Economics and Banking – Page 450 – Digital Finance Analytics (DFA) Blog

Housing Credit Higher Yet Again

Today APRA released their Monthly Banking Statistics for February 2015. Overall housing lending by the banks rose by 0.53% in the month to $1.329 trillion. Investment lending rose by 0.68% and owner occupation loans by 0.45%. The lending records continue to be broken. Looking at bank by bank performance, CBA has the largest share of owner occupied loans (26.9%) whilst Westpac has 31.7% of investment home loans.

Tracking portfolio movements, we see that in the month Macquarie grew its total portfolio by 3% (compared with the market average of 0.5%), Suncorp and Members Equity Bank both grew by 1.9%, whilst AMP Bank rose by 1.2%

Looking at the YOY movements in the Investment portfolio, the market grew at 12% (above the APRA 10% monitor rate). A number of banks exceeded this growth level, with Macquarie, CBA and Suncorp at the top of the range.

Turning to deposits, balances rose by 0.53% in the month, to $1,82 trillion. The portfolio mix changed a little in the month, though CBA still has the largest share at 24.8%.

Here are the monthly portfolio movements. ANZ, Bendigo and Rabbobank lost relative share, reflecting further deposit repricing strategies.

Finally, the card portfolio rose to $41.5 billion. Little change in the market shares,with CBA at 27.8%, WBC at 22.7% and ANZ at 20.2%.

Private Funds Pose Most Systemic Asset Management Risk – Fitch

Private funds, i.e. hedge funds, pose the greatest systemic risk for the investment management sector based on key risk indicators identified by the Financial Stability Board’s (FSB) latest consultation paper, according to Fitch Ratings.

The paper on non-bank, non-insurance financial institutions that may pose systemic risk takes a dual approach for investment management, focusing on investment funds and asset managers, was published earlier this month. The latest FSB consultation paper identifies size (with and without regard to leverage), substitutability, interconnectedness, complexity and cross-jurisdictional activities as potential drivers of systemic risk in the investment management space. These factors are considered in the context of private less-regulated funds, regulated funds and asset managers.

The two key drivers of systemic risk are the use of excessive leverage (and associated counterparty relationships) and “substitutability,” or a fund’s gross (leveraged) size relative to its investment sector. If one or more large, heavily leveraged funds come to represent “the market,” this could introduce illiquidity in times of stress. The combination of these two factors, excessive leverage and a large market footprint, are most likely to create systemic risk in times of stress.

From this perspective, larger, leveraged private funds pose the most systemic risk in the investment management sector. Private funds are lightly regulated, and leverage constraints are far looser, reflecting counterparty risk limits rather than regulatory limits. Regulated investment funds are restricted from taking on excessive leverage. Leverage for regulated U.S. funds, measured as assets-to-net asset value, is restricted to 1.5x for senior debt, below the 3.0x or greater proposed by the FSB. In Europe, UCITs funds leverage is limited to 2.0x. This makes the transmission of systemic risk due to a forced deleveraging low for regulated funds.

Regulatory treatment of certain off-balance sheet derivative transactions represents one potential caveat. Certain derivatives are used by regulated funds in the U.S., where the regulatory treatment may not fully capture the true “economic leverage” that is incurred. For this reason, we “gross up” the balance sheets of rated funds that use derivatives to fully capture the underlying risks.

In the case of asset managers, Fitch notes that they operate primarily on an agency basis, acting on behalf of investors in their funds. As a result, asset management generally it is not a balance sheet intensive business and does not involve large amounts of leverage, maturity transformation or financial complexity. It is the funds themselves that take on leverage, to the degree allowed, utilize derivatives and have counterparty exposures.

Concentrating on unregulated private funds, with an emphasis on excessive leverage and fund-level market footprint, i.e. substitutability, may result in a more focused, nuanced approach. A deeper understanding of off-balance sheet activities at private funds and larger regulated funds also may help prudential regulators and the market identify less transparent sources of leverage and risk.

