Category: Household Survey

What Lies Beneath? – The Property Imperative 26 Aug 2017

Mortgage Stress hit the headlines thanks to the ABC Four Corners programme, which used data from our household surveys. But if the tip of the iceberg is high debt, rising costs and devalued incomes, what lies beneath?

We helped make the news this week, so in this special weekly edition of the Property Imperative to 26th August 2017, we take a deeper dive into the underlying drivers of high home prices, and the resultant massive debt burden.

The ABC Four Corners programme set out the first order issues quite well, and you can even use their interactive map to look at stress and interest rate sensitivity by post code, which is based on our data. But they did not touch on the more fundamental second order issues which need to be understood to explain how we got here. So we will discuss some of these more fundamental factors, and show why the whole housing conundrum is so complex.

There are a number of factors which have worked together to create very high property prices here, and in other countries around the world. The root cause is the shift in attitude towards property from somewhere to live, to seeing it as an asset class ripe for investment – the financialisation of property. Given the availability of cheap finance (thanks to low interest rates and in many economies extra stimulus from quantitative easing), and the high demand from investors, globally, price rises evident in many countries, mirroring high stock prices. Many baby boomers are at the front of the queue, looking for investment opportunities. But such high home prices makes it ever harder for new purchasers to enter the market, so rates of home ownership are dropping.

We also see flows of investment capital crossing international boarders, thanks to financial deregulation. For example, in Australia, last year Chinese investors bought more than $30 billion of property, including in some post codes more than 15% of residential purchases. Around the world there is hot money looking for a home, and the stellar returns on Australian property have made it an attractive target, especially in the light of the relatively stable political environment here, and until recently the ease by which foreign purchasers could enter the market. That said, Beijing has tightened controls on outbound investment, and this move will put pressure on prices in key property markets from New York to London. The top three overseas destinations for Chinese property investors in 2016 were the United States, Hong Kong and Australia.

In Australia, demand has also been stoked by strong migration. The recent census showed that 1.3 million new migrants have come to Australia since 2011. The impact of this is much debated, with many arguing that the floods of new residents moving to Australia is one of the most significant factors in play. The “big Australia policy” which, though not planned, is based on the assumption that we need more people to drive growth and pay tax; and so the current migration settings reflect this. Yet there is little proper planning for this continued lift in numbers. Some are now questioning this approach, which is causing significant congestion in our capital cities. And migration rates seem to be climbing with the fastest net overseas migration in 4 years, according to the ABS.

About one in three Australians are employed in property related industries, from building and construction, real estate, finance and specialist services. Because of this there is strong political and economic support for high levels of ongoing investment. The HIA this week released the latest National Outlook Report which suggests the housing sector will become less of an economic driver of the Australian economy, and also underscores the various regulatory interventions from state taxes, to limiting foreign investment and investor lending.

It is also worth saying that the standard line of there being an under-supply of property is questionable when we look at the census data on number of people per residence. In fact, this metric has remained static at 2.6 since 2000. Yet most households in our surveys believe we need more construction, not less.

Property Investment by local residents continues apace, supported by overgenerous tax concessions, across both negative gearing and capital gains.  Around 36% of mortgage lending is for investment property. Strong continued capital appreciation is driving this, and our recent surveys showed that even first time buyers were motivated by these gains. Property investment is pervasive, and as the Four Corners programme showed, some investors are geared up across multiple properties, with an appetite for more.  Earlier this year the ATO released their summary data which included quite comprehensive view of the range of costs those with rental properties have offset income. They also divide rentals into those functioning at a loss, and those who make a profit.

Of the 2.9 million rentals, 1.1 million made a profit, the rest a loss (which can be offset against other categories of income). That means 60% of rentals are under water.

We also showed this week that the Bank of Mum and Dad is the 11th largest lender in Australia, and that more than half first time buyers are looking to borrow from the family many of whom drew capital from their existing property. The Bank of Mum and Dad provides an average of $88,000, and some of this goes to assist first time buyers to go direct to the investment sector.

