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

Economic Well-Being of U.S. Households – Fed Survey

The Federal Reserve Board’s latest survey of the financial and economic conditions of American households released Wednesday finds that individuals’ overall perceptions of financial well-being improved modestly between 2013 and 2014 but their optimism about future financial prospects increased significantly.

The 2014 Survey of Household Economics and Decisionmaking, provides new insight into Americans’ economic security, housing and living arrangements, banking and credit access, education and student loan debt, savings behavior, and retirement preparedness. Sixty-five percent of adult respondents consider their families to be either “doing okay” or “living comfortably” financially–an increase of 3 percentage points from the 2013 survey.

Looking forward, households are increasingly optimistic. Twenty-nine percent of survey respondents say they expect their income to be higher in the year following the survey, compared to 21 percent of 2013 respondents.

The survey results reveal a lack of economic preparedness among many adults. Only 53 percent of respondents indicate that they could cover a hypothetical emergency expense costing $400 without selling something or borrowing money. Thirty-one percent of respondents report going without some form of medical care in the past year because they could not afford it.

The outlook for the housing market among surveyed homeowners remained generally positive, as 43 percent believe that their house increased in value over the past year and 39 percent expect home values in their neighborhood to rise in the coming year. Many renters also express an interest in buying but report financial barriers to homeownership, with half of all renters listing an inability to afford a down payment as a reason why they rent rather than own and 31 percent citing an inability to qualify for a mortgage as a reason for renting.

Twenty-three percent of the adult population has some form of education debt, according to the survey. However, this debt is not exclusively student loans. Fourteen percent of those with education debt say that some of that debt is on credit cards. Individuals who did not complete an associate or bachelor’s degree, first generation students, blacks and Hispanics, and those who attended for-profit institutions, are all disproportionately likely to be behind on repaying their student loan debt.

Recognizing the importance of degree completion to many outcomes, the survey explores why some individuals leave college without a degree. Family responsibilities is the most common reason, and was cited by 38 percent of all respondents who dropped out and by just less than half of women younger than 45.

The survey results also suggest that many individuals are not adequately prepared for retirement. Thirty-one percent of non-retirees have no retirement savings or pension, including nearly a quarter of those older than 45. Even among individuals who are saving, fewer than half of adults with self-directed retirement savings are mostly or very confident in their ability to make the right investment decisions when managing their retirement savings.

Consistent with a lack of preparedness for retirement, 38 percent of non-retired respondents say that they either do not plan to retire or plan to keep working as long as possible. Among lower-income respondents, whose household income is less than $40,000 per year, 55 percent plan to keep working as long as possible or never plan to retire.

The survey was conducted on behalf of the Board in October and November 2014. More than 5,800 respondents completed the survey. The report summarizing the survey’s key findings may be found at: http://www.federalreserve.gov/communitydev/shed.htm

Mortgage Discounts Still Running Hot

Latest data from the DFA household surveys highlights that many prospective borrowers are still able to grab significant discounts on new or refinanced home loans. The chart below shows the weighted average achieved across loans written, compared with the RBA cash rate. Despite the recent falls, discounting is still rampant.

However, we also see significant differences between players and across different customer segments and loan types. Not all households are getting the larger cuts. Discounts also varies by LVR and channel of origination, with those using a broker, on average, doing a little better.

The deep discounting flowed through to some margin compression in the recent results from the banks, and falls in deposit margins, as they continue to attempt to grab a larger share of new business. Households with a mortgage of more than a couple of years duration would do well to check their rate against those currently on offer in the highly competitive market. Even after switching costs, they may do better.

We also updated our strategic demand model, and our trend estimates for mortgage numbers out to 2020. We expect to see investment loan growth containing to run faster than owner occupation loans. Over the medium term we expect the number of owner occupied loans to grow at an average of 2.8%, and investment loans at 7.8% per annum over this period.

Behind the model we have made a number of assumptions about population growth, capital demands, house prices and economic variables, as well as the demand data from our surveys. Significantly, much of the demand is coming from those intending to trade down, buying a smaller place, AND a geared investment property. We will update the segment specific demand data in a later post.

DFA Household Finance Confidence Index Falls Again In April

The latest DFA Household Finance Confidence Index (FCI) to end April 2015, showed a further slight fall, from 91.97 in March to 91.87 in April, and continues to track below the long term neutral position.

