Household Survey – Page 49 – Digital Finance Analytics (DFA) Blog

Strong Demand For Robo-Advice May Cannibalise Financial Advisors

Robo-Advice, the concept of using computer automation to provide tailored financial advice has been hitting the headlines recently. DFA has researched household demand for these digitally delivered services, and today we share some of the results.

By way of background, a robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use human financial planners. Robo-advisors (or robo-advisers) use the same software as traditional advisors, but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning. Robo-advisors are typically low-cost, have low account minimums, and attract younger investors who are more comfortable doing things online. The biggest difference is the distribution channel: previously, investors would have to go through a human financial advisor to get the kind of portfolio management services robo-advisors now offer, and those services would be bundled with additional services.

ASIC’s chairman Greg Medcraft says computer-generated financial advice, or “robo advice” could slash investment costs and eliminate conflicts of interest in the maligned financial planning industry. They have established a “robo-advice taskforce”, which is investigating the suitability of potential entrants, who use computer algorithms to match investors with suitable assets at a lower cost than human advisers.

A number of Australian players are experimenting with different offers and solutions. For example, according to the AFR, Macquarie is creating a robo-advice platform that puts in one place more than 30,000 local and international investment choices. Unlike other robo-advice platforms, which are really vehicles for gaining funds under management and charging an asset management fee, Macquarie has opted for genuine portfolio advice that does not discriminate between particular fund managers or show any bias towards particular stocks or sectors.

Midwinter’s “Robo-Advice Survey” from 2015, which comprised of responses from over 288 advice professionals, representing over 65 licensees showed the majority of advisers (55%) surveyed were aware of Robo-Advice and not concerned about its potential to disrupt the advice industry, with 12% of these advisers actually excited about its arrival. Around a quarter of advisers were aware and concerned of the impact of Robo-Advice on their business. Only a small amount of advisers (5%) considered themselves apathetic towards the rise of Robo-Advice.

Fintech’s such as Decimal which was founded in 2006 by former Asgard senior executive Jan Kolbusz, provides new capability to the financial advice industry utilising the power and affordability of the cloud. Decimal has subsequently entered into an agreement with Aviva Corporation that saw the company listed on the ASX in April 2014 as Decimal Software Limited (DSX).

So turning to our analysis, DFA has been examining the prospective impact of Robo-Advice, from a household perspective using data from our household surveys. We have found that currently those who have received financial advice already, and who are most digitally aware would readily consider Robo-Advice services. Our conclusion is that rather than growing and extending advice to more Australian households, the first impact of Robo-Advice will be to cannibalise existing advisor relationships.

To start the analysis,we looked at overall estimated net worth by household segment. Those households with higher balances are more likely to have sought, or are seeking financial advice. On average a quarter of households have at some time sought advice.

Next we looked at the technographic trends across our household segments using our digital segmentation, between those who are digital natives (always used digital), migrants (learning to use digital) and luddites (not willing or able to use digital). The chart below shows the relative distribution by segment across these three. The more affluent, and younger are most digitally aligned, and so are more likely to embrace Robo-Advice.

Next, we combine the data about getting financial advice and technographics. We find a greater proportion of households who are digitally aware have sought advice.

Finally, we asked in our surveys about households awareness and intention to consider Robo-Advice solutions if they were available. The results are shown below, with young affluent households, young growing families and exclusive professionals most likely to consider such a service. The proportions for each segment are those who would consider Robo-Advice, across all the digital segments.

However, the analysis showed that those with existing advice relationships AND high digital alignment were most likely to consider Robo-Advice. Those who are digitally aligned, but not seeking advice showed no propensity to use such a service – at this point in time.

So two observations, first there are many different potential offerings which should be constructed on a Robo-Advice basis, as the needs, of young affluent, and very different from say exclusive professionals. So effective segmentation of the offers will be essential, and different personas will need to be incorporated into the systems being developed.

Second, the bulk of the interest lays with those who have had advice, so it may not, in the short term grow the advice pie. Indeed there appears to be strong evidence that existing advisors may find their business being cannabalised as existing clients switch to Robo-Advice. This is especially true if the range of options are greater, and the price point lower.

