Social Trends – Page 154 – Digital Finance Analytics (DFA) Blog

‘Speeding’ housing investors are pushing families too far

Market watchers are expecting a bombshell to be dropped on the property market next week, with Commonwealth Bank reportedly about to close its doors to refinancing housing investors wishing to migrate from other banks.

Fairfax Media suggested this could send “shockwaves” through the property market – though whether it will cause a price correction is far from certain.

At present, the consensus view is that CBA is simply taking a breather from lending to investors so as not to breach the mortgage growth speed limit imposed by the regulator.

The Australian Prudential Regulatory Authority introduced the speed limit in late 2014, requiring banks to limit growth in their investment mortgage books to 10 per cent per annum.

But even if CBA does slam on the brakes on Monday, it won’t be nearly enough.

A broker’s view

One independent mortgage broker told The New Daily that the speed limit is a fairly weak measure for controlling the housing credit bubble because so many smaller lenders exist to pick up the overflow of demand from the big banks.

Housing market risks may be staying the RBA’s hand

So an ANZ customer chasing a better deal at CBA may now find their broker raking up names they’ve never heard of.

AFG, for instance, offers what the broker calls a “white label” home loan built on funding from a number of other banks.

A confident investor should have no problem signing up with such a provider, although less savvy investors may baulk at moving away from the psychological safety of the big banks.

A second flaw

The net result of the speed limit is to slow lending to a degree, but it has likely helped smaller lenders take additional market share.

The latter is not a stated goal of the policy, and even the real goal – to reduce investor activity – really doesn’t go far enough.

To understand why, two factors need to be considered. The first is population growth and the second is inflation. Consumer price index inflation is currently running at 1.5 per cent per annum, and population growth is around 1.4 per cent.

Combining those two figures, the amount of money lent against the housing market would have to grow just under 3 per cent to stay ‘steady’ in relation to the rest of the economy.

In fact, although the value of mortgage debt in Australia has grown by an average of 8 per cent since the onset of the GFC, the last calendar year saw banks’ mortgage books grow by almost exactly the ‘steady’ amount – 2.9 per cent.

That’s partly due to lower volumes of homes changing hands, and partly due to a slow-down in house price growth.

Why 10 per cent is too much

What’s alarming about the 10 per cent speed limit, which CBA is apparently hitting and other banks are getting close to, is that it’s more than three times the ‘steady’ rate of growth.

That means the mortgage market continues to be rebalanced away from owner-occupiers and towards investors.

It is investors driving extraordinary price growth in Sydney – up more than 60 per cent since 2012 – and Melbourne, and it is first home buyers and young families being priced out of the market.

This has to change. One suggestion, from economist Leith van Onselen, is to halve the speed limit to 5 per cent. That would still see investment loans growing faster than the population and inflation, but it would at least be a start.

Let’s get the language right

It would also be useful if media commentators could start focusing on the younger, more vulnerable portion of the housing market rather than celebrating the windfall capital gains made by the older and wealthier portions.

To illustrate what I mean, I’ve prepared two charts from the same set of ABS numbers for Sydney – one with a happy upward slant, the other with a depressing downward slide.

The first, which many readers will be familiar with, shows the huge capital gains investors have made in the past few years –expressed as the house price to income ratio.

The second looks at this period of financial exuberance from the first home buyer’s perspective where the question is not “how many incomes is my asset worth?” but rather “how much of the asset is my income worth?”

From that perspective, the appropriate headline is not ‘House prices boom in Sydney’ or ‘Investor returns at record levels’ – it is ‘Purchasing power of wages plummets’ or ‘Housing affordability tumbles’.

Do Investment Property Investors Also Use SMSF’s?

We recently featured our analysis of Portfolio Property Investors, using data from our household surveys. We were subsequently asked whether we could cross correlate property investors and SMSF using our survey data. So today we discuss the relationship between property investors and SMSF. We were particularly interest in those who hold investment property OUTSIDE a SMSF.

To do this we ran a primary filter across our data to identity households who where property investors, and then looked at what proportion of these property investors also ran a SMSF. We thought this would be interesting, because both investment mechanisms are tax efficient investment options. Do households use both? If so, which ones?

We found on average, around 13% of property investors also have a self managed super fund (SMSF). Households in the ACT were most likely to be running both systems (17%), followed by NSW (14%) and VIC (12.8%).

Older households working full time were more likely to have both an SMSF and Investment Property, but we also noted a small number of younger households were also using both tax shelters.

We found a significant correlation between income bands and use of SMSF among investment property holders (this does not tell you about the relative number of households across the income bands, just their relative mix). Up to 30% of higher income banded households have both a SMSF and Investment Property.

