Social Trends – Page 168 – Digital Finance Analytics (DFA) Blog

Refinancing; An Important Driver Of Housing Finance

We have been looking in detail at recent trends in housing refinance, by using a combination of the recently released ABS data and results from the DFA surveys. There is an interesting story to tell here. So today we explore the refinancing landscape. First the ABS data shows us that refinancing value has been increasing to a record $5.9bn in July 2014, and represents more than 30% of all owner occupied lending, and about 17% of all housing lending.

We also see that the state distribution is centered on NSW and VIC.

However, looking in percentage terms, there is only a small rise in NSW, and a fall in QLD.

Turning to our surveys, about 17.5% of refinacing are to fixed loans, the rest variable, either principal and interest or interest only. A considerable proportion of refinance deals are via brokers, with a record 74% in September.

Households with loans between $250k and 500k are likely to refinance, though those with larger loans are more likely to refinance their loan, compared with those with below $100k balances.

Turning to the loan type, the majority are refinancing to a principal and interest loans (P&I), though we note that those with larger balances are more likely to consider an interest only loan.

Looking in more detail, we see that brokers are more likely to initiate a conversation with a household on refinancing if the loan is larger. Many are driven by the need to reset the term (this relates to the industry practice of having a nominal 30 year term, with five year reviews, plus fixed term loans maturing). We also see a concern to reduce monthly payments, especially in the loans between 250k and 500k, and to release cash in the case of larger loans, especially above $750k, where we assume the capital appreciation in the property is most significant.

In the survey detail, we found that some were releasing capital to assist in the purchase of an investment property, or to assist others to purchase a property. Refer to the recent post on the Bank of Mum and Dad. Most households who were concerned about rates have already locked into fixed products, though many still preferred the variable rate product. We also found that more than 50% of households considering a refinance were ahead of schedule on their nominal monthly repayments. Those in the range 250k – 500k were least likely to be ahead.

Overall then, refinancing is a significant element in the property owning household sector, and yet there has been little discussion of this facet of the market, compared with first time buyers and investors.

Foreign Property Buyers Are Market Significant – nab

The results from the National Australia Bank’s latest residential property survey shows that foreign buyers are flocking to buy Australian property, snapping up one out of every six new homes – and that number is set to get higher.

Foreign buyers were more prevalent in new housing markets in Q3. Foreign buyers accounted for 16.8% of total demand (about 1 in 6 of all buyers), and this share is tipped to rise further next year (17.3%). Foreign buyers were more active in all states, especially VIC where they accounted for an estimated 24.8% of demand (or 1 in 4 sales). In contrast, local investors were less active in Q3, with their share of national demand falling to 27% (32.5% in Q2). Local investors accounted for a smaller share of demand in all states.

Foreign buyers were slightly more active in established property markets in Q3, with their share of total national demand rising to 8.2% (7.2% in Q2). Foreign buyer demand for established property increased in all states except NSW. VIC led the way, with foreigners accounting for a record high 11.5% of established property demand.

NAB chief economist Alan Oster said first-home buyers were not competing with foreign investors for property, because foreign buyers opt for high-end apartments – “they’re not buying cheap stuff”. It’s local investors creating the most difficulty for first-timers, he said, spurred on by low interest rates, superannuation changes and a tax system that encourages property investment.

While there are restrictions on what properties foreign investors can buy, the Foreign Investment Review Board has been criticised for failing to enforce those rules and a parliamentary inquiry into foreign investment in residential real estate is due to deliver its recommendations in November.

First Time Buyers Get The Investment Bug – Big Time

The most recent ABS data continues to underscore the fact that Owner Occupied First Time Buyers are sitting out of the market. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 11.8% in August 2014 from 12.2% in July 2014.

However, this is not telling us the full story. We have been tracking the rise and rise of first time buyers who are going direct to investment property. The chart below shows the state of play, and the significant rise in the number of first time buyers going to the investment sector, especially in Sydney and Melbourne.

Another way to look at the data is the percentage of FTB who went for investment housing. In the latest data we estimate that around 30% of potential first time buyers went for the investment option. These are not identified in the official figures. I would also add that the small sample sizes prior to 2012 may impact the trend data, but the DFA samples, into 2013 and beyond are large enough to be meaningful and significant.

