This Is Why Mortgaged Household Are Debt Exposed

When we published our sensitivity analysis on mortgaged households, which shows that more than 20% were on the edge financially speaking even at current low rates, a number of people asked why this was so, given the assumed affordability buffers and other underwriting safeguards.

Well, apart from the obvious issues of static incomes, rising costs of living, and potentially higher interest rates ahead, many mortgaged households also have other debts to repay. So today we run through some of our survey results looking at these other household debts. And it is not pretty.

To start, here is the average balances for mortgaged households, looking at their use of unsecured credit (e.g. personal loans, store cards etc) and credit cards. In the case of credit cards, we show two balances, first the current outstanding balance, and second the average revolving (hard core) debt outstanding.  Households with debts, on average and on top of the mortgage have $12,000 in unsecured loans, $11,000 in card debt, of which $10,000 is revolving.   These can cost as much to service each month as the mortgage repayment!

We can slice and dice the households, using some of our custom SQL views. For example, here are the average balances by household age bands.  Households between 40 and 59 have the larger loan and revolving balances, though interestingly, those 60-70 have the largest card balances.

As incomes rise, debt levels also rise, so some of the debt is owned by households with more ability to repay. However, remember the larger number of households are in the first three bands, where debt is still rife.

We can examine this debt by our master household segments. Once again, more affluent households have larger debts, but young growing families have on average close to $20,000 in debt, including some on revolving cards (where interest is charged at a high rate).

We can examine the data across our regions. Urban centres, including ACT, Greater Sydney and Melbourne have the highest debt levels. Many of these households also hold the largest mortgages.

Finally, it is interesting to note that from a digital behaviour standpoint, those younger households who are online most of the time and prefer to use digital channels (Natives) borrow more than Luddites (those who prefer not to go online, but the larger debts are held by households who have migrated online. These Migrants are progressively using online channels more than ever.  You can read more about our channel use inour report  The Quiet Revolution.

So, to sum up. Many households have large mortgages AND other debts, including credit cards and personal loans. This entire portfolio of debt must be considered when looking at their sensitivity to rising rates, and when comparing static incomes with rising debt repayments. Just looking at the mortgage gives only part of the full picture.

Much of this debt would not exist when the bank made their mortgage underwriting decision. That point in time view however does not necessarily still hold true. Should ongoing affordability testing be required by the regulators?

The Rise and Rise of Portfolio Investment Property Households

The number of Property Investing households in Australia in rising. Today we look specifically at the fastest growing segment – Portfolio Property Investors.

This sector, though highly leveraged, is enjoying strong returns from property investing, are benefiting from generous tax breaks and many are expecting to purchase more property this year. However, we think there are some potential clouds on the horizon, and that the risks linked to this segment are higher than many believe to be true. Our latest Video Blog post discusses the findings from our research.

The investment property sector is hot at the moment, with around 1.5 million borrowing households now holding investment property and the number of investment loans is the rise. In December according to the RBA, investment loans grew at 0.8%, twice as fast as owner occupied loans, and around 36% of all loans are for investment purposes.

But not all property investors are created equal. Using data from our large scale household surveys, we have looked in detail at those who hold multiple investment properties.

These Portfolio Investors have become a significant force in the market. For example, in November about twenty per cent of transactions were from portfolio investors – or about six thousand transactions. Whilst overall investment loans grew at 0.8%, there was an estimated 4% increase in transactions from Portfolio Investors.

If we plot the overall loan growth trends against the proportion who are Portfolio Investors, we see a that since late 2015, it is these Portfolio Investors who have been driving the market. In addition, more than half of these transactions are in New South Wales, which is the property investor honeypot.

Many Portfolio Investors will have three or four properties, though some have more than twenty and the average is about eight. Some of these households have taken to property investment as a full-time occupation, others see it as their main wealth building strategy.

Property portfolios vary considerably, although we note that there is a tendency to hold a portfolio of lower value property – such as would be suitable for first time buyers, rather than million dollar homes. This is because the rental income is better aligned to the value of the property, and there is more demand from renters, and greater supply.

About half of portfolio investors prefer to buy newly build high-rise apartments, whilst others prefer to purchase a property requiring renovation, because they believe renovation is the key to greater capital appreciation in the long run, even if rental income is foregone near term.

Property Investors are able to get a number of tax breaks, especially if negatively geared. They are able to offset both capital costs by way of adjustments to the capital value on resale and recurring costs, which are offset against income.

Together negative gearing and capital gains makes investment property highly tax effective. There is good information on the ATO site which walks through all the benefits, but in summary you can claim:

In terms of financing, you can also claim:

  • stamp duty charged on the mortgage
  • loan establishment fees
  • title search fees charged by your lender
  • costs (including solicitors’ fees) for preparing and filing mortgage documents
  • mortgage broker fees
  • fees for a valuation required for loan approval
  • lender’s mortgage insurance, which is insurance taken out by the lender and billed to you.

Stamp duty and legal expenses can be claimed as capital expenses.

Given the strong capital appreciation we have seen in property values, especially down the east coast, portfolio investors are less concerned about rental incomes than capital values. Indeed, in recently published research we showed that about half of investment property holders were losing money in cash flow terms – but significantly, portfolio investors were on average doing better.

But these capital gains are now being crystallised by sassy portfolio investors.

If we chart the proportion of portfolio investors who have sold an investment property, to buy another property, it has moved up from 5% in 2012, to 11% in 2016. These transaction means they are able to release net equity for future transactions, and offset capital costs in the process. Once again, portfolio investors in NSW are most likely to churn a property.

Our surveys also show portfolio investors are most likely to transact again in 2017, are most bullish on future home price growth, and will have multiple investment mortgages.

Significantly, many portfolio investors are using equity from one investment property to fund the next, and are reliant on rental income to service the mortgage. They often have multiple mortgages with different lenders. In addition, we found that many portfolio investors are using interest only loans, to keep loan servicing to a minimum and interest charges as high as possible for tax offset purposes.

So long as property prices continue to rise, this highly-leveraged edifice will continue to generate high returns, which are, after tax, better than cash deposits or the share market. Of course the world would change if interest rates started to rise, capital values fell, or the banks clamped down on interest only loans. Overall, we think there are more risks in this sector of the market than are generally recognised.

In addition, we think there is a case to look harder at the tax breaks available to portfolio investors, and suggest that a cap on the number of properties, or value which can be so leverage should be considered. This is because as property values rise, tax-payers end up subsidising portfolio investors more than ever.

So, in summary, our analysis shows the market is being severely distorted, making homes less affordable, and shutting out many owner occupied purchasers who cannot compete. Risks are building, but meantime Property Portfolio Investors are having a field day!




Net Rental Yields Under Pressure

We have updated our gross and net rental yield modelling to take account of recent results from our household surveys, which incorporates the latest movements in rental income, investment loan interest rates, and other costs including agency fees and other ongoing costs. This gives a view of the gross rental yield by state, as well as the net rental yield. We also estimate the after mortgage value of the property.

The average rental property has a gross rental yield of 3.83% (down from 3.9% in September 2016), a net rental yield of 0.22% (down from 0.4% in September 2016) and an average equity value (after mortgage) of $161,450 (compared with $161,798 in September 2016).

There are considerable variations across the country with Victoria and New South Wales both under water on a net yield basis. Tasmania offers the best net rental return.  We have ignored any potential tax offsets.

We can compare the results from the previous run in September. Of note NSW has now dropped into negative net yield territory.

There are a number of factors in play. These include rising interest rates on investment property, a number of new investment property owners, and a weak rise in rents (which tend to follow incomes more than home prices). Agency management fees, where applicable have also risen.

This means that many investors are reliant on the capital gains providing a return on their investment.

Next time we will look at some of the other data views, by segment, property and location. Many investors, in cash terms are loosing money.

Latest Gross and Net Rental Yields Vary; Wildly

We can spot the best and worst investment property returns across the nation, using updated data from our household surveys. The average GROSS rental return in Australia is 3.9%, the NET rental return (after interest costs, management and repair costs etc, but before tax) is 0.4%. The average net equity held in a investment property is $161,798. This is the marked to market value of the property, minus the loans outstanding.

The data takes account of lower interest rates, and changes in rents as well as the latest property values. Things get interesting when we start to look at the segmented data. Not all investment properties are equal. Here is the average by each state.

rental-yield-oct-2016-statesThe left hand scale shows both gross rental yield (blue) and net rental yield (orange), while the line shows the average net equity in the property. We have sorted from lowest net rental return.

In VIC whilst the average gross return is still at 3.3%, the average net return is a 0.2% LOSS, while the average equity is $152,412. Compare this with QLD, with a gross return of 4.5% and a net return of 1.1%, with equity of $154,665. The best net return is to be found in TAS, where gross yield is 5.3%, net yield 1.7% and average equity $141,595.

Another way to look at the data is by our household segments. Here we find more affluent households are getting significantly better net returns (before tax) compared with those with lower incomes, including battlers, those living on the city fringes, and multicultural families.

rental-yield-oct-2016-household-segmentsCutting the data by our property segmentation, we find that portfolio investors are doing the best, with net returns well above 1%.

rental-yield-oct-2016-property-segmentLooking at our geographic bands, we find those on the urban fringe, or suburbs doing the least well. The best returns at a net yield level can be found in the CBD or CBD fringe.

rental-yield-oct-2016-geogFinally, we can drill down to individual postcodes and suburbs. To illustrate this, here is a chart of the 20 worst performers in VIC.  Households in Glenlyon (3461), a suburb of Bendigo about 86 kms from Melbourne are at the bottom.

rental-yield-oct-2016-vic-b20 The average net yield is a LOSS of 3.5%, and a net equity of just $24,000.

Remember that we are looking at the data before tax. Many investors will be willing to wear low net returns on property, to offset other income because of anticipated future capital gains. Negative investment gearing has a big impact on household investment behaviour.

The Property Worm Turns

Change is afoot, according to the latest findings from our household surveys which looks at property intentions and motivations. The results, (which includes data from as recent as last week), are showing significant changes compared with a couple of months ago, and investors, in particular, are feeling the heat, thanks to rising lending costs, flat rentals, and lower house price rise expectations.

The intent to transact is on the wain, with portfolio and solo investors signalling a fall in expected transactions. In contrast, there is a significant uplift in those seeking to refinance an existing loan (which mirrors recent rises in refinanced loans, and the current attempts by lenders to attract borrowers with attractive deals for owner occupied loans).

Survey-Nov-2015---TransactHouse prices expectations are on the turn, with investors, those eternal optimists, now more uncertain about future capital appreciation. Almost all segments are showing a fall in future expected growth compared with a couple of months ago, but investors are in the headlights. Such large changes over just a couple of months is unusual.

Survey-Nov-2015---PricesThere remains significant demand for loans, and those wishing to borrow more…

Survey-Nov-2015---Borrow… but investors are banking on tax breaks to support their investments, as the cost of finance rises, in the context of flat income growth and rentals.  Overall investors think there is still a better return to be had than from bank deposit accounts, although as we showed recently, may, in net cash flow terms, will be underwater.

Survey-Nov-2015---InvestorsFinally, looking at savings intentions, we see little change, with prospective first time buyers still saving hard, despite low returns from deposits.

Survey-Nov-2015---Buy   In the next few days we will drill further into the detailed segment specific data, but it looks as if the property worm is indeed turning.

DFA Survey Shows Property Demand Remains Strong

Following on from yesterdays video blog on the overall results from the latest household surveys, over the next few days, we will dig further into the data. We start with some cross segment observations, before in later posts, we begin to go deeper into segment specific motivations. You can read about our segmentation approach here. Many households still want to get into property – demand is strong, thanks to lower interest rates, despite high home prices and flat incomes. Future capital growth is expected by many in the market, and by those hoping to enter. This despite a fall in household confidence, as measured in our finance confidence index.

We start with savings intentions. Prospective first time buyers are saving the hardest, despite the lower interest being paid on deposits. More than 70% are actively saving to try and get into the market (though we will see later, more are switching to an investment purchase). Portfolio and solo property investors are saving the least – despite the recent changes to LVR’s on loans.

A significant proportion of those saving are actively foregoing other purchases and spending less, so they can top up their deposits. A higher proportion are also looking to the “Bank of Mum and Dad” for help.

SurveySavingJuly2015Looking next at borrowing intentions over the next 12 months (an indication of future mortgage finance demand), down-traders are slightly less likely to borrow now, compared with a year ago, whilst investors are firmly on the loan path. First time buyers will need to borrow. Refinancers are active, and one motivation we are seeing is the extraction of capital during refinance, onto a lower interest rate.

SurveyBorrowJuly2015Many households are still bullish on house price growth. Investors are the most optimistic, whilst down-traders the least. There are significant state differences, with those in the eastern states more positive than those elsewhere.

SurveyPricesJuly2015So, who is most likely to transact? Portfolio investors are most likely, then down-traders, and solo investors. There is also a lift in the number of households looking to refinance, to take advantage of lower interest rates. The recent public announcements by the banks, about tightening lending criteria appears to have encouraged some to bring forward their plans to purchase, in the expectation that later it may be more difficult to get a loan.

SurveyTransactJuly2015The recent tweaks in rates are having no impact on household plans, as the absolute rates are still very low – lower than ever – for many. We conclude that the demand side of the property and mortgage markets are still intact.

Next time we will look in detail at data from first time buyers, and then investors.

The Benefits of Combining Content Marketing and Segmentation

Interesting segment from marketingsherpa on how customer segmentation and targeted content can work.

One of the most talked-about marketing trends at the moment may also be one of the most effective. According to Demand Metric, content marketing generates three times as many leads as traditional outbound marketing while costing 62% less.

At MarketingSherpa Email Summit 2015, Courtney Eckerle, Manager of Editorial Content, MarketingSherpa, sat down with Stephen Bruner, Marketing Manager, Precor, to discuss the value of content marketing and segmentation as well as the benefits of implementing a strategy using both of these marketing methods.

Precor is the second largest fitness equipment manufacturer in the U.S. and third in the world. Its clients are primarily fitness clubs and consumers. The company focuses on helping each of these consumer segments find the best products for their needs.

Watch the video excerpt from the MarketingSherpa Media Center to learn more about the relationship between content marketing and segmentation:

ASIC Launches a ‘Women’s Money Toolkit’

ASIC has launched a ‘Women’s Money Toolkit’, a free online resource designed to help Australian women manage their finances, make money decisions at key life stages and enhance their financial wellbeing.

The toolkit was developed in response to the particular needs of women who face financial issues and challenges as a result of factors such as their greater likelihood of variable workforce participation, longer life expectancy and on average lower superannuation balances. Research suggests there are differences in the way that women and men generally interact with finances, indicating the need for a tailored approach to financial education.

The Women’s Money Toolkit is available on ASIC’s MoneySmart website at

Image of the Womens Money Toolkit

Relevant facts and figures that informed the development of ASIC’s Women’s money toolkit:

  • 46.1% of women in employment work part time hours, compared to 16.8% of men.
  • In 2013, the life expectancy of Australian women was 84.3 and the life expectancy of men was 80.1
  • At age 60-64, women have on average $104,734 in their super balance while men have $197,054).

The ANZ’s Survey of Adult Financial Literacy in Australia revealed differences in the financial attitudes and behaviours of Australian women and men including:

  • Women aged 28 to 59 had higher scores than men on keeping track of finances
  • Women of all ages were more likely than men of all ages to agree that ‘money dealing is stressful’
  • Women of all ages had lower scores than men on impulsivity.

Latest Edition Of The Property Imperative Released Today

The Property Imperative, Fourth Edition, published April 2015 is available free on request. This report which summarises the key findings for our research into one easy to read publication. We continue to explore some of the factors in play in the Australian residential property market by looking at the activities of different household groups using our recent primary research, customer segmentation and other available data. Specifically we look at the property investment juggernaut and how we are becoming a nation of  property speculators. It contains:

  • results from the DFA Household Survey to end March 2015
  • a focus on first time buyer behaviour and overseas property investors
  • an update of the DFA Household Finance Confidence Index

PropertyImperativeLargeGo here to request a copy.

From the introduction:

This report is published twice each year, drawing data from our ongoing consumer surveys and blog. This edition dates from April 2015.

The Australian Residential Property market is valued at over $5.4 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia. The Reserve Bank (RBA) has recently highlighted their concerns about potential excesses in the housing market is on their mind, when considering future interest rate cuts.

According to the Reserve Bank (RBA), as at February 2015, total housing loans were a record $1.43 trillion , with investment lending now at a record 34.4%, and representing more than half of all loans made last month. There were more than 5.2 million housing loans outstanding with an average balance of about $241,000. Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 36.9% of new loans issued were interest-only loans. This report will explore some of the factors in play in the Australian Residential Property market. We will begin by describing the current state of the market by looking at the activities of different household groups leveraging recent primary research and other available data. We also, in this edition, feature recent research into first time buyers and foreign investors; and look at household finance confidence.

Digital Disruption and P2P Lending

DFA research was featured in a Sydney Morning Heald feature today “Banks look vulnerable as lucrative loans market gets personal online” by banking reporter Clancy Yates. The article nicely highlights some of the interesting and potentially disruptive plays in the evolving Australian market, including the peer-to-peer lending sector.