Finally, we look across our master household segments. These segments are the most powerful way to understand how different household groups are behaving. The most affluent groups tend to hold both investment property and SMSF – for example, 30% of the Exclusive Professional segment has both. Less affluent households were much less likely to run a a SMSF.

This shows that more affluent households are more able and willing to use both investment tax shelter structures. It also shows that any review of the use of negative gearing, investment properties and the like, needs to be looked at in the context of overall tax planning. Given the new limits on superannuation withdrawals, we expect to see a further rotation towards investment property, which as we already explained has a remarkable array of tax breaks and incentives. We expect the number of Portfolio Property Investors to continue to rise whilst the current generous settings exist.

Is Local Unemployment Related to Local Housing Prices?

From The St. Louis FED.

The U.S. national labor market has recovered from the effects of the 2007-2009 recession; however despite the national labor market recovery, significant regional variation remains. Recent economic research highlights links between regional labor and housing markets. In their article, “ The Recent Evolution of Local U.S. Labor Markets, ” Authors Maximiliano Dvorkin and Hannah Shell examined the recession and recovery by reviewing the correlation between county-level unemployment rates and changes in housing prices.

National unemployment reached a pre-recession low in December 2007; by October 2009 the unemployment rate in most counties increased between 4 and 20 percentage points. The authors found that areas with higher unemployment rates before the recession experienced larger increases in unemployment during the recession, and those areas with lower unemployment rates before the recession experienced smaller upticks in unemployment during the recession.

The authors theorized that one reason for the disparity in unemployment rate increases could be related to the housing supply. Specifically, the unemployment rates in Arizona, New Mexico, Nevada and Utah remained above their pre-recession levels; these are also areas where housing prices dropped significantly.

When they examined the percent change in county house prices with the change in the county unemployment rate, the results showed a strong negative correlation, meaning that counties with larger decreases in housing prices experienced larger increases in the unemployment rate, perhaps because larger house price declines during downturns are leading to larger declines in local consumption spending that further depress the local economy.

Household Finance Confidence Slips After Christmas Binge

We have released the latest edition of the Digital Finance Analytics Household Finance Confidence Index, to end January 2017 today, which is a barometer of households attitudes towards their finances, derived from our rolling household surveys.

The aggregate index fell slightly from 103.2 in December to 102.68 during January, but is still sitting above a neutral measure of 100, and the trend remains positive. However there are a number of significant variations within the index as we look across states and household segments. These variations are important

First, the state scores are wider now than they have ever been, with households in NSW the most positive, at 110, whilst households in WA slip further to 81. Households in VIC and SA also slipped a little, whilst households in QLD were a little more positive.

The performance of the property market is the key determinate of the outcomes of household finance confidence, with those holding investment property slightly more positive than owner occupied property owners, whilst those who are renting, or living with family or friends are significantly less positive. Whilst some mortgage holders have received or expect to see a lift in their mortgage rate, this is offset by strong capital growth in recent months. The NSW property holders, especially in greater Sydney are by far the most positive. Renters in regional WA, where employment prospects are weaker, are the least positive.

Looking in detail at the drivers of the index, we see a rise by 1% of households who are felling less secure about their employment prospects – especially those in part-time jobs – and more are saying they are under employed.

In terms of the debt burden, there was a 4% rise in those less comfortable about the debt they hold, thanks to rising mortgages, the Christmas spending binge and higher mortgage rates.

More household are saying their real incomes have fallen, up 3%, whilst those who say their costs of living have risen was up 8%.

To offset these negative indicators however, some households reported better returns from term deposits and shares, as well as a significant boost to capital values on their property. Those who said their net worth had risen stood at 64%, up 5% from last month. The property sector is firmly linked to household confidence, and vice-versa.

By way of background, these 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.

If scandals don’t make us switch banks, financial technology might

From The Conversation.

An efficient market relies on rational customers being willing to change suppliers when there’s good reason to do so. But what happens when customers stay put regardless? This issue is particularly acute in the banking industry.

Even when bank customers have a very good reason to switch, behavioural economics research shows they’re often reluctant to make the move. For example, big scandals that affect banks have a weak impact on consumer behaviour. However, there is a greater propensity to act among customers who are directly impacted.

Behavioural economics also shows bank customers are often slow to switch to take advantage of better offers from competitors. In 2016, the UK’s Competition and Markets Authority lamented that only “3% of personal and 4% of business customers switch to a different bank in any year” in the country. In 2013, Canstar suggested the figure is slightly higher in Australia at 5%.

Despite the slightly higher propensity to switch banks among Australian consumers, there’s much we can learn from the UK’s use of behavioural economics to nudge customers to act in their own best interests. In particular, financial technology companies can provide information platforms to make it easier for customers to switch.