Then there is the wealth effect which rising home prices provides. Anyone holding property will benefit, at least on paper from capital appreciation, and so do not want to see prices slide. Two thirds of households own residential property, so the political weight of numbers is on the side of keeping home prices growing. No wonder, politicians do not want to be holding the reins of power when prices go south.  Neither do they want to rock the boat on negative gearing – though Labor says they would tackle it.

Talking of political power, most states are befitting significantly from the stamp duty received on home purchases. For example, NSW enjoyed more than $7bn of receipts from residential transactions last year – a sizable share of their entire revenue budget. So states and territories do not want to turn that off.  In addition, many are slugging foreign investors additional taxes and charges, to further boost revenue.

Then of course, the banks continue to grow residential lending at three times inflation or CPI, creating, as we discussed last week an amazing debt monster.  This is helped by generous capital ratios which makes home lending more capital efficient than lending to business, even of the growth it generates is, well, illusory.  But for lenders, mortgage lending is highly profitable, and remains their primary growth engine. They will continue to lender as hard as they can, targeting lower risk households in particular.

The profitability of the finance industry was underscored by results from two of the aggregators – these players sits between the banks and mortgage brokers. Mortgage Choice delivered a 10.2% growth in cash profit, though revenue was up just 1.1% to $199 million. They have 654 credit representatives and settlements rose to 12.3 billion.

Australian Finance Group (AFG) reported a 2017 net profit of $30.2 million an increase of 33% on FY2016. They now have around 2,900 mortgage brokers, and process on average around 10,000 loan each month with 45 lenders on their panel.

The finance sector is reliant on a buoyant home lending sector, and as Four Corners highlighted, with 60% of their assets in this business, they would be exposed in any downturn. We also saw in the programme some examples of shoddy practices in the sector, and generally we believe that underwriting standards are still too generous.

The regulatory structure in Australia, with the RBA, ASIC and APRA, collectively with Treasury in the Council of Financial Regulators, has been myopic in its focus, not wanting to rock to boat given the high economic impact of the construction sector, with high volumes of apartments coming on stream in the next year or two. They finally got around to pressing down on interest only loans – too little too late in our view, but this has given the banks ample ammunition to lift the interest rates on these loans, and as a result, they are competing for principal and interest loans, especially for owner occupied borrowers below 80%, with keen rates.  Note too, lenders were forced to tighten their controls, which suggests that the risk management processes in the banks is not adequate, we think they are trading volume and profit over prudent behaviour. Overall loan growth is too strong relative to incomes, but no one wants to talk about the risks of this in a low income growth environment. The regulators are trapped because rates are too low, but they cannot raise them because of the pressures this would exert on households. They argue the systemic financial stability risks are being adequately managed, we are not so sure.  Currently loan volumes continue to grow too strongly.

So in summary, if you pile up all the stakeholder groups who benefit from rising prices, ranging from existing owners, investors, lenders, the construction sector, and the political weight of numbers, no surprise that little is being done to tackle the root cause issues – of high migration, poor lending standards and too strong mortgage loan growth.  This underpins the high household debt and rising mortgage stress.

The politicians may play lip service to housing affordability, and lenders still claim they are being disciplined in the current environment. But it could all too easily turn to custard.

We need a focussed policy on controlling migration, effective planning to accommodate growth, tighter lender restrictions and higher interest rates. But the likelihood is we will continue to muddle though, kick the can down the street, and hope it will turn out ok. But, hope, to quote former New York City Mayor Rudy Giuliani, is not a strategy.

And that’s the Property Imperative Weekly to 26th August. If you found this useful, do subscribe to get our latest updates, and check back again for next week’s installment.

Household Finance Confidence Continues To Fall

Digital Finance Analytics has released the July results from our Household Finance Confidence Index, which shows a further fall, with momentum decaying.

The average score was 99.3, down from 99.8 last month and below the neutral setting. However, the average score masks significant differences across the dimensions of the survey results. For example, younger households are considerably more negative, compared with older groups.

This is strongly linked with property owning status, with those renting well below the neutral setting (and more younger households rent these days), whilst owner occupied home owners are significantly more positive. We also see a fall in the confidence of property investors, relative to owner occupied owners.

