Household Survey – Page 30 – Digital Finance Analytics (DFA) Blog

The Shape of 2018 – The Property Imperative Weekly 30th Dec 2017

In the final edition of the Property Imperative Weekly for 2017, we look ahead to 2018 and discuss the future trajectory of the property market, the shape of the mortgage industry, the evolution of banking and the likely state of household finances.

Watch the video, or read the transcript.

We start with the state of household finances. The latest data from the RBA shows that the ratio of debt to income deteriorated again (no surprise given the 6%+ growth in mortgage debt, and the ~2% income growth). The ratio of total debt to income is now an astronomical 199.7, and housing debt 137.5. Both are at all-time records, and underscores the deep problem we have with high debt.

We think that households will remain under significant debt pressure next year, and the latest data shows that mortgage lending is still growing at 3 times income growth. We doubt that incomes will rise any time soon, and so 2018 will be a year of rising debt, and as a result, more households will get into difficulty and mortgage stress will continue to climb. We think Treasury forecasts of rising household incomes are overblown. On the other hand, the costs of living will rise fast.

As a result, two things will happen. The first is that mortgage default rates are likely to rise (at current rock bottom interest rates, defaults should be lower), and if rates rise then default rates will climb further. The second outcome is that households will spend less and hunker down. As the Fed showed this week, the US economy is highly dependent on continued household spending to sustain economic growth – and the same is true here. We think many households will hold back on consumption, spending less on discretionary items and luxuries, and so this will be a brake on economic activity. This will have a strong negative influence on future economic growth, which we already saw throughout the Christmas shopping season.

Mortgage interest rates are likely to rise as international markets follow the US higher, lifting bank funding costs. This is separate from any change to the cash rate. This year the RBA was able to sit on its hands as the banks did their rate rises for them. We hold the view that the cash rate will remain stuck it its current rut for the next few months, because the regulators are acutely aware of the impact on households if they were to lift. They have little left in the tank if economic indicators weaken, and the bias will be upward, later in the year.

Competition for new loans will be strong, as banks need mortgages to support their shareholder returns. The latest credit data from the RBA showed that total mortgages are now at a record $1.71 trillion, and investor lending has fallen to an annual rate of 6.5%, compared with owner occupied lending at 6.3%, so total housing lending grew at 6.4%. Business lending is lower, at 4.7% and personal lending down 1.2%.

But APRA’s data shows that banks are writing less new business, so total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reached $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow. In fact, comparing the RBA and APRA figures we see the non-bank sector is taking up the slack, and of course they do not have the current regulatory constraints. The portfolio movements of major lenders show significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little. Westpac and NAB grew their investment loans more than the others.

We think there will be desperate attempts to attract new borrowers, with deeply discounted rates, yet at the same time mortgage underwriting standards will continue to tighten. We already see the impact of this in our most recent surveys. The analysis of our December 2017 results shows some significant shifts in sentiment – in summary:

First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate away from property investors.
Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, and this could have a profound impact on the market. We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. First time buyers remain the most committed to saving for a deposit, helped by new first owner grants, while those who desire to buy, but cannot are saving less. Those seeking to Trade Up are most positive of future capital growth. Foreign buyers will be less active in 2018.

So our view is that demand for property will ease, and the volume of sales will slide through 2018. As a result, the recent price falls will likely continue, and indeed may accelerate. We will be watching for the second order impacts as investors decide to cut their losses and sell, creating more downward pressure. Remember the Bank of England suggested that in a down turn, Investment Property owners are four times more likely to exit compared with owner occupied borrowers.

So risks in the sector will grow, and bank losses may increase.

More broadly, banks will remain in the cross-hairs though 2018 as the Royal Commission picks over results from their notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards. We expect more issues will surface. The new banking code which was floated before Christmas is not bad, but is really still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits? What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans? And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

We will get to hear about the approach to Open Banking, the Productivity Commission on vertical integration and the ACCC on mortgage pricing, as well as the outcomes from a range of court cases involving poor banking behaviour. APRA will also discuss mortgage risk weights. So 2018 looks like adding more pressure on the banks.

So in summary, we think we will see more of the same, with pressure on households, pressure on banks, and a sliding housing market. Despite this, credit is growing at dangerous levels and regulators will need to tighten further. We are not sure they will, but then the current issues we face have been created by years of poor policy.