Why bank customers don’t change

Behavioural economists have shown that consumer decisions are not rational. In particular, there is a “sunk cost bias” that affects consumer decisions. That is, consumers tend to place more value on any previous effort or expenditure they’ve made rather than judging economic value when they make decisions.

If you have left a 20% deposit on an item in a store, you will probably buy it, even if you found the same item for sale at 75% of the price elsewhere. So, customers will tend to stick with the bank they’ve got, despite scandals.

Competition authorities, led by the UK’s Competition and Markets Authority, are increasingly trying the “nudge” options offered by behavioural economics as a way to help persuade an irrational consumer to do what is in their best interests. A nudge is simply a mechanism to encourage people. It might be a reminder as to the consequences of not taking the action or benefits of going ahead.

Regulators have examined ways in which nudges can be given without unintended consequences. For example, should the nudge be a carrot or a stick? And which works best? The UK’s Competition and Markets Authority’s chief economic advisor, Mike Walker, advises regulators to “test, learn and adapt”.

A critical part of any nudge is presenting information in a way that can be used easily by consumers. Intermediaries, comparison tools and other financial technology services can provide this information.

How financial technology businesses could help

One of the barriers at the moment to getting customers to switch in Australia is a lack of information on all bank products and financial technology businesses to manage this information.

Although the UK implemented services that make it easier to switch between retail bank accounts, the UK’s Competition and Markets Authority found that this didn’t improve competition in the sector. To resolve this problem, it has ensured that customers have information on other banks and their account options as part of new account-switching regulation.

The way that this works is that customers can compare their existing offering with alternatives using an app that talks to an open electronic interface to the bank. The UK’s Competition and Markets Authority has mandated that the retail banks provide this interface, known as an applications programming interface, to both consumers and to financial technology businesses.

The effect is a space for new businesses to provide comparison tools. These new financial technology businesses will not impose a significant cost on the banks. Each of the UK banks has spent around £1 million each to create these open electronic interfaces, according to the UK Open Data Institute.

The open electronic interfaces will be associated with the European Union Second Payment Services Directive, which will be implemented before Brexit takes effect. This directive will help automate parts of the switching process.

The Australian banks and the Reserve Bank under the auspices of the Australian Payments Clearing Association are trialling a New Payments Platform to try to make it easier for customers to switch. But it’s not likely to have the same degree of flexibility and consistency as the approaches adopted in the UK, as it focuses on financial institution needs, rather than consumer ones.

Regulators in Australia should use behavioural economic analysis to learn more about how consumers use any new information on bank switching or services on this offered by financial technology businesses.

We’re still waiting on evidence on how these new financial technology companies will change consumer behaviour in the UK. But it is likely that in the very least it will increase the intensity of rivalry between the retail banks, this can only be a good outcome for consumers in the UK.

This could also inform a similar implementation in Australia, particularly after a parliamentary committee’s first report on the four major banks is released.

Author: Rob Nicholls, Lecturer in Business Law, UNSW

One in two Australian households expected to be retire ready

Fifty-three per cent of Australian households are expected to have enough for a comfortable retirement from their combined superannuation savings, personal assets and the Age Pension, according to the latest CommBank Retire Ready Index released today.

When the Age Pension is removed, the number of households that can afford a comfortable retirement reduces to 17 per cent, and to just six per cent when the calculations are based on superannuation only.

Linda Elkins, Executive General Manager Advice, Commonwealth Bank said: “The good news is that many Australians who may not currently be on track for a comfortable retirement are very close. A little bit of planning could see them reach the comfortable level.”

CommBank commissioned Rice Warner to prepare the report, which shows that many Australians are close to achieving the comfortable retirement standard defined by the Association of Superannuation Funds of Australia (ASFA). The report shows that while 53 per cent of Australian households are on track, a further 18 per cent are projected have 80 to 99 per cent of what they will need.

The overall results are mixed across cohorts and age groups, and highlight the growing importance of superannuation in helping Australians achieve a comfortable retirement.

Millennials will need to save harder for retirement than other cohorts due to their longer life expectancies. Superannuation will play an important role and will comprise, on average, 78 per cent of retirement assets for 25 year-olds working today.

“The CommBank Retire Ready Index shows how important superannuation will be for the long term financial well-being of young Australians. Many people do not become engaged with superannuation until later in their working lives, but taking a keener interest in superannuation now, consolidating accounts into one super fund and contributing a little more each week can help younger Australians stay on track for a comfortable retirement,” Ms Elkins said.

In the 60-64 year-old age group, couples are expected to be better off than singles but will have reduced retire readiness as they have not received the long term benefits of compulsory Superannuation Guarantee contributions. On the other hand, younger age groups are expected to have less in assets at retirement outside of superannuation when compared with their older counterparts.