Across the states,  we see a small decline in confidence in NSW from a strong starting point, whilst VIC households were more confident in July.

The driver scorecard shows little change in job security expectations, but lower interest rates on deposits continue to hit savings. Households are more concerned about the level of debt held, as interest rate rises bite home. The impact of flat or falling incomes registers strongly, with more households saying, in real terms they are worse off. Costs of living are rising fast, with the changes in energy prices, child care costs and council rates all hitting hard. That said, the continued rises in home prices, especially in the eastern states meant that net worth for households in these states rose again, which was not the case in WA, NT or SA.

Sentiment in the property sector is clearly a major influence on how households are feeling about their finances, but the real dampening force is falling real incomes and rising costs. As a result, we still expect to see the index fall further as we move into spring, as more price hikes come through. In addition, the raft of investor mortgage rate repricing will hit, whilst rental returns remain muted.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

 

More Households Worry About Saving For Retirement

An increasing number of Australians believe they will fall far short of being able to fund their retirements, which may be leading to a greater focus on paying down debt and putting more aside in savings, according to the latest research from MLC.

Between the fourth quarter of 2016 and first of 2017, the MLC Wealth Sentiment Survey Q1 2017 recorded an increase in Australians who think they will have “far from enough” in retirement, up from 24 per cent to 32 per cent of respondents.

The research also identified a significant disconnect between the retirement Australians want and the one they expect to have. Most respondents described their ideal retirement with words like “relaxed”, “comfort” and “travel”, while one in five used words like “stressful”, “worried”, and “difficult” to describe how they expect their retirement will be.MLC Wealth Sentiment Survey Q1 2017

“While economic indicators are quite strong, at an individual level it’s apparent that Australians aren’t feeling confident about their finances, and this may be causing anxiety about retirement,” MLC General Manager of Customer Experience, Superannuation, Lara Bourguignon, said.

“What’s interesting is that respondents said they need over $1 million to retire on, but even small super balances help in retirement, so instead of being worried and fearful, people should feel motivated and empowered to take the little steps that make a big difference.”

More Australians paying off debt, saving

The survey also shows Australians are now taking debt and saving more seriously.

Overall, 21 per cent of Australians plan to pay off more debt in the next three months, outweighing those who intend to pay off less debt (13 per cent) than they were previously. Further, 26 per cent intend to save more and 19 per cent save less.

“With people reporting they are concerned about having enough in retirement, it may be that Australians are taking a closer look at debt and implementing savings strategies that will help improve their overall financial position,” Ms Bourguignon said.

“While the catalyst may be a lack of confidence about funding retirement, getting in control of your finances is very empowering, and so we may see people feeling a lot better about their money in the long run.”

Australians don’t feel wealthy enough to seek financial advice

Another key insight from the research was that Australians believe they need to be wealthy in order to seek financial advice, a finding that may be holding many back from reaching their financial goals, Ms Bourguignon said.

“Many respondents said they would visit a financial adviser if their needs were more complicated, or if they earned more or had money to invest. But tackling debt or implementing a savings plan is actually the ideal time to engage a financial adviser.

“We certainly need to start changing our view around advice being only for the wealthy; it’s for all of us.”

Other key findings:

  • Women are more pessimistic than men about having enough for retirement – 62% don’t expect to have enough to retire on, compared with 52% of men.
  • Despite concerns about funding retirement, three in four Australians haven’t seen a financial adviser in the last five years.
  • Only three in ten Australians are comfortable borrowing to invest, with a third of these preferring investing in property.

About the MLC Quarterly Australian Wealth Sentiment Survey

The MLC Quarterly Australian Wealth Sentiment Survey interviews more than 2,000 people each quarter. It aims to assess the investment environment by asking questions related to current financial situation, investment intentions, level of concern related to superannuation and other investments, change in life insurance, and distance to retirement and investment strategy.

Home ownership falling, debts rising – it’s looking grim for the under 40s

From The Conversation.

Home ownership among young people is declining, as mortgage debt almost doubles for the same age group, results from the Household Income and Labour Dynamics in Australia (HILDA) survey show. It also shows young people are living with their parents longer.

