Household Survey – Page 47 – Digital Finance Analytics (DFA) Blog

Property Purchase Expectations Are Still Strong

Today we continue our discussion of the latest Digital Finance Analytics household surveys, which looks in detail at intentions to purchase property in the next 12 months. This includes data up to late July, so is clear of potential election impacts. The analysis uses a large sample size, so is statistically robust. We use a segmentation model to flush out the main differences between household types. This is described in our publication “The Property Imperative” which is available on request. These results will flow into the next edition later in the year.

We start with some cross-segment comparisons. First, we find that households are just a little less confident house prices will rise in the next year, compared with 12 months ago. However, around half of all households still believe price growth will roll on. Property investors are the most optimistic, whilst those seeking to sell-down, the least.

Looking next at whether households expect to transact, we find that investors are mostly likely to make a purchase, but there is a continued rise among those wanting to refinance. 40% of those seeking to refinance expect to do so in the coming year.

Turning to borrower expectations, first time buyers, those trading up, and portfolio investors are most likely to seek additional mortgage funding. In fact, as interest rates have fallen, demand is even stronger.

Those saving to assist in a purchase are mainly confined to households who are yet to transact, or who are trading up. More than 70 per cent of first time buyers wishing to purchase, continue to save.

We will look in more detail at the forces which are driving investors in a later post, but this summary chart gives a good flavour of what we found. Tax efficiency is the single most powerful driver, and property capital appreciation is also important. Together these are perceived to give better returns that from deposits (in this low interest rate environment). Around 15 per cent of investors cited the low finance rates currently available.

Finally, in this post, we look at which household segments are most likely to use a mortgage broker. Given that half of all new transactions are originated via this route, understanding which customer groups are most likely to reach of advice is important. Those seeking to refinance are most likely to transact via a broker.

Next time we will look at some of the more detailed segment specific analysis. But in summary, whilst property transaction, and lending volumes may be falling, there is still strong demand for property. This will provide ongoing support for prices in the coming months, and also suggests that households will be seeking deals from lenders. There is life in the old dog yet!

Mortgage Stress Falls As Rates Are Cut

We have run our mortgage stress models, using data from our latest household surveys. At the moment, 21.73% of households are in difficulty (a fall thanks to lower rates from last years), though some locations and segments are above 30%. You can read about how we calculate mortgage stress in the Anatomy of Mortgage Stress.

Households in stress are having to cut back spending, are likely to be putting more on credit cards, will have refinanced to reduce payments, may be in arrears, or are taking to a broker about refinancing. The stress model has been updated with the latest survey data, and recent mortgage repricing. This covers owner occupied loans only. In our experience, stressed households, in a flat income environment do not recover, and grind on into greater difficulty later – also of course they are very exposed should rates rise.

Our first chart shows the proportion of households in stress by age of loan. (Of course most loans are just a few years old, so there are more households in recent years. We still see the impact of high first time buyer volumes in 2010 flowing though to higher stress levels, still.

Stress is not just the domain of the young. In fact proportionally, older households with loans are more likely to be stressed – though the numbers with a mortgage are much lower – this is because incomes are squeezed, and households have outstanding mortgages for longer.

Our master household segmentation shows that younger families, and disadvantaged households are more likely to be in stress. The affluent are least impacted.

Finally, we have a view by state and region. There are considerable differences across the states and by location. Again, this does not show the relative count by area, but remember half of all loans reside in NSW and VIC.

Overall we conclude that the cash rate cuts and deep discounts on refinanced loans have eased the pain for many households, despite static incomes. This chimes with recent improved household finance confidence levels.

Provided rates stay low, or go lower, stress levels will remain contained provided employment rates do not rise. Of course the real killer would be interest rate rises. But we are now not expecting lifts in rates anytime soon.

Around 1 in 6 “highly” anxious

The latest NAB research shows that anxiety is the main detractor of personal wellbeing in Australia – mirroring the results in many other advanced countries. But, some of us are managing our anxiety much better than others.