“The report also shows that more men than women are retire ready. Women have longer life expectancies, and therefore need more assets to maintain a comfortable level of retirement. Women also generally have lower retirement savings due to career breaks during their child bearing years and lower average income levels throughout their working lives.”

Ms Elkins also said: “People who are approaching retirement could give their savings a boost by taking advantage of the current superannuation contribution caps before they are reduced on 1 July.”

“It is important that people of all ages understand how much they will need to save now to secure their financial futures.”

“To help Australians see how on track they are for a comfortable retirement, CommBank has developed a retirement calculator. This is a good first step to see how retire ready you are and is a useful resource to help you get on track to reach your goals for a comfortable retirement,” she said.

Is big business, super funds the key to fixing social housing problem in Australia?

From The Herald Sun.

PHILANTHROPISTS, charities, superannuation funds and publicly-minded big business will be encouraged to build and manage social housing developments in a bid to dramatically boost the number of social houses available across Australia.

Treasurer Scott Morrison said major changes were needed in the way social housing was provided, to make it more attractive to the private sector.
The Lend Lease housing development in London is designed to provide affordable housing but also ensure profits for developers. Picture: Ella Pellegrini
Speaking at a $3.8 billion new housing estate in London which has set 25 per cent of its new houses aside for affordable housing, Mr Morrison said governments provided almost all of the social housing in Australia, but demand was outstripping supply.

“There are currently over 180,000 people on social housing waiting lists across Australia,’’ he said.

“The number of social housing dwellings would need to grow by almost 50 per cent in order to accommodate this number of people.

“At present the Commonwealth and state and territory governments combined are spending over $10 billion a year on housing but it is failing to improve outcomes, particularly for those with low-moderate incomes.’’

Mr Morrison will today launch a discussion paper on ways to increase the practise known as social impact investment, to get private sector involvement in the social housing market.

The aim is to make building, supplying and managing social housing an attractive business proposition, as well as being a good thing to do for the community.

At its core it is designed to deliver better outcomes for the people who use the service but it also needs to provide a financial return.

“If social impact investing doesn’t make money then people won’t do it,’’ Mr Morrison told News Corp.

“It’s not social impact benevolence. It’s social impact investment.’’

The Government could play a role by reducing the cost and burden of compliance, being a co-owner of a development, getting rid of legal barriers, helping organisations access low-cost, long-term finance, and potentially direct-paying Commonwealth rental assistance to landlords.

“A key objective is to create an enabling environment for social impact investment that doesn’t displace private sector financing,’’ Mr Morrison said.

Social impact investing can be done through issuing social impact bonds, which the New South Wales and South Australian governments are already doing on a project-by-project basis.

But large-scale private projects do not yet exist in Australia.

Mr Morrison this week toured the Elephant Gate project being developed by Lend Lease in Southwark, south London.

The project saw the notorious, crime-riddled Heygate council estate bulldozed, and a new development of 3000 homes go up in its place, incorporating community facilities such a skills centre, where trainees worked on the site.

A quarter of the properties were set aside for affordable housing — half of them available under shared ownership, where the owners buy just a portion of their home, according to their incomes.

The other homes are social housing, scattered throughout the entire complex, where tenants pay a capped rent, under the deal between Lend Lease and the Southwark Council.

“We don’t really have projects like this in Australia and it is does require a capacity in state governments, a capacity even in the Federal Government as well as building up our social organisations,’’ he said.

“You’ve got to get the returns, that’s the other challenging thing.

“You’ve got to get the security of income and that really does require you to rethink using your Commonwealth rental assistance and how you’re using welfare payments and getting a guarantee that rent is going to turn up in the bank account.

“When you start getting a more guaranteed income stream for these types of developments that’s far more attractive to the developers, far more attractive to the institutional investors.’’

High Household Debt Kills Real Growth

A new working paper from the BIS “The real effects of household debt in the short and long run” shows that high household debt (as measured by debt to GDP) has a significant negative long term effect on consumption, and so growth.

A 1 percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point. Our results suggest that the negative long-run effects on consumption tend to intensify as the household debt-to-GDP ratio exceeds 60%. For GDP growth, that intensification seems to occur when the ratio exceeds 80%.

Moreover, the negative correlation between household debt and consumption actually strengthens over time, following a surge in household borrowing. What is striking is that the negative correlation coefficient nearly doubles between the first and the fifth year following the increase in household debt.

Bad news for Australian households where the ratio is well above 80%, at 130%.

This is explained by massive amounts of borrowing for housing (both owner occupied and investment) whilst unsecured personal debt is not growing. Such high household debt, even with low interest rates sucks spending from the economy, and is a brake on growth. The swelling value of home prices, and paper wealth (as well as growing bank balance sheets) do not really provide the right foundation for long term real sustainable growth.

Note: BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS.