Digital Finance Analytics (DFA) Blog – Page 1047

Property Investors Get A Second Wind – Latest DFA Survey

The latest DFA Survey results indicate that momentum in the property investor segment is set for an upswing, as we move into the spring season. When we last reported on our survey results, there was a dip in intentions, quite strongly linked to budget uncertainly. This has largely evaporate now other than continuing concerns about potential benefit cuts. Today we summarise some of the recent results which points in this direction.

First we look at prospective purchasing intentions across our segments. We see first time buyers still languishing, whereas solo investors, portfolio investors and uptraders are showing an increase in momentum compared with results from June.

House price expectations are pretty similar to earlier in the year, more are thinking prices are set to continue to rise, than fall.

Sole investors are being motivated by the prospect of appreciating property values, and better returns than deposits. They also continue to be attracted by tax breaks associated with investment purchases.

Superannuation investors are still in the market attracted by the tax efficient nature of this investment class, and backed by expectations of rising prices. They are also responding to lower deposit rates.

Looking that those SMSF funds with property, we see that most have 30-40% of their super aligned to property, but there is a wide spread. Absolute numbers of SMSF’s with property remain quite low, but it is growing.

So what is driving the resurgence of investors? We see that that overhand from the budget has mostly gone now, and funding is readily available. We also see that those who already bought, are coming back for more.

Finally, when we look at the budget factors in particular, we see that the high income levy still has an impact, whereas fears of changes to negative gearing has fallen, along with fears of changes to superannuation rules. We note though that concerns about reductions in benefits remains.So, putting that all together, we think that investment lending will continue to outstrip owner occupied lending, and reach new records in coming months. We will incorporate this latest data into our models, and plan to publish an updated edition of the Property Imperative later in the year.

RBA Leaves Rates On Hold – Again

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Monetary policy remains accommodative. Interest rates are very low and for some borrowers have continued to edge lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices has been slower this year than last year, though prices continue to rise. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.

Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.

Housing Lending Reaches Record $1.375 Trillion in June – RBA

The RBA published their financial aggregates to June 2014, and rounds outs the picture we discussed yesterday. Looking at lending aggregates first, we see investor housing moved up 8.7% in the 12 months to June 2014, whilst owner occupied lending grew over the same period by 5.3%, thus, combined, housing grew 6.4% in the past year. Business lending grew, but was boosted by the provision of bridging loan facilities associated with the re-structure of a domestic corporate entity, and personal credit was up by 3.5% over the last 12 months.

We can show the monthly data, which highlights how housing lending has been moving. The growth in investment lending is clear.

Turning to the value lent, housing lending reached a new record, $1.375 trillion.

Looking at the split between owner occupied and investment lending, the stronger growth on the investment side is again clear,

and is at a new record of 33.73% of all housing loans outstanding.

Looking at how the banks are funding this lending growth, we see overall growth in deposit growth slowing

and overseas funding rising.

The continued growth in investment lending will drive house prices higher, and bloat the bank’s balance sheets, but is not economically sustainable. Ever greater leverage into the housing sector remains a concern. That said, data from our latest household surveys, just in, highlights that investors are getting a second wind, so more growth in likely. Updated survey results will be released next week.

June Bank Lending Data Up Again!

APRA published their monthly banking statistics for June 2014 yesterday. This is a snapshot of the bank’s total books by category. Momentum continues in the housing sector, with owner occupied lending up 0.7% and investment lending up 1.2% in the month, and totalling $1.266 trillion. Looking at the trend since January, we see the majors still sitting in their familiar positions, and we note the momentum at ING and Macquarie also.

Looking in detail at the relative share in June, CBA has more than 27% of owner occupied lending, and Westpac nearly 32% of investment loans.

Looking at the movements, month on month in value terms, we see Westpac grew their investment lending most strongly, CBA grew both owner occupied lending and investment lending, whilst nab focused more on owner occupied lending. Macquarie is writing both owner occupied and investment loans. Bendigo is more focused on owner occupied lending. Members Equity appears to be loosing a little from their owner occupied loans.

Turning to Credit Card Loans, balances rose 0.2% in the month (after a fall last month), at $40.6 billion. CBA still leads the pack, and we continue to see ANZ and Citi shrinking their portfolios. Macquarie, as we highlighted previously picked up an additional portfolio last month.

Finally, if we look at deposits, balances grew at 0.64% in the month, to $1.72 trillion. Not much change in the relative positioning of the banks.

However, it is worth noting that nab balances fell in the month, ANZ rose a little, whereas CBA and Westpac had stronger $5billion plus uplifts.

