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

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.

Latest DFA Report – The Property Imperative 5 – Just Released

The Property Imperative, Fifth Edition, published September 2015 is available free on request.

This report explores some of the factors in play in the Australian residential property market by looking at the activities of different household groups using our recent primary research, customer segmentation and other available data. It contains:

results from the DFA Household Survey to September 2015
a focus on underwriting standards and mortgage pricing
an update of the DFA Household Finance Confidence Index
a discussion of the impact of high house prices

You can obtain a copy of the report, delivered via email here.

From the Introduction.

The Property Imperative is published twice each year, drawing data from our ongoing consumer surveys, research and blog. This edition dates from September 2015 and offers our latest perspectives on the ever-changing residential property sector.

We begin by describing the current state of the market by looking at the activities of different household groups using our recent primary research and other available data.

In this edition, we also look at current mortgage pricing dynamics and underwriting standards; update our household finance confidence index and discuss the impact of chronically high house prices over the longer term.

Residential property is in the cross-hairs of many players who wish to influence the economic, fiscal and social outcomes of Australia.

By way of context, the Australian residential property market of 9.53 million dwellings is currently valued at over $5.76 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank (RBA), banking competition and regulation and other factors. Indeed the RBA is “banking” on property as a critical element in the current economic transition.

According to the RBA, as at July 2015, total housing loans were a record $1.48 trillion . There are more than 5.4 million housing loans outstanding with an average balance of about $243,000 . Approximately 61% of total loan stock is for owner occupied housing, while a record 39% is for investment purposes. Last month, more than half of new loans written were for investment purposes.

The relative proportion of investment loans leaped by nearly 2.5% to 38.9% thanks to a significant reclassification of loans by some lenders.

In addition, 39.7% of new loans issued were interest-only loans.

The RBA continues to highlight their concerns about potential excesses in the housing market . In addition Australian Prudential Regulation Authority (APRA) has been tightening regulation of the banks, in terms of supervision of lending standards, the imposition of speed limits on investment lending and has raised capital requirements for some banks . The latest RBA minutes indicates their view is these regulatory changes are slowing investment lending somewhat , though we observe that demand remains strong, and in absolute terms, borrowing rates are low.

The story of residential property is far from over!

Table of Contents:
1 Introduction 3
2 The Property Imperative – Winners and Losers 4
2.1 An Overview Of The Australian Residential Property Market 4
2.2 Home Price Trends 4
2.3 The Lending Environment 6
2.4 Bank Portfolio Analysis 9
2.5 Market Aggregate Demand 10
3 Segmentation Analysis 16
3.1 Want-to-Buys 16
3.2 First Timers 16
3.3 Refinancers 19
3.4 Holders 19
3.5 Up-Traders 20
3.6 Down-Traders 20
3.7 Solo Investors 21
3.8 Portfolio Investors 21
3.9 Super Investment Property 21
4 Special Feature – Current Mortgage Pricing Dynamics 24
4.1 Regulatory Context 24
4.2 Bank Reaction 25
4.3 Portfolio Implications 28
5 The DFA Household Finance Confidence Index 30
6 Who Benefits From High House Prices? 33
7 About DFA 35
8 Copyright and Terms of Use 36

Mortgage Discounts Crash

Latest data from the DFA surveys which is going into the forthcoming edition of the Property Imperative, shows that the era of very large mortgage discounts is passing. The average discount has now fallen from above 100 basis points to around 60 basis points and it will continue to fall further. This means a windfall for lenders who can pocket the extra margin, or use it to attract owner occupied new business.

The range of discounts between the upper and lower bounds is reducing, with the lowest bounds around 20 basis points.

The most insightful data is the split by loan type. Loans for investment loans (both new and refinanced) are much reduced, with the average a little above 20 basis points – some lenders offer no discount at all now. On the other hand, owner occupied borrowers with new or refinanced loans can obtain a larger cut in rates. This reflects the new competitive landscape, where lenders are seeking to swing business away from the investment sector to owner occupied lending.

You can read our earlier analysis on discounts here.

