Digital Finance Analytics (DFA) Blog

The Rise Of Renters By Choice

The private rental sector has expanded at more than twice the rate of the increase in Australian households in the last two decades. This increasingly diverse form of tenure now houses about one in four of us. Via The Conversation.

Australia’s lightly regulated private rental sector means the insecurity of tenants is a key factor in why most Australians aspire to own their home. However, despite this insecurity, our research suggests an increase in people choosing to rent for a long time – ten years or more – accounts for a small part of the growth in private renters.

Much of this growth is attributable to middle- and high-income tenants. Especially in Melbourne and Sydney, high housing prices mean saving for a deposit takes much longer than in the 1990s. In the meantime these households are renting for a long time.

‘Who stays put, loses’

In our survey of 600 private renters in different areas of Sydney and Melbourne, we asked: “Many people are renting privately for longer periods (10+ years). Do you think this is a positive trend?”

About a third responded in mainly positive terms. Their main reasons were:

renting is more affordable than owning
there are fewer worries and liabilities
renting is more flexible than owning.

Some questioned the norm of home ownership in Australia.

For a more in-depth understanding, we interviewed 60 long-term private renters in low, medium and high-rent areas in Melbourne and Sydney. Almost all who chose to rent mentioned flexibility as a key advantage.

“Choosers” highly valued the freedom to move or travel at will. Zygmunt Bauman’s concept of liquid modernity highlights the increasing desire for transience. As he explains:

Transience has replaced durability at the top of the value table. What is valued today (by choice as much as by unchosen necessity) is the ability to be on the move, to travel light and at short notice. Power is measured by the speed with which responsibilities can be escaped. Who accelerates, wins; who stays put, loses.

Renters in their own words

Patricia*, who lives in a high-rent part of Melbourne, has always rented.

Well since I came to Australia in 1977, I rented. I didn’t want to buy. Got close [to buying] a couple of times, but changed my mind.
I just travel anywhere and everywhere. I thought […] if you’ve got a house you’re stuck there, and I thought, no. I work hard for my money, so that money that I work hard for is for me, not to have a [permanent] roof over my head. […] Renting has been good for me because I can still do what I want.

Myra lives in a studio apartment in a high-rent area in Sydney and has no desire to own a home. She is single, in her mid- to late 30s, and earns well. The possibility of being asked to vacate did not bother her.

Maybe I’ve been lucky, but every situation has always sorted itself out. You know a lot of people would have freaked out if they had to move out […] It didn’t concern me in the slightest, yeah. I mean not at all. There’s always somewhere to stay. So it suits my lifestyle. I wouldn’t want to buy [a property], even if I had the money.

Leanne inherited a third of a house. Rather than using the proceeds to buy a property, she decided to move to Melbourne’s inner city (a high-rent area) and continue renting.

So I thought rather than put money into a house […] I would invest it and I could travel and go to concerts and live the life I wanted to lead, so that’s basically what I did and I’m still renting.

Pam was renting in a low-rent area in outer Sydney. She felt her situation required the flexibility of renting:

The relationship was rocky and you can’t predict the future, but I knew it wasn’t going to end up in marriage and kids and all that kind of crap […] We were both working, both earning good money and we could have afforded to buy a house between us […] But for me it was like, no. I don’t know where this [her relationship] is going, so no way, I’m not going to put myself in that predicament and then have to go through court to go, “This is mine, this is yours”, all that crap. But so it was my choice to rent and to stick to it […] I’m not going to rely on anybody else for anything, no way.

Her renter status allowed Pam to make a rapid, clean break.

I just got up one day and walked cos I knew he was going to ask me to marry him the next day, so I said: “I’m just going to go to the shops to get a packet of cigarettes.” I left everything behind. I went for a walk, never went home.

For the families with children who choose to rent long-term, the key reason is it allows them to live in highly desirable areas where they cannot afford to buy. Gabrielle and her partner earn well and live in a high-rent area in Sydney:

Sure it [home ownership] provides you with security and you don’t have that stress of […] having to move. I get that, but at the same time, you know for us, for example, if we wanted to buy we’d be paying four times what we pay at the moment in a mortgage […] It doesn’t really make financial sense to go and do that […] You’d have to live somewhere. So I choose to live in a nice area where my children are [at school].