The Melbourne Institute of Applied Economic and Social Research undertakes the survey every year. It’s Australia’s only nationally representative household longitudinal study, and has followed the same individuals and households since 2001.

The survey shows the rate of home ownership among 18 to 39 year olds declined from 36% in 2002 to 25% in 2014. In the same age group, the decline in home ownership has been largest for families with dependent children, falling from 56% to 39%.

Even for those in this group who manage to buy a home, mortgage debt has risen dramatically. In 2002, 89% of home owners in this age range had mortgage debt. By 2014 this had risen to 94%.

More significantly, the average home debt rose considerably. Expressed in December 2015 prices, average home debt grew from about A$169,000 in 2002 to about A$337,000 in 2014. Low interest rates since the global financial crisis have meant mortgage repayments for these home owners have remained manageable, but this group is very vulnerable to rate rises.

Detailed wealth data in the survey, collected every four years since 2002, show this increase in debt and decrease in ownership are part of a trend in the wider population. HILDA shows 65% of households were in owner-occupied dwellings in 2015, down from 69% in 2001.

In fact, the decline in home ownership has been greater than the decline in owner-occupied households. This is largely because adult children are living with their parents for longer.

For example, the HILDA data show that the proportion of women aged 22 to 25 living with their parents rose from 28% in 2001 to 48% in 2015. For men this proportion rose from 42% to 60%.

Among those who manage to access the housing market, the data shows that the growth in home debt is not simply because they are borrowing more to purchase their home. A surprisingly high proportion of young home owners (between 30% and 40%) actually increase their debt from one year to the next, despite most of them remaining in the same home. Even over a four-year period – for example, from 2010 to 2014 – at least 40% of young home owners with a mortgage increase their nominal home debt.

The proportion of people with home debt that exceeds the value of their home – that is, negative equity – has also risen. In 2002, 2.4% of people had negative equity in their home; in 2014, 3.9% had negative equity. This is a relatively small proportion, but this could change as even small decreases in house prices will result in substantial increases in the prevalence of negative equity.

How this changes with location, income and profession

In 2014, less than 20% of Sydneysiders aged 18 to 39 were home owners, compared with 36% or more in the ACT, urban Northern Territory and non-urban regions of Australia. To a significant extent this reflects differences across regions in house prices.

Sydney and Melbourne have particularly high house prices, while non-urban areas generally have comparatively low house prices. Regional differences in the incomes of 18 to 39 year olds also play a role.

Those with the highest home-ownership rates are professionals and, to a lesser extent, managers. They experienced relatively little decline in home ownership.

For workers in other occupations, home ownership has declined substantially. In 2014 home ownership was especially rare among community and personal services workers, sales workers and labourers.

This decline represents profound social change among this age group, where renting is increasingly becoming the dominant form of housing. In 2002, 61% of people aged 35 to 39 were home owners – a clear majority of their age group. By 2014, this proportion had fallen to 48%.

The changing housing situation of young adults is part of a broader change in the distribution of wealth in Australia. The HILDA Survey shows that differences in average wealth by age have grown since 2002. For example, in 2002, median net wealth of those aged 65 and over was 2.8 times that of people aged 25 to 34. In 2014, this ratio had increased to 4.5.

The decline in home ownership among young adults and this broader trend in wealth have implications for their long-term economic wellbeing and indeed for the retirement income system. Even if house price growth moderates and many of those currently aged under 40 ultimately enter the housing market, it’s likely that a rising proportion will not have paid off the mortgage by the time they retire. It may be that many will resort to drawing on superannuation balances to repay home loans, in turn increasing demands on the Age Pension.

Author: Roger Wilkins, Professorial Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, University of Melbourne

Mortgage Stress Gets Worse in July

Digital Finance Analytics has released mortgage stress and default modelling for Australian mortgage borrowers, to end July 2017.  Across the nation, more than 820,000 households are estimated to be now in mortgage stress (last month 810,000) with 20,000 of these in severe stress. This equates to 25.8% of households, up from 25.4% last month. We also estimate that nearly 53,000 households risk default in the next 12 months, 2,000 down from last month.

