The Reserve Bank's statement on Tuesday 1 February about its decision to hold the key cash rate steady at 4.75%, contains enough cautious comments about the state of the economy to ensure that rate rises are unlikely in the next few months.

The political climate is fairly treacherous for the Big 4 Australian banks at the moment and they are therefore highly unlikely to move their rates up without the official cash rate trigger. Given the big 4 banks have a $135 billion requirement to raise funding in 2011 with said costs steadily increasing internationally, it’s something the Big 4 would love to pass on to the consumer which they demonstrated when the RBA met in November 2010.

As a result of this, Charter Finance and other brokerage houses noted a large exodus from the Big 4 banks to regional and non-bank lenders (mainly in residential lending). This has inadvertently eased the Big 4’s immediate funding pressures somewhat, but the banks will have to weigh up losing more customers versus carrying the burden of this increased cost in the future should the RBA hold rates for the next few months.

With regards to the near future, the RBA governor Glenn Stevens delivered a recent speech advising that the resource rich areas of the Australian economy are potentially expanding too quickly for the economy to meet the demand for labour and materials. This is also being evidenced in the local (NSW) construction industry, where good labour is becoming increasingly difficult to secure and the fall-out from the QLD floods is yet to materialise which will obviously create a far deeper labour shortage in the coming months (further driving up wage pressure and inflation).

Unfortunately for states such as NSW the central bank cannot conduct its monetary policy to allow for regional differences. It has only one currency to control, and really only one tool being the interest rate with which it can manipulate demand.

Given that, it will definitely move to contain the resources boom if inflation threatens to move above its target range of 2% to 3%. It will move early to prevent this even if us southern states are not enjoying the fruits of the continuing resources boom.

Luckily however, inflation has been lower than expected, about 2.25% last year, and the Reserve says it expects that inflation this year will 'be consistent with the 2% - 3% target.

Despite above-mentioned concerns, the RBA is of the view that the east coast floods will not have a major affect on prices, and that short-term price blips would not influence its analysis in any event. It does not expect the post-flood rebuilding process to more than modestly boost aggregate demand, and with it, inflationary pressure.

True Lo Doc Loans @ 7.13%!

The GFC swallowed a number of non-bank lenders together with the competitive products they, and others who have remained, offered. One such product is the lo-doc loan. Most remaining lenders require BAS statements which in effect negates any benefit for the borrower and generally if offered, they are at rates well into mid 8%’s.

CFI has access to a lender at present that is offering a genuine lo doc loan on the back of an accountant’s letter only. The pricing is very competitive at 7.13%. Please contact us on (02) 9393 2747 as soon as possible to discuss further should this be of interest to you.

• The non-residential construction market may be facing one of its toughest periods as government stimulus packages are phased out and flooding delays projects.
• The construction industry was one of the hardest hit by the global financial crises as banking finance became scarce and many developers either collapsed or went to ground.
• The Australian Industry Group and Housing Industry Association’s performance of construction index shows the impact of stimulus spending has worn off and private sector investment is yet to take its place, with activity and new orders contracting again in December after a series of subdued months.
• Although the widespread flooding is likely to create a vast quantity of work in the medium term, it has also destroyed equipment and materials.
• Research found companies exposed to the building materials sector would be hurt by the floods but government spending and associated construction work boded well.
• The damage caused by the east coast floods is another hurdle for the industry that has broadly suffered all last year and now faces an uncertain year ahead.
• The past year forced many builders to do jobs at little to no margin just to keep the books turning over.
• One-third of local builders that responded to a survey said their current bid margins were more than 2% below margins on existing backlog.
• A gradual recovery in commercial and industrial building is tipped by many industry groups.  Prior to the Queensland floods, Macromonitor forecasts the building industry would soon reach its lowest ebb for commercial and industrial building followed by a steady recovery in the second half of this year.
• Underpinning this trend, it is predicted greater demand for office space and retail turnover will improve, however it will be nowhere near as high as before the financial crisis.
• The coming year will be far from easy, with forecast predicting a 28% real decline in total non-residential building commencements in 2010-11 followed by a 4% recovery in the following year.

Generally, the most important element of a loan to a borrower is price (although a number of clients of late are happier paying a premium to have a non major lender). The following are examples of two recent deals where we achieved very competitive pricing:
 

1) Commercial Investment

• Debt: $11,200,000
• Gearing: 65%
• Price: 2.00% above BBSY. (A percentage of the facility was required to be fixed).
• Note: Interest cover set at 1.78x. Full personal guarantees

2) Residential Home Loan

• Debt: $2,000,000
• Gearing: 60%
• Rate: 7.13%
• Note: This was a lo doc loan that only required completion of an accountants certificate verifying income.

Please contact Dean Perlman on (02) 9363 2747 or dean@charterfinance.com.au to discuss any finance queries you may have.