Household Survey – Page 51 – Digital Finance Analytics (DFA) Blog

Online Access Is Driving Payday Industry to New Heights

DFA has completed detailed analysis of households and their use of small amount credit contracts, a.k.a. payday lending. The analysis, derived from our longstanding household surveys, was undertaken in conjunction with Monash University Centre for Commercial Law and Regulatory Studies (CLARS) and commissioned by Consumer Action Law Centre, Good Shepherd Microfinance, and Financial Rights Legal Centre. The report “The Stressed Finance Landscape” is available here.

We review detailed data from the 2005, 2010 and 2015 surveys as a means to dissect and analyse the longitudinal trends. The data results are averaged across Australia to provide a comprehensive national picture. We segment Australian households in order to provide layered evidence on the financial behaviour of Australians, with a particular focus on the role and impact of payday lending.

We think the overall size of the market is growing, thanks to the rise on online access, and we recently posted our modelling, which we summarise below:

The transference to online channels is linked with a rise in the number of households who, whilst not financially distressed (distressed households are first not meeting their financial commitments as they fall due, and are also exhibiting chronic repeat behaviour, and have limited financial resources available) are financially stressed (struggling to manage their financial affairs, behind with loan repayments, in mortgage stress, etc).

Digital disruption opens the door to new lenders (local and overseas), and makes potential access to this source of credit immediate. The volume of loans is set to increase and more than ever will be originated online. In addition, some digital players offer special member designated areas secured by a password, where special offers and repeat loans could be made away from public sight. Online services are now mainstream, and this presents significant new challenges for customers, policy makers and regulators.

Some of the key points (as summarised by Good Shepherd Microfinance) from the report:

• The total number of households using a payday lending service in the past three years has increased by more than 80 per cent over the past decade (356,097 to 643,087 households).

• All payday borrowers were either ‘financially stressed’ (41 per cent) in that they couldn’t meet their financial commitments or ‘financially distressed’ (59 per cent) because in addition to not meeting their financial commitments, they exhibited chronic repeat behaviour and had limited financial resources.

• 2.69 million households are in ‘financial stress’ which represents 31.8 per cent of all households and is a 42 per cent increase on 2005. Of the households in financial stress, 1.8 million are ‘financially distressed’ (just over 20 per cent of all households) – a 65 per cent increase on 2005.

• The number of people who nominated overspending and poor budget management as causes of financial stress had decreased over the past 10 years (from 57.2 per cent to 44.7 per cent). Unemployment has become a more significant factor with over 15 per cent of households indicating this caused their financial problems.

• In 2005, telephone and local shops were the most common interface to payday lenders. By 2015, more than 68 per cent of households used the internet to access payday lending. Mobile phones and public personal computers (eg libraries) were the most common device used.

• The number of borrowers taking out more than one payday loan in 12 months has grown from 17.2 per cent in 2005 to 38 per cent in 2015 and borrowers with concurrent loans have increased from 9.8 per cent to 29.4 per cent in the same period.

• The top three purposes for a payday loan were: emergency cash for household expenses (35.6 per cent). Emergency cash for household expenses included children’s needs (22.7%), clothing (21.6%), medical bills (15.1%) and food (11.4%). More payday loans are being used to cover the costs of internet services, phone bill and TV subscriptions (7.8 per cent) than in 2005 and 2010.

• Many distressed households (38.7 per cent) were refinancing another debt and 36.8 per cent already had another payday loan when taking out their payday loan. Around half of the households that had used payday lending services indicated they would be willing to take out another payday loan.

• Single men were more likely to use a payday loan (53 per cent) and the average age of the borrower was 41 years old. In the last five years, households in their thirties almost doubled their use of payday loans (16.3 per cent in 2005 to 30.35 per cent in 2015). Only 5.26 per cent of borrowers had a university education. The average annual income of payday borrowers in 2015 was $35,702.

• ‘Financially distressed’ households generally use payday loans either because it is seen as the only option (78 per cent), while ‘financially stressed’ households are attracted by the convenience (60.5 per cent).

How Big Is The Payday Lending Market In Australia?