We have been tracking the number of households in stress each month since 2000, and since a small easing in February 2016, the number under pressure have been rising each month.  The RBA cash rate cuts have provided some relief, especially directly after the GFC, but now mortgage rates appear to be more disconnected from the cash rate as banks seek to rebuild their margins.

The main drivers of stress are rising mortgage rates and living costs whilst real incomes continue to fall and underemployment is on the rise.  This is a deadly combination and is touching households across the country, not just in the mortgage belts. On the other hand, employment remains strong in NSW in particular, so income rose a little and small reductions in some owner occupied mortgage rates helped too.

This analysis uses our core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end July 2017.

We analyse household cash flow based on real incomes, outgoings and mortgage repayments. Households are “stressed” when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30%) going on the mortgage.

Those households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home.  Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

Martin North, Principal of Digital Finance Analytics said “flat incomes and underemployment mean rising costs are not being managed by many, and when added to rising mortgage rates, household budgets are really under pressure. Those with larger mortgages are more impacted by rate rises”.

“The latest housing debt to income ratio is at a record 190.4[1] so households will remain under pressure. Stressed households are less likely to spend at the shops, which acts as a drag anchor on future growth. The number of households impacted are economically significant, especially as household debt continues to climb to new record levels.”

“We continue to see the spread of mortgage stress in areas away from the traditional mortgage belts. A rising number of more affluent households are also being impacted.”

Regional analysis shows that NSW has 225,090 households in stress, VIC 229,988 (217,655 last month), QLD 144,825 (141,111 last month) and WA 107,936 (106,984 last month). The probability of default fell a little, with around 10,000 in WA, around 10,000 in QLD, 13,000 in VIC and 14,000 in NSW. There were falls of about 1,000 from last month in NSW and VIC, thanks to improved employment prospects. Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.

Here are the top 30 post codes sorted by risk of default estimated over the next 12 months.

[1] *RBA E2 Household Finances – Selected Ratios March 2016

Rental Stress, The Hidden Problem

There is much discussion of mortgage stress, some of which we highlight by our ongoing research into the growing numbers of households under financial pressure. The results for July will be out soon.

But rental stress is less discussed, but in our mind is equally significant, so today we explore some of the data in our Core Market Model to July 17. In fact there are more households in rental stress than in mortgage stress according to our analysis. We know their financial confidence on average is lower.

First, we need to define rental stress. Whilst some will use a “30% of income to pay the rent” as a benchmark, we do not think it is an adequate measure – not least because we see large numbers of households renting where more than 30% of income is paid away on rent, yet they are not in financial difficulty. Others pay less away, but are in stress. 30% is too arbitrary!

So we look at net cash flow. If households, once they pay their rent, tax and other outgoings have close to nothing left, or a small deficit, at the end of the month, they fall into our mild stressed category. Those with a severe cash deficit at the end of the month, are in serve stress.

We start by looking at the causes of rental stress. Using data from our surveys, we find that costs of living, under employment and flat incomes are the main causes of rental stress.

Those renting tend to hold less financial assets, so are more exposed, especially where they are also responsible for bills (electricity, council rates etc). Those in difficulty will be more likely to hold multiple credit cards, and also access short term loans to get by. Those in the stressed categories will be less likely to spend at the shops, and so are a brake on economic activity.  One strategy some use is to move to cheaper rented accommodation, with poorer facilities to reduce outgoings. The migratory nature of renters, especially those in stress are not well understood. The current tenancy regulations in Australia are pretty weak. Much of this movement is not reported, nor recorded.

So, lets look at some of the numbers, remembering one third of households are renting, in round numbers that is 3 million households.

Looking by state, more than half of renters in NSW are in rental stress (on our definition), and the highest proportion of any state here are in severe rental stress. The proportion of households in stress fades away as we look across the other states and territories. But the three most populous states have the highest rental stress levels.

Looking across our segments, we see that older households are more under stress, and a significant proportion in severe stress.  Whilst wealthy seniors may hold some savings, stressed seniors do not. Many are reliant on Government support.

