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

Property Investors Latest Attitudes – DFA Survey

Continuing our series on the latest DFA survey results, today we look at the investment sector. We start by looking at the barriers which Investors believe may influence their investment decisions. Whilst the impact of budgets changes are off the agenda now, there is a growing concern about upcoming regulatory changes and how they may impact the investment market. In contrast the RBA warnings appear to have lost their immediate focus. Investors are less concerned about potential interest rate rises now and a greater proportion have already bought. High prices are having an impact, but it appears obtaining funding is not an issue for most. We found that, unlike first time buyers, investors were easily able to find appropriate properties to purchase, and gain finance.

Looking at solo investors in particular, they are driven by tax efficiency, and expectation of appreciating property values. They see net returns from property a better bet than deposits.

The picture for portfolio investors is somewhat similar. They are move motivated by the hope of appreciating values than solo investors and the tax advantages of leveraged property investment.

Those investors considering investing in property via a SMSF wrapper, are clearly driven by tax strategies and the expectation of rising property values.

We see these SMSF investors are getting their advice from a number of sources, mortgage brokers, and internet sites have the greatest impact, and we noted a rise in advice from real estate agents as an influence. (In this survey, investors could score multiple advice sources).

Finally, we asked about the property distribution within a SMSF, and the greatest proportion is between 20 and 40 per cent of the portfolio.

First Time Buyer Barriers By State

After I posted the results from the DFA household survey yesterday, I was asked by a number of readers if I could provide a state by state breakdown of the barriers. As the survey runs by post code, it was feasible to do this, and today I post the state results from the latest analysis.

To recap, first time buyers in the DFA survey are those who are actively seeking to acquire a property for the first time. Once they have obtained a property and settled in, they then migrate into one of our other property owning segments. You can read about our segmentation here.

Turning to the results, we see that the price barrier is highest in NSW and WA, and lowest in QLD. It is also more difficult to find a place to buy in NSW and WA, whereas the barriers in SA are lower. We also see fear of unemployment is the most significant barrier in TAS and QLD, and is lowest in WA and NSW. We also found that first time buyers in WA were most concerned about the risk in interest rate rises.

Finally, to reassure readers, at any one time DFA has 26,000 households in the survey, so the sample size is large enough to be statistically relevant. It is also worth noting the relative distribution of FTB in the ABS data, although they define first time buyers differently, namely those who have transacted for the first time, not those looking to buy, as we do.

Property Momentum On The Slide

We just updated the DFA household surveys, with data to end November, and there are some interesting transitions in play, which taken together with potential action on foreign buyers, suggests we will see property momentum easing in the next few months. This actually may be a “get out of jail card” for the RBA and provide reasons why macroprudential may not be required after all, and why interest rates may need to be cut further next year, not lifted. Today we look at our cross segment summaries. You can read about our segment definitions and survey approach here. This update will later be incorporated on the next edition of the Property Imperative Report.

We begin with the updated estimate of the number of households by DFA segment. We find that there are 6.5 million households who are property active, and 2.25 million households who are property inactive (meaning they live in rentals, with family, friends or other accommodation). Those who are inactive continues to increase, with 26% of all households in this group now.

Of those who are active, we split them out into those with owner occupied property, those with investment property, and those who invest via SMSF. This is the national picture, to end November 2014. Of those households who are property active, 68.2% are owner occupiers, 31% have investment properties, and 0.8% have property investments via SMSF.

Looking at the cross segment results, we are seeing a steady decrease in those saving in order to enter the property market. This includes the Want-to-Buys and the First Timers, the latter who are to some extent active in market exploration. Up-Traders and Down-Traders are saving a little more, but the lack of momentum in savings means households are less likely to try and enter the marker later. Three factors have influenced this trend. First, low deposit interest rates, second lower disposable incomes, and third, a view that prices are so high they will never be able to enter the market.