DFA Video Blog On Latest Household Finance Confidence Results

Today we published the latest DFA Household Finance Confidence index (FCI), which showed a further fall. This video blog discusses some of the findings, and considers some of the issues which explains the results, and what may change them.

You can read about how we assemble the index here, and past results here.

Latest DFA Survey Shows Household Finance Confidence Falls

The latest edition of DFA’s Household Finance Confidence Index to end August is released today, and it shows a significant fall. With a score of 87.69 (down from 91.1 in July), it is the lowest since the index started, and is well below its neutral setting, which was crossed in April 2014. Recent stock market volatility, concerns about employment prospects, rising living costs and slowing income growth all combine to drive the index lower.

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 at the drivers of the index, this month, 40% of households are concerned about rising costs of living (up 1.8% on last month), whilst 52% said their costs had not changed (down 3.3%). In the surveys, recent council charges and school fees were mentioned specifically.

Turning to real income (after inflation), about 4% of households saw their income rise in real terms (up 0.3% on last month), whilst 39.6% said their incomes had fallen (down 0.5%) and 55% said there had been no change. Income from bank deposits continued to drop, thanks to lower rates, and dividends from some shares were lower than expected. A significant proportion did not expect to see any rise in wages in the next six months.

Looking at debt, 11.4% of households were more comfortable with their current levels of borrowing, (down 1.2% on last month), whilst 59% were about the same (up 1.85%), thanks to the expectation that interest rates were unlikely to rise any time soon. There was a rise of 0.5% in those feeling less comfortable about their level of debt, (27%), this was directly linked with concerns about future employment prospects.

Turning to savings, 13.5% of households were more comfortable with their level of savings (down 0.4% compared with last month), whilst 30.2% were less comfortable (a fall of 1.1%). 54% of households were feeling about the same as last month, up 1%.

Looking at job security, 13.8% of households felt more secure about their job prospects (down by 1.9% on last month), whilst 22% felt less secure (up 2.5%) and 61.5% felt as secure as last month (down 0.5%). There were significant state and industry variations, with those employed in mining and construction more concerned, especially in WA, along with those in manufacturing in VIC and SA, and those in QLD and NSW in resources. Those in the service sectors, such as healthcare and finance were more confident. Younger workers and those aged over 50 years were more concerned, whilst females were less concerned than males.

Finally, looking at net household worth, 60% of households thought their net worth had risen (down 2.2% on last month), thanks mainly to rising home values in the eastern states. 24.6% saw no change (up 1.5%) and 13.6% saw a fall. The main drivers of those with concerns can be traced to the volatility on the stock markets, and falling property values in WA. We also note that the one third of households who are not property active are significantly more represented in the falling category, because they do not benefit from the wealth effect of rising property prices.

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 did also note though a strong interest in property as the most secure investment option, and as a result, we expect to see ongoing high demand. We will cover this in more detail in a future post.

DFA Household Finance Confidence Index For July 2015 Shows Investors Have It

We released the latest DFA Household Finance Confidence today, incorporating results from our household surveys to end July. The overall index recovered a little from its all time low last month, rising to 91. This is still below a neutral setting. The index has been below water since April 2014.

This month we pulled out data from the 26,000 survey responses, segmented by our master property categories. We found that households who are property inactive (those renting, living with parents or friends, or homeless) consistently registered a lower score, at 87 this month, and we see a falling rating since we started this analysis in 2012. On the other hand, those households with investment property consistently rated higher, because of the wealth effects of rising property values, and because their incomes were more stable. Owner occupied households fell between the two extremes, though we noted a kick-up this month, thanks to the prospect of potentially cheaper loans ahead. We also see a subtle fall in the confidence of property investors, who are reacting to recent hikes in interest rates for investment properties. Could this be the first sign of an investment sector slow-down?

Now turning to the All Australia aggregate data, we see that costs of living continue to worry households, with 38% of households saying their costs were rising, up 3% on last month, and a similar fall in those who said there was no change to their costs. Households identified costs relating to council rates, food, fuel and overseas purchases as the main reasons for the rise. Those families burdened with child care costs and health related expenditure also suffered significant increases.