Looking across the geographic zones (a series of concentric rings around our main urban hubs) we see significant levels of stress in the urban centres, as well as on the urban fringe. The former is being created by high rents – especially in the newly constructed high-rise blocks being thrown up across the eastern states, often occupied by young affluent households; whilst in the urban fringe, it is more about depressed incomes. We see stress rolling out into the regions, but is less apparent in the more rural and remote areas.

Finally, here is list of the regions across the country. Greater Sydney and the Central Coast have the highest representation of stressed renters as a proportion of all households renting.

All this highlights the issues we have due to the combination of flat incomes, and rising costs. It is also the obverse of the picture we revealed yesterday, where we showed rental growth is very low (causing more investors to have a net cash-flow problem).

Once again we see the outworking of poor public policy over a generation. With an internationally high proportion of property investors and a high proportion of people who are likely to never own their own property, rental stress provides another important perspective of the issues we face.

We have very granular data, down to post code, but that will get too detailed for this post.

 

 

Property Demand, Rotating, Not Falling

The latest results from the Digital Finance Analytics Household Surveys, show that whilst there are segmental movements in play, overall demand for property remains intact, despite rising mortgage interest rates and concerns about stalling income growth.

Results from the latest 52,000 survey show that first time buyers are being encouraged by the more generous first home owner grants on offer in several states. On the other hand, the relative benefit of home purchase relative to renting has reduced.

The biggest changes in the barriers first time buyers are experiencing relate to the availability of finance, whilst concerns about future interest rate rises, and rising costs of living reduced a little compared with our May results. Overall first time buyer demand is up.

Turning to property investors, the barriers to purchase are changing with a rise in those concerned about rising mortgage interest rates and availability of finance.

The reasons to transact have shifted, with a significant rise in those saying they were driven by tax benefits (both negative gearing and capital gains) whilst there was a fall in those looking to appreciating property prices and low finance rates. Overall, investor demand is down a bit.

Another important group are those refinancing. After a strong swing in 2016 to get a better loan rate, there has been a rise in those seeking to reduce their monthly repayments.

So plotting the change of transaction intention over the next 12 months, we see a significant fall in both portfolio and solo property investors, but a rise in first time buyer purchasers expecting to transact.

Finally, we see that in relative terms there is a fall in the proportion of property investors expecting to see home prices rising in the next 12 months, whilst first time buyers are a little more positive, and there has been little change in expectation across our other segments.

Putting all this together, we think demand for finance, and for property will remain quite strong, and on this read, it is unlikely home prices will fall much at all in the major eastern state markets. Other states are more at risk of a fall, which once again underscores the diversity in the market across Australia.  As a result lenders will still be able to write more business, though the mix is changing.

 

Household Finance Confidence Breaks Down

Digital Finance Analytics has today released the Household Finance Confidence index to June 2017, and the news is not good. Overall the index has dropped below the neutral setting and appears to be trending lower. The current reading is 99.8% compared with 100.6 in May.

The fall is being driven by a confluence of issues, none new, but now writ large. Households are seeing the costs of living rising (especially power costs, child care costs and council rates), whilst household income remains depressed and is falling in real terms. Returns on deposits actually fell as well, so mortgage repricing is not being matched by better saving rates. The costs of mortgage repayments rose.

The most significant fall in confidence was in the property investor segment, where loan repricing has been more pronounced, whilst rental incomes are hardly growing. They are also concerned about slowing capital appreciation. However it is still true that property owners have their confidence buttressed relative to property inactive households who are more likely to be renting, and see no rise in their net worth.

Looking across the states, confidence is still highest in the booming states of NSW and VIC, though down a bit; whilst WA is recovering a little from lows earlier in the year.

Looking at the scorecard, households are more concerned about the amount of debt they hold, real incomes continue to fall and costs of living continue to rise. This despite job security not being a major concern. Take home pay however is.

