Category: Household Survey

Investment Mortgages, a 10-Year View

Continuing our series on the 10-year data from our household surveys, today we look at the investment mortgage portfolio. We find some interesting variations compared with the owner occupied borrowing segments, which we discussed recently.

In value terms, 28% of the portfolio is held by exclusive professionals, 15% to suburban mainstream, 14% mature stable families, 10% to young affluent, 9% to rural and 5% to young growing families.  19% of the portfolio was written in 2016.

In 2016, 23% of the loans were to the exclusive professional segment, 14% to young affluent, 11% to rural, 17% to mature stable families, 12% to suburban mainstream, and 5% to young growing families.  Young affluent households were more active last year, than across the entire portfolio.

In 2016, the average value of the mortgage to exclusive professionals for investment purposes was $982,360 compared with $536,193 for young affluent, $652,812 for mature stable families and $412,924 for young growing families.

The analysis shows the penetration of investment properties touches most segments, but is also shows a skew towards more affluent groups.

A 10-Year Segmented View Of The Mortgage Book

Within our household surveys, we record the date when a mortgage was drawn down. This provides a useful perspective of how long the mortgage was been on book. Applying a segmented view of this data offers an interesting perspective on the market.

In this view we have taken data from the past 10 years, and applied our master household segmentation to reveal the distribution of gross balances across the 10-year period.

Well over 20% of all loans in the entire portfolio, by value were written last year. In 2016, 29% of loans were written by young affluent households, 18% by exclusive professionals, 11% by suburban mainstream and 9% by young growing families.

Interestingly, the average loan written in 2016 for our exclusive professional segment was $1,163,950, compared with $691,843 from the young affluent segment, $428,156 for young growing families, and $163,764 in the battling urban segment. This illustrates the greater leverage in the more affluent sectors, which is why they are more exposed to potential rate rises, as we discussed yesterday.

It also again highlights the power of effective segmentation!

Another Perspective On Rate Sensitivity

Yesterday we took a deep dive looking at how sensitive borrowing households are to a prospective rise in their owner occupied mortgage rates. A fundamental, though valid assumption we made was to look at the relative number of households impacted. This distribution led the analysis.

However, we can look at the data through a lens of relative mortgage value, not household count. This changes the perspective somewhat and today we explore this additional dimension.

We use the same movement in rate scenarios, from under 0.5% up, to more than 7% and show the relative portfolio distribution by value of outstanding loans and the tipping point where the household would fall into mortgage stress.

Using this lens, we immediately see that from a value perspective, a significant proportion of value resides in NSW (larger home prices, bigger loans). Within the NSW portfolio, more than 20% of the value would be impacted by a small incremental rise in mortgage rates. We also see some value impacted in VIC and WA, but to a lessor degree. In other words, the more highly leveraged state of households in NSW means a small rise in real mortgage rates will bite hard here. This despite all the focus in the press on WA and QLD!

Another interesting view is created by using our geographic zoning definitions, radiating from the central business district (CBD) in the middle, in concentric rings, out to the suburbs, and into the regions beyond. The areas where sensitivity is highest to small rate rises are the inner and outer suburbs, plus the urban fringe. This is because mortgages are quite large, relative to incomes. In other words, there is a geographic concentration risk which needs to be taken into account.

Our household segmentation models highlights that from a value perspective, young affluent and exclusive professionals have a dis-proportionally large share of value, and a significant proportion of this would be at risk from even a small rise.

Finally, again using our value lens, we can see that the largest segment which would be impacted by a 0.5% or less rate rise are soloists (see our earlier post for definitions) who got their mortgage via mortgage brokers. In comparison, delegators who get their loans direct from the bank, without an intermediary, are least exposed.

So, we conclude it is essential to look at the mortgage portfolio both from a value AND count perspective. But in fact, it is the value related lens which provides the best view of relative risk. This is how risk capital should be allocated.

Larger loans, via brokers are inherently more risky in a rising rate environment.

Mortgage Customer Satisfaction A Drag

Data from Roy Morgan shows mortgage related satisfaction has fallen, whilst banking using an app on a mobile phone or tablet is now more popular than using branches, with 38.8% of Australians using it in an average four-week period, compared with only 28.2% for branches. Satisfaction is a major driver of this trend with 90.7% satisfaction with mobile banking among the big four, compared to 84.8% satisfaction with branches.

CBA leads in satisfaction with mobile banking

With a 93.8% satisfaction rate among its mobile banking customers, the CBA has the highest satisfaction of the 10 major banks and has improved by 2.2% points over the last 12 months. Bendigo Bank is a close second with 93.4%, followed by ING Direct on 92.7%. The remainder of the big four banks were well below this top group with ANZ on 88.4%, NAB on 88.0% and Westpac on 87.7%.