Given the current Small Amount Credit Contract Laws review is in train, DFA has been looking at the data in our household surveys to try and quantify the potential size, and trends in the market – colloquially known as the payday lending sector. There is no consistent reporting of payday data, unlike other consumer finance statistics, and the industry comprises a number of commercial entities which do not fall within banking regulation or reporting. Whilst the market is small compared with the $40bn credit card industry or the $140bn total consumer credit market, there are signs of growth, especially facilitated by online origination. We won’t rehearse the definitions or pros and cons of these loans, but will present our work on estimating the size of the payday market. This may assist others interested in the sector.

By way of context, there are many and varied estimates as to the size of the market. ASIC in 2013-2014 suggested $400m, and since 2010, ASIC enforcement action has resulted in close to $2 million in refunds to more than 10,000 consumers who have been overcharged when taking out a payday loan. In 2007, an article in the BRW suggested it was $800m, a number offered recently in an article “Making hay from payday loans” by Steve Worthington Adjunct Professor at Swinburne University in 2015.

So to estimate the size, we begin with data from our ongoing household surveys. From this data we can estimate the number and duration of loans being written each year. This is our baseline data and we think about $600m of loans were written in the last full year, to December 2014, a rise from $300m in 2005.

Significantly, if we apply our segmentation analytics on this data, we discover that the type of household accessing payday loans is changing. Whilst we won’t go into detail here, we identify households which are financially stressed, and those who are distressed. The former are primarily being embarrassed by a short term cash crisis, and turn to payday on an occasional basis as a convenient fix often via an online service. Financially distressed households are those with chronic debt problems and were the core constituency of payday lenders a few year back. Of course some households who start out as stressed, slip into distress later.

We have also estimated the future value of new loans by these segments, based on a number of assumptions listed below.

Note this is an indicative model only, and underlying assumptions and therefore outputs, may change. We model future volumetrics based on our baseline household survey data. We gross up the 26,000 per annum reference data to national level, on a statistical representative basis. We assume there will be similar utilisation and debt patterns, at a segment and state level, and overlay expected population and employment growth. We assume population and household growth will maintain current trend levels. In addition, we overlay current online segment profiles, which shapes the mix between both distressed and stressed households, and reflects the rise of online application and fulfillment for Pay Day loans. We project online take up forward, extrapolating from current trends and device usage. We assume the current mix and duration of loans, including multiple loans, continues at current rates. We assume no change in the current payday legislation, and we assume the current levels of availability of other forms of credit, and current lending rules.

We make the following specific assumptions (the DFA model can be flexed using different parameters).

Unemployment at the national level will remain at 6.3% out to 2018 (and current state differentials continue, with rising rates in WA and SA.
Cash interest rates will rise from 2.0% from mid 2016, to reach 3.5% by 2018
GDP will remain at 2.5% to 2018
Core inflation will remain at 2.5% to 2018
Income growth, after inflation will be zero out to 2018

Estimates are rounded up. Based on past performance, we have a confidence level of +/- 1.5% out to December 2016, and +/- 3% beyond to 2018.

Finally though we want to estimate the total market size, so we need to take account of the total stock of loans outstanding, including those refinanced or extended, and those in default. This is significantly harder to estimate accurately. However, we have made an attempt, and we have assumed default rates will continue to run at close to 20% as indicated in our household surveys.

Thus, the baseline market estimate for the current year will be in the region of $670m, and when we include arrears, refinance and other stock adjustments it could be as high as $908m. We think the market will grow to more than $1bn with current regulatory and economic settings, thanks to the significant rise in online origination and the segment shifts. By 2018, we estimate that more than 80% of loans will be taken via online apps and web sites. The chart below summarises all these points.

One final perspective. If we chart the the DFA estimates for payday and the RBA Personal Finance Stock data (d02Hist) from 2005, we see that Pay Day lending growth is accelerating relative to the broader personal finance trends.

DFA Household Finance Confidence Index Languishes In September

The negative household confidence sentiment continued in September according to the latest results from our household surveys, released today. The overall score was 87.73, compared with 87.69 last month. These are levels well below 100 which is a neutral result, and still in the lowest region since 2012 when the DFA FCI started. The instability in the financial markets, flat real income growth, and rising costs swamped any positive impact on the change of Prime Minister overall. Households with property investments remain significantly more confident than those who are property inactive.