The Economics Of Deflation

In a speech at Imperial College Business School, Deputy Governor Ben Broadbent explores the economics of deflation. He explains what the theoretical risks are, how the MPC could respond were risks to materialise and why, while the MPC must be ‘watchful’, the chances of sustained deflation are ‘low’.

This week the ONS announced that CPI had fallen to 0%, ‘the first time the UK has failed to record positive annual inflation for over 50 years.’ Some have claimed that ‘deflation is a problem “because it encourages people to postpone consumption”. … and this can lead to a vicious circle in which prices are then depressed further.’ This is ‘at best a partial description of the problem, at worst a bit misleading. It leaves out two important considerations.’

First, any incentive to delay purchases is offset by an increased propensity to consume when, as now, nominal incomes are rising. Secondly, the incentive to save applies whenever nominal interest rates are higher than inflation and doesn’t ‘suddenly appear when expected inflation dips below zero’. Likewise, debt deflation is driven by nominal incomes falling much faster than nominal interest rates and would not occur when incomes are growing. What we have seen in the past few months is, instead, ‘what some have termed “good” deflation’; an improvement in the terms of trade which has led to an increase in nominal income growth.

In theory, even where periods of mild deflation, like that seen in Britain in the second half of the 19th century and up to the First World War, do lead to falls in nominal wages, ‘there doesn’t look to be anything particularly bad about negative inflation’ – so long as the appropriate level of the real interest rate is sufficiently high not to have to contend with the zero lower bound. When that is the case, interest rates can compensate for widespread price falls.

‘Clearly, we are not in the same position today’ and given the cuts in interest rates made necessary by the financial crisis ‘there is now less room to deal with any entrenched and protracted deflation, in prices and wages alike’ should that occur. ‘The evidence suggests that unconventional policy is effective: even if they don’t circumvent it entirely, asset purchases help soften the constraint of the zero lower bound. Second, with the financial system gradually improving my guess is that the neutral real rate of interest is more likely to rise than fall over the next couple of years.’

Nonetheless the constraints of the effective lower bound means the MPC must be ‘watchful’ for signs that ‘falling prices will beget yet weaker or even negative wage growth – that today’s “good” deflation will metastasise into something a good deal worse’.

‘What are the chances of such a thing?’ There is evidence that price falls have ‘already fed through to spending and household confidence’ and that the propensity to consume has dominated the propensity to save. The historical experience also suggests that low inflation is very unlikely to persist. Looking at 3,300 data points from across the world, in only 70 has inflation actually fallen and ‘in the majority of those inflation was positive the following year. Of the 24 instances in which prices have fallen for more than one year, all but four – two in Japan, two in Bahrain – have occurred in developing countries with pegged exchange rates.’

The presence of a credible monetary policy framework reduces even further the risk of protracted deflation. ‘If people expect inflation generally to be on target, over the medium term, the central bank has to do less to actively ensure it’ and policy does not need to respond to ‘one-off hits to the price level.’

Ben concludes that over the next couple of years ‘headline inflation will get a sizeable kick upwards, once the falls in food and energy prices drop out of the annual comparison. In the meantime, the UK labour market continues to tighten – low inflation won’t be the only influence on pay growth this year – and the boost imparted by lower commodity prices to real incomes is already apparent in higher consumer spending, here and in other countries too. ‘

The New Complexity

On microscopes and telescopes is a speech given by Andrew G Haldane, Chief Economist, Bank of England. It contains some important insights into the questions of how to model the current state of the financial system. For example, there may be greater scope to co-ordinate macro-prudential tools. One way of doing so is to develop macro-prudential instruments which operate on an asset-class basis, rather than on a national basis. Here are some of his remarks.

At least since the financial crisis, there has been increasing interest in using complexity theory to make sense of the dynamics of economic and financial systems. Particular attention has focussed on the use of network theory to understand the non-linear behaviour of the financial system in situations of stress. The language of complexity theory – tipping points, feedback, discontinuities, fat tails – has entered the financial and regulatory lexicon.

Some progress has also been made in using these models to help design and calibrate post-crisis regulatory policy. As one example, epidemiological models have been used to understand and calibrate regulatory capital standards for the largest, most interconnected banks – the so-called “super-spreaders”. They have also been used to understand the impact of central clearing of derivatives contracts, instabilities in payments systems and policies which set minimum collateral haircuts on securities financing transactions.

Rather less attention so far, however, has been placed on using complexity theory to understand the overall architecture of public policy – how the various pieces of the policy jigsaw fit together as a whole. This is a potentially promising avenue. The financial crisis has led to a fundamental reshaping of the macro-financial policy architecture. In some areas, regulatory foundations have been fortified – for example, in the micro-prudential regulation of individual financial firms. In others, a whole new layer of policy has been added – for example, in macro-prudential regulation to safeguard the financial system as a whole.

This new policy architecture is largely untried, untested and unmodelled. This has spawned a whole raft of new, largely untouched, public policy questions. Why do we need both the micro- and macro-prudential policy layers? How do these regulatory layers interact with each other and with monetary policy? And how do these policies interact at a global level? Answering these questions is a research agenda in its own right. Without answering those questions, I wish to argue that complexity theory might be a useful lens through which to begin exploring them. The architecture of complex systems may be a powerful analytical device for understanding and shaping the new architecture of macro-financial policy.

Modern economic and financial systems are not classic complex, adaptive networks. Rather, they are perhaps better characterised as a complex, adaptive “system of systems”. In other words, global economic and financial systems comprise a nested set of sub-systems, each one themselves a complex web. Understanding these complex sub-systems, and their interaction, is crucial for effective systemic risk monitoring and management.

This “system of systems” perspective is a new way of understanding the multi-layered policy architecture which has emerged since the crisis. Regulating a complex system of systems calls for a multiple set of tools operating at different levels of resolution: on individual entities – the microscopic or micro-prudential layer; on national financial systems and economies – the macroscopic or macro-prudential and monetary policy layer; and on the global financial and economic system – the telescopic or global financial architecture layer.

The architecture of a complex system of systems means that policies with varying degrees of magnification are necessary to understand and moderate fluctuations. It also means that taking account of interactions between these layers is important when gauging risk. For example, the crisis laid bare the costs of ignoring systemic risk when setting micro-prudential policy. It also highlighted the costs of ignoring the role of macro-prudential policy in managing these risks. That is why the post-crisis policy architecture has sought to fill these gaps. New institutional means have also been found to improve the integration of these micro-prudential, macro-prudential, macro-economic and global perspectives. In the UK, the first three are now housed under one roof at the Bank of England.

He concludes:

This time was different: never before has the world suffered a genuinely global financial crisis, with every country on the planet falling off the same cliff-edge at the same time. This fall laid bare the inadequacy of our pre-crisis understanding of the complexities of the financial system and its interaction with the wider economy, locally but in particular globally. It demonstrated why the global macro-financial network is not just a complex adaptive system, but a complex system of systems.

The crisis also revealed gaps and inadequacies in our existing policy frameworks. Many of those gaps have since been filled. Micro-prudential microscopes have had their lens refocused. Macro-prudential macroscopes have been (re)invented. And global telescopes have been strengthened and lengthened. Institutional arrangements have also been adapted, better enabling co-ordination between the micro, macro and global arms of policy. So far, so good.

Clearly, however, this remains unfinished business. The data necessary to understand and model a macro-financial system of systems is still patchy. The models necessary to make behavioural sense of these complexities remain fledgling. And the policy frameworks necessary to defuse these evolving risks are still embryonic. More will need to be done – both research and policy-wise – to prevent next time being the same.