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, for all Australia, we see that households are a little more confident about their employment status (+0.28%), but there was overall little change (63.2%). We noted a rotation in confidence towards NSW and away from WA, reflecting the impact of the mining boom coming off.

Looking at confidence with respect to savings, we find that whilst about half of the households scored about the same, there was a further deterioration in those more comfortable (-0.3%) and a rise in those less comfortable (+0.43%). The main factors which are driving this related to ever lower deposit interest rates, and the need to tap into savings as income growth stalls. Males tend to be more confident than Females.

Turning to debt, we see that households are less comfortable about the the amount of debt they hold (-0.9%), this is explained by a growth in the absolute level of debt many households have, and concerns that cash flow is under pressure making it more difficult to repay on time. Lower interest rates have not translated into lower debt costs as many hold balances in credit cards where interest rates remain high.

Turning to real income, some households have seen their incomes rise and were more comfortable (+1.5%), but in contrast more are also less comfortable, as their incomes were eroded in real terms (+1.4%), so as a result, the number who stayed the same fell by 2.2% to 55.8%. Those in part-time work tended to be less confident.

Households whose costs of living rose were up by 1.6% to 37.2%, driven by higher child care costs, garage repair bills, some foods and council rates. 57% of households saw no major change and 4% saw their cost fall, thanks to reductions in fuel costs and some foods. The falling AU$ also had some impact on the results.

Finally, we looked at net worth, 60% of households think their net worth has improved, thanks to higher house prices and paying forward on mortgage repayments, whilst 14% believe their net worth fell. Many of these households live in rented accommodation, and have substantial debts, and relatively few assets. Those not borrowing, but holding substantial savings balances were more likely to see their net worth reduced.

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.

Note, these results were collated before the last RBA interest rate cut, and the budget speech. We will examine the impact of these factors on households next month.

Latest Edition Of The Property Imperative Released Today

The Property Imperative, Fourth Edition, published April 2015 is available free on request. This report which summarises the key findings for our research into one easy to read publication. We continue to explore 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. Specifically we look at the property investment juggernaut and how we are becoming a nation of property speculators. It contains:

results from the DFA Household Survey to end March 2015
a focus on first time buyer behaviour and overseas property investors
an update of the DFA Household Finance Confidence Index

PropertyImperativeLarge Go here to request a copy.

From the introduction:

This report is published twice each year, drawing data from our ongoing consumer surveys and blog. This edition dates from April 2015.

The Australian Residential Property market is valued at over $5.4 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, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia. The Reserve Bank (RBA) has recently highlighted their concerns about potential excesses in the housing market is on their mind, when considering future interest rate cuts.

According to the Reserve Bank (RBA), as at February 2015, total housing loans were a record $1.43 trillion , with investment lending now at a record 34.4%, and representing more than half of all loans made last month. There were more than 5.2 million housing loans outstanding with an average balance of about $241,000. Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 36.9% of new loans issued were interest-only loans. This report will explore some of the factors in play in the Australian Residential Property market. We will begin by describing the current state of the market by looking at the activities of different household groups leveraging recent primary research and other available data. We also, in this edition, feature recent research into first time buyers and foreign investors; and look at household finance confidence.

DFA Household Finance Confidence Index Falls In March

We have released the latest edition of the DFA Household Finance Confidence Index, the results of 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.

The overall index fell from 92.1 to 91.97 in March, which continues the overall declining trend since February 2014.

Looking at the elements within the index, nearly 60 percent of households are enjoying a growth in their net worth, mainly thanks to further rises in house prices and positive stock market movements. On the other hand, there was a rise of 1.5 percent in those who have seen their net worth fall, these are households who predominately do not own property.

There were small movements in the costs of living data, with school fees and child care being two elements which have hit some households hard, though offset by falls in the costs of fuel. We also see the impact of falling exchange rates on overseas purchases, especially from the US. Finally, rentals are increasing faster than incomes for some households, especially in cities on the east coast.

Household real incomes are relatively static, though there is little evidence of rising income. Less than 4 percent of households recorded a rise in real terms.

Some households are a little more comfortable with their level of debt, this is directly linked to the fall in RBA rates in February. However, there was also a rise in those households who were concerned about the debts they owed, with a rise of 0.57 percent. On average females were more concerned than males, and older households more worried than younger ones.