In this report, we asked how well “highly” anxious Australians think they are managing their anxiety. On average, around 60 per cent of highly anxious Australians believe they are coping well, around 25 per cent are managing but around 16 per cent are not coping.

The survey also reveals significant differences in how well different groups are coping with their anxiety. While both young men and young women identify as having high levels of anxiety, around 1 in 3 young women who have “high” anxiety say they are not managing their anxiety well – by far the biggest share of any group. In contrast, fewer than 1 in 10 young men with “high” anxiety believe they are not managing it well.

According to NAB Chief Economist, Alan Oster, “while this is clearly a concern, it is unclear to what extent young women feel more comfortable speaking about their ability to cope with anxiety than young men”.

Around 1 in 4 highly anxious singles and defactos are also not managing their anxiety well.

The report also updates NAB’s Wellbeing Index for the March quarter 2016. Wellbeing fell to 64 in Q1 2016 (64.4 in Q4 2015), with all measures rated lower, except anxiety, albeit it remains the biggest detractor of personal wellbeing.

Among key demographic groups, wellbeing was highest in Tasmania, capital cities, for high income earners (+$100K), men, over 50s, widows, two person households, those without children and professional and part time workers.

In contrast, wellbeing was lowest for singles, young Australians (particularly women), low income earners (less than $35,000) and labourers.

First Time Buyers Continue To Be Squeezed But Still Want Property

Rounding out our survey findings, we look briefly at the first time buyer market segment. We noted in the summary that there was still demand – and we see this translated into both owner occupied and investment property purchases. The “Bank of Mum and Dad” is becoming an important factor, with more than half of first time buyers saying they had some financial help from the wider family. In some cases this translated into a deposit, in other transaction costs, but the most common mode appears to be a loan – often at cheap rates. We also know that banks look for a savings behaviour, so a windfall gift is not necessarily the most successful mode of assistance.

The latest data shows that first time buyers are as interested in capital gains, and tax advantage as meeting a need for a place to live. The tax advantage benefit registered more strongly this time around (thanks to all the recent publicity around negative gearing and capital gains benefits). On the other hand, the first home owner grant structures have largely been dismantled, and in any case they simply pushed prices higher, so were an expensive and ultimately ineffective lever.

The barriers to purchase – which vary by state to some extent – centre on the fact that simply house prices are too high. As a result finding a place to buy, especially competing with investors (who we saw yesterday are back in the game) is hard. We also see a spike in households unable to find finance, as lending criteria have tightened. Lower interest rates do not translate automatically to a larger loan, as the banks are using a floor of 7.25% or more for serviceability assessment – and this has not changed since the recent rate cut. Our modelleing shows that there are much deeper rate discounts for existing buyers wanting to refinance, compared with first time buyers. In addition, the maximum LVR has lowered, so larger deposits are needed – at a time when interest rates on deposits continue to grind lower. Thus first time buyers are squeezed, at a time when incomes are static in real terms.

Looking at the types of property first time buyers are considering, we see that 23% are simply not sure what to go for. Our surveys show that price is the main determinate, and the style, or location of property is somewhat secondary. They simply want to “get on the ladder” – despite the fact we are probably close to peak house prices, and peak household debt! Nationally, the suburban house remains the most attractive option, though more are now having to settle for a suburban unit (20%).

If we ask about whether they will go for an investment property or an owner occupied property, we see that most of those going the investment route are considering a unit, on the fringe of the City. About one third of first time buyers will likely end up as an investor, not living in their own owner occupied home.

We have discussed the drivers of first time buyer investors before, and track the monthly approvals – a gap which remains in the ABS data sets.

You can read more detailed analysis in our report – The Property Imperative, which is released twice each year. The last edition was released in March 2016.

So What’s On The Mind Of Property Investors?