For example,

There may be greater scope to co-ordinate macro-prudential tools. One way of doing so is to develop macro-prudential instruments which operate on an asset-class basis, rather than on a national basis. This would be recognition that asset characteristics, rather than national characteristics, may be the key determinant of portfolio choices and asset price movements, perhaps reflecting the rising role of global asset managers.

There has already been some international progress towards developing asset market specific macro-prudential tools, specifically in the context of securities financing transactions where minimum collateral requirements have been agreed internationally. But there may be scope to widen and deepen the set of financial instruments covered by prudential requirements, to give a richer array of internationally-oriented macro-prudential tools. These would then be better able to lean against global fluctuations in a wider set of asset markets.

Mortgages – The Truth About Households Paying Ahead

One of the arguments often used to disprove any issues in the housing market is the fact that some households are paying well ahead of required repayments. For example in the recent RBA Bank Stability Report, they say “Outside of investor housing, household sector finances are currently less cause for concern. Household credit growth has remained moderate, because new lending for purposes other than investor housing has been more subdued and because existing borrowers are taking advantage of low interest rates to pay down debt more quickly than contractually required. The aggregate mortgage buffer – as measured by balances in offset and redraw facilities – has risen to almost 16 per cent of outstanding loan balances (more than two years’ worth of scheduled repayments at current interest rates). ““More broadly, households continue to save a greater share of their income than in the decade or so prior to the financial crisis. Households’ ability to meet interest payments on their loans is being aided by the low level of interest rates. However, while the debt-to-income ratio has been relatively stable over the past decade or so, especially once balances in offset accounts are netted off, it is high relative to its longer-run history.”

In contrast, last year, Fitch Ratings played down the extent to which Australian home owners are rushing to pay back their banks, saying the average increase in voluntary home loan repayments has been modest and not changed in recent years. They found the average borrower is paying about 1.5 to 2 per cent more of their mortgage. The Fitch report, did confirm borrowers were ahead, but found the size of voluntary repayments was ”surprisingly low”. It also said high saving was not the main reason loans were being paid down quickly. Instead, it said the early repayment of debt had more to do with refinancing by borrowers and redraw products, which allow people to borrow more than they needed and treat their mortgage as a low-cost line of credit.

Or again, last year, the Australian reported that some 85 per cent of NAB’s home loan accounts are now ahead on mortgage repayments — by an average of 13 months versus an average of 12 months in 2012 — as customers buoyed by low interest rates pay down debt faster. Of the home loan accounts that are ahead on mortgage repayments, 70 per cent are owner-occupiers, 16 per cent are investors and 14 per cent are first-homebuyers. The majority are aged between 40 and 49 (31 per cent), with the bulk of the remainder evenly split between the 30-39 and 50-59 age groups (25 per cent each).

So does the aggregate data as cited by the RBA really shows the true state of play? Not all loans have redraw and offset facilities. When interest rates fall, are repayments automatically adjusted? So which households are paying ahead? How far ahead are they? To answer these questions we used data from our market model and today outline some of the key findings. The net result shows that whilst some households are ahead, and some well ahead, it is concentrated in specific parts of the mortgage book. It should be said, it is a predominately owner occupied mortgage phenomenon. Within in the DFA segments, the bulk of households who are ahead are classified as holders. These are households with no plans to switch properties or refinance. Many have left monthly repayments at levels aligned with higher rates, and have allowed repayments to run on at higher than needed to meet current repayments. A significant proportion of these households have redraw facilities, meaning they could lift their borrowing if the wanted to.

Looking at the age of the primary household member, we see there are periods when households are more able to repay ahead. Late twenties, when children have yet to arrive, or later thirties when both parents are more able to work and so lift income. We see a fall off in later life.

The value of the property itself is not a very good predictor of whether a household will be paying ahead, though we see a greater distribution at lower property values.

Households with smaller outstanding balances are significantly more likely to be paying ahead, compared with larger loan balances.