We therefore question the assumption expressed within the industry that Robo-Advice is not a threat, as it will simply expand the pie to segments which today do not seek advice. In fact, we suggest the clever play is to make it a tool, and aligned to Advisors, rather than a substitute for them. In addition, the marketing/education strategies need to be developed carefully. There is a lot in play here.

RBA’s Latest Statement Raises Two Interesting Questions

The latest Statement of Monetary Policy, released today, continues to tell the now well rehearsed story. Resources down, China under pressure, local growth slowish, and transitioning from mining, sort of working, whilst home lending continues to grow at above 7% annually. But they kick around two interesting issues. First, why is the unemployment rate so good when growth is sluggish, and second why is the household savings ratio lower now?

Looking at employment first:

…strong employment growth has also been supported by a protracted period of low wage growth which, along with the exchange rate depreciation, may have encouraged firms to employ more people than otherwise. At the same time, growth in the supply of labour has increased through a rise in the participation rate, notwithstanding lower population growth. The unemployment rate declined to around 5¾ per cent in late 2015, having been within a range between 6 and 6¼ per cent since mid 2014. Nevertheless, there is evidence of spare capacity in the labour market, as the unemployment rate is still above recent lows, the participation rate remains below its previous peak and wage growth continues to be low.

Also, the low growth of wages is likely to have encouraged businesses to employ more people than otherwise. Measures of job vacancies and advertisements point to further growth in employment over the coming months. In response to this flow of data, the forecast for the unemployment rate has been revised lower. The fact that the improvement in labour market conditions has occurred against the backdrop of below-average GDP growth raises some uncertainty about the economic outlook. It is possible that the strength in the labour market data contains information about the economy not apparent in the national accounts data, or that the strong growth in employment of late will be followed by a period of weaker employment growth. Alternatively, the strength in labour market conditions relative to output growth may reflect a rebalancing of the pattern of growth towards labour intensive sectors and away from capital intensive sectors.

DFA is of the view that the growth in lower-paid non-wealth producing jobs at the expense of productive jobs is the key – more are now working in the healthcare and services sector (in response to growing demand thanks to demographic shifts), but it just moves the dollar around the system, and does not create new dollars. There is difference between being busy, and being productively (economically speaking) busy.

Turning to the savings ratio:

… after falling for more than two decades, the aggregate household saving ratio in Australia increased sharply in the latter half of the 2000s. While it has since remained close to 10 per cent – which implies that, collectively, households have been saving about 10 per cent of their incomes – the saving ratio has declined modestly over the past three years or so.

Understanding developments in the saving ratio is important because changes in household saving behaviour can have implications for the outlook for aggregate consumption. Trends in the household saving ratio in Australia over recent years are likely to reflect a range of factors, including the effect of the boom in commodity prices and mining investment on household incomes, behavioural changes stemming from the global financial crisis, and the current low level of interest rates. Longer-term factors such as financial deregulation and population ageing have also played a role. Households’ expectations about future income growth and asset valuations, and the uncertainty around those expectations, are also relevant to their saving decisions. Many households accumulate precautionary savings to insure against an unanticipated loss of future income or unexpected expenditure (such as on a medical procedure). At the macroeconomic level, precautionary saving is likely to be particularly important if households are very risk averse or constrained in their ability to borrow to fund consumption when their incomes are temporarily low. For example, the financial crisis is likely to have made households more uncertain about their future employment or income growth and/or led them to reassess their tolerance for risk, which would have encouraged them to increase their rate of saving. Surveys at that time showed an increase in the share of households nominating bank deposits or paying down debt as the ‘wisest place for saving’, although this may have also reflected lower expected rates of return on other financial assets following the financial crisis.

The level of interest rates can also influence the saving ratio. On the one hand, the current low level of interest rates reduces both the return to saving and the cost of borrowing, which encourages households to bring forward consumption; this might explain some of the recent decline in the aggregate household saving ratio. Low interest rates also support the value of household assets, which increases the amount of collateral households can borrow against, and potentially reduces the incentives for households to save. On the other hand, the household sector in aggregate holds more debt than interest-earning assets, so cyclically low interest rates provide a temporary boost to disposable income through a reduction in net interest payments, some of which may be saved. Households also need to save more to achieve a given target level of savings when interest rates are low.