Households can help to manage their financials by building a budget to identify their commitments and cash flows. Prospective mortgage borrowers should run their own numbers at 3% above current rates, and not rely on the banks assessment of their ability to repay – remember banks are primarily concerned with their risk of loss, not household budgets or financial sustainability per se. Regulators have a lot more to do here in our view.

Many will choose to spruke property in 2018 (we are already seeing claims that the Perth market “is turning”), and the construction sector, real estate firms, and banks all have a vested interest in keeping the ball in the air for as long as possible. Governments also do not want to see prices fall on their watch, and many of the states are totally reliant on income from stamp duty. But we have to look beyond this. If we are very luck, then prices will just drift lower; but it could turn into a rout quite easily, and don’t think the authorities have the ability to calibrate or correct a fall if it goes, they do not.

The bottom line is this. Think of property as a place to live, not an investment play. Do that, and suddenly things can get a whole lot more sensible.

That’s the Property Imperative Weekly to 30^th December 2017. We will return in the new year with a fresh weekly set of objective news, analysis and opinion. If you found this useful, do leave a comment, or like the post, and subscribe to receive future updates. Best wishes for 2018, and many thanks for watching.

Some Segments Are More Likely To Buy, But Is It Enough?

Now, in our review of the results from our household surveys, we look at owner occupied purchasers. We start with “want to buys” – households who would like to purchase but cannot. High home prices are the strongest barrier (31%), followed by availability of finance (27%), rising costs of living (17%) and concerns about interest rate rises (16%). Unemployment is not currently a major concern.

Turning to first time buyers, around 30% are buying for a place to live, while 17% are eying the potential capital gains (down from 31% a year ago). 15% are motivated by tax breaks, and 11% by the availability of first home owner grants (FHOG), up from 1% a year ago. Greater security is also another factor (12%).

Turning to first time buyer barriers, the most significant challenge is problems with finance availability at 24.5% (compared with 11% a year ago), and house prices 41.1% (compared with 45.5% a year ago). Finding a place to buy is a little easier, down from 24% a year ago to 16% now.

Looking at the type of property they expect to purchase, we see a rise in city edge units, and suburban units, as more purchase an apartment not a house. 17% are not sure what to buy, compared with 22% a year ago.

Those seeking to refinance are driven a desire to reduce monthly payments (42%), 17% to withdraw capital, 18% for a better interest rate and 14% to lock in a fixed rate. Poor lender service is not a significant driver of refinancing.

Those seeking to sell and move down the market are seeking to release capital for retirement (41%), up from a year ago, 30% moving for great living convenience, and 10% because of illness or death of a spouse. Interestingly, the attraction of putting funds into an investment property has reduced from 23% a year ago to 16% now.

Finally, those seeking to trade up, 32% are doing so to get more space, 38% for investment purposes down from 43% a year ago, 17% for life style change and 13% for job change.

So the surveys highlight the lower appetite for investment property, the barriers limiting access to funds, and the desire to extract capital before prices fall much further.

Putting all this together, we think home prices are likely to fall further, as investor appetite continue to dissipate, and whilst there will be some first time buyer substitution, it will not be sufficient to keep prices high. Sydney, Brisbane and Melbourne markets are most likely to see a fall though 2018. There is a risk of a more sustained fall if more property investors decide to cut their losses and try to lock in paper profits.

The Property Playing Field Is Tilting Away From Investors

Continuing our series on our latest household survey results, we look more deeply at the attitude of property investors, who over the past few years have been driving the market. We already showed they are now less likely to transact, but now we can look at why this is the case.

Looking at investors (and portfolio investors) as a group, we see the prime attraction is the tax effectiveness of the investment (negative gearing and capital gains tax) at 43% (which has been rising in recent times). But availability of low finance rates and appreciating capital values have both fallen this time around. They are still driven by better returns than deposits (23%) but returns from stocks currently look better, so only 6% say returns from investment property are better than stocks! Only tax breaks are keeping the sector afloat.

We can also look at the barriers to investing. One third of property investors now report that they are unable to obtain funding for further property transactions, nearly double this time last year.

Then 32% say they have already bought, and are not in the market at the moment. Whilst concerns about more rate rises have dissipated a little, factors such as prices being too high, potential changes to regulation and RBA warnings all registered.

