Social Trends – Page 169 – Digital Finance Analytics (DFA) Blog

Household Income Trends Show Strongest Growth At The Top

The ABS today released their Distribution of Household Income, Consumption and Wealth data for the years from 2003 to 2012. According to the ABS, the average gross disposable income of Australian households grew 58 per cent in the period 2003-04 to 2011-12. However, the highest income quintile grew at a rate above average, at 62 per cent. All other income quintiles grew above 50 per cent , but below the average rate of 58 per cent. We see that older Australian’s income has been growing faster than younger ones.

The relative share of gross income is gravitating towards older households. This is a function of the growing number of older households, thanks to the demographic shifts, and the fact they hold the lions share of investments yielding income.

We can also look across the income quintiles (20% bands). We see stronger income growth in the higher income groups. This is stated in perecentage terms, but in doller terms the relative amounts are significant.

We can see that growth in incomes for the richest quintile is stronger than the lower ones.

The ABS says growth in wages and salaries was by far the largest contributor to this increase, except for the lowest income quintile, where social assistance benefits were the largest contributor to their income growth.

This is an important data-set and is the first time data for household groups has been released under the framework of the national accounts. We can look at which household groups are driving the growth in income, consumption, savings and wealth in the national accounts.

For example, households with two adults and dependent children were responsible for about one-third of the growth in household gross disposable income.

Households where the reference person was aged 35 to 44 years had an increase in income tax of $9,000 – with their payments going from $17, 000 in 2003-04 to $26,000 in 2011-12 – which was above the average increase of $4,500.

Of course this data stops in 2012, so we cannot yet see the impact of falling incomes in real terms, which we have discussed previously.

Household Incomes And Property Segmentation

In the current discussions about macroprudential, stimulated by the RBA comments last week and likely to be stoked further as the RBA appears before the Senate Banking Committee on Thursday, many are claiming that household balance sheets and incomes are supporting the growth in house prices, and so no intervention is needed. The chair of the Banking Committee Sam Dastyari is “concerned about the unanticipated consequences of the Reserve Banks’s view-change on the sustainability of the housing boom and whether it needed to interfere with bank lending”.

The debate has shifted to first time buyers, and not wishing to put further barriers in the way of the small number able to enter the market at prices which are already too high. They may be missing the point. First, the increase in household wealth is directly linked to the rise in house prices (a weird piece of feedback here, as prices rise, households are more wealthy, so can accommodate higher prices – spot the chicken and egg problem?). In addition, wealth is growing thanks to stock market movements (though down recently) driven partly by the US and European low rates and printing money strategies. This will reverse as rates are moved to more normal levels later. Superannuation, the third element is of course savings for retirement, so cannot be touched normally (there are exceptions, and no, first time buyers should not be allowed to use their super to get into the property market). More first time buyer incentives won’t help.

But, we have been looking at household incomes, after inflation, at a segment level. We segment based on property ownership, and you can read about the DFA segments here. On average, across all households, income growth is falling behind inflation. This is the ABS data from June 2014. In the past few months, real income is going backwards, before we consider rising costs of living.

However, at a segment level, the situation is even more interesting, and diverse. Those wanting to buy, but unable to enter the market are seeing their incomes falling sharply, inflation adjusted, making the prospect of buying a house more unlikely. We are seeing the number of households in this group rising steadily, see our Property Imperative Report.

First time buyers, those who have, or are purchasing for the first time, are also seeing income falling in real terms, more sharply than the average. This is why we are predicting a higher proportion of first time buyers will get into mortgage stress, especially if interest rates are increased. This is one reason why loan to income ratios for this group are high.

Then looking at holders, their incomes are moving closer to the average. Holders have no plans to change their property, many have mortgages.

Refinancers, are hoping to lock in lower rates, though we note the forward rates are now higher than they were, which may suggest the lowest deals are evaporating. One of the prime motivations for switching in this segment is to reduce outgoings, not surprising when we see incomes falling faster than the average in real terms.

Now, looking at Up Traders, we find their incomes are rising more quickly than the average. Up Traders have been active recently. They have the capacity to service larger loans. They will be purchasing primarily for owner occupation.

Down Traders have incomes rising more quickly, thanks to investment income, and there still about one million households looking to sell and move into a smaller property, releasing capital in the process. They are also active property investors, directing some of their released capital in this direction, either direct, or via super funds.