They also did not want the burden of a large mortgage:

[…] I have no desire to put myself in a position where I have a $2 million mortgage and have to work for the rest of my short life to pay for it […]

Although probably only a small proportion of people choose to rent long-term, this option may be gaining ground. Young, well-paid professionals in particular see the flexibility of private renting as attractive.

Location also seems to be a critical factor. Most of the choosers rented in desirable inner suburbs of Sydney and Melbourne, which would otherwise be inaccessible. An estimated one-in-eight private renters are “rentvestors” who rent where they want to live and buy elsewhere to get a foothold in the housing market.

*All names used are pseudonyms.

Authors: Alan Morris, Research Professor, University of Technology Sydney; Hal Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW; Kath Hulse, Research Professor, Centre for Urban Transitions, Swinburne University of Technology

The Catch-22 In The Housing Market

Despite the recent influx of positive reporting on the trajectory of the housing market, there remains “a fundamental, structural problem” with the price of property in Australia, according to financial analyst Martin North. Via Australian Broker.

While the rising home values evidenced from mid-2019 have been largely celebrated as an overtly positive trend, North has his doubts.

“It’s not sensible to hope and assume prices will continue to go ever higher. House prices are very high relative to income. Actually, very high relative to any other measure you can name, like GDP,” he said.

A recently-released Demographia survey showed Australia has some of the most unaffordable property in the world. While Hong King and Vancouver claimed the top two spots on the list, Sydney and Melbourne came right after.

“Further, we’ve got too much debt in our system, which is supported by debt that’s difficult to repay, even at low interest rates,” said North.

“There is definitely a cap, in my view, on how much home price growth we should expect and will see.”

The affordability concerns which have dominated Australia for years were again thrown into sharp relief by recent figures around hopeful market entrants.

“The latest data shows the first home buyer average loan is now $408,000 across Australia – the highest it’s ever been,” said North.

“That’s massive for a first-time buyer trying to get into the market. Think about the income multiples that figure represents; that’s maybe eight, nine, 10 times what many people make.

“It’s an unsustainable position to be in. We can’t allow home prices to continue to run away. It will create a bigger problem for us later.”

It’s important to focus on the hard data amidst the sea of vested parties doubling down on their own rhetoric, North said.

“The banks want property prices to go higher because if they go lower, they have much more risk in their system and on their books than they want to admit,” he explained.

“The Reserve Bank and Treasury both want prices to rise to create the wealth effect. If people feel more wealthy, which they generally do as prices rise, they go and spend more. Trying to bring prices higher is really the only lever they’ve got.”

However, according to North, it’s “failed policy” to bank the future of the economy on “ever-inflated house prices” with nothing else to support it.

“I come back to the fundamental reality of the ratio between debt and income, the ratio between debt and GDP,” he said.

“We’re in an unsustainable position. We’re betting the farm on the property sector and, in my view, it’s going to fall over at some point; it’s just a question of how soon.”

Australia’s Banks Are Preparing To Bail-In Retail Bank Deposits

Economist John Adams and Analyst Martin North examines recent changes to the terms and conditions from our major banks. Have you read yours recently?

APRA’s list of ADI’s: https://www.apra.gov.au/register-of-authorised-deposit-taking-institutions

DFA Age/Segment Distribution

In response to a question, we are publishing a couple of analytic slides which shows the relationship between DFA household and property segments and age bands.

Our segments are derived from multi-factorial analysis but do have an age related dimension also. You can read more here.

The first chart maps our master segmentation.

The second is our property segmentation.

Both are based on data to January 2020.

Auction Results 08 Feb 2020

Domain released their preliminary results for today (the first full week back in the new year).

Volumes are up on last year at the same time and clearance rates will be higher (though will settle below 74.7% as more results come in).

Canberra listed 51, reported 36 and sold 30, with 6 passed in giving a Domain clearance of 83%.

Brisbane listed 84, reported 35 and sold 14 with 3 withdrawn and 21 passed in giving a Domain clearance of 37%.

Adelaide listed 50, reported 27 and sold 16 with 11 passed in giving a Domain clearance of 59%.