We expect to see the index fall further as we move into spring, as more price hikes come though (e.g 20% uplift in electricity for many). The raft of mortgage rate repricing still has to work though and income growth will remain contained. Sentiment in the property sector is clearly a major influence on how households are felling about their finances, but the real dampening force is falling real incomes.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

 

Inequality Rules – The Property Imperative Weekly 8th July 2017

The Reserve Bank held the cash rate, more banks hiked mortgage interest rates, household debt rose again and our latest research showed that more than 800,000 households across Australia are experiencing mortgage stress. Welcome to the latest edition of the Property Imperative Weekly.

HSBC said the housing bubble fears were overblown. At a national level, a key reason for rising housing prices has been housing under-supply, Chief Economist Paul Bloxham wrote in a research note on Thursday and suggested that a significant fall in Australian housing prices, as occurred in the U.S. and Spain during the global financial crisis, is unlikely.

But data from CoreLogic showed whilst  home prices rose in the last quarter, whilst auction volumes fell, and housing affordability deteriorated. The national price to income ratio was recorded at 7.3 compared to 7.2 a year earlier, and 6.1 a decade ago. It would have taken 1.5 years of gross annual household income for a deposit nationally at the end of the March compared to 1.4 years a year earlier and 1.2 years a decade ago. The discounted variable mortgage rate for owner occupiers was 4.55% and an average mortgage required 38.9% of a household’s income.

New data from the RBA showed that the household debt to income rose to a high of 190.4. Households are more in debt than they have ever been, and the main question has to be, can it all be repaid down the track, before mortgage interest rates rise so high that more get into difficulty.

Our June mortgage stress results  showed that across the nation, more than 810,000 households are estimated to be now in mortgage stress up from 794,000 last month, with 29,000 of these in severe stress. This equates to 25.4% of households, up from 24.8% last month. We also estimate that nearly 55,000 households risk default in the next 12 months. The main drivers are rising mortgage rates and living costs whilst real incomes continue to fall and underemployment is on the rise.  This is a deadly combination and is touching households across the country, not just in the mortgage belts.

We analyse household cash flow based on real incomes, outgoings and mortgage repayments. Households are “stressed” when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30%) going on the mortgage. Stressed households are less likely to spend at the shops, which acts as a drag anchor on future growth. The number of households impacted are economically significant, especially as household debt continues to climb to new record levels.

Census data shows that Home ownership has continued to fall among younger Australians. Only 36 per cent of people aged 25-29 said they owned their home outright or with a mortgage – likely the lowest level since at least the 1960s. Home ownership for the next age group, 30-34, also declined, to 49 per cent, which is likely another record low.

Overall inequality in Australia is rising, between those who have property and those who do not. Australia has prominent examples of economic policies that disproportionately benefit the upper-middle class, such as the capital gains tax discount and superannuation tax incentives. We also have a geographically concentrated income distribution, with the rich living in neighbourhoods with other rich people. The poor are also more likely to live in close proximity to people who share their disadvantage.

There were major changes to mortgage rates and underwriting standards this week, with many following the herd by lifting rates for interest only borrowers, especially investors whilst making small downward movements in principal and interest loan rates, especially at lower LVRs.

NAB will start automatically rejecting customers who want to borrow a high multiple of their income and only pay interest on their home loan, amid concerns over the growing risks created by rising household indebtedness.     While NAB already calculates loan-to-income ratios when assessing loans, it has not previously used the metric to determine whether a customer gets a loan, and such a blanket approach is unusual in the industry.

We have maintained for some time that LTI is an important measure. It should be use more widely in Australia, as it is a better indicator of risk than LVR (especially in a rising market).

Several more banks tweaked their mortgage rates this week. Virgin Money for example increased its variable and fixed rates for new owner occupied loans for LVRs of over 90% by 35 basis points or 0.35%, and increased its standard variable rates for owner occupied and investment interest online loans by 25 basis points.

Auswide Bank announced an increase to their reference rates for investment home loans and lines of credit of 25 basis points from 11 July 2017 will result in a new standard variable rate (SVR) of 6.10%. They blamed funding pressures and regulatory limits on investment and interest only lending.

