Social Trends – Page 166 – Digital Finance Analytics (DFA) Blog

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.

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.

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.

FactCheck: was Australia on a debt trajectory heading to 122% of GDP?

From The Weekend Conversation:

“given we inherited a trajectory of debt and deficit heading to 122% of GDP, which was the Greek-like proportions the Prime Minister talked about. We have halved, just through our legislated measures, we have halved that trajectory. So now we are heading towards just above 50% of net debt to GDP. – Assistant Treasurer Josh Frydenberg, interview with Fran Kelly on RN Breakfast, March 26, 2015″.

Mr Frydenberg and other Abbott government ministers have, on several occasions, told voters their measures have trimmed a debt and deficit trajectory heading to 122% of GDP down to just above 50%.

But where do those numbers come from and how much credence should we place in them?

The Intergenerational Report

When asked for a source for those numbers, a spokesperson for Mr Frydenberg directed The Conversation to the Intergenerational Report, released by Treasury in early March, in particular Chapter 2, which states under section 2.1.3 Balance Sheet that:

Under the “previous policy” scenario, net debt is projected to reach 122% of GDP in 2054–55. This represents $5,559 billion in today’s dollars and is equal to $139,900 per person (Chart 2.4). The projected level of Australian Government debt is significantly improved under the “currently legislated” scenario. Net debt is projected to reach 57.2% of GDP in 2054–55 ($2,609 billion in today’s dollars) under the “currently legislated” scenario.

Remember, the debt in question here is domestic currency debt accumulated by government due to budget deficits (where government spending has exceeded tax revenue). It’s not about debt owed by Australians to foreigners which is denominated in foreign currency. Nor are we referring to private debt owed by businesses and households. (Australia’s foreign debt is very low, and even smaller is government foreign debt. Private debt is obviously very large but rarely highlighted as a concern, even though that was a major issue for the US in the GFC).

So the Assistant Treasurer has accurately quoted figures from the Intergenerational Report, which forecast that Australia was on a trajectory to reach debt worth 122% of GDP in 2054-55.

However, while he’s been accurate in quoting it, a number of economists regard the figures in the Intergenerational Report as problematic and politicised.

Treasurer Joe Hockey has rejected claims that the report is a political document, saying:

Some will claim it’s a political document. So be it… But the numbers and the trends are there, whether it’s the Liberal party, the National party, the Labor party, the Greens or Palmer United, the fact is the trends are still there.

Uncertainties

There is a significant random element to budgets, which naturally governments treat opportunistically. For instance, the surpluses under the earlier Howard government were largely due an inflow of revenue from the mass privatisations of assets in the 1990s.

To begin with, any forecast 40 years ahead is fraught with uncertainty. Another problem with long term predictions is that very small changes in figures attached to factors under consideration, when compounded, induce large changes in the projections. Minor tweaks to economic models can have major consequences when projected 40 years into the future.

For example, a PwC report released in July 2013 estimated that the Australian governments’ debt levels as a proportion of GDP will rise to 77.9% by 2049-50 – a significantly different scenario that shows that different economic models can produce vastly different results when projected over long time periods.

The Intergenerational Report’s Appendix C on methodology refers to a wide range of assumptions made about demographic changes but some of those assumptions have been criticised by other economists, like the University of Queensland’s John Quiggin.

The report says on page 111 that “various models that produce the projections are under the guidance of a senior Treasury steering committee designed to ensure internal consistency and legitimacy of assumptions.”

But it is not clear if these models factor in the costs of reduced government spending on health, education and the environment. For instance, if the health budget is cut, hospital admissions and workdays lost would increase, in turn affecting economic activity.

Debating debt

The background – and highly politicised – question behind all of this is: how worried should we be about government debt?

On one side of that debate are those who take what has been called a neoliberal position. They are concerned that government activity funded by borrowing will raise interest rates and crowd out private business activity, which is viewed as more efficient.

On the other side are Keynesian economists, who argue that governments may need to run budget deficits – especially in times of downturn, like the GFC. Such budget deficits will be cancelled out when the economy consequently improves and unemployment falls, they say, because the tax take will increase and welfare payouts will fall. In addition, government spending on infrastructure and research and development would support the growth of industry, they argue, hence a certain amount of government debt is necessary.

In fact, debt has been remarkably variable and volatile over time and across countries with very differing levels of development and patterns of economic growth. Debt is influenced by a large range of factors, including economic growth and inflation.

Verdict

Mr Frydenberg’s quote that “we inherited a trajectory of debt and deficit heading to 122% of GDP.. [and] just through our legislated measures, we have halved that trajectory” is an accurate reflection of the findings of the Intergenerational Report. However, without more detail on how the authors of the report arrived at that figure of 122%, it is not possible to say if it is true or not. And while Mr Frydenberg has been accurate in quoting it, the report’s modelling has been criticised by a number of economists.

Review

The FactCheck is clearly correct in finding that Mr Frydenberg’s statement accurately reflected the estimates of the Intergenerational Report 2015.