Yeh! Central Banks Will Save Us – The Property Imperative Weekly 8th Feb 2020

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents:
00:20 Introduction
00:51 US Markets
02:05 Trade Wars
02:30 Monetary Policy
03:50 Virus Threat
09:00 China
11:40 Eurozone
12:30 Deutsche Banks
Australian Segment
14:30 RBA Policy
19:00 Services Index
19:15 Property
20:20 Tap and Go Rules
21:20 Reporting Season Coming Up
23:15 AMP Penalty
24:55 Cash Ban Latest

RBA Says Borrowers With Older Mortgages Pay Higher Interest Rates

For variable-rate mortgages, older loans typically have higher interest rates than new loans, even for borrowers with similar characteristics. This means that existing borrowers who are able to refinance with another lender or negotiate a better deal with their existing lender can achieve interest savings. This box examines the extent to which borrowers with older mortgages pay higher interest rates and considers the drivers of this. From the RBA Statement On Monetary Policy.

Interest rates are higher on older loans

The difference in interest rates between new and outstanding variable-rate home loans increases with the age of the loan. Just under half of all variable-rate home loans in the Reserve Bank’s Securitisation Dataset were originated four or more years ago. Currently, these loans have an interest rate that is around 40 basis points higher than new loans (Graph C.1). For a loan balance of $250,000, this difference implies an extra $1,000 of interest payments per year.

Some of the difference in rates between older and newer mortgages can be explained by a shift in the mix of different types of variable-rate mortgages over time. In particular, the share of interest-only and investor loans in new lending has declined noticeably in recent years and these tend to have higher interest rates than other loans. Nevertheless, even within given types of mortgages, older mortgages still tend to have higher interest rates than new mortgages. The right-hand panel of Graph C.1 shows this for principal-and-interest owner-occupier loans, which account for around 55 per cent of mortgages. Moreover, higher interest rates for older loans has been a feature of variable-rate mortgages for several years (Graph C.2).

Outstanding Variable Housing Rates — Graph C.2

There is strong competition for new borrowers

In part, the variation in interest rates paid by different borrowers reflects their creditworthiness or the riskiness and features of loans. In addition, it reflects the different interest rates offered by different lenders. However, the time at which the mortgage was taken out also has an important influence on the interest rate paid. This reflects the tendency for competitive pressures to be strongest for new and other borrowers who are in the process of shopping around for a loan.

The discounts that borrowers receive have increased in recent years

Very few borrowers actually pay interest rates as high as the standard variable rates (SVRs) published by lenders. While SVRs are the reference rates against which variable-rate loans are priced, lenders also advertise a range of interest rates that are materially lower than their SVRs.^{[1], [2]} In addition, most individual borrowers are offered, or may be able to negotiate, further discounts on the interest rate applied to their loan. For instance, the major banks’ ‘package’ mortgage interest rates for owner-occupier loans currently attract a discount of around 50–100 basis points to SVRs.^[3] The lowest advertised rates are around 100 basis points lower than those package rates, and a few borrowers receive even larger discounts.

Indeed, in recent years, the average discounts relative to SVRs offered by major banks on new variable-rate mortgages have grown, widening from around 100 basis points in 2015 to more than 150 basis points in 2019 (Graph C.3). By increasing the discounts on rates for new or refinancing borrowers over time, rather than lowering SVRs, banks are able to compete for new borrowers without lowering the interest rates charged to existing borrowers. So the rise in the average differential between SVRs and interest rates charged on outstanding variable-rate loans reflects the increased discounting on more recently originated loans. The discounts borrowers receive on loans are usually fixed over the life of the loan, although they can be renegotiated. Indeed, interest rates charged on outstanding variable-rate loans have declined by more than SVRs in recent times in part because well-informed borrowers have been able to negotiate a larger discount with their existing lender, without the need to refinance their loan.

In January 2020, the Reserve Bank began publishing more detailed monthly data on mortgage interest rates paid by households on new and existing mortgages (see ‘Box D: Enhancing the Transparency of Interest Rates’), which may help more households to make better-informed choices about their mortgages.

Major Banks' Variable Housing
Rates — Graph C.3

Endnotes

Lenders usually advertise a number of SVRs; often the applicable rate will depend on whether the property will be used for an owner-occupied or investment purpose, and whether the borrower elects to repay the principal of a loan or the interest only. [1]

For more information see RBA (2019), ‘Box D: The Distribution of Variable Housing Interest Rates’, Statement on Monetary Policy, November, pp 59–60. [2]

A typical package mortgage has additional features beyond a ‘basic’ mortgage, such as an offset account, but will attract a higher fee. It may be offered in conjunction with discounts on other products, such as credit cards and insurance policies.

https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/8501.0Dec%202019?OpenDocument