Digital Finance Analytics (DFA) Blog – Page 1035

DFA Video Blog On First Time Buyers Switching To Investment Property

DFA analysis shows that more first time buyers are leaping into investment property instead of purchasing a property for owner occupation. This short video explains why.

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 read the detailed analysis of the household survey results here.

Shadow Banking And Monetary Policy

The Bank of England just published a research paper “Do contractionary monetary policy shocks expand shadow banking?”

We previously discussed the role and importance of shadow banking, making the point that up to the 1980s, traditional banks were the dominant institutions in intermediating funds between savers and borrowers. However, since then, the role of market-based intermediaries has steadily increased. Whilst shadow banking cannot be defined as a homogenous, well-defined category, it embrances at least three types of intermediaries: asset-backed (ABS) issuers, finance companies, and funding corporations. In addition, shadow banking sector involves a web of financial institutions and a range of securitisation and funding techniques, and these activities are often closely intertwined with the traditional banking and insurance institutions. These interlinkages can involve back-up lines of credit, implicit guarantees to special purpose vehicles and asset management subsidiaries. So, given the focus on greater banking system regulation, and the role of monetary policy in this, the question is, does tighter monetary policy flow on to impact shadow banking. Is so, how?

Using detailed modelling, they find that monetary policy shocks do seem to affect the balance sheets of both commercial banks and their unregulated counterparts in the shadow banking sector. However, a monetary contraction aimed at reducing the asset growth of commercial banks would tend to cause a migration of activity beyond the regulatory perimeter to the shadow banking sector. In fact the monetary response needed to lean against shadow bank asset growth is of opposite to that needed to lean against commercial bank asset growth.

This means that monetary policy designed to control commercial banking may, as an unintended consequence, increase shadow banking activity (and so work against the policy intent). Therefore, they suggest that authorities should continue to develop a set of regulatory tools, complementary to monetary policy, that (a) seek to moderate excessive swings in risk-taking by commercial banks, as embodied in recent macroprudential frameworks, and (b) seek to strengthen oversight and regulation of the shadow banking sector. Monetary policy alone is not enough.

House Price Growth Set To Fall – Fitch

Fitch Ratings “Global Housing and Mortgage Outlook” suggests House price growth is expected to moderate across the Asia-Pacific region in 2015, driven by government regulatory pressures, tightened affordability and gradual interest-rate rises. The growth slowdown will be led by Australia, where national house prices are forecast to rise 4% in 2015, down from 7% in 2014, and in Hong Kong, where Fitch expects prices to be flat as compared to the 10% growth in 2014.

These forecasts are featured in Fitch’s latest Global Housing and Mortgage Outlook, published on 14 January. Of the six APAC countries included in the report, only Korea is expected to have price gains that exceed that in 2014; even then, it is forecast to be just 2%.

Australia will see house-price increases slow in 2015, down to 3%-4% in Sydney and Melbourne, and flat in Perth. Affordability pressures will remain in Australia’s largest cities, with price rises continuing to outstrip income growth, and home prices approaching the affordability ceiling. Lending volumes will continue to grow as investment activity is expected to remain high; investment loans are expected to continue to account for 50% of new lending. That said, as rental yields drop to less than 3.5%, Fitch stresses that housing investors’ buying sentiment could be vulnerable to weakening if other asset classes offer better returns.

Government policy action, pressured affordability and the likelihood of interest-rate rises in the long term will continue to be key themes for the housing and mortgage outlook in the APAC region. A gradual increase in mortgage rates is expected in 2015 and 2016 in Australia, New Zealand, Hong Kong and Singapore, all of which show relatively high interest rate sensitivity. At the same time, governments and regulatory authorities are targeting soft landings for the housing market in several economies including New Zealand, Hong Kong and Singapore, which have seen rapid price growth over the past decade.

Hong Kong is a case in point, where Fitch believes macro-prudential measures will lead to a marked slowdown in price growth. Home prices are forecast to be to be flat this year versus a 10% increase in 2014, and an average gain of 15% over the previous decade. The government’s cooling measures should stabilise affordability at current levels, though home prices already are highly stretched relative to incomes. Fitch maintains that Hong Kong does risk a downturn, considering the combination of the stretched affordability, rising rates, and the large involvement of speculative investments in the sector.

Similar macro-prudential measures in Singapore and New Zealand are having the desired impact on markets by dampening house price movements.

Singapore and Australia, Japan and South Korea are expected to see government measures to support the housing sector, in contrast to Hong Kong.

Lending For Housing Investment Higher Still

The ABS published their finance statistics today to November 2014. It appears to me we have an unbalanced economy, where more and more lending is flowing into property, stoked by investment demand (and encouraged by negative nearing). As a results, house prices rise, inflating the bank’s balance sheets, and personal assets. But there is less lending for productive commercial purposes.

