Household Survey – Page 53 – Digital Finance Analytics (DFA) Blog

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.”

DFA Household Finance Confidence Index Falls In June To New Low

The latest edition of the DFA Household Finance Confidence Index was released today. The latest data to end June shows there was a fall over the last month, the score moved from 94.6 to 89.0, the lowest score since the index started in 2012. A number of factors pressed in on households, including the international financial situation, flat or falling real incomes, concerns about local job security, and concerns about security.

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, overall job security fell, with those feeling more secure than a year ago at 16.4%, down 0.5%, whilst those who feeling less secure rose by 0.82% to 19.8%. Local employment conditions are still worrying many, overlaid by the international situations in Europe and China.

Looking at costs of living, those who said their costs of living rose in the past year was at 35.3%, down by 2.3%, whilst 58% said costs were similar, up 1.19%. Many commented on the costs of child care, which appears to be a major household budget issue.

About 5% said their incomes had risen in real terms in the last year, whilst 36% said their incomes had fallen, which is up slightly from last month. Many have not been able to benefit from a cost of living pay rise, and overtime opportunities are limited.

Lower interest rates have impacted households attitudes to debt. About 12.4% of households were more comfortable, thanks to these lower rates, although the proportion who felt uncomfortable with their level of debts rose 1.2% to 27%. Those with a more recent and large mortgage were the most uncomfortable. Around 58% of households were as comfortable as 12 months ago. We noted that younger households with mortgages were the most concerned, whilst older households with lower debt levels were more confident.

Turning to savings, 13.8% of households were more comfortable with their level of savings compared with twelve months ago, whilst 31% were less comfortable, up 0.4%. The main reason for the discomfort can be traced to the lower returns on savings. Many are finding that their income is being squeezed. This is especially true among older household groups, especially those with higher health related expenses.

Finally, looking at overall net worth, 60% of households think their worth is higher than 12 months ago, though this fell by 3% in the month, thanks to recent stock market falls. In some states, property prices are also down, but not in Sydney and Melbourne. Those in rented accommodation or in financial stress saw their worth fall, (15%) whilst about 23% saw no change, up 0.6%. Households in rented accommodation or in receipt of Centrelink support were generally less comfortable.

So overall, we see the continuing trend of lower income, higher costs, those households with property and shares enjoying offsetting net worth growth, but others not participating to the same extent. The budget has had little longer term impact, and the RBA rate cut has also not changed the overall trajectory of the index. Households are wary, and will remain cautious in the months ahead.

Note that this data is averaged across the states, though we note some significant differences between WA (overall confidence lower) and NSW (overall confidence higher), thanks mainly to differential movements in house prices and employment prospects. We do not published the detailed segment and state based analysis in this post. This detail is available to our paying clients!

Households Necks In The Debt Noose

The ABS data released yesterday, highlights that overall household debt is sky high, much of it linked to mortgage borrowing. Whilst household net worth is over $8 trillion, its mainly thanks to house price inflation (and stock market holdings inflated by ultra low interest rates and QE). The RBA data tells the story. Using their data, (E2 HOUSEHOLD FINANCES – SELECTED RATIOS) we see that the ratio of housing debt to income is rising, in fact both the ratio covering owner occupied housing, and that covering both owner occupied housing and investment housing has risen significantly.

Of course, interest rates are low, so the ratio of interest payments to income are lower than when interest rates were at their peak in 2008. So the common assumption is that whilst debt is high, households can service it, and those with higher incomes have the greatest debt exposure.

In addition, banks are now “required” by APRA to use an interest rate of 7% when considering a loan application, higher than the common practice of a number of banks. APRA highlighted recently the range of rates banks were using for serviceability testing.

Chart 4: Existing mortgage debt shows interest rate used in investor serviceability assessment between 4%-9%

Some banks were underwriting loans with a very small serviceability buffer, so will have loans on book at greater risk, but at the moment serviceability is not required to be marked to market on an ongoing basis (though that may change under Basel IV).

This takes us to mortgage stress. Now, DFA has been tracking mortgage stress for year. Low interest rates have got many out of difficulty.

