NSW First Time Buyer Trends From 2002

As part of our household surveys we have been examining the state of play for NSW first time buyers since 2002. In our research we have identified the year in which they purchased, whether they subsequently refinanced, or moved on, and how many of these households are currently having difficulty in finding a lender to refinance with. To be clear, this is a snapshot, as at August 2014, across multiple cohorts.

The data shows, firstly the monthly volume of loans written for first time buyers, peaking in 2009, and now languishing at a 20 year low. Next we plot, by age of the purchase, what proportion of households have subsequently either refinanced an existing loan, or sold and bought elsewhere. Perhaps it is not surprising that loans which are older, are more likely to be churned. The yellow trend line shows the proportion of households, by year of origination who have tried, but have not so far been able to refinance their loan. We see a significant peak in loans written in the 2009 boom time (when first time buyer incentives were at their peak, both at a federal and state level in a response to the GFC). More recent loans are less likely to be churned, so we see the drop in recent month. This suggests that there are a number of households in the 2009 and 2010 cohort who are in some strife.

First-Time-Buyers-NSWWe also analysed data on their current levels of mortgage stress, and their loan to income (LTI) ratios. We found that the average LTI grew steadily through the 2007-2012 cohorts, and currently stands at close to 6 times current gross income. We also see a peak in mortgage stress, in those households who took a loan in the 2009-2012 period. The proportion in mortgage stress are lower in the cohorts before and after this period. Once again the data highlights potential issues in specific cohorts, who are highly sensitive to unemployment,  falling income or rising rates.

First-Time-Buyers-LTI-NSWThis data also is a warning, that first time buyer incentives can pull households into the market, and lay potential long term problems for them.

Real Incomes Go Backwards

The ABS published their Wage Price Index to June 2014. In seasonally adjusted terms, both the Private and Public sector wage price indexes rose 0.6%. The rises in indexes at the industry level (in original terms) ranged from 0.1% for Accommodation and food services, Public administration and safety, and Arts and recreation services to 0.9% for Mining. The trend index and the seasonally adjusted index for Australia rose 2.6% through the year to the June quarter 2014.  Rises in the original indexes through the year to the June quarter 2014 at the industry level ranged from 2.0% for both Wholesale trade and Professional, scientific and technical services to 3.2% for Education and training.

We see a consistent falling trend in income growth, since 2010.

 
Income-Growth-to-June2014Looking at the impact after adjusting for inflation, real effective incomes are now falling.

Adjusted-Income-Growth-to-June2014This is significant and serious. Many households have taken on the burden of large mortgages assuming that whilst they will experience short term pain, their incomes would grow, so easing spending pressures. This however is just not happening. Consider this updated data on household Loan To Income ratios (LTI). Some households have an effective LTI about 5 times. This is very high.

LTIAllStatesUpdatedIn our surveys, we find that some segments are particularly exposed. The worst is in our Growing segment, these are younger families, many of whom are first time buyers, or recent up graders. As a result mortgage stress is high, and growing in this group, even at current low interest rates.

LTIAllStatesGrowingUpdated2

These pressures help to explain why many households are not feeling very confident, and are reacting to rising energy, child care and school fees, falling real incomes, and rising mortgage stress. The most affluent households are least impacted.

House Price Momentum Slowing As Value Reaches $5.2 Trillion

The ABS released their latest data on Residential Property Prices today. The total value of residential dwellings in Australia was $5,196,355.9 m at the end of June quarter 2014, rising $112,598.5 m over the quarter. The mean price of residential dwellings rose $9,900 and the number of residential dwellings rose by 37,600 in the June quarter 2014. The price index for residential properties for the weighted average of the eight capital cities rose 1.8% in the June quarter 2014 and rose 10.1% through the year to the June quarter 2014. The capital city residential property price indexes rose in Sydney (+3.1%), Melbourne (+1.3%), Brisbane (+1.8%), Adelaide (+1.0%), Canberra (+0.8%), Darwin (+0.7%) and Hobart (+0.3%) and fell in Perth (-0.2%). Recent data suggest momentum is slowing, a little.

ResidentialPricesQOQJune2014Annually, residential property prices rose in Sydney (+15.6%), Melbourne (+9.3%), Brisbane (+6.8%), Adelaide (+5.6%), Hobart (+4.3%), Perth (+3.6), Darwin (+3.4%), and Canberra (+2.2%).

