Social Trends – Page 174 – Digital Finance Analytics (DFA) Blog

Foreign Investors Fees Still In The Air

Speaking on ABC Insiders this morning Josh Frydenberg, Assistant Treasurer made the point that the foreign investor regulations, recently announced were open for consultation, and that a number of issues had yet to be resolved. For example, should a foreign investor pay the fee each time they apply to purchase a property (so bidding on multiple properties would mean multiple fees)? Or should they pay one fee to cover multiple potential transactions? If they are not successful in purchasing the target property, is the fee refundable? He appeared to be advocating paying the fee before putting a bid in, one fee for multiple bids, and refundable if unsuccessful.

However to decide, we need to know if the fee is simply to cover the cost of appropriate agency administration, or whether it is designed to be a barrier to transact. It is not clear for the available material which is envisaged. Administration would be a combination of assessing the credential of the individual (so once per person), and also the property (so once per property). Also, if unsuccessful, is it appropriate to refund the entire fee? After all, the work needs to be done before allowing a bid (else if you only pay after a successful transaction, what happens if you were declined subsequently, once you have contracted to purchase?)

He also confirmed there had been no action taken on a residential purchase by a foreigner since 2006, adequate data was not being collected, and cross agency communication was not effective.

Clearly more work needs to be done to design this right. DFA suggests that a foreign investor should be able to make application for approval to purchase property in Australia. This should be a licence, which needs to be maintained and renewed from time to time. Then there would be a fee payable on each property application. This latter fee would be refundable in the case of an unsuccessful sale. It would also reduce the red tape so some extent.

Wage Growth Still Slow

The ABS released their wage price index to December quarter 2014, showing continued slow wage growth. The Private sector index rose 0.6% and the Public sector rose 0.7%. The All sectors quarterly rise was 0.6%, which marks the ninth consecutive All sectors quarterly increase between 0.6% and 0.7%.

The Private sector through the year rise to the December quarter 2014 of 2.4% was smaller than the Public sector rise of 2.7%. Through the year, All sectors rose 2.5%. The CPI is now down to 1.7%, so wages are running slightly ahead.

In original terms, wages rose 0.6% in the December quarter 2014 for All sectors. The Private sector rose 0.5% in the December quarter 2014, smaller than the Public sector rise of 0.7%. The All sectors through the year rise was 2.6%. The Private sector rose 2.5% and the Public sector 2.7%.

The largest quarterly rise of 0.7% was recorded by Victoria, South Australia and Western Australia. Tasmania recorded the smallest quarterly rise of 0.3%. Rises through the year ranged from 1.7% for the Australian Capital Territory, to 2.8% for Victoria and the Northern Territory.

In the Private sector, the quarterly rise for South Australia of 0.7% was the largest quarterly rise of all states and territories. The smallest quarterly rise was 0.3%, recorded for Tasmania and the Australian Capital Territory. Rises through the year in the Private sector ranged from 2.0% for Western Australia to 2.7% for Victoria, South Australia and Tasmania. Wages growth in Western Australia continued to ease in the December quarter 2014. For the fourth quarter in a row the quarterly growth was smaller than the same quarter the year before.

In the Public sector, Western Australia recorded the largest quarterly rise of 1.5%, with Tasmania recording the smallest quarterly rise of 0.2%. Western Australia and the Northern Territory both recorded the largest through the year Public sector rise of 3.5%. For the second quarter in a row, the smallest through the year rise for the Public sector was recorded by the Australian Capital Territory (1.4%). Commonwealth government employee pay changes are most evident in the wages growth reported for the Australian Capital Territory. Public sector wages growth in other states and territories is mostly driven by regularly scheduled State and Local government pay increases.

By Industry, Information media and telecommunications recorded the largest All sectors quarterly rise of 1.2%. The smallest quarterly rise for All sectors of 0.2% was recorded by Accommodation and food services.

The All sectors through the year rises for the December quarter 2014 ranged from 1.9% for Professional scientific and technical services to 3.4% for Education and training and Arts and recreation services.

In the Private sector, Information media and telecommunications recorded the largest quarterly rise of 1.3%. Public administration and safety recorded the smallest rise of 0.1%. Rises through the year in the Private sector ranged from 1.9% for Professional scientific and technical services to 3.9% for Arts and recreation services.

In the Public sector, Education and training recorded the largest quarterly rise of 1.2%. The smallest quarterly rise of 0.4% was recorded by Professional scientific and technical services and Electricity, gas, water and waste services. Rises through the year in the Public sector ranged from 3.4% for Education and training to 1.5% for Professional scientific and technical services, the equal smallest through the year rise in this industry since the commencement of the Wage Price Index.

Australians Trading Fixed For Mobile Broadband

According to the latest OECD data, published today, whilst we are lagging behind other developed OECD countries in fixed broadband, we rank third in the world for wireless broadband behind Finland and Japan. Some Australians have more than one wireless service and mobile growth is significantly higher than fibre.