Households with a high LVR (Loan to Value Ratio) are much less likely to forward pay.

Some occupations are more likely to be ahead, including those working in the agribusiness sector, office and administration and sales.Those in mining, and legal professions and social sciences are least likely to be ahead.

The geographic footprint is interesting, with households in the Melbourne region the most likely to be paying ahead, then Brisbane, whilst a lower relative proportion in located in the Sydney region. Households in WA are less likely to be paying ahead, whilst relatively, those in Canberra are more likely to be paying above the minimum.

The top 10 pay ahead post codes in NSW are Dubbo, Naremburn, Greystanes, Baulkham Hills, Earlwood, Leumeah, Woollahra, Cronulla, Narrabeen, and Castle Hill. In VIC, Cranbourne, Tarneit, Derrimut, Wheelers Hill, Northcote, Malvern, Langwarrin, Kennington, Bundoora and Greensborough. In QLD Mount Pleasant, Harristown, Caboolture, Benowa, Basin Pocket, Millbank, Buderim, Geebung, Coral Sea, and Brighton. In WA Tapping, Canning Vale, Success, Currambine, Wonthella, South Perth, Morley, Huntingdale, Midland and Lamington.

At current interest rate levels, the average coverage is about eleven months, though some have even more in the bank.

So, the conclusion is that the households who are paying ahead have smaller mortgages, lower LVRs live in more established suburbs and are under less financial pressure. However, do not be deceived, there are significant numbers of household with high LVRs and LTI’s and no hope of paying forward. We showed that in our previous post. You cannot make a compelling case for saying the housing sector is fine on the back of paying ahead data. It is too myopic.

BOQ 1H Results Supported By Housing Lending

BOQ today announced record interim cash earnings after tax of $167 million for the six months to 28 February 2015, a solid result driven by growing momentum in lending growth, strong Net Interest Margin performance and further asset quality improvements. Statutory profit after tax rose 14% to $154 million on the prior comparative half. Home lending including investment loans was a significant element in the results.

In its first full half since acquisition in July 2014, BOQ Specialist performed well with highlights including lending growth of $352 million in on-balance sheet mortgages, on track to exceed its target for the full financial year. BOQ’s financial performance enabled the Board to set an interim dividend of 36 cents per share fully franked, an increase of 4 cents or 13% on1H14.

Lending growth headed back towards system levels as a result of the strategic initiatives BOQ has implemented in recent years, including expansion of the mortgage broker channel and investment in the Business Bank’s presence and capabilities.Retail lending grew at an annualised 6% to $27.3 billion over the February half with $813 million underlying growth. The housing book saw increased diversification with 57% of applications originating from outside of Queensland, largely driven by the broker channel which contributed$420 million of loan growth and accounted for 14% of settlements.

Investment lending is below the 10% monitoring threshold which APRA has imposed.

Commercial lending balances continued to exceed system levels, growing by an annualised 10% over the six months to $8.0 billion. A greater presence in New South Wales, Victoria and Western Australia saw the geographic concentration of the portfolio in Queensland reduce further. In its first full half of contribution, BOQ Specialist’s contribution to lending growth exceeded expectations delivering $352 million in on-balance sheet mortgages while maintaining margins and credit quality across the portfolio. BOQ Finance grew by an annualised 6% over the half to $4.0 billion. This was a healthy result against an industry backdrop of lower volumes due to a slowdown in plant and equipment investment in the broader economy.

Despite a highly competitive market, the Bank’s Net Interest Margin rose 20 basis points from February 2014 to 1.97% due to an 11 basis point increase from BOQ Specialist as well as ongoing pricing discipline. Deposit interest rates were managed down.