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.

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.

Looking in detail at the elements which drive the survey, 40% of households said their costs of living had risen in the past 12 months, a rise of 0.17% from last month. Only 3.6% of households said their costs had fallen, down 2% on last month. Major movements were driven by the rising costs of some supermarket goods, as well as child care and school fees. 55% of households said their costs of living had not changed in the part year, a rise of 2.5% from last month. The majority of younger households were significantly worse off.

Turning to income, after inflation, 4.8% of households said their incomes had risen, up 0.6% on last month, whilst 40% said their real incomes had fallen, down 2% on last month. 55% said there had been no change in the part 12 months. Those relying on income from savings continue to be hit by low deposit account interest rates, and recent stock market falls. We saw a number of households report a fall in overtime, especially in WA and SA, whilst in NSW and VIC additional work was a little easier to find.

Next we look at debt. 11% of households were more comfortable than 12 months ago, little changed from last month. Many of these continue to pay ahead on their mortgage, and are reducing credit card debt. 27.7% of households were more uncomfortable than a year ago, up 0.38% on last month. Those younger households with a owner occupied mortgage were most concerned, and in addition, we noted the rise of concern among those using credit cards to balance their spending. The ongoing low mortgage rates on owner occupied mortgages provides a buffer, and so far, the higher rates on investment loans have not worked through to dent confidence. 58% of households were as comfortable with the debts they service, very similar to last month.

Looking specifically at savings, 13.2% were more comfortable, down 0.4% on last month. 31.1% were less comfortable, up 1% on last month, thanks to stock market volatility and ultra low bank deposit rates. There was a higher concern now that the Government may impose more tax on superannuation following the change of leadership. 54% of households were still as comfortable compared with 12 months ago, little changed on the month.

The state variations in job security are becoming more pronounced, with WA, SA and NT all showing greater concerns, whilst NSW and VIC continued to improve. We noted those currently working in the construction sector were more concerned this month, thanks to an expected development slow-down. Those more secure than last year rose 2.1% to 15.9%, thanks to the NSW and VIC effect. 63% of households were as confident as 12 months ago, up 2%, whilst those less confident overall fell by 2% to 19%. However, there are a number of moving parts which are working in different directions, and which are averaged away in the national summary.

Finally, we look at net worth, a measure of overall value held, net of debt by households. Overall, those with higher net worth than a year ago remained at 60%, whilst those with lower net worth rose 1% to 14.5%. 23.5% of households said they had no overall change, up 2.6% on last month. There are again offsetting forces at work in these results, with sustained house price growth in NSW and VIC more than offsetting falls in the stock market. On the other hand, states where house prices were weaker, were more likely to see net worth fall, because mortgage debt is still high.

If we look at the overall index by property segment (as defined by DFA), those who are property inactive (either renting, living with friends, at home, or in public housing) had a lower confidence score, because they had all the pressures created by rising costs, static or falling incomes, and no upside from property. Investment property investors were the more confident (though still well below the 100 neutral level), and owner occupied home owners are between the other two segments.

Overall then household financial confidence continues to languish, despite record low interest rates. Because of this we believe many households will continue to spend carefully, and be careful not to extend their high personal debt further. We also see how property is supporting the confidence levels significantly, and of course if this changed for any reason (for example, static or falling capital growth, or rising rates) confidence would be significantly dented further. The future of housing has become the key to confidence.

Property Investment Via SMSF Still On The Rise

As we round out the household segmentation analysis contained in the recently released Property Imperative report, today we look at residential property investment via a self managed superannuation fund.

APRA reports that Self-Managed Superannuation funds held assets were $589 billion at June 2015, a fall from $600 billion in March 2015.

Throughout the survey we noted an interest in investing in residential property via a self-managed superannuation funds (SMSFs). It is feasible to invest if the property meets certain specific criteria. In August the Government said such leveraged investments had their support, although the FSI inquiry had suggested such leverage should be banned. The rationale for this earlier recommendation was to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly and fulfill the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle. Is this something which the Turnbull government might revisit?