However, Mr Frydenberg’s statement referred to the “trajectory” that the government inherited. The “previous policy” scenario of the Intergenerational Report was not “inherited” – it includes substantial budgetary drags due to Abbott Government policies. The “previous policy” scenario of the Intergenerational Report is based on the 2013-14 MYEFO figures, which amongst other changes from the Labor government’s policies, assume the abolition of the Carbon and Mining taxes, and the creation of a paid parental leave scheme.

The Intergenerational Report assumes that a number of welfare payments will decline substantially relative to average wages, that health spending will grow much more slowly over the next decade than the last, and that governments will cut income taxes even when deficits and debt are rapidly increasing.

In analysing concerns about debt, it is worth noting that if governments fund services today with borrowing, they effectively ask taxpayers of future years to pay for them through higher taxes and lower living standards than they would enjoy otherwise. Although there are academic debates about whether budget impacts are mitigated through changed consumer behaviour or inheritances, the intergenerational transfer of budget deficits (sometimes labelled as “intergenerational theft”) is often cited as a reason to avoid increasing government debt. – John Daley, Chief Executive Officer at Grattan Institute.

Have you ever seen a “fact” that doesn’t look qu

More Than 5% Of Property Is Owned By Overseas Buyers

The vexed question of how many foreign buyers are in the Australian residential property market, continues. The Master Builders of Australia estimated that foreign investors account for 5 to 6 per cent of the Australian housing market. Meriton said overseas buyers represented closer to 2.5 per cent of annual sales. The Foreign Investment Review Board figures show for the year from July 2013, $24.8 billion in foreign investment was approved, 44% higher than the prior year. But no one really knows. The FIRB data does not jive, the mortgage lending data does not take account of foreign funding, and we know that the current approval processes are being flouted – see the recent parliamentary review. There is no good source of truth. Here at DFA, we like a challenge, so we turned our household surveys to the problem.

DFA recently highlighted data from our first time buyer surveys, which showed that about 4% of all first time buyers and 9.2% of investor first time buyers were overseas, which is more than enough to more than move the dial, especially given the concentration in Sydney.

We have been looking at the data in our broader survey, and we have been able to make an estimation of the penetration of foreign buyers by post code. In this more extensive data set, we look beyond the mortgage, (as many fund from overseas) to the question of ownership. From our survey, we can draw some relevant conclusions. First, we think that of the nearly $6 trillion of residential real estate in Australia, certainly more than 5% is owned by overseas buyers, which is worth more than $300 billion in today’s terms. More than half of the property is in Sydney, a quarter in Melbourne, and the rest spread across the other states.

However, one of the most interesting elements in the data is the concentration in specific post codes. We have geo-mapped the data for some of the major centres. In Sydney, the hot spots were Millers Point, Surry Hills, Hurstville and the inner East. The average purchase price was around $400,000 and was most likely a unit (some purchased some time back, when prices were lower than today). Actual prices ranged from more than $1m, down to below $250k. Almost none of the properties were mortgaged to an Australian bank. In these contested areas, prices will be pushed higher.

In Brisbane, the hot spots were McDowall, Oxley (Qld), East Brisbane, Fortitude Valley and Wavell Heights. The average price was $325,000, with again a focus on units.

In the west, in Perth, the favoured areas were Mount Claremont, Nedlands, Subiaco and East Perth. Average price was $497,000 and a larger proportion of purchases were houses than in the eastern states.

In Melbourne, favoured areas included Hawthorn, Melbourne, Maribyrnong, Brunswick, Kew, Richmond, Footscray, Fitzroy and St Kilda. Average value was $312,000, and was biased towards units.

Finally, in Canberra, the average was $580,000.

We can drawn some general conclusions. The argument that most overseas buyers are buying multi-million dollar properties so there is no contention with first time buyers will not wash. They are competing for similar properties. Many are temporarily in Australia, but are using money from foreign sources, often family funds. Next, they are buying in areas adjacent to the CBD and are happy to purchase high density units (many will be familiar with this style of living from their own cities). These are also the targets of onshore investors, another reason why prices are rising. Finally, we found that many were looking to hold the property for capital growth (rather than rental income). About one fifth of the property was currently vacant. This hints at a worrying trend, are some investors just letting the property stand idle and empty? What does this do to the area, and other units in the block. Is there a case for an occupancy test? Given the rise in the number of property inactive Australians and the rise in people wanting to rent, is there a way to make these vacant properties more accessible to potential tenants?

The Problems with Relying on the Bank of Mum and Dad

DFA recently highlighted the rise of the bank of Mum and Dad. In The conversation, there is an article highlighting some of the potential risks, especially with formal bank guarantees.

Ask a parent how far they would go to support the financial aspirations of their children, and chances are they will say: “Yes, if I had the money I would be happy to act as a guarantor for my children to purchase a property.”

Australian capital city house prices rose by 7.9% in 2014, while the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments is near record lows – 14.2% in January 2015, compared to 20.4% in December 2012.