Turning to income, 4% more households this month said their income was falling in real terms, and 40% of households fall into this category. As well as wages being static or falling, households also saw falls in the interest paid on bank deposits. Only 4% said their incomes had risen, these tended to be households receiving dividend income from stocks. Just over 55% of households said their incomes had not changes (though as highlighted above, their costs had), so many are feeling the pinch.

Next, looking at job security, those households who felt more secure in their jobs fell by nearly 1%, to 16% of households. More than 62% of households felt no difference in their level of job security. There were significant state and industry variations however, with those in WA and SA the most concerned, and registering a fall in security, whilst NSW and VIC both registered higher rates of job security.

Looking at household debt (which is very high at the moment), 13% of households were more comfortable at their levels of debt, whilst 26% were less comfortable, and 60% were as comfortable as last time. Low interest rates are allowing households to manage high debt, but of course they are highly leveraged, and would be impacted if interest rates were to rise. Most households expect rates to remain low for the next couple of years.

Turning to savings, 14% of households were more comfortable with the savings they had, little changed from last month, whilst 54% were as comfortable as last month. Households commented on the difficulty of finding a good home for their savings, in the current low interest rate environment, and were concerned that adjusted returns were worth next to nothing. We also noted an increase in those households unable to get access to $2,000 within a week in an emergency. Around 15% of households are in this category, and the majority are those who are property inactive.

Finally, we look at net worth. Those households in the eastern states with property are feeling better off thanks to continued rises in property prices. Those with investment properties were feeling particularly smug. However, those in WA, NT and QLD were more more concerned about the trajectory of house prices, and saw their net worth falling – 62% of households saw their net worth rise, up 2%, whilst 14% saw it fall.

So overall, slowing wage growth and rising costs of living are counterpointed by rises in property prices, and low interest rates. However, bearing in mind that rates are unusually low and house price growth unusually high (for some), we do not see the fundamentals in place for a significant boost to household financial confidence any time soon. Therefore we expect households to spend conservatively, continue to save, and seek higher investment returns from higher risk asset classes.

Refinancing Will Be The Next Big Thing

As the banks dial back investor lending to meet the speed limit set by APRA, owner occupied loans are becoming the focus. Within that, we are already seeing very attractive refinance deals – including low rates and cash backs. One lender has announced a 4.19% home loan variable rate for owner occupiers, with an LVR 80-85% LMI refund offer for new owner occupier home loans and $2000 cashback for owner occupiers purchasing or refinancing their own home.

We think refinancing, will become the centre of attention, so the latest findings from our household surveys include detailed analysis of the dynamics of refinancing households. There are around 535,000 owner occupied households in our refinance segment, plus 134,000 who are investors, and 3,300 who have property in a SMSF account. This is a significant number. The latest monthly transaction data from the ABS shows a lift in refinancing, and we think this will continue as investment lending tightens.

Trend-Lending-Flows-May-2015

First we look at underlying drivers. The most significant reason to consider a refinance is to reduce monthly repayments with 40% of households considering refinance looking for lower rates. The recent rate reductions for such deals will help stoke the market. We also see a rise in those looking to refinance to facilitate withdrawing capital thanks to recent house price gains. The capital is being used for a range of activities, including paying off credit card debt, paying for renovations, a holiday, or a wedding. For many, this makes economic sense, as interest rates on a mortgage are lower than short-term finance. However, it lifts the LVR and raises household debt, not necessarily without risk. Some will fix a rate, but more are thinking rates may go lower yet, so are preferring to go for a variable rate. Not a bad call in the current conditions.

Looking at the refinance drives across the loan value, we see that those with the largest loans are most likely to release capital, and those with loans between $250-500k most likely to seek to reduce monthly payments, and also will reset a fixed term loan.

Larger loans are more likely to be refinanced to interest only, whereas smaller loans are more likely to be principal and interest refinancing,

Finally, those seeking to refinance are most likely of any segment to use a broker in the transaction. So brokers need to be honing their refinancing discussion (having spend the last few months focussing on the investment sector).