There was a small rise in households who were more comfortable with their savings position, but more are less comfortable, and this is directly linked to the current low interest rates offered for deposits, and the prospect of even lower rates, and the quest for higher yield elsewhere looking ahead. Females were significantly more concerned than males.

Finally, looking at job security, there was a significant rise in those households who are concerned, with a drop in those who felt more secure than last year by 1.7 percent and a rise in those who fell less secure. That said, more than 60 percent registered as about the same. We noted some state variations, with those in WA significantly more concerned than those in NSW.

Note that the detailed state by state and segmented data is not publicly released. We will update the index again in a months time.

A Deep Dive Into Mortgage Discounts

We have been highlighting the battle for market share, and the varying discounts which are available to some. Today we deep dive into the world of discounts, drawing data from our market model. We conclude that households, on average, get better discounts which using a broker, discounts for investment loans are more generous, and reconfirm that more affluent households get the best deals. We also see that competition and deep discounts are making many loans unprofitable to the banks who make them (taking fully absorbed costs into account). As such, the current deep discounts are unsustainable.

We start by looking at the average discounts in basis points individual loan providers are offering. Some are significantly more aggressive than others. We have hidden the real names of the lenders concerned. We see that there are more banks offering owner occupied loans than investment loans. The best average discount for an investment loan is from provider 9.

Some of the owner occupied providers are quite generous in their discounts, but generally investment loans get bigger discounts at the moment.

Looking at channel of origination, and year of inception of the loans, we see that consistently third party (broker) loans get bigger discounts, and that the discounts have been growing in recent years. In the owner occupied sector, discounts for loans via the branch (first party) are slightly lower in 2015.

In the investment loan sector, we see a trend of growing discounts in recent years, with third party originated loans getting a better deal.

Turning to the DFA property segments, in the investment loan category, we see that portfolio investors are getting the very best discounts, whilst first time buyers are not doing so well, but they are slightly ahead of holders, refinance and trading down households.

Looking at our master household segments, we see that the wealthy – professionals and young affluent get the best deals. Those with less bargaining power do not do so well.

This is true of both investment mortgages (above) and owner occupied mortgages below, though we see that in the latter case, the discounts are slightly less generous.

We also see that interest only loans command a larger discount in some states, especially in ACT. Others are more line ball.

In comparison interest only owner occupied loans can consistently command a larger discount, than normal repayment loans, but as highlighted already these discounts are on average a little lower than in the investment sector.

So what is the profit impact of these discounts? DFA has calculated the relative profit of each loan and using an index we can display the relative profit contribution in cash terms. For owner occupied loans, up until 2013, most years were net profitable to the lenders. We note that this changed in 2014 and 2015 as discounts expanded, and competition increased. Overall in cash terms they are making a slight net loss on some loans written now. This is partly explained by the one off costs of setting up a new loan, and initial broker commissions. As loans age, they on average become more profitable.

The investment loan profit footprint is very interesting, as here we see a consistent fall in the profit index since 2010, with the largest drops in 2014 and 2015. This is explained partly by the significant growth in volumes, and the deeper discounting. Again, older loans become more valuable. Most banks would calculate an amortised cost of origination, spread over a number of years, but we prefer a true cash view.

We conclude from this that recent loans for many providers (especially those less efficient) will be loosing money initially, and the portfolio will be supported by the older more profitable loans. We also think that discounts are unsustainable at current levels, and will see them come off over the next few months.

Latest DFA Survey – First Time Buyers Motivations and Barriers

We continue our series using data from the latest DFA segmented household surveys. First time buyers are more than ever becoming property speculators. Whilst we have already quantified the number of first time buyers and first time investors in the market,

today we look at their underlying motivations. So, looking at these trends there are some striking observations. We see that the prospect of potential capital gains, is now the highest rated driver at 32%, whilst the desire for somewhere to live is just 28%. 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. Fewer buyers now expect to pay less than renting, whilst the prospect of greater security remains about the same.

The biggest barrier to purchase are clearly current prices. This translates into too higher mortgages, or too bigger savings requirements to get into the market. The bank of “Mum and Dad” remains a prime source of funding. Fear of unemployment has diminished, whilst the problem of finding a place to buy has increased (now 22%). The impact of potential interest rates reduced slightly, in response to the RBA cut, and expectation of lower rates for longer. Many now assume rates will stay low for at least three years, and they plan on this basis.