Turning to solo property investors (who own just one or two investment properties), 43% report the prime motivation is tax efficiency, 40% better returns than bank deposits and better returns than stocks (7%). But the accessibility of low finance rates and appreciating property prices have fallen away.

Those investing via SMSF also exhibit similar trends with tax efficiency at 43%, leverage at 16%, and better returns than deposits 14%. Once again, cheap finance and appreciating property values have diminished in significance.

We also see 23% of SMSF trustees get their investment advice from internet or social media sites, 21% use their own knowledge, while 13% look to a mortgage broker, 14% an accountant and 4% a financial planner. 15% will consult with a real estate agent and 9% with a property developer.

There is a fair spread of portfolio distribution into property. 13% have between 40-50% of SMSF investments in property, 29% 30-40% and 30% 20-30% of their portfolios.

Next time we will look at first time buyers and other owner occupied purchasers. Some are taking up the slack from investors, but is that sufficient to keep the market afloat?

Latest Survey Results Are In – The Great Property Rotation Is On

Digital Finance Analytics has completed the analysis of our latest household surveys, to December 2017. We see some significant shifts in sentiment, which we will discuss in more detail over the next few days. These results will inform our option of likely developments in 2018. But here is a summary.

First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate.
Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

Here are some summary slides. We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, which could have a profound impact on the market. Those seeking to Trade Up are most positive of future capital growth.

First time buyers remain the most committed to saving for a deposit, while those who desire to buy, but cannot are saving less.

We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. We will explore the reasons for this change in a later post.

As a result, the proportion of investors expecting to transact in the next year has fallen. In fact, only Down Traders are slightly more likely to purchase than last time.

Finally, for today, we see minor changes in the intention to use a mortgage broker.

We continue to see a pattern where those seeking to refinance, and first time buyers are most likely to turn to a broker. Some other segments are less likely to use the channel to obtain a loan.

Next time we will look in more detail at the segment specific data. But we can certainly say there is strong evidence now that the property market is rotating, away from investors, and towards owner occupied borrowers. There will be consequences for the market.

A Year In A Week – The Property Imperative 23 Dec 2017

In This Week’s Edition of the Property Imperative we look back over 2017, the year in which the property market turned, focus on the risks to households increased, and banks came under the spotlight as never before.

Welcome the penultimate edition of our weekly property and finance digest for 2017.

We start with the latest Government budget statement, which came out this week. There was a modest improvement in the fiscal outlook, largely reflecting a boost in tax collections, including from higher corporate profits in the mining sector. But there was also a consumer shaped hole, driven by low wages, lower consumption and lower levels of consumer confidence. Yet, in the outlook, wages are predicted to rise back to 3%, and this supporting above trend GDP growth. This all seems over optimistic to me.

In any case, according to the IMF, GDP is a poor measure of economic progress, with its origins rooted firmly in production and manufacturing. In fact, GDP misrepresents productivity and they say companies that are making huge profits from mining big data have a responsibility to share their data with governments.

The mortgage industry has seen growth in lending at around 6% though the year, initially led by investors piling into the market, but then following the belated regulatory intervention to slow higher risk interest only lending, momentum has switched to first time buyers, at a time when some foreign buyers are less able to access the market. A third of customers with interest-only mortgages may not properly understand the type of loan they have taken out, which could put many in “substantial” stress when the time comes to pay their debt, UBS analysts have warned. We have also seen a change in mix, as smaller lenders and non-banks (who are not under the same regulatory pressure) have increased their share. AFG’s latest Competition index which came out yesterday, showed that Australia’s major lenders have taken a hit with their market share now down to a post-GFC low of 62.57% of the mortgage market.

Household finances have been under pressure this year, with income growth, one third the rate of mortgage growth, so the various debt ratios are off the dial – as a nation we have more indebted households than almost anywhere else. This is a long term issue, created by a combination of Government Policy, RBA interest rate settings, the financialisation of property, and the rabid growth of property investors – who hold 35% of mortgages (twice the proportion of the UK). The combination of rising costs of living, and out of cycle rate rises, have put pressure on many households as never before – and we have tracked the rise of mortgage stress through the year to an all-time high.