Satisfaction1 with mobile banking2 vs branch banking – 10 Largest Consumer Banks3

mobile-vs-branch-banking-sat-chart

1. Based on used in the last 4 weeks 2. Using an App on a mobile phone or tablet 3. Based on customer numbers. Source: Roy Morgan Research Single Source (Australia). 6 months ended November 2015, n= 25,410; 6 months ended November 2016, n=24,727

Satisfaction with branch banking is highest for Bendigo Bank (94%), followed by Bankwest on 90.8% and St George (89.5%). The lowest were Westpac (82.8%) and NAB (85.0%). CBA branch satisfaction is at 85.7%, a long way behind that of its mobile users (93.8%) a gap that has widened over the last 12 months.

Mortgage customers of the big four remain a drag on satisfaction

The mortgage customers of each of the big four banks continue to be a drag on their overall satisfaction, despite historically low home-loan rates. Over the last 12 months, satisfaction among the big four’s home-loan customers has fallen further behind their other customers with a decline by 2.8% points to 75.4%, compared to a drop of only 0.4% points for non-home-loan customers (to 80.5%).

Satisfaction of Mortgage and Non-Mortgage Customers – 10 Largest Consumer Banks1

mortgage-vs-non-mortgage-sat-chart

1. Based on customer numbers. Source: Roy Morgan Research Single Source (Australia. 6 months ended November 2015, n= 25,410; 6 months ended November 2016, n=24,727)

ING Direct has the highest home-loan customer satisfaction (of the top 10) with 94.8%, followed closely by 94.5% for Bendigo Bank. These two remain well clear of the field, with the next best being St George (83.6%) and Bankwest (83.3%). The CBA has the highest home-loan customer satisfaction of the big four with 78.0% and Westpac the lowest (72.6%).

The CBA and NAB the big four improvers in November

The CBA was most improved among the big four for the month of November (up 0.3% points to 82.0%), maintaining its top position. The NAB also improved satisfaction marginally (up 0.1% point to 78.8%) but ANZ (down 0.6% points to 77.5%) and Westpac (down 0.1% points to 76.7%) both declined.

Consumer Banking Satisfaction

consumer-banking-sat-chart-trended

Source: Roy Morgan Consumer Banking Satisfaction Report, November 2016, average6-month sample n=25,015.

While the big four maintain a close eye on who is the satisfaction leader among them, the mutual banks remain well ahead of all four. The average satisfaction level for the big four in November was 79.5%, compared to the Mutual Bank’s average of 90.1%. The best performers among the mutual banks were Greater Bank (94.5%), Bank Australia (93.9%) and Teachers Mutual Bank (92.3%), all well ahead of the top ranked big four, the CBA on 82.0%

These are the latest findings from Roy Morgan’s Single Source survey of 50,000+ people pa.

How Households Will Respond To Interest Rate Rises

We have updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards.

To complete this analysis we examine how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. We then run scenarios across the data, until they trip the mortgage stress threshold.

At this level, they will be in difficulty.  The chart shows the relative distribution of borrowing households, by number. So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.

If we overlay our household segments, we find that young growing families and young affluent households are most exposed to a small rate rise. However, some in other segments are also at risk.

State analysis highlights that households in NSW are most sensitive, a combination of larger volumes of loans as well a larger loans, relative to incomes resulting is less headroom.

Younger households are relatively more exposed, because their incomes tend to be more limited and are not growing in real terms relative to mortgage repayments.

Analysis by DFA property segment shows that whilst some first time buyers are exposed at low rate movements, those holding a mortgage with no plans to change their properties (holders) are also exposed. In addition, some seeking to refinance are doing so in the hope of reducing payments, because they have limited headroom.

Finally we turn to other insights from our data. First, those households who sourced their mortgage via a mortgage broker are more likely to be in difficulty with a small rate rise, compared with those who went direct to a bank. This, once again, shows third party loans are more risky. This perhaps is connected to the types of people using brokers, as well as the broker’s ability to suggest lenders with more generous underwriting standards and coaching on how to apply successfully.

We also see that rate seekers (we call these soloists) who are driven primarily by best rates, are more sensitive to small rate rises, compared with those who are more inclined to seek advice, and appreciate service more than price (we call these delegators).

Soloists who went via a broker are the most exposed should rates rise even a little, whereas delegators going to a bank, are more able to handle future rises.

Segmentation, effectively applied can results in quite different portfolio outcomes!

Aussies feel pressure on household budget

From AAP. Only one-fifth of Australians think the national economy is in good shape, a new survey has found, in a grim assessment of consumer cheer heading into Christmas.

A quarterly survey by consumer advocacy firm CHOICE has found only about one in five people believe the Australian economy is in good shape – the lowest positive rating since its Consumer Pulse survey began in 2014.

The December results show that consumers are under increasing financial pressure and feel less positive about their household budget and the economy.

“Many Australians start to feel sharper financial pressures leading into the holiday period, as gifts and parties eat into our savings or credit balance,” acting CHOICE chief executive Matt Levey said.