ResidentialPricesYOYJune2014The median price of established houses exceeds $700,000 in Sydney. Hobart and Adelaide have the lowest values. Looking at the rest of the states, beyond the capital cities, NT has the highest value, and QLD exceeds NSW and VIC. Note this data is to December 2013 only, as the ABS does not yet reprot the latest data for the past 6 months.

MedianEstablishedPricesDec2013Looking at attached dwellings, again Sydney is highest, on average, at over $550,000, whereas away from the capital cities, prices are higher in NT and QLD.

MedianHousePricesAttachedDec2013Looking at the number of transfers, momentum is clearly in Sydney and Melbourne. Brisbane is showing signs of upward movement. Note again this data is to December 2013.

NumberofTransfersDec2013Property is too highly priced, compared with income measures, and international comparisons. The long term chronic problem of poor supply, easy loans and high demand continues to be a brake on the broader economy. Household confidence is not buttressed by rising prices. Many continue be be excluded from the market.

June Finance Data – ABS

The ABS published their June lending data today, covering commercial, housing and other lending categories. Owner occupied housing rose 1.8% in seasonally adjusted terms, Personal finance fell 1.8% and commercial lending rose by 12.1% in June after a fall of 5.9% in May.

AllLendingJune-2014Looking at housing lending, investment lending remains significant (though in percentage terms it fell slightly this month). This is on a seasonally adjusted basis.

HousingLendingJune-2014Investment lending accounted for 38% of all housing including refinance, and unsecured.

InvestmentPCJune2014Looking more narrowly, the proportion of investment loans written remains close to record, at 46.3% of loans, the all time record is 46.8% (May 2014). This is calculated by removing refinance and unsecured lending.

InvestmentTrendJune2014

June Housing Finance Up 1% – ABS

The ABS published their housing finance data today to June 2014. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 1.0%. The value of commitments grew faster than the number of transaction, so the average loan size is increasing.

TotalCommittmentsJune2014Growth in NSW, WA and TAS was faster than the national average.

StateMovingAverageJune2014

We see the momentum spread across the states, with WA and NSW making the largest growth contribution. VIC and QLD grew more slowly.

TotalCommittmentsValueStateJune2014

First time buyers are still at historic lows. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 13.2% in June 2014 from 12.6% in May 2014.

FTBPCJune2014

State variations are quite marked. NSW has the lowest proportion of first time buyers, WA the highest. The VIC data shows the impact the removal of some first time buyer incentives in 2013.

FTBPCStateJune2014

Investors loans grew faster than owner occupied loans. This is consistent with the results from our household research.

OOINVSplitsJune2014The splits, after removing refinance of existing loans are 47% investment loans and 53% owner occupied loans.

OOINVPCSplitsJune2014So, momentum continues, the trends are set, growth in the investment sector, first time buyers excluded, and overall growth stimulated by rising prices. The RBA quarterly statement on monetary policy, issued today, indicates they are  comfortable with the current position:

One area where there has been a marked improvement is dwelling investment, which grew strongly in the March quarter and is clearly in an upswing. The increase in dwelling investment is being underpinned by the ongoing strength in the established housing market. Housing price inflation over 2014 to date has not been as rapid as it was over the second half of 2013, but prices continue to rise. Loan approvals are higher than they were a year ago, but have been little changed since late last year. At this level, they are consistent with growth in housing credit stabilising at a rate that is a bit faster than income growth, although the growth of investor credit has continued to outpace that of owner-occupiers. The high rate of housing price inflation has underpinned strong growth in standard measures of household wealth. Along with the very low level of interest rates, this has seen consumption growing a little faster than household income, leading to a gradual decline in the saving rate over the past 18 months or so. Nevertheless, after picking up through 2013, consumption growth looks to have slowed in the first half of this year, with weaker retail sales growth and consumer sentiment falling to below-average levels. It remains to be seen whether this slower growth of consumption is temporary. Indeed, a timely measure of consumer sentiment has rebounded recently to be back above average.

I am less sure, because we are banking on larger loans supporting the growth in house prices, despite record low interest rates, and a significant rise in investment loans. There are risks in this scenario.

Australia’s Unemployment Rate Increased to 6.4 per cent in July 2014 – ABS

According to the ABS, in data released today, Australia’s seasonally adjusted unemployment rate increased by 0.3 percentage points to 6.4 per cent in July 2014. We also note that female and male unemployment rates have converged.

