Social Trends – Page 175 – Digital Finance Analytics (DFA) Blog

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.

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.