ING Direct  changed their reference rates, for owner-occupier borrowers, the principal and interest rates will decrease by 5 basis points. But for owner-occupier borrowers, interest-only rates will increase by 20 basis points and investor borrowers on interest-only loans will cop a 35 basis point rise. They are also encouraging borrowers to switch to principal and interest repayment loans.

Bendigo Bank lifted variable interest rates by 30 basis points for existing owner occupied interest only customers and 40 basis points for existing investment interest only customers. They also lifted business loans with new business interest only variable rates up by 40 to 80 basis points and fixed interest only rates increasing by 10 to 40 basis points.  On the other hand, new Business Investment P&I variable rates will decrease by 15 basis points and fixed P&I interest rates decreased by 30 basis points.

The RBA held the official cash rate at 1.5 per cent for the tenth time on Tuesday. It hasn’t moved since a 25 basis point cut in August 2016. But Analysis shows that the gap between the RBA rate and the standard rate banks quote to mortgage borrowers is around the widest in 20 years. The Banks did not pass on the full benefit of the RBA’s record-low rates in order to offset costs and prop up profits. Last year there was a massive race to the bottom in terms of discounts to try to gain volume and share. Many banks dented their margins in the process. But now they’ve now got the perfect cover, thanks to APRA’s regulatory intervention, and so we expect to see mortgage rates continuing to grind higher, particularly for investors and anyone on interest-only. This will simply lead to more mortgage stress down the track whilst the banks rebuild their profit margins. Another example of inequality.

And that’s the Property Imperative to the 8th July. Check back again next week

Major banks increase ‘share of wallet’

New research findings from Roy Morgan found that over the last decade, the big four banks have all increased their share of their customers’ dollars (‘share of wallet’). This metric is the most objective measure of customer loyalty because it is based on their financial behaviour rather than the more subjective measures that lead to this outcome.

These are the latest findings from Roy Morgan’s Single Source survey of over 50,000 consumers conducted over the 12 months to May 2017.

Big potential remains to increase business from existing customers

The following chart shows that the only two major banks obtaining more than 60% of their customers’ business are Bank SA (60.9% share of wallet) and CBA (60.4%). Both of these banks have shown improvement over the last decade, with Bank SA up 12.4% points and CBA up 7.4% points.

 

All of the big four banks have shown improvement in ‘share of wallet’ over the last decade, which correlates with their improvement in satisfaction over this period. Apart from the CBA (up 7.4% points), the ANZ improved by 5.2% points (to 52.4%), the NAB was up 4.0% points (to 55.3%) and Westpac improved by 1.3% points (to 52.5%).

’Share of Wallet’ depends mainly on the performance in the top quintile

The top quintile (or 20%) of banking customers, based on the value of all their banking products, accounts for nearly three quarters (74.2%) of the total value of banking products and as a result it becomes critical to measure performance in this key segment.

The best performer for ‘share of wallet’ in the top quintile is Bank SA (60.3%), followed by the CBA (58.1%).

All of the banks shown in this chart have a higher ‘share of wallet’ among their lower value quintile customers, largely as a result of their having less overall value in banking products, making it difficult to split their banking across different institutions. Bank customers in the highest value quintile on the other hand, with a minimum value in banking products of $466,000, generally have considerable scope to split their banking,

Norman Morris, Industry Communications Director, Roy Morgan Research says:

“This research has shown that in order to maximise the value to banks obtained from each of their customers, it is necessary to increase and track ‘share of wallet’, particularly in the higher value segment. The advantage of using ‘share of wallet’ is that it is the best behavioural metric for measuring brand loyalty.

“Results in this survey show that it generally takes time to improve ‘share of wallet’, as evidenced by the fact that the major banks have taken a decade to show significant improvement. There is a strong indication that the major improvement in customer satisfaction with banks over this period is likely to have contributed to this positive trend in ‘share of wallet’. The challenge now is to maintain this momentum by improving the proportion of ‘very satisfied’ customers in the high value (top quintile) segment, as they are not only likely to then become strong advocates for their bank but have the most potential to increase their ‘share of wallet’.

“There remains considerable opportunity for banks to increase business with their existing customers as they are currently only capturing around half of what is possible”.