Continuing the update of the latest household survey results, today we look at the investment housing sector. Having seen some months of reduced investment lending activity, the most recent ABS data showed a resurgence of investment lending. We think this will continue. As we reported yesterday, we recorded a spike in the proportion of households who were considering an investment property. Looking across all investors, they say it is the tax effective nature of the investment which drives the demand, coupled with appreciating property values. These together provides better returns than savings accounts or shares. The low costs of finance also helps.

There are a number of barriers which might stop investors from transacting. Last time the prospect of potential budget changes registered, whereas this time the proportion of investor households who cited this as a reason to avoid transacting dissipated. We see a similar trend relating to changes in regulation. On the other hand, there was a rise in those unable to get funding – from below 5% last year to more than 15% this year, reflecting tighter underwriting requirement. So not everyone can get what they want. Results of the election are in the “Other” category, and hardly registered. Investors seem to assume no change in government. High home prices appear to be less of a barrier now.

Looking at solo investors – those who only have one or two investment properties, the prospect of better returns than other investment vehicles is the strongest driver, and the recent cash rate cut has underscored this even more. We see evidence of older investors turning to property instead of bank term deposits (and we see a switch from term deposits to call savings accounts as part of the picture), because of the very low interest rates on offer.

Households who are portfolio investors maintain a basket of investment properties. There are 193,000 households in this group (up by 2,000 from the previous survey). The median number of properties held by these households is eight. Some have more than 20!

In addition, we continue to see a rise in those investing via a SMSF (we have yet to detect an impact on the $1.6m cap which was announced in the budget, which of course is only applicable to those in draw down mode, and even then is still tax efficient).

Households looking to invest via a SMSF seems to be getting information from a mortgage broker (24%) or internet sources (22%). Financial Planners (7%) lag behind Accountants (14%) and Real Estate Agents (11%).

Finally, we still find that those who do investment via SMSF do not tend to put all their super savings into property.

Next time we will look at the latest data relating to first time buyers.

Demand For Property Roars Back To Life

The results from the just updated Digital Finance Analytics Household Surveys shows that after a few wobbly months, demand for property has strengthened. The latest results supplement those found in the Property Imperative Report, which is still available on request. According to the results, lower interest rates, the removal of the negative gearing “risk”, no budget changes, and lower returns from alternative investments all lead to the same conclusion – buy property. We also note that property price rise expectations have risen for some. Over the next few days we will discuss our segment specific findings – looking especially at investors and first time buyers. Today, however we summarise the main trends.

In response to the question, are you expecting to transact in the next 12 months, we see a larger proportion of investors and refinancers expect to be active. Solo investors showed the largest movement compared with the February 2016 data.

More than half of households expect property prices to continue to rise in the next 12 months. Uptraders increased their expectations, compared with February, others were a little less bullish. But a fair degree of optimism reigns.

Looking at borrowing requirements, we see that demand for more credit remains strong – the 7% growth rate in credit will likely continue. Demand is strongest among investors, but we also see a spike in the refinance sector. This is driven by finance availability, lower and discounted rates and capital extraction.

First time buyers are saving the hardest, but uptraders also saving.

Looking at the barriers to purchase, we see that the availability of finance is now impacting more than 12% of households wishing to transact. This reflects tighter underwriting criteria now in play. Fear of unemployment has fallen as a factor, whilst the expectation of future rate rises has diminished significantly. High prices are still a significant factor.

Finally in this overview, we see that the propensity to use a mortgage brokers remains strong among investors, refinancers and first time buyers.

Next time we will look in more detail at our segment specific analysis. You can read about our segmentation methodology here.

Property Investor Confidence Lifts

The latest edition of the Digital Finance Analytics Household Finance Security Index, to end April, released today, shows a lift from 88.14 to 89.20. This is still below the long term neutral score of 100, but is the highest score so far this year.

Of note is the significant spike from 89.67 to 92.45 in confidence among property investors, thanks to the Government stance on negative gearing, the expectation of interest rate cuts, and better news on home price growth. Investor households in NSW and VIC improved the most. Property active owner occupied households saw a small lift from 95.43 to 95.93, thanks to the expectation of lower mortgage rates (though offset by lower returns from those with deposits). Improved stock marker performance assisted. Once again, stronger positive scores in NSW and VIC were somewhat offset by noticeably weaker scores in WA and QLD.