BOQ’s Common Equity Tier 1 ratio increased 19 basis points to 8.82% during the half. The Bank’s capital position remains the highest of Australia’s regional and major banks based on Standard and Poor’s risk-adjusted capital approach, positioning it well given the evolving domestic and global regulatory environment. Cost to Income (CTI) ratio for the half increased to 48.1% due to the inclusion of BOQ Specialist for the entire period as well as one-off costs(property costs and CRM impairment expenses) already flagged to the market. Excluding BOQ Specialist, underlying expense growth was 3% annualised from 2H14. Total loan impairment expense was down 22% on prior comparative period to $36 million (1H14: $46 million). Total impaired assets across retail,commercial and BOQ Finance fell 13% to $259 million (1H14: $298 million). Housing impairments rose.

During the half, BOQ continued to strengthen its balance sheet, creating a sustainable funding profile that is able to support growth and deliver internal capital generation. Fitch Ratings’ decision in November 2014 to lift its long-term credit rating from BBB+ to A- followed similar upgrades from other ratings agencies. These changes have improved access to long-term wholesale funding markets and allowed the Bank to actively manage its funding profile by diversifying composition and increasing duration, while reducing cost.

BOQ advocates the implementation of stronger capital measures as recommended by the FSI inquiry.

We think BOQ’s future will be determined by the trajectory of the housing market, and the extent to which they are able to grow their commercial business in an increasingly competitive market. They are certainly at a capital disadvantage compared with the majors and will need to target customer segments carefully to compete successfully.

Economic Implications of High and Rising Household Indebtedness

The Reserve Bank of New Zealand just published an interesting report on this important topic. High and rapidly rising levels of household debt can be risky. A high level of debt increases the sensitivity of households to any shock to their income or balance sheet. And during periods of financial stress, highly indebted households tend to cut their spending more than their less-indebted peers. This can amplify a downturn and helps to explain why many advanced economies since the 2008-09 crisis have had subdued recoveries. Financial institutions can suffer direct losses from lending to households, although these losses are rarely enough on their own to cause a systemic banking crisis. The sustainability of household debt can be assessed best by looking at data detailed enough to build a picture of how debt and debt servicing capacity is distributed across different types of borrowers.

Households, either individually, or in aggregate, can ‘over-borrow’, and financial institutions can ‘over-lend’ to them. A high level of household debt can affect both the financial system and the economy in several ways that are explained in this article.

Two sets of comparative data makes interesting reading. First, household debt-to-disposable income ratio – by country. Cross-country comparisons of debt levels need to be treated with caution, given a variety of measurement issues and different institutional features. That said, the rise in household debt in New Zealand over the last cycle was not exceptional compared to other countries, and Australia is higher.Second, Household debt-to-income ratios – selected countries. The Reserve Bank comments that “in quite a few countries there was no domestic financial crisis and little sustained fall in house prices. Policymakers in several of these economies, including New Zealand, have subsequently become concerned by household sector developments over the past several years – developments underpinned by low interest rates and an easing in lending standards. Household debt levels have started to increase from already high levels, while house prices are growing from a starting point of ‘over-valuation’.

The implementation of an LVR speed limit in New Zealand reflected emerging developments in the housing market that if left unchecked, could have threatened future macroeconomic stability. Some other jurisdictions have also used new macro-prudential tools, in combination with improving the existing underlying prudential framework. In addition to LVR restrictions, other measures include: maximum debt servicing-to-income limits, maximum debt to-income limits, higher risk weights on banks’ housing loans and prudent (or responsible) lending guidelines.

They conclude that:

“This article has focused on the various channels through which household debt can affect the financial system and broader economy. In this sense, households can ‘over-borrow’, although this is often not apparent in ‘real time’ and excess debt levels can lead to, or aggravate, economic downturns or periods of financial distress. The relationship between household indebtedness and consumption volatility is important for the macroeconomy, because it means that the behaviour of highly indebted households during periods of financial duress can amplify downturns. While historical evidence suggests losses on household lending are rarely the sole factor in systemic banking crises, housing-related credit booms and busts often occur alongside booms and busts in other sectors such as the (much riskier) construction and commercial property sector. It is also worth noting that, over time, housing loan portfolios have become a larger share of bank lending in many countries, including New Zealand, increasing their potential to play a larger part in future financial crises. Thus household debt is an important area of focus from a financial stability perspective.