The latest MLC Wealth Sentiment Survey contained further evidence of the pressure on households and their finances. Being able to save has been a challenge for a number of Australians – almost 1 in 5 of us have been unable to save any of our income in recent years, and for more than 1 in 4 of us only 1-5%. Expectations for future income growth are very conservative – nearly 1 in 3 Australians expect no change in income over the next few years and 15% expect it to fall. Our savings expectations for the future are also very conservative – with more than 1 in 5 Australians believing their savings will fall. The “great Australian dream” of home ownership is still a reality for many, but for some it’s just a dream – fewer than 1 in 10 Australians said they didn’t want to own their own home, but 1 in 4 said home ownership was something they aspired to but did not think it would happen.

Of course the RBA continues on one hand to warm of risks to households, as in the minutes published this week, yet also persists with its line that households can cope, with the massive debt burden, as its skewed towards more wealthy groups. They keep referring to the HILDA survey, which is 3 years old now, as a basis for this assertion. They should take note of a Bank of England Working paper which looked at UK mortgage data in detail, and concluded the surveys tend to understand the true mortgage risks in the market – partly because of the methodology used. They concluded “These results should make policy makers less sanguine about the developments in the UK mortgage market in recent years, which are traditionally analysed using these surveys”.

The latest report from S&P Global Ratings covering securised mortgage pools in Australia to end Oct 2017, showed 30-day delinquency fell to 1.04% in October from 1.08% in September. They attribute part of the decline to a rise in outstanding loan balances during the month, and many older loans in the portfolios (which may not be representative of all mortgages, thanks to the selection criteria for securitised pools). But 90+ defaults remain elevated – at a time when interest rates are rock bottom.

Banks are under the gun, as Government have turned up the pressure this year. There are a range of inquiries in train, from the wide-ranging Banking Royal Commission (which the Government long resisted, but then capitulated), and a notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards has also been issued. The scope includes mortgage brokers and financial advisers. Also the ACCC is looking at mortgage pricing, The Productivity Commission is looking at vertical integration, and we have the BEAR regime which is looking at Banking Executive Behaviour. This week we also got sight of the Enhanced Financial Services Product Design Obligations, and of course the major banks copped the bank tax. There are also a number of cases before the Courts. This week, NAB said it had refunded $1.7 million for overcharging interest on home loans and CommInsure paid $300,000 following ASIC concerns over misleading life insurance advertising

This tightening across the board is a reaction to earlier period of market deregulation, privatisation and sector growth. But at its heart, the issue is a cultural one, where banks are primary focussing on shareholder returns (as a company that is their job), but at the expense of their customers. Even now, the decks are stacked against customers, and the newly revised banking code of conduct won’t do much. We think the Open Banking Initiative will eventually help to lift competition, and force prices lower. But, after many years of easy money, banks are having to work a lot harder, and with much more lead in the saddle bag. Meantime, it is costing Australia INC. dear.

More significantly, the revised Basel rules, though watered down, still tilts the playing field towards mortgage lending, and makes productive lending to business less attractive. Also there is more to do on bank stress testing according to the Basel Committee. The regulation framework is in our view faulty.

One question worth considering, as the USA and other Central Banks lift their base cash rates, is whether there is really a “lower neutral rate” now. Some, in a BIS working paper have argued that Central Banker’s monetary policy have driven real interest rates lower, rather than demographics. But another working paper, this time from the Bank of England, comes down on the other side of the argument. The paper “Demographic trends and the real interest rate” says two-thirds of the fall in rates is attributable to demographic changes (in which case Central Bankers are responding, not leading rates lower). In fact, pressure towards even lower rates will continue to increase. This is a fundamentally important question to answer. We suspect the role of Central Bankers in driving rates is less significant than many suspect, and structural changes are afoot.

Rates in Australia have stayed low this year, at 1.5%, despite the RBA saying this is below the neutral setting, and we expect the bank to move later in 2018, upwards. The rate of rise is now expected to be lower than a year ago, but the international pressure will be up. In addition, the US tax reforms will likely switch more investment to the US, and so banks, who rely on international funding, will likely have to pay more. So we still expect real rates to go higher ahead, creating more pressure on households. Also, of course as rates rise, the costs of Governments running deficits rises, something which will be a drag on the budget later.

Home prices continued to rise through 2017 in the eastern states, while in NT and WA they fell. Recent corrections in Sydney may be an indication of what is ahead in the Melbourne market too. Demand remains strong, but lending standards have been tightened, and investors are getting more concerned about future capital appreciation. This year building approvals were still pretty strong, in line with firm population growth. As an aside, an OECD report this week said that Australian property may well be a target for money laundering, and more needs to be done to address this issue. Auction volumes continue to slide, and we have seen a significant fall in recent weeks.