Structural changes to the Australian financial system have been important longer-term drivers of changes in household saving behaviour. Financial deregulation in the 1980s and a structural shift to low inflation and low interest rates in the 1990s allowed households that were previously credit constrained to accumulate higher levels of debt for a given level of income. This rise in indebtedness was accompanied by strong growth in housing prices and a reduction in the household saving ratio to unusually low levels. In this way households were able to support consumption via the withdrawal of housing equity. Innovation in financial products – such as credit cards and home-equity loans – also gave households much better access to finance. The adjustment to these structural changes in the financial system appears to have largely run its course by the mid 2000s.

The ageing of the population is another longer-term influence on the saving ratio. If shares of younger and older households in the population were constant over time, the different saving behaviours of these households would not affect the aggregate saving ratio. However, Australia’s baby-boomer generation is a larger share of the population now and has been entering the retirement phase since around 2010. Because households save less in their later years, this is expected to have a gradual but long-lasting downward influence on the aggregate household saving ratio. However, a potentially offsetting influence is rising longevity, which may lead households to save more during their working years to finance a longer period of retirement.

The amount that each of these drivers have contributed to recent trends in the aggregate household saving ratio is unclear. It is also uncertain how they will evolve over the next few years, although the Bank’s central forecast embodies a further modest decline in the saving ratio, that reflects, in part, the unwinding of the impact on saving from the earlier boom in commodity prices and mining investment.

Using data from the DFA household surveys, we note three factors in play. First, household confidence levels still below long term trends, so we would expect households to continue to save, if they can, against perceived future risks. Second, older households hold the bulk of the savings, and they are indeed growing as a proportion of the total, so again we would expect to see a rise, not a fall in the ratio. But, the third factor, is in our view, the most significant. That is that many are relying on income from savings, and as deposit interest rates have fallen (and alternative investment options become more risky), some have switched savings into investment property and others are having to eat into capital to survive. The RBA’s policy settings of low interest rates, and high house prices are being reflected back in lower savings ratios.

Owner Occupied Demand Stronger – ME Bank

ME’s latest Property Buying Intentions Report indicates demand for residential property may remain strong over the next 12 months despite prudential changes and tightening of lending criteria for some home buyers. The Report shows a big jump in demand for property by owner occupiers potentially offsetting falling demand by investors, while buyers continue to outnumber sellers.

According to the Report:

In the six months to December 2015, the proportion of Australians intending to buy a property/home fell 1 point to 17%, matched by a correspondingly small fall in the proportion intending to sell a property/home (down 1 point to 7%). Buyers continue to outnumber sellers by more than two-to-one.
Over the same six month period and among those actively looking to buy and/or sell property during 2016, there was a 5 point increase to 50% in the proportion looking to buy a home to live in (owner occupier buyers) offsetting a 5 point fall to 33% in the proportion looking to buy an investment property (investor buyers).
Also among those active in the property market, planned sales by home owners remained unchanged over the six months to December at 26%, while there were fewer intended sellers of investment properties (down 5 points to 8%).

ME Treasurer, John Caelli, said notwithstanding other factors, the findings indicate property demand pressures from buyers may remain strong over the next 12 months. “While recent tightening in bank prudential regulations and lending criteria have reduced the proportion of investor buyers, overall demand for property may remain strong due to increased demand by owner occupier buyers. “Demand expectations from buyers may also remain strong due to unmet demand from owner occupiers supported by continued low borrowing costs and recent improvements in the labour market.”

Other findings

23% of Gen Y are saving to buy a property to live in and 25% intend to buy a property to live in in the next 12 months, the most of any age group.
10% of Gen X are saving to buy an investment property and 8% intend to buy an investment property in the next 12 months, the most of any age group.
The proportion of first home buyers has increased slightly to 22% in the six months to December 2015, up 1 point.
Of those actively looking to buy or sell a home to live in in the 12 months, 19% are downsizers, 22% are upgraders and 59% are looking for property with a similar price point.

About the House Buying Intentions Report

ME commissioned DBM Consultants to conduct an online survey of approximately 1,500 Australians aged 18 years and older who do not work in the market research or public relations industries. The population sample was weighted according to ABS statistics on household composition, age, state and employment status to ensure that the results reflected Australian households.