Looking at where they will buy, 20% of potential first time buyers are not sure where to purchase. Across all Australia a suburban home is still the most desired property type, but in Sydney, a unit is much more the expectation now, mostly on the urban fringe, or inner suburbs.

If we look at the split between owner occupied and investor first time buyers, we see investors are predominately going after units, either on the edge of the City (inner suburbs – e.g. in Sydney Hurstville, Wolli Creek), or suburban units.

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. This is why we expect to see a continued rise in the number of first time investor buyers.

Latest DFA Survey – Investor Motivations

Continuing our series of updates from our latest household surveys, today we look at the latest investment property trends. Looking at solo investors first (using the DFA segmentation) we see the main drivers to transact relate to the continued potential for appreciating property values and the tax efficient nature of the investment. We also see an expectation of higher returns than deposits. This all explains why property investment is so hot. It is, from an investment perspective, for many, the best game in town. The average age for a first time property investor continues to fall, and now stands at 38 years, partly reflecting the rise of first time buyer investors, as we featured recently.

Turning to potential barriers which may stop investors transacting, current prices are not seen as a critical issue – only 18% said this was a turn-off. Whilst 45% had already transacted, there is still significant potential for further purchases, especially in the Sydney and Melbourne markets. We also see that whilst there is some recognition of potential changes to regulation (relating to LVR hurdles, interest only, and gearing), less than one third of investors are worried by this. Finally, only 15% were worrying about potential budget changes, we saw a spike after the budget last year, we may see the same again in our post budget survey. Nearly half expect to select an interest only loan.

Investing via a super fund is still a minority sport, though some investors are getting advice from internet forums, or mortgage brokers. We estimate about 3.5% of SMSF have an investment property in their fund, and a further 3% are actively considering this investment route.

Those who are thinking of a SMSF transaction continue to be attracted by tax efficient outcomes and appreciating property values. These drivers match the broader investment sector quite well as we showed above.

Finally we look at portfolio investors. This is becoming an ever more important sector, because the capital gains and imcone from current properties are being used to leverage further investment, to crease a self-sustaining (some would say critical mass) proposition. The proportion with a holding of 10 properties or more is steadily increasing. Again, these investors are driven by tax efficiency and appreciating property values and also an expectation of better returns than deposits. One trend we detected in this segment is the rise in the number of portfolio investors who now see property investment as their main source of income, it has essentially become their job.

Next time we will look at some of our other segment findings.

NZ Loan To Income Ratios Higher

The Reserve Bank of NZ released a report today “Vulnerability of new mortgage borrowers prior to the introduction of the LVR speed limit: Insights from the Household Economic Survey.” The paper uses household level data for New Zealand to assess the vulnerability of new mortgage loans to owner-occupiers between 2005 and 2013.

They modelled financial vulnerability, considering:

Does the household have adequate cash flow to support mortgage borrowing?
How large is the equity buffer of the household?

Their analysis suggests a move towards more stretched debt-to-income ratios between the 2008-10 and 2011-13 cohorts.

They highlighted that most banks will lend at much higher DTIs to high income borrowers than low income borrowers. Owner occupiers with an income of greater than $80,000 do account for almost half of high DTI lending in the 2011-13 cohort. However, this is significantly lower than their share of total lending of around 70 percent. By number, such households account for only 30 percent of owner occupiers with a high DTI.19 Subject to the caveat that our sample of high DTI borrowers is relatively small, this suggests that owner-occupiers with a high DTI are more likely to have an income below $80,000 than those with a low DTI (despite banks’ preference to supply high DTI loans to high income households).

They found an increase in typical DTI multiples compared to earlier years, in addition to the well-known rise in the share of high-LVR lending. The proportion of borrowers with both a high-DTI and a high-LVR also increased sharply and was higher than prior to the GFC. These results are consistent with an increase in the vulnerability within the 2011-13 cohort, although the quantum of lending undertaken and the tail of very high DTI borrowers both remained smaller than prior to the GFC.

Note that an assessment of the vulnerability of other borrower types – including investors and owner occupiers that have not recently bought – is left for future work.