Looking at the need to borrow, we see a continual rise in the demand for loans from those expecting to transact. Only Down-Traders are less likely to borrow. The need to borrow more is a reflection of higher prices in many states, though as we highlighted yesterday, there appears to be a change in the wind with regards to property prices. Lending for investment property will continue, so we may see additional controls on this type of lending coming though in due course as part of the regulatory review, but overall demand is unlikely to grow significantly beyond this.

In our surveys, we see a consistent lowering of expectations, across the segments in relation to whether prices will rise in the next 12 months. Property investors are also a little more sanguine on house price growth, though still more optimistic that owner occupiers. That said, more than half across the board still are expecting a further rise, despite stretched loan to income ratios and high benchmarks.

So, turning to question of whether households will transact in the next year, we see falls in several significant segments – Portfolio Investors, and Down-Traders are most likely to transact. In sheer volume terms, it is the Down-Traders who are most likely to keep the property ship afloat as they attempt to liquidate some of the capital locked away in their property. We see a supply/demand re-balancing ahead, and as a result, a slowing in house price growth. If investors get cold feet, prices will fall from current levels.

In the next few days we will delve into our segment specific results.

Refinancing; An Important Driver Of Housing Finance

We have been looking in detail at recent trends in housing refinance, by using a combination of the recently released ABS data and results from the DFA surveys. There is an interesting story to tell here. So today we explore the refinancing landscape. First the ABS data shows us that refinancing value has been increasing to a record $5.9bn in July 2014, and represents more than 30% of all owner occupied lending, and about 17% of all housing lending.

We also see that the state distribution is centered on NSW and VIC.

However, looking in percentage terms, there is only a small rise in NSW, and a fall in QLD.

Turning to our surveys, about 17.5% of refinacing are to fixed loans, the rest variable, either principal and interest or interest only. A considerable proportion of refinance deals are via brokers, with a record 74% in September.

Households with loans between $250k and 500k are likely to refinance, though those with larger loans are more likely to refinance their loan, compared with those with below $100k balances.

Turning to the loan type, the majority are refinancing to a principal and interest loans (P&I), though we note that those with larger balances are more likely to consider an interest only loan.

Looking in more detail, we see that brokers are more likely to initiate a conversation with a household on refinancing if the loan is larger. Many are driven by the need to reset the term (this relates to the industry practice of having a nominal 30 year term, with five year reviews, plus fixed term loans maturing). We also see a concern to reduce monthly payments, especially in the loans between 250k and 500k, and to release cash in the case of larger loans, especially above $750k, where we assume the capital appreciation in the property is most significant.

In the survey detail, we found that some were releasing capital to assist in the purchase of an investment property, or to assist others to purchase a property. Refer to the recent post on the Bank of Mum and Dad. Most households who were concerned about rates have already locked into fixed products, though many still preferred the variable rate product. We also found that more than 50% of households considering a refinance were ahead of schedule on their nominal monthly repayments. Those in the range 250k – 500k were least likely to be ahead.

Overall then, refinancing is a significant element in the property owning household sector, and yet there has been little discussion of this facet of the market, compared with first time buyers and investors.

First Time Buyers Get The Investment Bug – Big Time

The most recent ABS data continues to underscore the fact that Owner Occupied First Time Buyers are sitting out of the market. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 11.8% in August 2014 from 12.2% in July 2014.

However, this is not telling us the full story. We have been tracking the rise and rise of first time buyers who are going direct to investment property. The chart below shows the state of play, and the significant rise in the number of first time buyers going to the investment sector, especially in Sydney and Melbourne.

Another way to look at the data is the percentage of FTB who went for investment housing. In the latest data we estimate that around 30% of potential first time buyers went for the investment option. These are not identified in the official figures. I would also add that the small sample sizes prior to 2012 may impact the trend data, but the DFA samples, into 2013 and beyond are large enough to be meaningful and significant.

From our surveys, we found that:

1. Most first time buyers were unable to afford to purchase a property to live in, in an area that made sense to them and were being priced out of the market.

2. However, 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.

3. About one third who purchased were assisted by the Bank of Mum and Dad, see our earlier post. More 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 incentives, as we discussed before.