Women are increasingly using payday loans, at growth rates above system

New DFA research shows that women who are most vulnerable and under the most significant financial pressure are most likely to access payday services. Those that do are quite likely to take multiple loans.

DFA, in conjunction with Monash University published a report on households in financial stress last year using data from our household surveys. It was cited by ASIC in their review of debt advice services, published yesterday.

We have now completed an extension to the analysis, commissioned by Good Shepherd Microfinance, looking in particular at how women are using payday loans. This analysis is relevant to the SACC review currently underway. Payday lending is defined as loans of $2,000 or less for terms between 16 days and 12 months, in accordance with the National Consumer Credit Protection Act 2009 definition of a small amount credit contract.

Our analysis reveals that women are increasingly using payday loans, at growth rates above system. This is explained partly by a low initial penetration rate, greater financial need and autonomy, and greater availability and ease of online loans. We expect these growth rates to continue.

Not all women are equally likely to access payday loans. Those in challenging financial situations, with sole charge of children are most likely to use this form of credit, and often do so as a form of emergency cash for household expenses. Solo women without children are less likely to use payday loans, and when they do, it tends to be for a specific purpose such as car repairs. Finally, the behaviour of women in family units is closely aligned to the general population, and the decision to access payday is often either a joint decision or delegated to another family member.

1. Are women increasingly using payday lending in Australia?

The short answer is “yes”; women are using payday lending more. In 2005 about 84,000 women had used payday lending, but this had grown to 177,000 in 2015, a 110% rise compared to growth in the total industry in Australia of 80% over the same period. Transactions initiated by women as the decision maker, whether in a family or other context, comprised about 27% of all payday loans in 2015.

Our analysis segments Australian households into various groups in order to identify those that are financially stressed (with a subset defined as financially distressed).

Financially stressed households are generally coping with their current financial situation (even if using unconventional means), while financially distressed households are not. By coping, we mean for example, short term borrowing from family, friends, or payday loans, as well as juggling multiple credit cards, moving debts from one credit source to another and deliberately making late payments. The distinction between financially stressed and financially distressed households is important, because the spectrum of financially stressed households in Australia using payday lending facilities has broadened significantly since 2005. During the period of analysis (and as shown in our original report) the rise in loans to financially distressed households grew only slightly, but there was a significant rise in the volume of loans made to financially stressed households. These classifications of households are, of course, dynamic, with financially stressed households moving into a position of distress and vice versa.

Across the general population, the average size of an individual payday loan fell between 2005 and 2015 from $776 to $611. Yet if we look at payday loans to women, the average loan made rose significantly from $427 in 2005 to $592 in 2015.

There are a number of reasons that may explain this. First, the proportion of loans to women has increased between 2005 and 2015. Second, more independent women are getting loans. Third, lenders have changed their lending criteria. Fourth, women have greater need of financial assistance and are borrowing more. Further research would be required to determine which of these factors have been most influential.

We conclude that women are more likely to use a payday loan today. They are able to access funds on-line, with lenders using on-line channels to attract households in less severe financial difficulty.

Some women in financial need have limited alternate options. We explore this later.

2. What are the household characteristics of women who use payday lending in Australia?

To answer this question, we have identified three discrete groups within which women may reside. Each has different drivers and needs, and uses payday lending to different degrees. This segmentation is based on analysis from our household surveys and is tailored specifically for this paper.

Using this segmentation, we can now overlay the payday lending data statistics from our surveys.

Of those women using payday lending in 2015, 47% came from the one-parent family segment, a much higher level than the 15% distribution of households with a single female parent across the general population. Conversely, while 64% of the general population falls within the family segment, the percentage of women using payday loans from this segment was only 36%.

3. How are women using payday lending in Australia?

Segmental analysis shows that one-parent women are more likely to have multiple loans over the last twelve months, compared with other female segments and the general population. Conversely, single women without children are most likely to have just one loan (87%), compared with general population (62%).

We find that one-parent women are more likely to have multiple concurrent loans, compared with other female segments and the general population.

On-line origination has become a predominant industry feature, and one-parent women are now the most likely segment to use this channel, thanks to the emergence of easy to use on-line apps.