Australians are also reporting a drop in spending on non-essentials, with more than half of respondents tightening the belt and putting off purchase of big ticket items.

CHOICE’s Consumer Pulse report found fears over the economy are the worst they have been since the survey began two years ago, with just one in four households saying they’re living comfortably.

“In particular, our survey shows that Australians between 30 and 49 are more likely to live off credit cards if they run out of money before pay day,” Mr Levey said.

A third of people under 30 said they dipped into their savings in the last year to make it to pay day, while a quarter had borrowed money from family or friends. About 20 per cent of people aged 30 to 49 reported they deliberately missed the due date on a bill.

CHOICE’s report follows the release this week of the federal government’s mid-year budget review, which forecast that despite lower savings, consumers will likely boost spending on the back of low interest rates and employment growth.

However, the Consumer Pulse figures show that consumers are not necessarily feeling confident enough about their financial future to take on more debt or spending.

“MYEFO’s predictions about household savings match what Australians have told our survey,” Mr Levey said.

“But this won’t necessarily translate into higher consumer spending. In the next 12 months, a majority of people say they are planning to cut back on discretionary and non-essential purchases.”

CHOICE’s Consumer Pulse report, which tracks Australians’ views about the economy and household spending, was based on online responses from 1025 people aged between 18 to 75 years.

Credit Cards Take A Christmas Hit

Christmas is a time when our credit cards get a workout. Data from the RBA shows a significant hike in the number of transactions leading up to the holidays. We marked these  in yellow. But it is worth noting that whilst credit limits are rising, revolving balances are not.

But card use varies by our household segments as used in our surveys.

Using data from our household surveys we find that the relative proportion of households with credit cards varies considerably.  Almost all younger households have cards, as do more affluent households. Disadvantaged households are less likely to had access to a credit card.

If we then overlay the average transaction turnover and revolving balances these also vary by segment. For examples, wealthy seniors use their cards and have high turnover balances, but revolve very little. On the other hand, exclusive professionals use their cards, and revolve significantly.

Younger families are also using their cards, but the average balance and turnover is lower.

This once again highlights the importance of customer segmentation within financial services. You can read more about our analysis of credit card economics here.

 

 

A Deep Dive On Household Rate Sensitivity

Today we look at a Interest Rate Sensitivity – a specific slice of data from our household surveys which we use to drive the mortgage stress data series, as we discussed recently.

Using data from our surveys we are able to estimate the amount of headroom households would have if mortgage interest rates were to rise. We are expecting rises through 2017.

We look at a range of scenarios, and as rates rise estimate the “pain point” for specific households, taking into account their other commitments, income, type of loan and mortgage repayments. Today we look at owner occupied loans.

Looking at sensitivity by age of household, more than 65% of those under 40 years with a mortgage would have difficulty if rates rose just 0.5% (50 basis points).  Households who are older, on average have more headroom. In the “more than 7%” category, 60% of households are over 40 years.

Another interesting cut is the penetration of Lenders Mortgage Insurance (LMI). Around half of households with an LMI protected loan (remember the LMI Insurance protects the BANK, not the Household) would have difficulty if rates rose bu 50 basis points. Households with no need for LMI (normally because they have a lower loan-to-value ratio) have more headroom.

We see from our property segmentation that a greater proportion of first time buyers would be caught if rates rose 50 basis points, but property holders are the largest segment at the high end of the risk profile.

A look at our master segments shows that young growing families and young affluent households are relatively the most exposed if rates rise. Interestingly our battling urban, and disadvantaged fringe groups (who would generally be regarded as the worst credit risk) have more headroom. This is because they have smaller mortgages, so are less leveraged.

By state, NSW have the highest proportion of households which would be exposed by a 50 basis point rise – again because of large mortgages and high home prices.  By comparison, households in QLD AND VIC have more headroom.  Some households in WA are also exposed at 50 basis points.

Finally, we also see that the majority of households we identified as in severe mortgage stress appear in the band who would be under pressure if rates rose just 50 basis points. This is a validation of our modelling, and shows the alignment between mortgage stress and rate movements.

A further illustration of the power of effective segmentation!

 

The Full 100 Mortgage Stress Listing

To complete our series on mortgage stress, based on our household surveys, here is the complete list of the top 100 most stressed suburbs, and their relative position on the default list, as at December 2016.

Victoria has the highest number of suburbs in the listing.

As we discussed yesterday, this is based on the absolute number of households in the suburb who are in difficulty.  You can also watch our video blog where we discuss the research.

Running our risk models, we expect the banks to be reporting higher mortgage defaults next year, with a lift in write-offs from around 2 basis points, to 4 basis points. However, this is still at a low, and manageable level given the capital buffers they hold. We do expect provisions though to rise.

New DFA Video Blog – Household Mortgage Stress and Defaults

Using data from our household surveys in this new video blog we discuss the findings from our latest modelling. More than 22% of households are currently in mortgage stress, and 1.9% of households are likely to default. Both are likely to rise next year.