Overall our survey showed that around 3.35% of households were holding residential property in SMSF, and a further 3% were actively considering it . Of these, 33% were motivated by the tax efficient nature of the investment, others were attracted by the prospect of appreciating prices (26%), the attractive finance offers available (15%), the potential for leverage (12%) and the prospect of better returns than from bank deposits (10%).

We explored where SMSF Trustees sourced advice to invest in property, 21% used a mortgage broker, 23% online information, 11% a Real Estate Agent, 14% Accountant, and 7% a Financial Planner. Financial Planners are significantly out of favour in the light of recent bank disclosures and ASIC publicity on poor advice.

The proportion of SMSF in property was on average 34%.

According to the fund level performance from APRA to June 2015, and DFA’s own research, Superannuation has become big business, with total assets now worth over $2 trillion (compare this with the $5.5 trillion in residential property in Australia), an increase of 9.9 % from last year.

Property Investors Are Still Optimists

Continuing our series on the latest findings from The Property Imperative, we look at property investors today. We find that they are seriously optimistic about the future of property (and recent capital gains have fueled their future expectations).

Looking first at what we call solo investors, about 987,000 households only hold investment property, 2.2% of which are held within superannuation. Households in this segment will often own one or two properties, but do not consider they are building an investment portfolio.

They are strongly driven by the tax efficient nature of property investment via negative gearing and capital gain concessions. They also have enjoyed low finance rates, strong capital appreciation, and better returns than from bank deposits.

Around 84% of households expect prices to rise in the next 12 months, 42% of households expect to transact within the next year, 51% will need to borrow more, and 39% will consider the use of a mortgage broker.

Turning to portfolio investors who are households who are portfolio investors maintain a basket of investment properties. There are 178,000 households in this group.We see somewhat similar motivations as discussed above, with tax efficiency being the strongest driver, followed by appreciating property values and good returns. We see a number of these households devoted to property investment as a full-time occupation.

Indeed, the median number of properties held by these households is seven. Most households expect that house prices will rise in the next 12 months (88%), and 77% said they will transact in the next 12 months.

Many will borrow more to facilitate the transaction (85%), and 53% will use a mortgage broker. Significantly we now see about 21% of portfolio investors looking to their property investments as the main source of income, it has in effect become their full time job.

Next time we look at those investing via a self managed superannuation fund.

Does Trading Down Trump Trading Up?

As we continue to look over the results of the latest household surveys, as captured in the recently released Property Imperative report to September 2015, we look at households who are wanted to trade up and trade down. These are important segments of the market because they have reason to transact, and access to funding if they decide to trade. In fact they tend to underpin the market, and the balance between the two tell us something about demand and supply, and also which sectors are more likely to be on the up.

So looking first at those seeking to trade up, our survey identified about 1,077,000 households who are considering buying a larger property. Most (91%) are owner occupied. Of these households 12% are expecting to transact within the next 12 months, whilst 64% of households expect house prices to rise in this period.

The main reasons for these households to transact are as a property investment (40%), to obtain more space (33%), because of a job move (12%) and for a life-style change (12%). Many of these households will require further finance (72%) and a quarter will consider using a mortgage broker (22%), whilst 33% of these households are actively saving to facilitate a transaction. We note that prospective future capital gains rated most strongly, the view of property as an investment continues to drive behaviour. We also note that the majority of up-traders are seeking houses rather than apartments. Given the focus on owner occupied finance now, lenders and brokers would do well to consider their strategies to assist this market segment.

Turning to down-traders, more than 1.25 million households are considering selling and buying a smaller property. These households tend to be older, and with higher net worth. Of these 71% are considering an owner occupied property, and 29% an investment property. Of these 670,000 currently have no mortgage and own the property outright. Many will not need bank finance to transact. Some however may seek investment finance.

Around 24% of these households expect house prices to rise over the next year, whilst 51% expect to transact within 12 months, 9% will consider using a mortgage broker and 9% will need to borrow more. Households will transact to facilitate increased convenience (30%), to release capital for retirement (28%), because of unemployment (7%) or because of illness or death of a spouse (9%). Down traders tend to be seeking smaller more convenient property, are more likely to go for an apartment with good access to central facilities, such as shops and healthcare, and some may, as part of a wealth management strategy be seeking to release capital (as they have seen significant upside in recent times) and opt for an investment property (sometime with negative gearing).