We found broadly similar patterns of awareness of payday lending across the various segments, although families with a single female parent were far more likely to use a local shop or lender than the average, and were significantly more influenced by friends.

4. What are the motivations and drivers of women using payday lending in Australia?

Our segmental analysis highlights that families with a single female parent are more likely to use payday loans to cover emergency cash for household expenses compared with the general population, or other female segments. Solo women are more likely to use payday loans for car expenses and other one-off items rather than emergency cash scenarios. The family segment mirrors the broader population.

We now turn to the underlying reason why a household is in financial difficulty. A range of drivers is found in the sample. Once again, women in one-parent roles stand out from the general population, as they are more likely to get into difficulty because of a relationship breakdown (25%) and are experiencing a reduction in available government benefits. These women are less impacted by loss of employment than other segments and the general population.

How Sensitive Are Property Investors To Interest Rate Rises?

Continuing our series on potential material risks within investment loans, today we reveal some of the analysis we have undertaken on the potential impact on investors of prospective rate rises using data from our household surveys. We framed the questions here around how large a rise could an individual household cope with before getting into financial discomfort. We considered scenarios between zero and 7%. The overall results are startling. We found that about a quarter of property investors said they would have difficulty meeting any additional interest rises – even 0.5% – implying that they are already under financial pressure. Others could cope with various rises, though more than 50% of investors would be in potential difficulties should rates rise by 3%. On the other hand, more than 30% of investors were able to cope with a significant rise, even above 7% from current levels.

So which households are most exposed? We start by looking across the DFA property segments. We found that 20% of first time buyer investors would be concerned by any rise, whereas more than 40% for portfolio investors (who are more highly geared) and a considerable proportion of people who traded down and geared into an investment property recently would be caught out. Others, such as those refinancing, or holding property appear to be more able to swallow potential rises.

The size of the loan portfolio has a bearing on households, with the average portfolio investor having a balance of over $750,000 in investment property (some much more) so would be more sensitive to rate rises.. We conclude that generally households with smaller investment loans are (perhaps obviously) a little more able to cope with potential rises.

Next we cut the data by states. Here we found that investors in TAS were most concerned about potential rate rises, followed by SA and ACT. These are states were income growth (and property appreciation) is slowest. On the other hand, investors in WA and NT appeared more able to cope with significant rises

Finally, we examine the data by our core household segments. Here we found that wealthy seniors were the most exposed (incomes relatively flat compared with their investment portfolios), followed by stressed seniors and young affluent.

Of course, if rates were to rise – perhaps this is not likely in the near term – investors have the option of selling up, but the analysis shows that some would need to act quite fast in a rising rate environment. It also raises the question as to whether the banks underwriting criteria are working – because they should be assuming borrowers could cope with a rise to above 7.5%, which is 2-3% higher than most are currently paying. Our research suggests that some households are geared up to the hilt, and have no spare cash for unexpected raises down the track.

Next time we will add in the impact of owner occupied borrowing also.

How Material Is “Material” For Property Investors?

The latest iteration of the BIS paper on proposed capital adequacy changes includes a fundamental change to the way the risk charge would be calculated for investment property purchases funded by a mortgage. Fundamentally, if repayments are “materially dependent on cash flows generated by the property”, then depending on the loan to value ratio, the risk weighting could be as high as 120%, significantly higher than today. We discussed this in our recent post.

BIS does not give any clear guidance on what “materially dependent” might mean, and comments are open until mid March, so finalisation will be later than this. However, this got us thinking. What would happen if, for some reason, the rental income stream stopped? Clearly in the short term, pending finding a new tenant or selling the property, the repayments would have to be made from other income streams – salary, investments and dividends.

So we have run some scenarios on our household database, to examine the potential impact. To start we estimate the average proportion of gross income which would need to go to servicing the investment mortgage. We have taken into account income from all sources (excluding rental income), and also calculated repayments based on the current interest rate, adjusted for discounts, and whether the mortgage was a principle and interest loan, or an interest only loan. We also take account of the impacts of negative gearing.

Over the next few days we will share some of our modelling, which will ultimately flow into our next Property Imperative report. Our last edition dates from September 2015 and is still available on request.

Our first analysis is grouped by our household property segments. These include households who only have investment property (Investors, and Portfolio Investors), as well as households with both an owner occupied property and an investment property (including first time buyers, holder, refinanced, trading-up and trading-down. You can read more about our segmentation here.

The chart shows the impact to their income if the repayments were to be serviced by said income, rather than rental streams. The chart shows the proportion of income which would be consumed, and the distribution of households by segment. There is considerable variation, but we see that a considerable proportion of households would need to put more than 25% of their income aside to service the mortgage. A small, but worrying proportion would require more than 50% of their income, and a small number more than 100%. This is significant, given the current low (and falling) income growth rates.

We can also look at the data through the lens of our master household segments. These are derived from a range of demographic and behaviourial elements. We see that generally more affluent households are more exposed to investment property, and as a result, require a larger proportion of their income (despite having larger incomes) to support the repayment required to replace rental income. We also see that stressed seniors, with a rental are more exposed, which is not surprising given their lower income levels.

Standing back, this initial analysis shows that it is not easy to determine what is “material”. Different segments and property portfolios will require different settings. In addition, as the extra capital charges being discussed will translate into higher mortgage interest rates for some, it appears that these increases will hit different segments to varying extents.

Will BIS attempt to describe conditions which are material, or leave it to the individual regulatory authorities – such as APRA?

Next time we will look at the consolidated impact of households with both owner occupied and investment loans. This is important because some households have more than half their income servicing property.

DFA Household Finance Security Index Lifts – For Some

The latest edition of the DFA Household Finance Confidence Index (FCI) is released today, using data from our household surveys up to the end of November 2015. The index moved up a little, from 90.73 to 91.46, but still below the neutral setting of 100. So overall households remain cautious about their financial state in the run up to Christmas.

The 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. We discuss the findings in the video below.

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.

One of the more interesting aspects of the research highlights that households who are property investors continue to have their overall confidence eroded, driven by the higher costs of finance and doubts about the prospect of future capital growth. This echoes the fall-off in investment lending we have been tracking in recent weeks. The downturn in investor confidence is most marked in NSW. On the other hand, owner occupied property owners have become relatively more confident, thanks to continued low interest rates. Those households who are property inactive (renting, or seeking to buy) remain the least confident sector.

Looking at the elements which drive the index, we find that 35.5% of households say their costs have increased in the past year, up by 0.6% from last month, whilst 5% say their costs have fallen. 59% say there has been no net change, thanks to lower mortgage interest costs over the year, helping to offset other rising costs. Low inflation levels are helping.

Income growth remains under pressure, with 5% saying their income has rising in the part year (after inflation), and 37% saying their real incomes have fallen, whilst 57% said there was no change. Many have not received any rise in pay over the past year, and are relying on more overtime to lift take-home wages. One respondent said ” we are simply running harder, just to stand still”.

Looking at debt levels, 61% said they had more debt than last year, 23% said there was no change, and just 15% said their debt was lower (up by 1.6% last month). Mortgages continue to be the main burden, and some households (those generally more affluent) are continuing to reduce their credit card and loan debt. We did also note a continued rise in small loans, from households under financial stress.

Many households have little money in the bank for a rainy day, but of those who are saving, 14% said they were more comfortable with their savings than a year ago which is down 1.5%, and linked directly to continued low rates of return available on many bank deposit accounts. Around 30% were less comfortable, because they had to dip into their savings to pay the bills, and in the run up to Christmas, down a little from last month. Several commented on recent stock market falls, and the risks to their investments running into 2016.

Job security was quite varied, depending on region and industry. Those employment in (lower paid) service industry jobs – for example in healthcare in NSW, were the most confident, whilst those in mining, agribusiness and construction, especially in WA and SA were more concerned. 17% felt more secure than a year ago, 62% felt about the same, and 20% felt less secure. Younger households felt less secure than more mature households.

Finally, 60% of households said their net worth was higher than a year ago, down a little from last month, thanks to recent stock market adjustments, and property coming off in several locations. 15% said their net worth was lower (a rise of 1.6% compared with last month), and 23% said there was no change.

We think it quite likely we will see continued improvement in coming months, although if house prices start to tumble, or interest rates were to rise, this would have an immediate negative impact. We would also observe that households remain cautious, and whilst we expect something of a spending boom over Christmas, it looks like it will be tempered by limited increases in personal credit, and lack of available savings.

