longer for existing loyal customers.
Now we are seeing the big banks try to buy more customers with marketing tactics offering cash back on refinances but remember - the house always wins.
In this example there are two houses.
The first is the bank. Over the life of the loan they could make way more than the cash back offer from you on annual fees and interest. In fact, if you moved to a big bank and never moved away you could be tens of thousands of dollars out of pocket in the long run. The cash ends up back in their pockets. So, for them this is a relatively cheap customer acquisition cost in a very competitive (bull) market to get more customers in the door makes sense.
That doesn’t mean you can’t benefit from getting cashback into your pocket and a lower rate.
Historically, the big banks would give these cashback offers but not have the best rates so you would pay more in interest compared to other banks, that is not as true these days.
At the moment big banks are offering cashback offers between $2,000 to $4,000 for you to refinance your mortgage with them. That is a nice chunk of change.
Remember that the cashback offers are a marketing and customer acquisition strategy so be mindful of the long-term costs and check alternatives. Fortunately, we work with the big banks and other lenders so let’s talk if you are keen to see if you should refinance with them or another lender.
The second is the value of the house itself.
Prices are escalating towards and almost certainly going to exceed the previous 2017 peak by the middle of this year, as we have talked about previously.
Putting aside prices for a moment and focusing on the number of properties, specifically free-standing houses, we could see a future issue with how much space people have to live in a few decades time.
The vast majority of new dwellings that have been and will be built are apartments. In Sydney, about half of all apartments are owned by investors (who might already have a house) and get favourable tax treatment for doing so, do it. Why wouldn’t they if the system incentives are setup that way?
The other half are Owner Occupiers, made up of first home buyers, foreign buyers (not as much as 2013 – 2016) and other regular people looking to own where they live.
This means only half of all apartments are generally are available for rent.
For houses, the number of available properties to rent is a lot less, in fact, probably close to 90% of houses being lived in by the people who own them.
One of the worries with this trend is that there are less and less houses available to renters.
This is pushing renters into apartments.
If this trend continues we could become a country of house owners who have a backyard and renters who share a hallway. Well, more so than it already is.
Economic flu shot
As concerns grow that the COVID-19 / coronavirus will become a global pandemic we need to ask ourselves what the economic impact will be at home here in Australia, and what can be done about it.
On the business front we haven’t really seen what the end result will be.
Retail, which is already an industry in recession, will be hit hard with shops being unable to get stock to sell. Who knows maybe there will even be a shortage of winter coats?
This is also true for e-commerce businesses which all run online and almost all source their goods from China, which has effectively come to a production and economic halt.
Big businesses that also rely (too heavily) on China for goods and paying customers will be hit hard, including car makers, airlines, electronic goods retailers, supermarkets, universities and clothing companies.
So far banks have not been affected, especially given there is enough profitable property buying activity.
Small business serving local communities have been so far largely unaffected, but if and when the virus becomes a domestic pandemic, people will immediately stop spending. Well, after a rush of panic buying that is.
Economically the impact is anyone’s guess, but they would all be guessing it will be bad.
So, who and what will be done about it?
Who is the RBA and the what is a rate cut.
The RBA is meeting next week to decide on the March cash rate call. Up until now the consensus was that we would not see a rate cut in March because Governor Lowe has said they are trying to look past the “transient” effects of the bush fires and virus and not respond in a knee jerk fashion.
This might change as the potential economic impact of the virus could be one of the leading factors tipping Australia into a recessionary type event.
But as we have talked about before the RBA has limited ammo left in monetary policy and rate cuts and will be hesitant to cut quickly.
The issue is they might not have a choice now.
As with real life flu shots they are only effective when you get them before you get sick. Because the economy could catch the flu from the virus they might need to give it the jab soon.