Good micro-level household data provide an important window into how debt and debt servicing capacity is distributed across the household sector, and are also helpful for carrying out simple stress-tests of the sector using a range of large, but plausible shocks. New Zealand’s data in this area are improving. Data from the Household Economic Survey show a rise in the proportion of borrowers with a high LVR and high debt-to-income ratio, thereby supporting the view that LVR speed limits have been appropriate to curtail risks to financial stability. The Reserve Bank will continue to develop its framework for analysing household sector risk and vulnerabilities.”

RBA On Household Risks

In the financial stability report today, the RBA comments:

“Household sector risks continue to revolve largely around the housing and mortgage markets. At this stage, competitive pressures have not induced a material easing in non-price housing lending standards. The composition of new mortgage finance remains skewed to investors, however, particularly in the largest cities. Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on. In the first instance, the consequences of such a downturn in prices are more likely to be macroeconomic in nature because of the effects on household wealth and spending would be spread more broadly than just on the recent property purchasers. However, the further housing prices fall in that scenario, the greater the chance that lenders would incur losses on their housing loans.

At the margin, the recent decline in mortgage interest rates can be expected to boost demand for housing further, although it will also make it easier for existing borrowers to service their debts. Indicators of household stress are currently at low levels, but could start to increase if labour market conditions weakened further than currently envisaged”.

They go on to discuss the APRA and ASIC measures and say it is too soon to assesses their effectiveness. Not, to worry though, as they are “monitoring an array of information”. Too little too late in my view. Actually households are currently more in debt than ever, so levels of stress are in relative terms higher. If rates were to rise, or if house prices fell, the impact would be severe and immediate (in Ireland it took just nine months to wreck household budgets in 2007).

Latest DFA Survey – Other Segments

Today we round out the latest survey results, by updating our other segments. The property as investment bug continues to spread.

First, those looking to trade up. Property investment has now overtaken the desire for more space as the main driver to transact. We also see that life style changes and purchase due to job changes are of similar significance. Up traders will be looking the purchase property from down traders, who slightly outnumber them.

The one million households looking to trade down, are still motivated first by the desire for greater convenience, but we also see an increasing desire to release capital for retirement and to lock in capital gains. This segment continue to be less bullish on future house price appreciation. Trading down because of unemployment and death of spouse also figure in the results. About 17% of down traders expect to use some or all of the proceeds of sale to facilitate the purchase of an investment property.

Refinancers are still motivated by the desire to reduce monthly mortgage repayments, though the proportion looking to lock in a fixed rate has fallen, on the expectation of lower rates in coming months. About 16% of these households are looking to release capital, thanks to lifting house prices. This capital will flow to purchase specific items like a new car, or holiday, or as a deposit for an investment property. The flow of money into further property assets of course works against the RBA’s desire to lift household spending towards facilitating economic growth.

Finally, as we highlighted before, the number of households who want to buy, but cannot continues to rise. The main barrier is the high price of property. Concern about interest rate rises has fallen in the light of RBA expectations.

This concludes the results from our latest surveys, and we will be incorporating the updated findings in the next edition of the Property Imperative, to be released in April.

Standing back, it is all about investment property. The nation is fixating on property speculation. A logical reaction to low interest rates, high house prices, and the search for yield, maybe. However, not good for long term productive growth. Yet, the recipe to address the underlying problem, greater housing supply, changes to negative gearing, increases in banking capital for housing, and other macroprudential measures seem beyond the powers that be. The current trajectory is deeply flawed, but I fear little will be done. Worst still, further interest rate reductions, would pour more fuel on the fire.