First Time Buyers Still In The Market But…

Continuing our analysis of the latest DFA household survey of property drivers and expectations, today we look at the First Time Buyer segment. For those wanting to buy, but are unable to do so, the main barriers remain high house prices, and costs of living (no surprise given static real income growth). However, we also see a spike in availability of funding as a barrier, compared with a couple of months ago. Lending criteria may be getting tighter for some. We also see fears of unemployment receding in the eastern states, though it was a little higher this time in WA.

So then, looking at those who are actively seeking to buy for the first time, more than 20% are unsure of the type of property they can find. Overall houses, are preferred but we see units very much in the frame, especially in the eastern states, in and around the main urban centres. There are more units available (resale and new construction) than houses in these areas, and prices for units will be a little lower.

For those actively seeking to buy for the first time, prices are the major barrier, most seem able still to get finance if they do find a place to buy.

One final perspective, from our earlier research, we are seeing some reduction in the absolute number of first time buyers going direct to the investment sector (the red line), but it is still a very significant factor. It is still a logical approach for some, to gain access to the housing market, perhaps by buying a cheaper place to rent and hoping for capital gains and tax breaks, though of course interest rates have risen in the investment mortgage sector, and prospective buyers are likely to be buying into very full (some would say precarious) prices. For many it is a dilemma, will prices continue to rise (in which case they need to get in now) or will prices begin to correct (in which case it is better to wait, to avoid the pitfalls of negative equity)? Given yesterday’s comments, waiting a bit may be the more sensible path as the property worm is turning, especially in the eastern states.

More next time on the other segments in our surveys. You can read our last Property Imperative Report which summaries the state of play as at September 2015. This post updates some of the data in that report.

The Property Worm Turns

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

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

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

There remains significant demand for loans, and those wishing to borrow more…

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

Finally, looking at savings intentions, we see little change, with prospective first time buyers still saving hard, despite low returns from deposits.

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

Household Financial Confidence On The Up

The latest edition of the DFA Household Finance Confidence Index for October 2015 is released today, and shows a noticeable uptick compared with last month. The current index stands at 90.7 compared with 87.7 in September, still below the long-term neutral position, but on the improve. Taken with the stronger employment dat a, released today by the ABS, we think there a potential drop in the cash rate is off the table, unless there is an external shock. Should the US lift rates in December this would be another nail in the rate cut coffin.

Looking at the segmentation of the index, property inactive and owner occupied households improved compared to property investors who were more concerned about rising mortgage rates, and lower property price growth. They are also being hit by lower rental returns. This shows the importance of the property sector on overall confidence.

Overall, at a national level, 61% of households said their net worth had improved, up 1.1% from last month, and still being supported by rising property prices in the eastern states. 13% of households said their net worth was lower, and these were impacted by lower stock market prices, and some property price falls in WA and SA.

Looking at cost of living, there was a fall in those who said their costs were higher at 35%, compared with 40% last month, mainly due to lower prices for some foods, fuel, and low interest rates. 60% said there was no real change.

Looking at real income, 5% said they were better off, a slight rise from last month, whilst 55% said their real incomes had stayed the same over the past year (this is after inflation), very similar to last month. 38.7% said their incomes, in real terms, had fallen.

Next we turn to debt. Here 13% were more comfortable (up 1.8% from last month) with their levels of debt, whilst 26% were less comfortable, and 58% about the same, close to last months results. The small hikes in mortgage rates have yet to hit, so we will see if the score changes next month. However, absolute low rates are helping, and future expectations for interest rises appear more subdued.

The status of savings showed that 15% were more comfortable, up 2.4% on last month, thanks to deposit returns stabilising, and dividends holding up.

Finally, job security improved, with 17% saying they felt more secure (up 0.7%), and 63% saying they felt as secure as last year, similar to last month. However, there was a more negative note in WA, and on an aggregated national basis, 20% of households were less secure, up 1% on last month. Better employment prospects showed through in NSW and VIC.

So, we think there is a change of momentum in the index, and unless there is some external shock, the index is likely to climb as we enter the summer months. One factor which came though in the data was a more positive expectation about our political leaders, and this is flowing though to improved confidence.