UmeploymentJuly2014The seasonally adjusted labour force participation rate increased by 0.1 percentage points to 64.8 per cent in July 2014. The number of people employed decreased by 300 to 11,576,600 in July 2014 (seasonally adjusted). The decrease in employment was due to decreased part-time employment, down 14,800 people to 3,499,200. This was offset by increased full-time employment, up 14,500 people to 8,077,400. The monthly seasonally adjusted aggregate hours worked series decreased in July 2014, down 14.8 million hours (0.9%) to 1,610.7 million hours. The seasonally adjusted number of people unemployed increased by 43,700 to 789,000 in July 2014.

Looking at the state data, the average unadjusted rate  unemployment rate increased 0.1 pts to 6.1%, based on unrounded estimates. ACT still has the lowest rate, whilst TAS has the highest.

StateUnemploymentJuly2014Whilst there are some statistical reasons for the result (changes in the sample this time), the fall in aggregate hours worked indicates this is a concerning result. As such, we expect unemployment to be a drag on momentum, and it will curb enthusiasm for property amongst some segments. In our household survey results however, the largest changes in unemployment were amongst those who were classified as property inactive, closely followed by those who have purchased recently. Given the high loan to income ratios in this group, any unemployment impact may be magnified in this highly leveraged group.

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.

SegmentIntentionsAug2014House price expectations are pretty similar to earlier in the year, more are thinking prices are set to continue to rise, than fall.

SegmentPriceExpectationsAug2014Sole 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.

SoleInvestmentAugust2014Superannuation 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.

SuperIvnestmentAugust2014Looking 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.

SMSFPropertyDistributionAugust2014So 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.

InvestmentBarriersAugust2014Finally, 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.BudgetInvestorsImpactAugust2014So, 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.

Retail Turnover Up In June – ABS

The latest ABS Retail Trade figures show that Australian retail turnover rose 0.6 per cent in June 2014, seasonally adjusted, following a fall of 0.3 per cent in May 2014. Turnover rose in household good retailing (1.7 per cent), food retailing (0.5 per cent), other retailing (0.9 per cent) and clothing, footwear and personal accessory retailing (1.4 per cent). These rises were partially offset by falls in cafes, restaurant and takeaway food services (-0.6 per cent) and department stores (-0.5 per cent).

RetailSalesTurnoverAllStatesJune2014Seasonally adjusted turnover rose in New South Wales (0.9 per cent), Victoria (0.6 per cent), Western Australia (1.1 per cent), South Australia (0.5 per cent), Tasmania (1.3 per cent) and the Northern Territory (0.3 per cent). Queensland was relatively unchanged (0.0 per cent). There was a fall in the Australian Capital Territory (-0.5 per cent). RetailSalesMonthlyChangeByStateJune2014Through the year, Australian retail turnover rose 5.5 per cent in June 2014, seasonally adjusted, compared to June 2013. The trend estimate for Australian retail turnover rose 0.1 per cent in June 2014. This follows a 0.1 per cent rise in May 2014. Through the year, the trend estimate rose 5.3 per cent in June 2014 compared to June 2013. In seasonally adjusted volume terms, turnover fell 0.2 per cent in the June quarter 2014, following a rise of 1.3 per cent in the March quarter 2014.

Looking at spend per capita, we see it fell a little in June, to $2,887. Looking at the changes over time, we see the trend still dropping, so households are not yet showing strong growth in retail spend – this is because for many, the costs of housing, child care and utility bills are blotting up more of their wallet.RetailSalesPerCapitalAllStatesJune2014

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.

FinancialAggregates12MonthPCGrowthJune2014We can show the monthly data, which highlights how housing lending has been moving. The growth in investment lending is clear.

FinancialAggregates1MonthPCGrowthJune2014Turning to the value lent, housing lending reached a new record, $1.375 trillion.

FinancialAggregatesMonthlyBalancesJune2014Looking at the split between owner occupied and investment lending, the stronger growth on the investment side is again clear,

InvestmentLendingSplitValueJune2014and is at a new record of 33.73% of all housing loans outstanding.

InvestmentLendingSplitPCJune2014Looking at how the banks are funding this lending growth, we see overall growth in deposit growth slowing

FinancialAggregatesDepositBalancesJune2014and overseas funding rising.

FinancialAggregatesOffshoreBorrowingsBalancesJune2014The 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.