But, if we put these two segments together, there are about 765,000 households looking to trade in the next year. Of these, nearly 80% are down traders. We think this will have an impact on the supply and demand footprint in the market, with smaller property being supported by the high number of down traders, and poor supply, whilst those with larger places, and wanting to sell may find a lack of buyers and a saturated market, so price differentials will moderate, with continue growth in the middle market, but more sluggish growth, or even a fall at the top end. This could well also distort prices in specific geographic areas. In other words, down traders may have to give a little on the price they get to sell their current place, and pay more for their next property, because of the higher level of demand. Up-traders will find good supply of property if they choose to transact, and will be able to negotiate hard on price.

Next time we look at the investment sector.

Refinancing Opportunities In The Spotlight

We continue to discuss the segmented findings from the latest edition of The DFA Property Imperative report, which was released this week. Today we look at the refinancing sector.

There are around 673,000 households considering a refinance of an existing loan of which 79% relate to an owner occupied property, and 21% to an investment property. To assist in the refinance, 75% of households will consider using a mortgage broker.

Households are looking to refinance for a number of reasons, including reducing monthly repayment (40%), to lock in a fixed rate (15%), because of a loan rollover (14%), in reaction to poor lender service (11%), for a better rate (5%) or to facilitate a capital withdrawal (15%).

In the next 12 month, 23% of these households are likely to transact (a rise from 14% last time), whilst 53% expect house prices to rise in the next 12 months.

The growth in refinancing can be expected to continue as the focus turns from investment lending to owner occupied new and refinance loans. There are a number of discounted offers for refinancing currently available. We note that a smaller proportion are refinancing to a fixed rate.

Within our data, we see that borrowers with larger loans are more likely to refinance to an interest only loan.

We also found that about 38% of loan refinance transactions were in the $250-500k range. Many potential refinancers have held their loan for more than 2 years, and may well benefit from accessing current keenly priced alternatives.

Lenders are homing in on existing owner occupied borrowers in the hope of persuading them to churn their loans. Mortgage Brokers in particular will see this as an opportunity as the growth in investment loans slows. The removal of exit fees makes it easier for households to move, and with incentives including cash-back and no fee offers in the market they are firmly in the spot light. We expect to see a rise in the proportion of refinance borrowers who leverage the capital appreciation of their property by withdrawing some additional capital.

It is worth saying that there are also more than than 808,000 households who are holding property, with 81% owner occupied and 21% investment. Whilst 431,000 of these properties are owned outright and are mortgage free, the remainder have a mortgage and may well be able to benefit from current offers. However, they will need to be enticed, as they do not plan to transact at the moment. Players may well consider some segment specific campaigns.

Of these holding households, 72% expect house prices to rise in the next year, but under 1% would consider using a mortgage broker because they are by definition not intending to transact in the next year (99%).

Next time we will look at up-traders.

First Time Buyers Still Want Property

Continuing with data from the latest edition of the Property Imperative, today we look at first time buyers. Our latest survey identified about 319,000 households who are first time buyers. The majority are seeking to purchase, or have recently purchased an owner occupied property (80%), the remainder preferring an investment property. Only 9% of these households expect to transact within the next 12 months, despite 67% believing house prices are set to rise in the same term.

The biggest barrier to purchase include high house prices (52%), fear of unemployment (11%), finding the right property (22%) and rising costs of living (6%). In terms of financing 61% of households will need to borrow more than they can currently obtain to transact, whilst 62% of households will consider using a mortgage broker to assist with the finance arrangements.

The barriers do vary by state. In NSW, first time buyers were finding it more difficult to find a suitable place to buy (28%), whereas costs of living were less significant here. In WA, fear of unemployment (22%) and high prices (54%) were the most significant barriers.

First time buyers are split between looking for a house or a unit (in Sydney more are looking for a unit). A greater proportion (21%) this time were simply not sure what to buy, or where to buy, a rise from 4% in 2013. A greater proportion of first time buyers in Sydney are likely to buy, or have bought a unit, rather than a house. In the other states, the preference for a house is stronger, though in Melbourne and Brisbane, it continues to drop. In Perth, house preferences are stronger.

