Household Survey – Page 52 – Digital Finance Analytics (DFA) Blog

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).

Property Investors Still Hot To Trot

Continuing our analysis of the latest DFA household surveys, we look at the investor segment. You can find our segment definitions here. We start by estimating the number of investors in the market. Overall, there are 2.16m households with investment properties, up from 2.01m in 2014. The growth is explained by the entry of increasing numbers of first time buyers, and more down traders becoming active.

We also see the continued rise in the number of portfolio investors – households with a portfolio of investment properties, to nearly 200,000. A significant proportion will have more than five properties. Around 75% of portfolio investors expect to transact within the next 12 months, 49% of solo investors and 52% of down traders.

First time buyers are increasingly going direct to the investment sector, with more than 50% of first time buyers in Sydney following this path. We have explained why this is occurring in a recent video blog.

The latest motivation data suggests that appreciating property value, and tax effectiveness remain the main drivers to transact. They are also influenced by low finance rates, and the ability to get better returns than from deposits. A rising number of investors are now relying on rental income for future living expenses, this is especially true among down traders, who need higher returns than bank deposits. Some barriers to transact do exist, the main issues are that they have already bought, and are not considering another purchase (38%), that prices are getting too high (20%) and some concerns about the changing regulatory environment – leading to availability and price of finance (22%). But concerns about rising interest rates, budget changes and RBA warnings are relatively low. We did note a slight rise in those unable to get finance – the main reason was that the transaction LVR was too high to meet current underwriting rules.

Finally, we continue to see a rise in property purchased through superannuation. Tax efficiency and appreciating property values, backed by low finance rates are key. We think that about 5% of transactions are now within superannuation.

So it reconfirms that property is really just another investment asset class, and many are using the current gearing and capital gains tax breaks quite logically. As we have discussed before, this is distorting the overall marker, and excluding many potentially willing owner occupied purchasers from the market.

DFA Survey Shows Property Demand Remains Strong

Following on from yesterdays video blog on the overall results from the latest household surveys, over the next few days, we will dig further into the data. We start with some cross segment observations, before in later posts, we begin to go deeper into segment specific motivations. You can read about our segmentation approach here. Many households still want to get into property – demand is strong, thanks to lower interest rates, despite high home prices and flat incomes. Future capital growth is expected by many in the market, and by those hoping to enter. This despite a fall in household confidence, as measured in our finance confidence index.

We start with savings intentions. Prospective first time buyers are saving the hardest, despite the lower interest being paid on deposits. More than 70% are actively saving to try and get into the market (though we will see later, more are switching to an investment purchase). Portfolio and solo property investors are saving the least – despite the recent changes to LVR’s on loans.

A significant proportion of those saving are actively foregoing other purchases and spending less, so they can top up their deposits. A higher proportion are also looking to the “Bank of Mum and Dad” for help.

Looking next at borrowing intentions over the next 12 months (an indication of future mortgage finance demand), down-traders are slightly less likely to borrow now, compared with a year ago, whilst investors are firmly on the loan path. First time buyers will need to borrow. Refinancers are active, and one motivation we are seeing is the extraction of capital during refinance, onto a lower interest rate.

Many households are still bullish on house price growth. Investors are the most optimistic, whilst down-traders the least. There are significant state differences, with those in the eastern states more positive than those elsewhere.

So, who is most likely to transact? Portfolio investors are most likely, then down-traders, and solo investors. There is also a lift in the number of households looking to refinance, to take advantage of lower interest rates. The recent public announcements by the banks, about tightening lending criteria appears to have encouraged some to bring forward their plans to purchase, in the expectation that later it may be more difficult to get a loan.

The recent tweaks in rates are having no impact on household plans, as the absolute rates are still very low – lower than ever – for many. We conclude that the demand side of the property and mortgage markets are still intact.

Next time we will look in detail at data from first time buyers, and then investors.

So Where Does The Mortgage Industry Go From Here?

We have just completed the latest DFA household survey, and in today’s DFA Video we summarise some of the main themes which we will cover in more detail in later posts. In the video blog we discuss the key demand and supply issues and make some observations about the future direction of house prices.