Finally, loans grew faster than deposits in the month, and the gap in funding is drawn from the financial markets, where spreads have dropped significantly, more than 65 basis points in some cases from 12 months ago. This is why we are seeing deposit rates falling, as we highlighted recently and savers are looking for yield elsewhere.

Later we will look at the RBA data, which includes the non-bank sector to round out the monthly analysis.

Building Approvals Fall In June – ABS

The ABS published their data today on Building Approvals to June 2014. The number of dwellings approved fell 1.1 per cent in June 2014, in trend terms, and has fallen for six months. The seasonally adjusted estimate for total dwellings approved fell 5.0% in June following a rise of 10.3% in the previous month. The seasonally adjusted estimate for private sector houses fell 2.2% in June following a rise of 1.4% in the previous month. The seasonally adjusted estimate for private sector dwellings excluding houses fell 10.5% in June following a rise of 26.7% in the previous month. Clearly the data is volatile month by month, so the trend series tells is more about what is happening. Overall, in seasonally adjusted terms, numbers are down, compared with the peak in January 2014.

Dwelling approvals decreased in trend terms in the Australian Capital Territory (15.2 per cent), New South Wales (1.8 per cent), Victoria (0.8 per cent), South Australia (0.7 per cent), Western Australia (0.7 per cent) and Queensland (0.4 per cent) but increased in the Northern Territory (9.2 per cent) and Tasmania (2.7 per cent). In trend terms, approvals for private sector houses fell 0.4 per cent in June. Private sector house approvals fell in trend terms in South Australia (3.7 per cent), New South Wales (0.6 per cent), Western Australia (0.4 per cent) and Victoria (0.2 per cent), but rose in Queensland (0.3 per cent).

The value of total building approved fell 2.6 per cent in June, in trend terms, and has fallen for seven months. The value of residential building fell 0.5 per cent, while non-residential building fell 7.1 per cent in trend terms. The seasonally adjusted estimate of the value of total building approved rose 3.7% in June and has risen for two months. The value of residential building fell 3.7% following a rise of 14.7%. The value of non-residential building rose 17.9% and has risen for two months.

Continued signs that low interest rates are not translating to strong growth in construction. We still are not building enough properties to meet demand, so expect house prices to continue to rise in some areas at least.

Why Enticing First Time Buyers With Super Is A Bad Idea

We know that first time buyers are sitting on the sidelines, as shown in our recent surveys. The biggest barrier is price. Many are desperate to enter the market and would jump at any additional incentive.

No surprise then to see proposals popping up from time to time to try and assist first time buyers. Often they are tactical and shorted sighted. The latest is from Nick Xenaphon, the Independent Senator for South Australia “Home affordability: a Super idea“.

Independent Senator for South Australia, Nick Xenophon, will introduce legislative changes in the Spring session of parliament to allow first home buyers to access their superannuation savings to pay a house deposit. Such a scheme successfully operates in Canada, called Home Buyers’ Plan, leading to improved housing affordability. At a Senate Economics References Committee hearing in Adelaide today, the Inquiry heard from HomeStart Finance (an arm of the South Australian Government) outlining the Canadian scheme. In Canada up to $25,000 can be accessed for a first home, and it’s made a dramatic difference for housing affordability there. However, Senator Xenophon will be moving for changes to Superannuation Act 1976 to allow the release to superannuation funds for a first home, with similar safeguards to the Canadian scheme. In Canada the amount has to be paid back into the super fund within 15 years. “With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” Nick said. “As HomeStart Finance said today, there’s something strange about being able to access your super fund if you are about to default on your housing loan, but you can’t access it to put a deposit on a home in the first place.” Housing affordability in Australia has fallen for the past three decades, as house prices outstrip income growth. An annual affordability survey by Demographia this year found Australia had the second-worst housing affordability in the world, behind Hong Kong. All 39 Australian housing markets surveyed were “seriously” or “severely” unaffordable, defined as having average house prices more than four times average income. Senator Xenophon gave credit to his state colleague, John Darley MLC, who has been a long-time advocate for releasing super funds for home buyers.

At least he recognises we have a serious problem in the housing sector. Here is the recent data on the percentage of first time buyers transacting, its pretty much as low as its ever been. However, we do not think his suggestion has merit. In fact it would be a disaster. His proposal would be, in effect an additional first time over grant, by another name, and we have already shown the first time buyer incentives merely lift prices in the short term, and do nothing to assist long term. You can read our earlier analysis “First Time Buyer Incentives are Bad News” here.

Two additional points, Canada’s housing market is overheating, as shown in our recent comparisons, based on the recent data from the IMF, which we reported here. So their policy settings are not correct.