So, this year we have seen changes in the financial services landscape, the property market is on the turn, and household’s debt levels are rising, creating financial stress for many. As a result, we expect many to spend less this Christmas.

Next time we will discuss the likely trajectory through 2018, but we wanted to wish all our followers a peaceful and restful holiday season. We have really appreciated all the interest in our work – through the year we have more than doubled our readership, thanks to you.

Many thanks for watching. Check back next week for our views on what 2018 may bring.

Saving Less, Income Flat, Home Ownership Dream Fading – MLC

The latest MLC Wealth Sentiment Survey contains further evidence of the pressure on households and their finances.

Being able to save has been a challenge for a number of Australians – almost 1 in 5 of us have been unable to save any of our income in recent years, and for more than 1 in 4 of us only 1-5%.

Expectations for future income growth are very conservative – nearly 1 in 3 Australians expect no change in income over the next few years and 15% expect it to fall.

So, not surprisingly, our savings expectations for the future are also very conservative – with more than 1 in 5 Australians believing their savings will fall.

The “great Australian dream” of home ownership is still a reality for many, but for some it’s just a dream – fewer than 1 in 10 Australians said they didn’t want to own their own home, but 1 in 4 said home ownership was something they aspired to but did not think it would happen. Young people still have broadly similar aspirations around home ownership as middle-aged Australians.

Most of us wait and save more before buying our first home and many are prepared to buy some way out of the city – almost 1 in 3 would/did wait longer to have a bigger deposit, and 1 in 4 would live in a suburb some way out of the city to purchase their first home. Around 16% would live in an apartment and 12% further away from work and family or a regional area.

Most Australians don’t plan to or are unwilling to use the family home to fund their retirement – only 18% would be willing to use the family home to fund their retirement either by selling it or using part of their home as equity. The average Australian home owner has around $547,000 of equity in the family home.

Being middle class depends on where you live

From The Conversation.

Politicians are fond of pitching to the “average Australian” but judging by the income of Australians, whether you are middle class depends on where you live. And where we live tells a rich story of who we are as a nation – socially, culturally and economically.

Income is at the heart of access to services and opportunities, which are differing and unequal based on where you live.

Our ability to afford housing that meets our needs largely determines where we live. In turn, where we live influences access to other important features of our lives which shape lifelong and intergenerational opportunities. For example, student performance is associated with everything from where a student lives to their parent’s occupation.

Household incomes in capital cities are typically among the highest, with incomes declining the further you live from major cities. So it’s understandable why Australians living outside or on the fringes of cities might feel somewhat left behind.

The Australian Bureau of Statistics presents “average” income as a range based on where you live. This range is marked by a lower number (30% of incomes) at the beginning and the higher number (80% of incomes) at the top.

This “average” income varies substantially between different rural areas from A$78,548 – A$163,265 in Forrest (ACT) to A$10,507 – A$26,431 in Thamarrurr (NT). This is actually an equivalised household income which factors in the economic resources like the number of people and their characteristics, between households.

The difference between the top and bottom of this range of “average” household income also shows greater inequality within areas.

Even within the greater Sydney metropolitan area, there’s significant differences in household income between areas. The average household equivalised income in Lavender Bay is around A$40,000 – A$95,000 higher than it is in Marayong.

The difference in income is marked, and there are other differences too. People in Marayong are on average younger than Lavendar Bay. Family size is smaller in Lavendar Bay. Over half of the Lavendar Bay residents hold university degrees, compared to a more skill-based workforce in Marayong.

Why there is no one “average” Australian

Cities offer access to myriad employment options. Industries associated with relatively high incomes are typically concentrated in cities to take advantage of global connections.

Sydney, Melbourne and Canberra are notable standouts based on household income. So if you live close to these major cities you’d be getting the most opportunities in terms of employment and income, given the you’re the right candidate.

But not everyone wants to live in the centre of cities. Housing, lifestyle and neighbourhood preferences also play a role in where we live, but are still influenced by income and proximity to such things as employment and family and friends.

Also, infrastructure which supports social and economic wellbeing is essential in communities, regardless of where we live.

What politicians should be talking about instead

Improving the different and unequal access across areas requires better internet connectivity and advances in the way we work. Policies around housing and family-friendly workplaces go some way to supporting Australians in work.