From our surveys, we found that:

1. Most first time buyers were unable to afford to purchase a property to live in, in an area that made sense to them and were being priced out of the market.

2. However, many were anxious they were missing out on recent property gains, so decided to buy a less expensive property (often a unit) as an investment, thanks to negative gearing, they could afford it. They often continue to live at home meantime, hoping that the growth in capital could later be converted into a deposit for their own home – in other words, the investment property is an interim hedge into property, not a long term play. Some are also teaming up with friends to jointly purchase an investment, so spreading the costs.

3. About one third who purchased were assisted by the Bank of Mum and Dad, see our earlier post. More would consider an investment property by accessing their superannuation for property investment purposes, a bad idea in our view.

Given the heady state of property prices at the moment, this growth in investment property by prospective first time buyers is on one hand logical, on the other quite concerning. We would also warn against increasing first time buyer incentives, as we discussed before.

Our analysis also highlights a deficiency in the ABS reporting, who are currently investigating the first time buyer statistics (because in some banks, first time buyers are identified by their application for a first owner grant alone). They should be tracking all first time buyer activity, not just those in the owner occupation category.

The Rise And Rise Of The Bank Of Mum and Dad

As part of the DFA household surveys, we segment the housing market, to identify those who want to buy and first time buyers, as well as those down trading, the affluent, suburban and seniors. We described the full segmentation recently. Today we look at those who are trying to buy. This group has been under pressure as prices rise, incomes stall, and property supply is limited.

One striking fact is the number of households in this group who are now banking with the “Bank of Mum and Dad”. The proportion of households who are borrowing from parents, or who are planning to, has been increasing steadily. The chart below shows the proportion who are relying on Mum and Dad Bank, and we also plot relative house price growth over the same period. This is an Australian average, there are state variations.

We then looked at the average amount being supplied by parents. In 2010 is was around $22,000. Today it is over $60,000. We also tracked the percentage increase year on year for transactions assisted by parent loans. Since May 2013, there has been significant growth.

We then looked at which household segments the funds were coming from. Down traders are the largest group, (there are over one million down traders in Australia at the moment) and growing as a percentage of all households, whereas suburban households (who themselves have larger loans now) figure less.

We also discovered that about half of these loans were made interest free, the other half, charged at a rate of interest at or below the market.

So, it is clear the Bank of Mum and Dad is a significant factor in the housing market, and the second order impact of down traders, is significant. It also means that if property prices were to slip, some down traders may find their generous family loans get eaten up in negative equity.

The low first time buyer rates would be even more adverse, without this extra assistance!

Macroprudential, Revolutions and the RBA

Over fifty years ago, in 1962 Thomas S. Kuhn’s book The Structure of Scientific Revolution was published. It is an important work because if helps to explain how things work, and its findings I think are widely applicable beyond the scientific community.

Amazon says of the book “Kuhn challenged long-standing linear notions of scientific progress, arguing that transformative ideas don’t arise from the day-to-day, gradual process of experimentation and data accumulation but that the revolutions in science, those breakthrough moments that disrupt accepted thinking and offer unanticipated ideas, occur outside of “normal science,” as he called it. Though Kuhn was writing when physics ruled the sciences, his ideas on how scientific revolutions bring order to the anomalies that amass over time in research experiments are still instructive in our biotech age.”

His central thesis is that the evolution of ideas, where one set builds on the previous set does not adequately explain what happens in practice. Actually, new ideas often emerge away from the main stream, are often rejected by incumbents, thanks to positional power and authority, but some ideas, quite suddenly become the new normal, and become mainstream in their own right.

He argues that people in positions of power and influence tend to operate with a specific frame of reference, which makes it difficult for them to accept information which does not chime with their own views. Sometimes, though, revolutions do happen and as a result, we see quite sudden revolutionary changes in the accept norms.

I believe the RBA’s stance on macroprudential is an interesting example. How come that up to a couple of months ago, they were quite sanguine on the housing market, and dismissed macroprudential as a fad. Yet now, judging by recent comments, they are expressing concerns about the housing market, and we expect to see some form of macroprudential intervention before the end of the year. The data highlighting issues in the housing sector have been amassing for some time now, yet the RBA appears to have suddenly twigged and become a late convert.

Kuhn’s thesis seems to neatly explain the change.