Overall costs of living were flat. We saw a further fall in those who had received a pay rise whilst those with property on average saw their net worth rise again.

There was a noticeable fall in those households who are not property active – either renting or living with family or friends. On average their score fell again, from 84.3 to 83.5. These households are more exposed to costs of living (including rising rentals), have no leverage to the rising property market and are more stressed financially than property holding segments. Around one third of households fall into this group.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 26,000 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.

Mobile First IS Banking’s Imperative

We recently released the latest 2016 edition of our banking channel report ‘The Quiet Revolution”, which is available on request. Our April Video Blog summarises the main findings.

The Quiet Revolution highlights that existing players need to be thinking about how they will deploy appropriate services through digital channels, as their customers are rapidly migrating there. We see this migration to digital more advanced among higher income households but momentum continues to spread. So players which are slow to catch the wave will be left with potentially less valuable customers longer term. Players need to adapt more quickly to the digital world. We are way past an omni-channel (let them choose a channel) strategy. We need to adopt a “mobile-first” strategy. Such digital migration needs to become central strategy because the winners will be those with the technical capability, customer sense and flexibility to reinvent banking in the digital age. The bank branch has limited life expectancy. Banks should be planning accordingly.

Household Finance Confidence Still Low In March

The latest data from our Household Finance Confidence Index showed little change in the month of March 2016, moving from 88.11 to 88.14 when averaged across all households. As the findings from last month therefore remain current, this will be a brief update this time around. Confidence is still below the neutral setting of 100, where the index has been since 2014.

Within the property segments, we saw little change in owner occupied households whilst there was a small rise in property investor households confidence, as talk of negative gearing changes dissipated and property price growth remained quite robust, this despite offsets created by rising interest rates. Property inactive households remained the least confidence, especially as rental growth is still above income growth, so housing is becoming ever more expensive.

Overall households budget expectations were mixed, thanks to the general policy confusion/vacuum which currently exists.

We also saw some small improvements among households with deposit savings, reflecting small improvements in rates of return. In contrast, those with stock market investments were more concerned about current returns as markets remained volatile.

Mortgage Delinquency Mapped

Today we release the latest modelling of our mortgage probability of default, and a map showing the current and predicted default hot spots across Australia. The blue areas show the highest concentrations of mortgage defaults. The average is 1.2%, but our maps show those areas a little above the average (1.2%-1.7%) and the most risky (above 1.7%). The highest risks are more than twice the national average.

Mining heavy states and post codes are under the most pressure.

As part of our household surveys, we capture data on mortgage stress, and when we overlay industry employment data and loan portfolio default data, we can derive a relative risk of default score for each household segment, in each post code. This data covers mortgages only (not business credit or credit cards, which have their own modelling).

Given that income growth is static or falling, house prices and mortgage debt is high, and costs of living rising, (as highlighted in our Household Finance Confidence index) pressure on mortgage holders is likely to increase, especially if interest rates were to rise. In addition, the internal risk models the major banks use, will include a granular lens of risk of default.

So, some borrowers in the higher risk areas may find it more difficult to get a mortgage, without having to jump through some extra screening hoops, and may be required to stump up a larger deposit, or cop a higher rate.

In QLD, locations including Camooweal, Clermont, Theodore, Loganlea and Gulngai score the highest.

In NSW, locations including Quirindi, Stanhope Gardens, Duri, Greta and Brewarrina scored high.

In VIC, Berwick, Endeavour Hills, Darnum, Moonee Ponds and Pascoe Vale scored the highest.

In WA, Butler, Port Kennedy, Merriwa, Secret Harbour and Nowergup scored high.

In SA, Montacute, Marree, Macclesfield, Stirling and Uraidla scored the highest.