Using June 2014 data, Australia ranked 20 out of 34 OECD countries based on the number of fixed broadband connections for 100 inhabitants, behind nations including Switzerland, UK Korea, New Zealand and Japan. Total penetration was around 27 per cent. About 81 per cent of connections were via DSL, 15 per cent and 3 per cent fibre. Our fibre rates are lower than the 17% OECD average. Mobile broadband penetration has risen to 78.2% in the OECD area, making more than three wireless subscriptions for every four inhabitants, according to data for June 2014 released today.

Mobile broadband subscriptions in the 34-country area were up 11.9% from a year earlier to a total of 983 million, driven by growing use of smartphones and tablets.

Seven countries (Finland, Japan, Australia, Sweden, Denmark, Korea and the United States as ranked in descending order of mobile broadband subscriptions) lie above the 100% penetration threshold.

Fixed broadband subscriptions in the OECD area reached 344.6 million as of June 2014, up from 332 million in June 2013 and making an average penetration of 27.4%. Switzerland, the Netherlands and Denmark remained at the top of the table with 47.3%, 40.8% and 40.6% respectively.

DSL remains the prevalent technology, making up 51.5% of fixed broadband subscriptions, but it continues to be gradually replaced by fibre, now at 17% of subscriptions. Cable (31.4%) accounted for most of the remaining subscriptions.

Annual growth of above 100% in fibre take-up was achieved in OECD economies with low to average ratio of fibre to total fixed broadband levels such as New Zealand, Luxembourg, Chile and Spain. Japan and Korea remain the OECD leaders, with fibre making up 71.5% and 66.3% of fixed broadband connections.

Full details are available from the OECD Broadband portal.

What’s Up With Economic Growth?

What’s up with Economic growth? According to Andrew G Haldane, Chief Economist, Bank of England in a recent speech, since the financial crisis, global growth has under-performed. In the decade prior to it, advanced economy growth averaged 3% per year. In the period since, it has averaged just 1%. The world has grown fast, then slow. That has led some to fear “secular stagnation” – a lengthy period of sub-par growth. The self-same concerns were voiced at the time of the Great Depression in the 1930s. The economic jury is still out on whether recent rates of growth are a temporary post-crisis dip or a longer-lasting valley in our economic fortunes. Pessimists point to high levels of debt and inequality, worsening demographics and stagnating levels of educational attainment. Optimists appeal to a new industrial revolution in digital technology. Given its importance to living standards, this debate is one of the key issues of our time.

“Today’s great debate is where next for growth. The sunny uplands of innovation-led growth, as after the Industrial Revolution? Or the foggy lowlands of stagnant growth, as before it? Which of the secular forces – innovation versus stagnation – will dominate? And if growth is going back to the future, on which side of the Industrial Revolution will it land?

The balance of these arguments matters greatly for future well-being and public policy. Indeed, it is hard to think of anything that matters much more. More parochially, for central banks setting monetary policy one of the key judgements is the appropriate “neutral” level of interest rates. You can think of this as the interest rate that would align desired saving and investment over the medium term.

But what is the “neutral” level of interest rates today? Secular innovation might imply a level at or above its historical average of 2-3%, in line with historical growth rates. But secular stagnation may imply a level much lower than in the past, possibly even negative. In monetary policy, this is the difference between chalk and cheese, success and failure.

One interpretation is society having become significantly more patient, as in the lead up to the Industrial Revolution: higher global saving relative to investment would lower global real interest rates. If that is the cause, bring out the bunting. By lowering the cost, and raising the return to innovation, investment and growth would be stimulated. Falls in real rates would signal secular innovation. The optimists would have it.

But an alternative reading is possible. Low real rates may instead reflect a dearth of profitable investment opportunities relative to desired savings. If that is the cause, bring out the bodies. For this would imply low returns to innovation and low future growth. Falling real rates would instead signal secular stagnation. The pessimists would have it.

And looking ahead, it is possible that sociological headwind could strengthen. One of the causes of rising inequality in advanced economies is believed to be the loss of middle-skill jobs, at least relative to high and low-skill jobs. There has been a “hollowing out” in employment. Technological advance – the mechanisation of middle-skill tasks – is believed to have contributed importantly to these trends.

A second secular headwind, closely related to rising inequality, concerns human capital. Inequality may retard growth because it damps investment in education, in particular by poorer households. Studies show parental income is crucial in determining children’s educational performance. If inequality is generational and self-perpetuating, so too will be its impact on growth.

Growth is a gift. Yet contrary to popular perceptions, it has not always kept on giving. Despite centuries of experience, the raw ingredients of growth remain something of a mystery. As best we can tell historically, they have been a complex mix of the sociological and the technological, typically acting in harmony. All three of the industrial revolutions since 1750 bear these hallmarks.

Today, the growth picture is foggier. We have fear about secular stagnation at the same time as cheer about secular innovation. The technological tailwinds to growth are strong, but so too are the sociological headwinds. Buffeted by these cross-winds, future growth risks becoming suspended between the mundane and the miraculous.

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.