In addition, there is additional risk, especially when prices are higher than they should be, that households will be exposed when rates rise. First time buyers are already highly exposed. It they also have their hard earned super locked into housing, this is an additional and concerning exposure. The interim FSI report highlighted concerns about super flowing into property. It is a risk too far.

If the politicians want to address the housing issue (and that means recognising there is a problem, which needs attention – RBA please note), then there are alternatives they should consider. Tackle negative gearing, work with the states on land supply, and bring in macroprudential controls on lending. Read my suggestions in detail in the submission I made to the Senate Inquiry into Affordable Housing. My policy suggestions were:

Australia should develop a strategic housing plan which guides ongoing development, be it in current centres, or expansion into new towns. Current tactical plans are not sufficient. The plan should specifically address the supply of affordable housing.
Strategies should be devised to increase land supply. State governments should reduce the current high levels of access fees for new development and revise planning criteria and processes. This has the potential to create considerable economic growth.
Overseas investors should not be able to access first-time buyer incentive schemes, and the Foreign Investment Review board rules should be strengthened to reduce the impact of foreign investors on the local market.
The RBA should have a direct multi-segmented housing affordability metric within its measurement framework. Affordability should be targeted at trend average, not rates experienced since the debt explosion of the 2000 onwards.
Macro-prudential policies should be employment to control the growth in lending. In line with the recommendations from the Bank of International Settlement debt to income servicing ratios should be employed as the policy tool of choice.
Negative gearing should be tapered away and removed for new transactions.
Joint equity schemes like the UK’s Help to Buy Scheme should be considered as a tactical step to assist some of the “Want-to-Buys.”

If The Worm Turns, What Happens To Household Mortgage Stress?

The wind appears to be changing. First the new head of APRA warned at a CEDA event they were watching the mortgage lending of the banks closely, “The Australian banking system clearly has a concentration of risk in housing. If anything was to go wrong in the housing market it would have very severe impact on the viability and health of the banking system, so it’s naturally something we watch very carefully.” Meantime in London, Treasury Secretary Martin Parkinson spoke to Chatham House where he mused on the low interest rate strategies being adopted by many countries, the limits of monetary policy and the potential for macroprudential measures. Locally, whilst fixed rate mortgages are being offered at record lows below 5%, the consensus appears to be shifting towards a lift in rates in Australia, partly as a result of rising inflation, although timing is not certain. So, what is the potential impact of a rate rise on Australian mortgage holders, bearing in mind that the average loan to income is stretched? How far would rates rise? Where would the pain be felt most?

To answer these questions, we have examined interest rate trends, and incorporated a rising rate scenario into our mortgage stress models. First, let’s look at rate trends. This is a plot of the RBA target rate since 1990. If we take a linear average, we see that currently we are well below the “neutral” range. An RBA rate of 4-4.5% would on this basis be a neutral rate. This is the first assumption I have made in my stress modelling.

Then we have to estimate the spread above the target rate the variable rate mortgage will be coming in at. We still have most households on a floating rate, although 15% are locking in fixed at the moment. This plot shows the target cash rate, against the spread between a CMT deposit account and a standard variable mortgage. Lets assume an average uplift of 300 basis points. That would put the mortgage rate at about 7%.

Now, we will assume rates will be lifted to this level in the next 12-15 months. We will also assume that income rises at the level it has in the past 2 years, and that unemployment stays at 6% (to isolate the effect of the rate movement). We then calculate for the 26,000 households in our survey the impact on their income/expenditure if their mortgages do rise. The impact is of course immediate, unless households are on a fixed loan. This is incorporated in the modelling. Now, we calculate the proportion of households which will be in mortgage stress in 18 months time (see the definitions we use here). Lets take Sydney as an example. This geo-mapping shows where the main movements are in terms of increases in mortgage stress. The blue postcodes are worst hit. Many of these households are in the western suburbs, and are typically younger, and on lower incomes. Many are first time buyers.

Mortgage stress does not mean an immediate crisis, but households hunker down short term, and it is a warning of trouble ahead because many households who get into difficulty are ultimately forced to sell. My read on this modelling is that if rates rise, the impact on the property market could be quite profound. This in turn does indeed lay potential bear traps for the banks, because of their high leverage into property. There is a strong case to lift the currently relatively low capital rules for the big four, to provide a buttress against rising rates, and to avoid financial stability issues. The recent FSI interim report touched on this. If rates do indeed start to rise, we will need to be alert to the issues. Actually, the regulators should have been acting sooner, as the genie is now out of the bottle. We will publish data on this scenario for other states another day.