Our analysis also highlights a deficiency in the ABS reporting, who are currently investigating the first time buyer statistics (because in some banks, first time buyers are identified by their application for a first owner grant alone). They should be tracking all first time buyer activity, not just those in the owner occupation category.

SMSF Property Investment Continues – DFA Survey

We updated our household surveys with the September data. Today we focus in on SMSF property transactions, which is a small, but rising factor in the market. We start by looking at the reason why trustees for SMSF’s are considering retail property. The strongest incentives are the tax efficient nature of the investment, and appreciating property values. Low rates also have part to play. I have excluded commercial property from the analysis.

We also asked where the trustees were getting advice from regarding retail property investment. Most interesting is a fall in advice from financial planners (maybe a reaction to FOFA, CBA etc?), and a rise in advice from real estate agents. Mortgage brokers also figure in the mix, alongside internet sources and own knowledge. We wonder how well qualified these sources are to provide the right advice, bearing in mind the long term nature of super.

Finally, we looked at changes in relative distribution of property in super funds, and of those who were investing in property (about 3% of all funds are investing in retail property, and another 3% are considering it). We see retail property making up quite a significant share of superannuation savings for some. The blue bar is last year, the orange bar is to September 2014.Others can decide if this a good or bad thing, but it does highlight the linkages between property and super, and demonstrates that if house prices fall, then some super funds will be impacted, just at the time house valves are also falling. The impact of the double whammy is potentially significant and concerning.

RBA Comments On Housing Have Impact – DFA Survey

We have updated our household surveys with the results for September. This forward-looking research revealed some significant changes in sentiment amongst households thinking of transacting, and many of these changes can be traced to recent comments made by the RBA in respect of investment housing. Our approach to household segmentation and our surveys is described in an earlier post. Today we will discuss some of the most important recent findings, which updates the results from our Property Imperative report.

So first we look at which segments are most likely to transact in the next 12 months. The changes over time are significant, with first time buyer ever less likely to purchase whilst investors, especially portfolio investors, more likely to buy. The impact of down-traders (remember there are more than one million households in this category) are also significant.

Demand for mortgage funding sits firmly with certain segments, especially investors, first time buyers and up-traders. Note that the bulk of down-traders do not need to borrow. This goes some way to explaining why house prices are moving faster than loan growth, and why investment loans are making up a large proportion of lending, especially in Sydney.

We found that first time buyers are still saving hard, though chasing ever higher prices, want-to-buys are saving less now, seeing the aspiration of owning a property evaporating fast.

We found that across the board, there was a little less certainty on house prices growth, though generally investors remain more bullish.

The want-to-buys find the biggest barrier relates to the high price of housing. No change here.

This barrier is also echoed in the first time buyer segment, with 50% seeing price as the main issue, the highest result in recent times.

Many refinancers will have now locked in at low rates, as the main reason is to reduce monthly outgoings. The proportion locking in at fixed rates is down a little.

We found that up-traders are still active, and there was an increase in those in this segment who are motivated by the prospect of capital appreciation, which is now running ahead, just, of buying to get more space. As shown above, the proportion of up-traders ready to transact is down a little.

Down-traders continue to seek to sell and buy smaller, driven by a quest to release capital for retirement, and for increased convenience. They were slightly more likely to incorporate an investment property in their strategy. We think the impact of down-traders on the market is understated by many observers, but the continuing release of capital from larger property, and buying smaller, plus investment, aligns with the growth in investment property demand, and yet lower rates of financing elsewhere.

Looking at investors, we see continued interest, driven by the tax-efficient nature of investment lending (a.k.a negative gearing, and SMSF investing). They remain confident about capital appreciation into the future, though less strongly than previously.

Finally, we looked at the potential barriers to investors, and we see a significant change. We ask about a range of barriers. One related to RBA warning, which this month have reach a new, high pitch. Investors are responding, and a proportion are concerned about potential regulatory changes. We also saw a tick up in the concerns about interest rates rising in coming months.