In essence, demand for property is still strong. Investors are still keen to purchase, first time buyers are flocking to the investment sector, down-traders are looking to property for income, so are keen to grab an investment property, and the number of portfolio investors is rising. We also see a significant rise in the number of investors via SMSF. Some are bringing their purchase decision forward to try and avoid credit tightening later. Foreign investors remain active (and are finding ways to buy established property – still.) Rental income is static, but investors are still getting benefits from negative gearing, and believe further capital gains will be delivered (again tax efficient). Geographically speaking, investors are most positive in Sydney, least in Perth. Property is seen as an investment asset class.

On the owner-occupied side of the ledger, first time buyers are finding it hard to purchase, thanks to a lack of suitable property, contention with investors, and tighter underwriting standards. Our surveys also highlight the low interest rates on deposits is making saving for a larger deposit harder. There is considerable interest in refinancing to a lower interest rate, and recent “great” deals on offer are encouraging more churn.

The proportion of property inactive households continues to rise.

On the supply side, there are concerns about the supply of property, and the supply of mortgage finance. We think mortgages for investment loans will be harder to get, will cost more, and some will miss out. Ongoing repricing and less discounting will provide to wider margins for the banks. Non-banks and some of the players operating below the 10% guide growth rate are still wanting to do deals.

To offset this, we expect to see rates for owner occupied refinance to be discounted, and a fierce battle for customers is breaking out. Discounts are still on offer here and other incentives are in play.

Brokers will need to change their tune a little, and tap some of the smaller players on behalf of their clients. Absolute volumes of investment loans are likely to fall, but owner occupied refinancing will likely fill the gap.

So on balance we think the demand/supply disequilibrium will continue to support house prices in the eastern states in coming months, although momentum will fall from current levels. The tweaks to interest rates, of a few basis points will not be large enough to kill the golden goose, (and for many are offset thanks to negative gearing) but the higher serviceability buffers and lower LVR ratios will make it harder for some to enter the market.

The killer blow to house prices will be a substantial rise in interest rates – if rates were to rise just 150 basis points, that would be enough to put many households under pressure. But in the current environment, we do not think a rise in rates is likely for a couple of years, so property momentum has some way to go.

FHBs Flocking to Investment Properties

According to Mortgage Choice, a growing number of first home buyers are choosing to purchase an investment property before they purchase an owner occupied dwelling. This is consistent with DFA’s previously reported analysis.

According to Mortgage Choice’s latest Investor Survey, 36.6% of investors were first time buyers – significantly higher than the 21.1% recorded this time last year.

Mortgage Choice chief executive officer John Flavell said the results weren’t surprising given that property prices continue to rise substantially across Australia’s capital cities where “most people want to live”.

“Australians increasingly want to live close to work and where the action is, which is why most people like to live as close to the capital city centres as possible. Of course, with prices rising across most capital cities, purchasing property near or close to the city is becoming increasingly difficult for buyers – especially first home buyers,” he said.

“As such, we are seeing an increasing number of first time buyers purchasing investment properties before an owner occupied property as this allows them to buy where they can afford and still live where they want to.”

Mr Flavell’s comments were echoed by the data, with one in every four first time buyers admitting that they had purchased an investment property before an owner occupied property because it was more affordable.

When asked why they had purchased an investment property first, 26.6% of respondents said they could more “easily afford it”, while 26.5% said it allowed them to “get their foot onto the property ladder”, and 18.9% said it allowed them to “buy where they could afford and still live where they want”.

But while there are plenty of good reasons why first time buyers choose to purchase an investment property before an owner occupied dwelling, Mr Flavell said he wouldn’t be surprised to see a slight reduction in the number of first time buyers purchasing investment properties next year.

“As a result of APRA’s decision to cap investment lending growth at 10% for lenders, many of Australia’s banks have started to make some sweeping changes to their investment lending policies,” he said.

“Moving forward, I think we can expect these changes to reduce the current level of investment lending. Unfortunately, it won’t be the middle-aged, middle-class or foreign investors who are locked out of the market, it will be first home buyers – those struggling to get a start. And I can see the gap between the ‘property haves’ and the ‘property have-nots’ widening as a result – especially if property values in markets like Sydney and Melbourne continue to grow.”