Investors also have incomes which are rising faster than the average, so no surprise they are active in the market, seeking yields higher than deposits, and taking advantage of negative gearing. We continue to see a small but growing number of investors using super funds for the transaction.

So, the segmental analysis highlights how complex the market is, and that there are no easy fixes. Any rise in interest rates would hit first time buyers very hard. Demand from investors (the foreign investment discussions is only a sideshow in my view) will be sustained, with the current policy settings. Raising interest rates will not help much on this front, because interest will be set against income. So macroprudential controls on investment loans makes more sense.

One option would be to differentially increase the capital buffers the banks hold for investment loans, making their pricing less aggressive, and the banks more willing to lend to suitable owner occupiers and businesses, which is what we need. Trimming demand for investment properties may help to control prices.

The bottom line though is that many years of poor policy are coming home to roost, on both the supply and demand side. A number of settings need to be changed, as discussed before.

My Recent Thoughts On House Prices

I did an interview for the ABC, on the RBA Financial Stability Review. Here is the transcript, courtesy of the ABC. The link to the interview, and my longer interview can be found at the ABC site.

By way of context, a quick reminder of current house price trends from the Economist:

CHRIS UHLMANN: The Reserve Bank (RBA) has given its strongest warning yet that a dangerous property price bubble in Sydney and Melbourne could destabilise the economy.

It’s now ramping up talks with other regulators to introduce lending controls to head off the risk of a damaging correction in prices.

With more I’m joined by our business editor, Peter Ryan.

And Peter, these warning have been around for the past year. Is the Reserve Bank starting on the back foot?

PETER RYAN: Well, this was certainly very strong language from the RBA yesterday that investment in Australian property is now becoming “unbalanced” and that the speculation increases the potential for current stellar prices to fall.

Now the RBA is now worried about the broader impact of any correction or a hard landing and how that would hurt not just the speculators but average Australians whose biggest single investment is usually the family home.

The property analyst Martin North says unless the RBA intervenes with tighter controls, there could be a correction in the range of 20 to 25 per cent and that some borrowers could find themselves overwhelmed in debt – in other words facing negative equity.

MARTIN NORTH: Property prices have been high for a long period of time so this is not just a little bubble. This is a long term systemic issue.

So what’s been happening is it’s been sucking a lot of money from people’s pockets out to pay the mortgage, right? Secondly, people have been committing to buy at the top of the market and so if prices were to move down, a lot of people who’ve bought relatively recently would be out of the money and that’s very significant.

A lot of those are investors – and investors will change their tune quite quickly, you know, particularly if capital growth is no longer in the sector. So yeah, this is a very unstable situation.

Also, the banks have a huge exposure to property, probably one of the highest exposures in the world and that means that whatever happens to the property market is going to impact not only individuals but also the banks as well.

PETER RYAN: If there was a correction and those property speculators decided to sell while they could and the market was flooded with properties, what impact would that have on the general market?

MARTIN NORTH: We will probably see a downward swing and that downward swing would gain quite a lot of momentum. I wouldn’t be surprised to see prices slipping by 20 to 25 per cent. It will probably self-correct a little bit beyond that but it’s that, it’s that sort of slide down and then up which is the problem.

PETER RYAN: And that of course is a huge problem for borrowers who bought at the top of the market, borrowed too much and are now over their heads in debt.

MARTIN NORTH: The real issue there of course is all the people will find that they’re in negative equity at a point. In other words, they can’t then sell. So we could find the situation where people are trying to sell, are being forced to sell. That will tend to drive prices further down, probably languish for quite some time because we have to correct back to long term averages between income and property prices in my view.

So this is more like I think the early signs of some of the things that happened in the US prior to the GFC.

CHRIS UHLMANN: Property analyst Martin North.

So Peter, can we expect to see action on lending controls from the Reserve Bank?

PETER RYAN: Well, the RBA governor Glenn Stevens is speaking in Melbourne later today and as always his comments will be scrutinised on perhaps when and how the RBA might intervene to prevent any property bubble bursting.

CHRIS UHLMANN: Business editor Peter Ryan, thank you.