When we compared the elements which influence a buying decision, we see a stronger focus on price in 2015. Schools are important, then access to transport. We see consideration of absolute commute times to be less important now than in 2010. However, almost all elements are traded away because of high prices.

Whilst the ABS tweaked their estimates of first time buyers taking a mortgage to adjust for the decline in first owner grants, they still give an incomplete picture.

The traditional wisdom is that first time buyers are sitting out of the property markets, because prices are high, loans harder to get, and confidence is falling. However one of the most significant developments surrounding first time buyers is that many more are now going direct to the investment sector.

The original data from the ABS, shows a small fall in the month to 15.4% in July 2015 from 15.8% in June 2015. The DFA data for investor FTB also fell. The number of first time buyers are still sitting at around 12,000 a month in total, still well below the peaks in 2009. Our surveys indicate strong FTB investor appetite. The changed underwriting requirements however are having an impact.

There are a number of drivers to this trend. First, most first time buyers were unable to afford to purchase a property to occupy, in an area that made sense to them and were being priced out of the market. Next, many were anxious they were missing out on recent property gains, so decided to buy a less expensive property (often a unit) as an investment, thanks to negative gearing, they could afford it. They often continue to live at home meantime, hoping that the growth in capital could later be converted into a deposit for their own home – in other words, the investment property is an interim hedge into property, not a long term play. Some are also teaming up with friends to jointly purchase an investment, so spreading the costs. In fact about one third who purchased were assisted by the Bank of Mum and Dad, and would consider an investment property by accessing their superannuation for property investment purposes, a bad idea in our view.

Given the heady state of property prices at the moment, this growth in investment property by prospective first time buyers is on one hand logical, on the other quite concerning. We would also warn against increasing first time buyer incentive.

Remember, also the data refers to loans, not property transfers, and we know from our surveys that additional purchases were made without the need for a mortgage by overseas investors, and local purchases cashed up thanks to the Bank of Mum and Dad.

Turning to the reasons why first time buyers are going down this track, our analysis of buyer motivations draws some striking observations. We see that the prospect of potential capital gains is now the highest rated driver at 30%, whilst the desire for somewhere to live is just 27%. We see the prospect of gaining tax advantage is growing, now up to 10%, whilst the advantage of a First Home Owner Grant (FHOG) is falling away as these grants become less accessible (6%). Fewer buyers now expect to pay less than renting, whilst the prospect of greater security remains about the same.

So putting this together, we conclude that first time buyers are reacting to the current house price boom in logical ways. They are however being infected by the notion that property is about wealth building, rather than somewhere to live. This notion, which served previous generations quite well (once they were on the property escalator), may be tested if interest rates rise later, or property prices fall from their current illogical stratospheric levels. The overriding result from the survey is the first time buyers are very fearful of missing out, and that delaying potential entry into the market will simply make it less affordable later. Recent changes to underwriting standards may cramp their style, but we still expect to see a continued rise in the number of first time investor buyers.

Over 1.3 m Households are Property Want-To Buys

Continuing our posts from DFA’s latest Property Imperative report, just released, which contains the latest data from our surveys, today we focus on the Want-To-Buys. This segment comprises households who want to buy a property, some are saving, but have not yet committed. Their aspirations are being crushed by current market conditions.

Over 1.3 million households aspire to purchase property, of which 84% are looking for owner occupied, and 15% are looking for an investment property.

At the moment 17% are actively saving, hoping to buy sometime in the future, this is lower than last year, when 28% were saving. For many, they see the savings task beyond them now because of rising prices, lower bank deposit rates, and lower incentives to enter the market.

The biggest barriers which are stopping them from purchasing, include that prices are too high (51%), the costs of living (17%) and fear of employment (13%). Only 1.3% were expecting to transact within the next 12 months, indicating that the majority are currently disenfranchised from the property market, despite the fact that 41% expect house prices to rise over the same period.

The proportion of households who are disenfranchised by high house prices continues to rise, whilst issues relating to unemployment have moderated slightly.

We also note a small rise in households unable to obtain mortgage finance, thanks to tighter underwriting standards.

Next time we will look at first time buyers.

