Digital Finance Analytics (DFA) Blog – Page 1050

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.

Payments Competition To Increase

The Treasury just released a consultation relating to Banking Amendment (Credit Card) Regulation 2014. Opening up access to non-ADIs is likely to increase competition and innovation in card issuing and acquiring, resulting in downward pressure on fees and charges, and better service to merchants and end users (which include consumers, business and government). Non-ADIs would also not be subject to the ongoing costs associated with supervision by the Australian Prudential Regulation Authority. We discussed the payments revolution recently. This is likley to put the existing players, namly the major banks under increased pressure.

The changes take effect on 1 January 2015. Implementation of the new regulatory framework will require the Payments System Board of the RBA to vary the Credit Card Access Regimes to provide for reporting requirements and disclosure of eligibility and assessment criteria for Scheme membership. The Australian Payments Clearing Association will also need to vary related Bulk Electronic Clearing System rules to allow certain non-ADIs to continue to participate in the system after the removal of the SCCI framework.

The exposure draft legislation would amend the Banking Regulations 1966 (the Regulations) to open up credit card issuing and acquiring to non authorised-deposit-taking institutions (ADIs). The reforms will allow non-ADIs to become credit card issuers and card acquirers in the Visa and MasterCard credit card schemes.

The exposure draft will revoke Regulation 4 of the Regulations, which provides that credit card acquiring and issuing is ‘banking business’ and triggers supervisory requirements of the Australian Prudential Regulation Authority. The exposure draft also makes a number of consequential amendments to the Regulations as a result of the revocation of Regulation 4.

All new entrants will need to meet the same consumer credit regulations that currently apply to banks (including specialist credit card institutions) under the National Consumer Credit Protection Act 2009. The proposed credit card access reforms will not alter these general consumer credit protections. The card schemes will be responsible for determining which entities may become card issuers or acquirers under their schemes, subject to a risk management framework imposed by the Reserve Bank of Australia (RBA).

The Unhappy State Of Investment Property

In the ABS data yesterday there was useful information on the state by state situation with regard to investment property lending. So today we look at the latest data, and it is quite shocking. The chart below shows the 6 month rolling average value of lending for property investment flows across the major states. It is the sum of lending for dwelling construction, and borrowing for established homes by individuals, and others. This is not seasonally adjusted, so it is original data. The most striking observation is the breakout in NSW, and to a lesser extend VIC. There is much more modest growth in the other states. No wonder then the RBA has been starting to warn.

But if we look by percentage splits, its is even more stark. In 2008, 32% of investment lending was in NSW, the most recent data puts it at 45%. In VIC, in 2008, it was 26%, today its still 26%. Compare this with QLD, where in 2008, it accounted for 23% of investment lending, whereas today it has dropped to 14.5%; WA also dropped a little. Combined, VIC and NSW comprise 71% of all investment lending – talk about concentration risks!

There is a strong correlation with buoyant investment activity and house prices of course, and this raises a significant question for the regulators, if macroprudential is brought in, can it be done in a way to target the investment sector without causing unintended consequences, and if investment is slowed in NSW, what does that say about the prospects for house prices in coming months. It is indeed an unhappy state of play.

August Lending Data Released

The ABS released their data series for August covering the entire lending spectrum (the housing details were released previously).

The total value of owner occupied housing commitments excluding alterations and additions fell 0.1% in trend terms, and the seasonally adjusted series fell 2.0%.

The trend series for the value of total personal finance commitments rose 1.0%. Fixed lending commitments rose 1.0% and revolving credit commitments rose 0.9%. The seasonally adjusted series for the value of total personal finance commitments rose 5.2%. Revolving credit commitments rose 5.9% and fixed lending commitments rose 4.7% .

The trend series for the value of total commercial finance commitments rose 0.2%. Revolving credit commitments rose 0.4% and fixed lending commitments rose 0.1%. The seasonally adjusted series for the value of total commercial finance commitments fell 16.3% in August 2014, after a rise of 3.4% in July 2014. Fixed lending commitments fell 18.6%, after a rise of 21.0% in the previous month. Revolving credit commitments fell 9.6%, following a fall of 26.8% in the previous month.

The trend series for the value of total lease finance commitments rose 1.1% in August 2014 and the seasonally adjusted series rose 8.7%, after a fall of 7.3% in July 2014.

This chart shows the seasonally adjusted flows for all finance categories.

Looking at property, we again see the investment lending sector strong, at close to 50% of all property lending, excluding refinancing.

Finally, we look at the share of investment lending as a proportion of all commercial lending. We see it sits above 20%, with a surge recently. The dynamics here are interesting, does if represent a fall in other business lending categories, or a replacement by rising investment property lending?

The other gap in the data is the number of new properties purchased as investment properties (this is different from investing in building new property). This is an important data point because one of the arguments proffered by some is that negative gearing supports new builds. Our own survey data suggests this is not the case, and most investment lending which is negative geared is going to established property.

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.