Australian Population Now 23.4m And Ageing

The ABS just released their preliminary demographic statistics to end March 2014. Australia’s total population increased by 388,400 people to reach 23.4 million by the end of March 2014, with a growth rate of 1.7 per cent, a continuation of the average annual growth rate for the past three years. Natural increase contributed 156,900 people to Australia’s population in the year to 31 March 2014, consisting of 306,500 births and 149,600 deaths. Net overseas migration contributed 231,500 to the population over the same period, accounting for 60 per cent of Australia’s total growth.

All states and territories recorded positive population growth in the year ended 31 March 2014. Western Australia continued to record the fastest growth rate of all states and territories at 2.5%. Tasmania recorded the slowest growth rate at 0.3%. New South Wales and Victoria continued to experience high population growth going against the trend of slowing annual growth around Australia – the population of New South Wales and Victoria grew by 114,500 and 108,800 respectively. Net overseas migration (NOM) was the main contributor to both New South Wales and Victoria’s population growth, accounting for 67 and 57 per cent of the states’ growth respectively. The NOM contribution to Victoria’s growth is below the Australian rate of 60 per cent, which highlights the recent increase in net interstate migration to the state. We’re also seeing fewer people moving to Queensland and Western Australia. Queensland recorded one of its lowest annual gains on record, slowing by 65 per cent in five years. Meanwhile, New South Wales recorded its lowest annual interstate loss in nearly 30 years and Victoria recorded its highest annual gain on record.
There is a significant skew towards older Australians, as can be seen by the relative movement from 1971, by age bands. In fact in absolute numbers, those under 20 years grew the slowest whilst those aged 40-69 grew the fastest. This has a profound impact on the community, with those planning to retire well ahead of new workers ready to join the workforce – yet youth unemployment is very high, as we discussed recently.

We can also look at the splits in percentage terms, which shows again these trends. In 1971, the fiftieth point was 27 years, today it is 38 years, and rising.

Mortgage Stress Coming To A Household Near You

We have updated our mortgage stress models, to take account of the latest tranche of economic data, including falling real incomes, potential uplifts in capital requirements and inflation running hot, so creating the need to lift interest rates; and demand for property continuing to go ahead of supply. Our recent post the Anatomy of Mortgage Stress explains our modelling assumptions, and importantly the definitions of stress we are using. We also explained why households are highly vulnerable to mortgage stress, because of larger loans, and flat incomes in our article If The Worm Turns. Today we will look at our projections out to 2017, once we factor in these various drivers. It is only one scenario, but this is our central case.

We use a series of questions to diagnose mortgage stress focusing on owner occupied households. Through these questions we identify two levels of stress – Mild and Severe.

Mild = households maintaining repayments, but by reprioritising expenditure, borrowing more on loans or cards, and refinancing
Severe = households who are behind with their repayments, are trying to sell, are trying to refinance, or who are being foreclosed

First we will look at the Australia-wide projections. We expect to see stress amongst first time buyers lift considerably from its current relative low levels. If rates do rise, unemployment stays high, and incomes continue to languish, then by 2017, we think that 40% of first time buyers will be in mortgage stress. Many who brought in the 2008-2009 boom are likely to be hardest hit. More recently the number of first time buyers has fallen to a long term low, so the number of more recent first time buyer households in stress will be lower.

We can look at the state variations. We see that VIC and QLD first time buyers are more likely to be impacted, whilst SA households less so, with WA and NSW first time buyer households sitting in the middle. This is partly a function of absolute house prices, and partly a function of income and unemployment trends across the states. We did not include the smaller states on the chart, but they are included in the average.

Finally, we look at the other, non-first time buyer households. Many continue to pay more than the minimum monthly mortgage repayments, taking advantage of the current low rates so they have some protection. However, as rates and unemployment bites, some households who have held property for some time will also experience stress. By 2017 up to 15% of established households will be in stress in our central scenario.

Our research suggests there is an 18 month to 2 year grind between the onset of stress and households taking bold steps (or forced to) like selling up. Before that, they often get into the debt cycle of more credit card debt, refinancing, and a general hunkering down to try and keep the mortgage payments going. It is the broader economic impact of this refusal spend which will have a significant dampening impact on economic growth. In addition the outworking of stress leads to selling a property, so we would expect to being to see some forced sales in 2017 and beyond, another reason why we think house prices are likely to correct to more normal loan to income ratios.

In coming posts, we will look further at the state and postcode level data.