Households Still Want Property, But Its Becoming More Challenging

Contained in the latest edition of the Property Imperative, released today is an update on households and their attitude towards property. Over the next few days we will post some specific findings from the report. Today we look at aggregate demand.

To understand the current dynamics of the residential housing market we need to examine the behaviours of different household segments, because generic averaging across these diverse segments hides important differences. There are about 8.98 million households in Australia , and using analysis from the Australian Bureau of Statistics, and our own survey, we have segmented these households looking specifically at their property owning behaviour.

First we split the households into those which are property inactive, and those who are property active. Property inactive households were defined as those who currently rent, live with parents, or are homeless, with no plans to enter the market.

Property active households are those who own, or actively desire to own property, either as an owner occupier, or as an investor, and either own the property outright, have a mortgage or are actively looking. The analysis shows that about 26.1% percent of households are property inactive, which equates to about 2.35 million households. Examining past data, and applying the same analysis, we discovered that even correcting for population growth and migration, the property inactive proportion of the household population has been steadily increasing.

A similar fall in home ownership rates have been confirmed by others and it is suggested that the main reason for this trend is that house prices have simply grown faster than average incomes, thus making it harder to buy into the market.

This signals an important underlying social issue, and is not being adequately addressed. Actually, we are seeing more households becoming tenants of the growing band of property investors, whilst many younger Australians are unable to buy for themselves, or are becoming property investors first. We note that in New Zealand, the Reserve Bank is consulting on changing the capital ratios for investment loans.

However, we will focus our attention on the property active household segments. To assist in our analysis we have segmented the property active segments by motivation and type. Below we outline our segments, and how they are defined.

Want-to-Buys Household s who want to buy a property, are saving, but have not yet committed
First Timers Households who are buying, or have bought for the first time
Refinancers Households who are restructuring their finances, but not moving house
Holders Households with no plans to move or refinance
Up-Traders Households looking to buy a larger place
Down-Traders Households looking to buy a smaller place
Solo Investors Households with a single investment property
Portfolio Investors Households with a portfolio of investment property

In our survey, we also mapped these segments across owner occupied and investment property types. The chart below shows the current number of households by segment distribution, as at September 2015 .

In our surveys, we looked across a number of dimensions, within the segments. This included whether they were actively saving to buy, intending to transact, borrowing needs and house price expectations. We will outline findings from each of these.
Portfolio Investors are more likely to transact in the next 12 months (over 77%), then solo investors (43%), then down traders (47%) and refinancers (23%). First time buyers (9%) and want to buys were least likely to transact (9%). Overall demand for property is still very strong, but headwinds are slowing momentum.

That said, first time buyers are saving the hardest (72%), although want to buys (21%) and up traders (32%) are also saving.

Turning to borrowing expectations, portfolio investors are most likely to borrow more (87%), up traders (73%), first time buyers (60%) and sole investors (51%) are also in the market.

Most segments are bullish on house prices over the next 12 months, with down traders being the least excited (24%). Investors have the strongest view of potential future growth, whilst the trends across other segments suggests a weakening of expectation, at the margin.

Some segments are more likely to use a mortgage broker than others, with refinancers mostly likely to (75%), then first time buyers (55%) then investors (36%).

One of the interesting aspects of the research is how consumers select a lender. More than ever, households do initial research online, using comparison sites, or social media before making a choice, either via a broker (who are doing well just now ), or direct with lenders. However these traditional business models are now at significant risk from digital disruption. The key selection criteria is price, price and then price. Below is segmented data, showing the relative importance of price, brand, flexibility, loyalty and trust. Apart for holders, who are not in the market currently, on average 80% of purchasers will make their final decision on the price of the deal. Brand is largely irrelevant.

The average new loan has grown again, to over $428,000 for a NSW non-first time buyer, according to the ABS data to July 2015 . The growth in loan size is running more slowly than house price growth (circa 13% in NSW), but significantly above average income growth.

About 10% of loans have a fixed rate (thanks to the current low RBA cash rate and expectation of lower rates to come).

The proportion of interest only loans written continues to grow, according to APRA data. The latest data to June 2015 indicates that more than 40% of new loans are interest only.

Next time we will look in more detail at some of the segment specific data.