The total value of owner occupied housing commitments excluding alterations and additions rose 0.5% in trend terms, and the seasonally adjusted series fell 0.2%.
The trend series for the value of total personal finance commitments rose 0.2%. Fixed lending commitments rose 0.5%, while revolving credit commitments fell 0.2%. The seasonally adjusted series for the value of total personal finance commitments fell 2.2%. Revolving credit commitments fell 3.1% and fixed lending commitments fell 1.4%.
The trend series for the value of total commercial finance commitments fell 2.8%. Revolving credit commitments fell 7.7% and fixed lending commitments fell 1.2%. The seasonally adjusted series for the value of total commercial finance commitments fell 2.6%. Fixed lending commitments fell 4.6%, while revolving credit commitments rose 3.8%.
The trend series for the value of total lease finance commitments fell 2.3% in November 2014 and the seasonally adjusted series fell 4.4%, following a fall of 4.6% in October 2014.

		Oct 2014	Nov 2014	Oct 2014 to Nov 2014
		$m	$m	% change

TREND ESTIMATES
	Housing finance for owner occupation(a)	17 169	17 248	0.5
	Personal finance	8 729	8 746	0.2
	Commercial finance	39 471	38 357	-2.8
	Lease finance	428	418	-2.3
SEASONALLY ADJUSTED ESTIMATES
	Housing finance for owner occupation(a)	17 309	17 282	-0.2
	Personal finance	8 922	8 730	-2.2
	Commercial finance	39 011	37 992	-2.6
	Lease finance	421	402	-4.4

Looking at the data in more detail, we see that commercial lending represent 59% of lending.

However, within commercial lending, we have lending for investment property. Cross matching the data. we see that of all commercial lending, more than 30% directly relates to residential investment property. Lending for other purposes has dropped.

Looking specifically at the housing sector, the growth in investment lending stands out.

In fact in trend terms half of all lending was for investment purposes, a record.

2015 should be the year when Government recognizes that it is time to act. The current settings will continue to risk financial stability and economic growth.

Bank Profits Under Pressure In 2015?

Fitch Ratings 2015 Outlook: Australian Banks report has a stable sector outlook for Australian banks in 2015, reflecting what should be a relatively steady operating environment despite a likely modest decline in real GDP growth and an elevated unemployment rate. These factors should in turn result in modestly weaker asset quality and an increase in impairment charges, which are likely to be offset by strengthened balance sheets and strong profitability.

A significant slowdown in China is the biggest risk to the outlook, given it is Australia’s largest trading partner, but such a slowdown is not Fitch’s base case. A relaxation of underwriting standards to improve growth also looms as a risk, although this appears less likely following the announcement in December 2014 of regulatory reviews of potentially higher-risk lending.

Housing credit growth is likely to slow in 2015, in part because of the regulatory review but also due to high household indebtedness and slower house price growth. Fitch expects household indebtedness to stabilise in 2015, with an easing in wage rises and as unemployment remains high.

Nevertheless, competition for loans will likely remain intense, placing some pressure on net interest margins. This and an expected rise in impairment charges will likely mean lower profit growth in 2015. Offsetting this, capital positions are likely to be strengthened, in part to address potential new requirements stemming from the 2014 Financial Services Inquiry (FSI) recommendations, while the shift towards more stable funding sources will probably continue.

Although banks may act on some FSI recommendations during 2015, many of the measures requiring government action, including legislation, are unlikely to be implemented before the end of the year. Fitch expects implementation timeframes to be set such that meeting the new requirements should not be overly onerous for banks

Australian Retail Ecommerce Sales to Top $10 Billion in 2015

According to eMarketer’s latest estimates of retail sales, Retail ecommerce sales in Australia will rise 14.4% this year to pass $10 billion. In 2014, ecommerce sales in the country increased 17.3% to account for over 4% of total retail sales, and that share will expand to 4.5% in 2015. Low double-digit gains will continue through 2017, and by the end of the forecast period, retail ecommerce sales will total $14.52 billion and represent 5.6% of retail sales in the country.

Australia falls in the middle of the pack in both absolute terms and percentage of total retail ecommerce sales when compared with the other Asia-Pacific countries, behind China, Japan and South Korea and ahead of India and Indonesia.

Interestingly, digital buyer penetration among internet users in Australia is the second highest in Asia-Pacific. eMarketer estimates that 79.4% of internet users in the country will purchase via any digital channel this year, behind only Japan (82.0% penetration). Due to its size, though, Australia has the smallest digital buyer population in Asia-Pacific, at 12.1 million.

Australia’s ecommerce landscape is crowded with international competitors—especially eBay-owned properties—according to October 2014 data from Experian Hitwise Australia. eBay Australia catalogued the highest number of visits, 23.1 million, during the week examined, accounting for 12.9% of retail site visits during that timeframe. The local edition of eBay-owned classifieds site Gumtree was second with 13.3 million visits and a 7.4% share, followed by eBay with 13.2 million for a 7.4% share, and Amazon with 11.6 million for a 6.5% share. [Note: The Australian version of Amazon’s site, Amazon.com.au, sells only ebooks.]

The remaining top 10 ecommerce sites, with visitor shares of around 1% or less, included user-supported deals-posting site OzBargain, consumer electronics retailer JB Hi-Fi Australia and hardware chain Bunnings Warehouse, Apple’s site, Alibaba Group-owned discounts site AliExpress and department store chain Target Australia. The list reflects a landscape dominated by consumer-to-consumer resale sites, alongside options for business-to-consumer transactions.