Overall then we still see demand strong, and focused in particular segments, especially investors and down-traders. However, the RBA warning are having an impact, even before they actually do anything to intervene further in the market. We do not believe that words alone will address the underlying systemic issues, but they can have a short term impact on sentiment, and may make some prospective purchasers think again – we therefore expect to see some small slowdown in coming weeks. That said, the market remains hot, and stoked by investors, and we believe there is a case for more direct intervention by the regulators. We also expect the RBA to keep up the verbal barrage.

Household Incomes And Property Segmentation

In the current discussions about macroprudential, stimulated by the RBA comments last week and likely to be stoked further as the RBA appears before the Senate Banking Committee on Thursday, many are claiming that household balance sheets and incomes are supporting the growth in house prices, and so no intervention is needed. The chair of the Banking Committee Sam Dastyari is “concerned about the unanticipated consequences of the Reserve Banks’s view-change on the sustainability of the housing boom and whether it needed to interfere with bank lending”.

The debate has shifted to first time buyers, and not wishing to put further barriers in the way of the small number able to enter the market at prices which are already too high. They may be missing the point. First, the increase in household wealth is directly linked to the rise in house prices (a weird piece of feedback here, as prices rise, households are more wealthy, so can accommodate higher prices – spot the chicken and egg problem?). In addition, wealth is growing thanks to stock market movements (though down recently) driven partly by the US and European low rates and printing money strategies. This will reverse as rates are moved to more normal levels later. Superannuation, the third element is of course savings for retirement, so cannot be touched normally (there are exceptions, and no, first time buyers should not be allowed to use their super to get into the property market). More first time buyer incentives won’t help.

But, we have been looking at household incomes, after inflation, at a segment level. We segment based on property ownership, and you can read about the DFA segments here. On average, across all households, income growth is falling behind inflation. This is the ABS data from June 2014. In the past few months, real income is going backwards, before we consider rising costs of living.

However, at a segment level, the situation is even more interesting, and diverse. Those wanting to buy, but unable to enter the market are seeing their incomes falling sharply, inflation adjusted, making the prospect of buying a house more unlikely. We are seeing the number of households in this group rising steadily, see our Property Imperative Report.

First time buyers, those who have, or are purchasing for the first time, are also seeing income falling in real terms, more sharply than the average. This is why we are predicting a higher proportion of first time buyers will get into mortgage stress, especially if interest rates are increased. This is one reason why loan to income ratios for this group are high.

Then looking at holders, their incomes are moving closer to the average. Holders have no plans to change their property, many have mortgages.

Refinancers, are hoping to lock in lower rates, though we note the forward rates are now higher than they were, which may suggest the lowest deals are evaporating. One of the prime motivations for switching in this segment is to reduce outgoings, not surprising when we see incomes falling faster than the average in real terms.

Now, looking at Up Traders, we find their incomes are rising more quickly than the average. Up Traders have been active recently. They have the capacity to service larger loans. They will be purchasing primarily for owner occupation.

Down Traders have incomes rising more quickly, thanks to investment income, and there still about one million households looking to sell and move into a smaller property, releasing capital in the process. They are also active property investors, directing some of their released capital in this direction, either direct, or via super funds.

Investors also have incomes which are rising faster than the average, so no surprise they are active in the market, seeking yields higher than deposits, and taking advantage of negative gearing. We continue to see a small but growing number of investors using super funds for the transaction.

So, the segmental analysis highlights how complex the market is, and that there are no easy fixes. Any rise in interest rates would hit first time buyers very hard. Demand from investors (the foreign investment discussions is only a sideshow in my view) will be sustained, with the current policy settings. Raising interest rates will not help much on this front, because interest will be set against income. So macroprudential controls on investment loans makes more sense.

One option would be to differentially increase the capital buffers the banks hold for investment loans, making their pricing less aggressive, and the banks more willing to lend to suitable owner occupiers and businesses, which is what we need. Trimming demand for investment properties may help to control prices.

The bottom line though is that many years of poor policy are coming home to roost, on both the supply and demand side. A number of settings need to be changed, as discussed before.