Mortgages
Rate cuts to provide support
In the December quarter, the Reserve Bank of Australia (RBA) attempted to constrain the magnitude of the economic downturn following on from stress in the global banking system and a deteriorating global economic outlook. Its actions included aggressive reductions in the target cash rate and the implementation of government guarantees to stimulate borrowing and lending among the banks.
Fragility in the banking system and weaker confidence resulted in a liquidity squeeze and a freezing of short-term money markets. In order to stem a systemic crisis the Australian Government introduced a range of measures designed to ensure that most financial intermediaries have ongoing access to funding. This involved the guarantee of deposits and wholesale funding of eligible authorised deposit-taking institutions. An unintended consequence of this intervention was large redemptions on mortgage funds as investor risk aversion reached extremes. In an attempt to protect existing investors, mortgage fund managers suspended lending activity and froze applications and redemptions.
The RBA dramatically shifted its stance on monetary policy during the quarter, cutting the cash rate by a total of 275 basis points (bps) to 4.25%. This is the lowest rate since 2002. The size of the cuts far exceeded market expectations, triggering the 90-day bank bill rate to fall sharply. It ended the quarter 317 bps lower at 4.15%. The market has priced in a further 175 bps of monetary policy easing based on this assertive rate cut and the RBA’s tough rhetoric, predicting a cash rate of just 2.5% by June 2009.
Lending margins for commercial properties continued to increase, and the absence of lending among the majority of non-banks lenders remained.
Property investors are still cautious, with auction clearance levels reflecting the suppressed market interest. We expect direct property returns to gradually return to their long-term mean (of around 8-10%) which will refocus attention on income rather than capital appreciation.
The latest round of RBA rate cuts should help provide some support to the property market while at the same time improve the relative performance of the Monthly Income Fund compared to other alternative income funds.
Update on Perpetual’s Monthly Income Fund
On Wednesday 22 October 2008, we followed the majority of mortgage funds within the industry and temporarily suspended all applications and redemptions on the Monthly Income and Mortgage Funds. As such no new lending took place during the December quarter.
We reopened the Monthly Income Funds for applications in early November and introduced a quarterly redemption process. Since then there have been no new developments in the operation of the funds. The Monthly Income Funds distributed and provided the redemptions since the fund suspension in January 2009.
More information on these developments click here