Mortgage stress is a poorly defined term. The RBA tends to equate stress with defaults (which remain at low levels on an international basis). A wider definition is 30% of income going on mortgage repayments (not consistently pre-or post tax). This stems from the guidelines of affordability some banks used in 1980’s and 1990’s, when economic conditions were different from today. This is a blunt instrument. DFA does not think there is a good indicator of mortgage stress, so we use a series of questions to diagnose mortgage stress focusing on owner occupied households. Through these questions we identify two levels of stress – Mild and Severe.

Mild = households maintaining repayments, but by reprioritising expenditure, borrowing more on loans or cards, and refinancing
Severe = households who are behind with their repayments, or are trying to sell, or are trying to refinance, or who are being foreclosed

In our latest data on stress we have noted some concerning trends. Despite the ultra-low interest rates, the proportion of households in some degree of mortgage stress is rising. This is because incomes are static, household expenses are rising and the average mortgage is larger, especially in some centres like Sydney. So if we look at segmented data we see that for some borrowing households, as many as 10% are registering in the severe category, and many more in the mild category. Many are just, and only just keeping their heads above water. Larger loans means they are more leveraged.

If we look at the severe stress by segment, by when the loan was last drawn down, we see significant peaks in more recent years (when loans were larger) than older loans. Typically in in years 2 and 3 of a loans life that stress is highest.

Now consider this. Assuming an average $350,000 mortgage over 30 years, if rates were to rise 1%, the average monthly costs for a p&i loan would rise by $220 and for an interest only loan $291. Such a rise would likely lift the proportion of households with mortgage stress from 35% of all borrowing households to close to 50% in our modelling. Interest only loans are more sensitive to rises.

We conclude that many households are a hair’s breadth away from difficulty. Another way of asking a similar question is how much free cash is available at the end of the month. For many households with large mortgages and average incomes, the short answer is nothing. No flex. No safety net. Whilst in the early 2000’s incomes were rising fast there is not easy exit this time. Many households are in the debt noose. Let’s hope no-one pulls the rope.

The Rise, and Rise, and Rise of Investor First Time Buyers

DFA has just released the latest analysis of survey results which shows that nationally 35% of all First Time Buyers are going direct to the Investment sector. However there are significant state differences, with more than fifty percent of transactions from first time buyers in NSW, and upticks in other states as the behaviour spreads. You can watch our latest video blog on this important subject.

Here is the data we used in the video. The first chart shows the national average picture, using data from the ABS to track owner occupied first time buyers (the blue area), data from DFA surveys to display the number of FTB investment loans (the yellow area), both to be read from the left hand scale, and the relative proportion of loans using the yellow line on the right had scale. About 35% of loans are going to investment first time buyers.

In NSW, the rise of investors has been running for some time, and as a result, more than 50% of loans are First Time Buyer investors. Note the growth thorough 2013.

In QLD, until recently there was little FTB investor activity, but we are seeing a rise in 2014, to a peak of 12%

The rise of FTB investors in VIC started in 2013, but is now growing quite fast, to about one quarter of all FTB activity.

Finally, in WA, where OO FTB activity is quite strong, we are now seeing the rise of FTB investors too. Currently about five percent are in this category.

There is a clear logic in households minds. They see property values appreciating in most states, yet cannot afford to buy a property for owner occupation in a place where they would want to live. So they choose the investment route. This enables them to purchase a cheaper property elsewhere by grabbing an investment loan, often interest only and serviced by the rental income. In addition they get the benefits of negative gearing and potential capital appreciation. Meantime they live in rented accommodation, or with families or friends. About ten percent of recent purchasers have received some help from “The Bank of Mum and Dad“. Finally, some see the investment route as a means to build capital for the purchase of an owner occupied property later, though others are now thinking more in terms of building an investment property portfolio. They are on the property escalator, with the expectation that prices will continue to rise.

There are some significant social impacts from this change, and there are probably more systemic risks in an investment loan portfolio, which should be considered. We are of the view that the recent APRA “guidelines” will only have impact at the margin, so we expect to see continued growth in FTB investment property purchases for as long as interest rates stay low and property values rise.

Joint DFA and JP Morgan Mortgage Report Released Today

Today we released the latest edition of the joint mortgage industry report, looking at the potential profitability and segment impact of changes in the industry, including the upcoming Basel 4 capital requirements. The report is only available direct from JPM, for compliance reasons. However, the DFA data analysis which was used in the report is available in the available on request Property Imperative report. In addition, we recently discussed the latest housing data and first time buyers, and the mortgage discounts in the market. We also explored Basel 4.