Any measures to redress inequalities require understanding the needs and wants of communities. Proposed planning to reconfigure the greater city of Sydney around population and socioeconomic infrastructure offers an example of a data-driven approach to planning. Whether the proposed reconfiguration of Sydney leads to improvements or greater segmentation will be revealed in practice.

Politicians rarely reflect the characteristics of the people they represent, particularly when we consider the remuneration, entitlements and perks of political office. The longer politicians are in office, and somewhat removed from the people they represent, the further they potentially become from gauging their electorate.

Yet politicians profess to know what the average Australians they represent needs and wants. They apply this to a range of things from service delivery to representation on political matters. And this is within reason.

But without current experience we struggle to see things from perspectives other than our own. Take for example the way some have come to label themselves outsiders from the social and political elite to advance their credibility with average Australians.

Bringing politicians in touch with the diversity of needs and wants of Australians starts with a self-check and recognition of individual bias (conscious or unconscious). This is the first step toward really understanding and connecting with Australians – be it in the “average” or otherwise.

Author: Liz Allen, Demographer, ANU Centre for Social Research and Methods, Australian National University

First Time Buyers Keep The Property Market Afloat – The Property Imperative Weekly – 9th Dec 2017

First Time Buyers are keeping the property ship afloat for now, but what are the consequences?

Welcome to the Property Imperative weekly to 9^th December 2017. Watch the video, or read the transcript.

In our weekly digest of property and finance news, we start this week with the latest housing lending finance from the ABS. The monthly flows show that owner occupied lending fell $23m compared with the previous month, down 0.15%, while investment lending flows fell 0.5%, down $60m in trend terms. Refinanced loans slipped 0.13% down $7.5 million. The proportion of loans excluding refinanced loans for investment purposes slipped from a recent high of 53.4% in January 2015, down to 44.6% (so investment property lending is far from dead!)

While overall lending was pretty flat, first time buyers lifted in response to the increased incentives in some states, by 4.5% in original terms to 10,061 new loans nationally. At a state level, FTB’s accounted for a 19% per cent share in Victoria and 13.7% in New South Wales, where in both states, a more favourable stamp duty regime and enhanced grants were introduced this year. But, other states showed a higher FTB share, with NT at 24.8%, WA at 24.6%, ACT at 20.1% and QLD 19.7%. SA stood at 13% and TAS at 13.3%. There was an upward shift in the relative numbers of first time buyers compared with other buyers (17.6% compared with 17.4% last month), still small beer compared with the record 31.4% in 2009. These are original numbers, so they move around each month. The number of first time buyer property investors slipped a little, using data from our household surveys, down 0.8% this past month. Together with the OO lift, total first time buyer participation has helped support the market.

The APRA Quarterly data to September 2017 shows that bank profitability rose 29.5% on 2016 and the return on equity was 12.3% compared with 9.9% last year. Loans grew 4.1%, thanks to mortgage growth, provisions were down although past due items were $14.3 billion as at 30 September 2017. This is an increase of $1.5 billion (11.8 per cent) on 30 September 2016. The major banks remain highly leveraged.

The property statistics showed that third party origination rose with origination to foreign banks sitting at 70% of new loans, mutuals around 20% and other banks around the 50% mark. Investment loan volumes have fallen, though major banks still have the largest relative share, above 30%. Mutuals are sitting around 10%. Interest only loans have fallen from around 40% in total value to 35%, but this represents a fall from around 30% of the loan count, to 27%. This reflects the higher average loan values for IO borrowers. The average loan balance for interest only loans currently stands at $347,000 against the average balance of $264,000. No surprise of course, as these loans do not contain any capital repayments (hence the inherent risks involved, especially in a falling market).

But there has been a spike in loans being approved outside serviceability, with major banks reporting 5% or so in September. This may well reflect a tightening of standard serviceability criteria and the wish to continue to grow their loan books. We discussed this on Perth 6PR Radio. So overall, we see the impact of regulatory intervention. The net impact is to slow lending momentum. As lenders tighten their lending standards, new borrowers will find their ability to access larger loans will diminish. But the loose standards we have had for several years will take up to a decade to work through, and with low income growth, high living costs and the risk of an interest rate rise, the risks in the system remain.