Many family-assisted first-home purchases are not being counted in the first home buyer data collected by the Australian Bureau of Statistics, but it’s likely the growing cost of owning a home is encouraging an increasing number of parents to help out via a guarantee, interest-free loan, initial deposit or simply making a monetary gift to their children. This financial support can change an individual’s decision to buy or rent a house or unit. Parental support can also help first home buyers avoid mortgage insurance charges that can easily exceed A$15,000 for a family home in a desirable suburb.

The risk to parents

Consumer advocates cite “lots of cases” where guarantors have been faced with the prospect of losing their home.

Since 2004 Australian banks have offered specific “family pledge” or “family guarantee” loans, allowing parents to provide both equity support and income support. These products are driving growth in the sector, adding to the risk for parents.

In the current economic climate with rising unemployment and costs of living, parents need to understand the risks of acting as guarantor, and all the legal responsibilities that come with it. The guarantor has a legal responsibility to repay the loan (along with any fees, charges and interest) if the borrower defaults. If the guarantee is tied against assets such as the family home, guarantors may end up losing their home, particularly if the parents’ financial position or health conditions have changed over the years. Often the lenders can sue the guarantor if the loan obligations are not met by the debtor. If parents have concerns, it may be a good idea to contribute towards the deposit so that a guarantee is not required.

It is equally important for parents to be educated with regard to the purpose of the loan, amount of the guarantee, to know in detail if their children have stable incomes, and the kind of loan they are guaranteeing (such as lines of credit or overdraft which have no specific time to maturity).

The risk to the banking sector

Family-pledged loans can be categorised as non-conforming loans, an area where lenders seek to minimise the level of risk as much as possible. The Australian Prudential Regulatory Authority has outlined some guidelines for ADIs with regard to loans including a guarantor relationship (e.g. from a parent of the borrower) to cover shortfalls in minimum deposit requirements. APRA acknowledges these loans carry a high risk and ADIs should carefully assess the guarantor’s income, credit worthiness, enforceability of potential claims and the value of any collateral pledged by the guarantor. APRA also emphasises that as a risk management strategy a prudent ADI should establish portfolio limits within its risk appetite for such lending. Such limits can be stress tested.

Since the 1997 Wallis Inquiry, household leverage has almost doubled. This has been accompanied by a significant increase in house prices relative to income over the past decade. Australian home prices are 50% higher than usual relative to rents, and around 40% higher than usual when compared to incomes. The Bank of International Settlements has already warned that a price correction may be coming.

The Financial System Inquiry is seeking measures to ease the effects of the housing market on the economy along with ways that these measures can be implemented.

Inadequate bank supervision and poorly underwritten home mortgages led to the financial crisis. Easing credit constraints, delivering innovative products (along with fee generating activities) without considering the associated risks, and a lack of internal and external monitoring and supervision, can increase non-performing loans and threaten the financial system and its stability.

Sydney Dwelling Values Surged 3% Higher in March – CoreLogic RP Data

Home values across the combined capital cities increased by 1.4 per cent in March 2015 according to the CoreLogic RP Data Home Value Index, driven by an exceptionally strong Sydney result where dwelling values were 3.0 per cent higher over the month. The latest indices reading shows capital city dwelling values moved 3.0 per cent higher over the first quarter of the year. CoreLogic RP Data head of research Tim Lawless said, “although value growth has started 2015 on a strong note, the annual rate of growth has moderated back to 7.4 per cent, which is
the slowest annual growth rate since September 2013.”

Sydney remains the standout capital growth performer, with values rising by 3.0 per cent over the month, 5.8 per cent over the quarter and 13.9 per cent over the year. With stronger housing market conditions over the first three months of the year, annual home value growth across the Sydney market has rebounded after slowing to 12.4 per cent in December 2014. Sydney is the only housing market where dwelling value growth remains in double digits, with the next strongest performer, Melbourne, showing a much lower rate of annual capital gain at just 5.6 per cent.

Each of the remaining capital cities have recorded an annual rate of growth which is less than three per cent, with values having declined across Perth, Darwin and Hobart over the year. Since home values began their current growth phase in June 2012, dwelling values across the combined capital cities have increased by 24.3 per cent. “Most of this growth is emanating from Sydney,” Mr Lawless said. “Over the current growth phase, Sydney dwelling values have increased by 38.8 per cent with Melbourne second strongest at 23.6 per cent. On the other hand, total dwelling value growth over the current cycle has been less than 10 per cent in Adelaide, Hobart and Canberra. “Combined capital city home values have increased by 3.0 per cent over the first quarter of 2015. While that rate of growth is strong it is important to note that it is lower than the 3.5 per cent increase in home values over the first quarter of 2014,” he said.

Based on the March results, Sydney’s growth trend appears to have disengaged from the rest of the capital city housing markets in terms of demand and subsequently in terms of value growth. The 5.8 per cent growth in Sydney dwelling values over the first quarter is the strongest quarterly growth rate since home values increased by 6.2 per cent over the three months to April 2009. The strength of the Sydney housing market currently is further highlighted by the fact that since the Reserve Bank cut official interest rates to 2.25 per cent at the beginning of February, auction clearance rates have been above 80 per cent each week.