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

Banks More Leveraged Into Housing Than Ever

Putting together data from the recent ABS releases, we can view some important data which shows that today Banks in Australia are deeper into property than ever they have been. As a result they are more leveraged (thanks to capital adequacy rules) and more exposed if prices were to turn. Meantime, other classes of commercial lending continues to decline.

To show this, we look first at the share of commercial lending which is investment housing related. These are the monthly flows, not the overall stocks of loans on book. On latest trend data, around 33 per cent of monthly lending is for investment housing. Its normal range was 20-25 percent, but thanks to a spike in investment for housing, and a fall in other commercial lending categories it has broken above 30 percent. From a capital and risk perspective, lending for investment housing is adjudged as less risky than other commercial lending categories.

Now, lets look at all lending for property, including owner occupied lending, investment lending, and alterations, again from a flow perspective. Now we find that 47 per cent of all monthly flows are property related, again, higher than it has traditionally been.

Finally, in our earlier analysis we highlighted the relative stock of different loan types. Overall, only 33% of all lending is productive finance for business purposes. Household and consumer debt continues to rise strongly. Housing Lending is driving the outcomes.

This is unproductive lending, simply feeding the debt beast, and inflating property to boot. It also means the banks have strong interests in keeping the beast fed, and the RBA, conscious of the need for financial stability, will continue to support the current mix. As Murray pointed out the government is guaranteeing the banks and if there was a failure the tax payer would pick up the tab.

First Time Investor Buyers Focused In NSW

After the ABS data came out yesterday, DFA updated its industry models, and included the status of First Time Buyer Investors, at a state level. We had already shown that there were many First Time Buyers who were not able to buy an owner occupied property, and were switching the an investment alternative, as a way to enter the market, and hedge on future value growth. Here is the updated picture, incorporating the latest DFA data and ABS revisions.

The number of Investor First Time Buyers continues to grow. Combined, the total number of First Time Buyers is rising, reflecting the momentum in the market. First Time Buyers are more active than thought, even if the ABS misses the Investor data. However, if we look at the state splits, we see that it is all NSW. There are a small number of FTB in the other states buying investment property, but it is mainly a NSW phenomenon at the moment, though we think it likely other states will follow suite.

In fact, if you look at the comparative data, we see that there are significantly more Investor First Time Buyers than Owner Occupied First Time Buyers in NSW. Around 2,000 owner occupied First Time Buyers, but 3,500 Investor First Time Buyers. We also found that close to 80% of these investors went for an interest only loan (for tax and serviceability reasons).

Compare this with VIC, where the trend is just starting to take off. Again, in this small sample, interest only loans featured significantly. Finally, if we look at the latest First Time Buyer barriers to purchase data by selected state from our surveys, we see that in NSW, they are more concerned about high prices, and finding a place to buy compared with other states. On the other hand, fear of unemployment was lower than in all other states, whilst in figures more strongly in QLD, SA and WA. (WA attitudes are changing fast as the mining boom subsides).

So, one of the reasons for the growing of investment property lending, is the NSW led switch by First Time Buyers into the Investment Sector. 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.

You can watch my earlier video blog on this subject here.

Housing Finance Leaps Higher

Data from the ABS today shows a further lift in home lending in December, driven hardest by the investment sector, but with owner occupation lending also in play. The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 1.0%. Investment housing commitments rose 1.2% and owner occupied housing commitments rose 0.9%. Investment lending comprised more than 50.6% of new loans, excluding refinance, another record. Refinancing remains strong in the current low rate environment. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 4.7%. However, DFA is now using the trend series in our modelling, as we think the SA series are suspect (according to the ABS, trend series reduces the impact of the irregular component of the seasonally adjusted series and is derived by applying a 13-term Henderson-weighted moving average to all but the last six months of the respective seasonally adjusted series, whilst the last six months are estimated by applying surrogates of the Henderson moving average to the seasonally adjusted series.)

In trend terms, the number of commitments for owner occupied housing finance rose 0.5% in December 2014. In trend terms, the number of commitments for the purchase of established dwellings rose 0.6%, while the number of commitments for the purchase of new dwellings fell 1.1% and the number of commitments for the construction of dwellings was flat.

Turning to First Time Buyers, on the revised new method of calculation and in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 14.5% in December 2014 from 14.6% in November 2014. The fall in First Time Buyer activity remains a feature in the current climate.

The state by state data reflects the revised First Time Buyer data, with NSW up by one third from 8% to 11% following the ABS revisions, compared with a national uplift of one quarter. We still see WA leading the way, though falling from the June 2014 peak. The other states are now more closely aligned. Given the size of the adjustment, we hypothise that at least one of the majors was not correctly recording first time buyer data.

RBA Lowers Growth Forecast

The RBA published their statement on monetary policy today. They point to a lower than expected growth and inflation forecast, but higher rates of unemployment. GDP is now projected at 2.25 per cent to June, and a quarter percent lower by the end of the year than their last projection. They are expecting unemployment to remain higher for longer, and above 6 per cent during 2017. Inflation is forecast at a headline level of just 1.25 per cent, thanks to lower oil prices, although the bank’s favoured core inflation measure still sits within its 2-3 per cent target.

Looking at the economic drivers, the banks said that the 9 per cent fall in exchange rates had yet to flow through into higher prices, and the fall in oil prices are estimated to have increased real household disposable income by 0.25 per cent over the last half of 2014, and will lift spending power by an additional 0.5 per cent over the first three months of this year.

“While growth in non-mining activity has picked up a little over the past two years, all components except dwelling investment look to have grown at a below average pace over the past year,” the RBA said.

The ABS capital expenditure survey suggests that there will be only very modest growth in non-mining investment in 2015.

The most significant comment for me related to the behaviour of households who have experienced significant lifts in wealth thanks to rising house prices, yet may not be turning this into higher rates of consumption.

“However, another possibility is that ongoing buoyant conditions in housing markets will have less of an effect on consumption than previously. In particular, in recent years fewer households appear to have been utilising the increase in the value of their dwelling to increase their leverage or trade up”.

This cuts to the heart of the problem. Their core strategy was to allow housing to expand, to lift wealth, to encourage spending, to drive growth, until the business sector kicks in. However, there is mounting evidence that households are not convinced, and are unwilling or unable to spend. Retail is still below trend, and as interest rates of savings fall, households become more conservative. It could be that their core thesis is flawed. Indeed, they had previously acknowledged

“we shouldn’t expect consumption to grow consistently and significantly faster than incomes like it did in the 1990s and early 2000s, given that the debt load is already substantial”.

In our recently published household finance confidence index we noted a consistent fall. No surprise then households are not performing as expected.