On the economic front, GDP from the ABS National Accounts was 0.6%. This was below the 0.7% expected. This gives an annual read of 2.3%, in trend terms, well short of the hoped for 3%+. Seasonally adjusted, growth was 2.8%. Business investment apart, this is a weak and concerning result. The terms of trade fell. GDP per capita and net disposable income per capita both fell, which highlights the basic problem the economy faces. The dollar fell on the news. Households savings also fell. No surprise then that according to the ABS, retail turnover remained stagnant in October. The trend estimate for Australian retail turnover fell 0.1 per cent in October 2017 following a relatively unchanged estimate (0.0 per cent) in September 2017. Compared to October 2016 the trend estimate rose 1.8 per cent. Trend estimates smooth the statistical noise.

So no surprise the RBA held the cash rate once again for the 16^th month in a row.

The latest BIS data on Debt Servicing ratios shows Australia is second highest after the Netherlands. We are above Norway and Denmark, and the trajectory continues higher. Further evidence that current regulatory settings in Australia are not correct. As the BIS said, such high debt is a significant structural risk to future prosperity. They published a special feature on household debt, in the December 2017 Quarterly Review. They call out the risks from high mortgage lending, high debt servicing ratios, and the risks to financial stability and economic growth. All themes we have already explored on the DFA Blog, but it is a well-argued summary. Also note Australia figures as a higher risk case study. They say Central banks are increasingly concerned that high household debt may pose a threat to macroeconomic and financial stability and highlighted some of the mechanisms through which household debt may threaten both. Australia is put in the “high and rising” category. The debt ratio now exceeds 120% in both Australia and Switzerland. Mortgages make up the lion’s share of debt. In Australia mortgage debt has risen from 86% of household debt in 2007 to 92% in 2017.

Basel III was finally agreed this week by the Central Bankers Banker – the Bank for International Settlements – many months later than expected and somewhat watered down. Banks will have to 2022 to adopt the new more complex framework, though APRA said that in Australia, they will be releasing a paper in the new year, and banks here should be planning to become “unquestionably strong” by 1 January 2020. We note that banks using standard capital weights will need to add different risk weights for loans depending on their loan to value ratio, advanced banks will have some floors raised, and investor category mortgages (now redefined as loans secured again income generating property) will need higher weights. Net, net, there will be two effects. Overall capital will probably lift a little, and the gap between banks on the standard and internal methods narrowed. Those caught transitioning from standard to advanced will need to think carefully about the impact. This if anything will put some upwards pressure on mortgage rates.

The Treasury issues a report “Analysis of Wages Growth” which paints a gloomy story. Wage growth, they say, is low, across all regions and sectors of the economy, subdued wage growth has been experienced by the majority of employees, regardless of income or occupation, and this mirrors similar developments in other developed western economies. Whilst the underlying causes are far from clear, it looks like a set of structural issues are driving this outcome, which means we probably cannot expect a return to “more normal” conditions anytime some. This despite Treasury forecasts of higher wage growth later (in line with many other countries). We think this has profound implications for economic growth, tax take, household finances and even mortgage underwriting standards, which all need to be adjusted to this low income growth world.

Mortgage Underwriting standards are very much in focus, and rightly, given flat income growth. There was a good piece on this from Sam Richardson at Mortgage Professional Australia which featured DFA. He said that over four days in late September two major banks added extra checks to an already-extensive application process. ANZ introduced a Customer Interview Guide requiring brokers to ask questions about everything from a customer’s Netflix subscription to whether they were planning to start a family. Three days later CBA introduced a simulator that would show interest-only borrowers how their repayments would change and affect their lifestyle. Customers would be required to fill in an ‘acknowledgement form’ to proceed with an interest-only application.

Getting good information from customers is hard work, not least because as we point out, only half of households have formal budgeting. So, when complete the mortgage application, households may be stating their financial position to the best of their ability, or they may be elaborating to help get the loan. It is hard to know. Certainly banks are looking for more evidence now, which is a good thing, but this may make the loan underwriting processes longer and harder. Improvements in technology could improve underwriting standards for banks while pre-populating interactive application forms for consumers and offering time-saving solutions to brokers and Open Banking may help, but while Applications can be made easier, this does not necessarily mean shorter.

More data this week on households, with a survey showing Australians have become more cautious of interest only loans with online panel research revealing that 46 per cent of Australians are Adamant Decliners of interest-only home loans according to research from the Gateway Credit Union. In addition, a further quarter of respondents are Resistant Approvers, acknowledging the benefits of interest-only loans yet choosing not to utilise them. Of the generations, Baby Boomers are most likely to be Adamant Decliners and therefore, less likely to use interest-only products. While Gen Y are most likely to be Enthusiastic Users.

Banks continue to offer attractive rates for new home loans, seeking to pull borrows from competitors. Westpac for example, announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans. Rates for both new fixed rate loans and variable rate loans were reduced. For example, the bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

The RBA released their latest Bulletin and it contained an interesting section on Housing Accessibility For First Time Buyers. They suggest that in many centers, new buyers are able to access the market, thanks to the current low interest rates. But the barriers are significantly higher in Melbourne, Sydney and Perth. They also highlight that FHBs (generally being the most financially constrained buyers) are not always able to increase their loan size in response to lower interest rates because of lenders’ policies. Indeed, the average FHB loan size has been little changed over recent years while the gap between repeat buyers and FHBs’ average loan sizes has widened. They also showed that in aggregate, rents have grown broadly in line with household incomes, although rent-to-income ratios suggest housing costs for lower-income households have increased over the past decade.

Housing affordability has improved somewhat across all states and territories, allowing for a large increase in the number of loans to first-home buyers, according to the September quarter edition of the Adelaide Bank/REIA Housing Affordability Report. The report showed the proportion of median family income required to meet average loan repayments decreased by 1.2 percentage points over the quarter to 30.3 per cent. The result was decrease of 0.6 percentage points compared with the same quarter in 2016. However, Housing affordability is still a major issue in Sydney and Melbourne they said. In addition, over the quarter, the proportion of median family income required to meet rent payments increased by 0.3 percentage points to 24.6 per cent.

Our own Financial Confidence Index for November fell to 96.1, which is below the 100 neutral metric, down from 96.9 in October 2017. This is the sixth month in succession the index has been below the neutral point. Owner Occupied households are the most positive, scoring 102, whilst those with investment property are at 94.3, as they react to higher mortgage repayments (rate rises and switching from interest only mortgages), while rental yields fall, and capital growth is stalling – especially in Sydney. Households who are not holding property – our Property Inactive segment – will be renting or living with friends or family, and they scored 81.2. So those with property are still more positive overall. Looking at the FCI score card, job security is on the improve, reflecting rising employment participation, and the lower unemployment rate. Around 20% of households feel less secure, especially those with multiple part time jobs. Savings are being depleted to fill the gap between income and expenditure – as we see in the falling savings ratio. As a result, nearly 40% of households are less comfortable with the amount they are saving. This is reinforced by the lower returns on deposit accounts as banks seek to protect margins. More households are uncomfortable with the amount of debt they hold with 40% of households concerned. The pressure of higher interest rates on loans, tighter lending conditions, and low income growth all adds to the discomfort. More households reported their real incomes had fallen in the past year, with 50% seeing a fall, while 40% see no change. Only those on very high incomes reported real income growth.

Finally, we also released the November mortgage stress and default analysis update. You can watch our video counting down the most stressed postcodes in the country. But in summary, across Australia, more than 913,000 households are estimated to be now in mortgage stress (last month 910,000) and more than 21,000 of these in severe stress, the same as last month. Stress is sitting on a high plateau. This equates to 29.4% of households. We see continued default pressure building in Western Australia, as well as among more affluent household, beyond the traditional mortgage belts across the country. Stress eased a little in Queensland, thanks to better employment prospects. We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points.

So, the housing market is being supported by first time buyers seeking to gain a foothold in the market, but despite record low interest rates, and special offer attractor rates, many will be committing a large share of their income to repay the mortgage, at a time when income growth looks like it will remain static, costs of living are rising, and mortgage rates will rise at some point. All the recent data suggests that underwriting standards are still pretty loose, and household debt overall is still climbing. This still looks like a high risk recipe, and we think households should do their own financial assessments if they are considering buying at the moment – for home prices are likely to slide, and the affordability equation may well be worse than expected. Just because a lender is willing to offer a large mortgage, do not take this a confirmation of your ability to repay. The reality is much more complex than that. Getting mortgage underwriting standards calibrated right has perhaps never been more important than in the current environment!

And that’s the Property Imperative to 9^th December 2017. If you found this useful, do leave a comment, sign up to receive future research and check back next week for the latest update. Many thanks for taking the time to watch.