ABS – Page 34 – Digital Finance Analytics (DFA) Blog

More Mortgage Lending Clouds On The Horizon?

The ABS released their housing finance series for November today. In essence, there was a small rise (0.1%) in overall lending flows, in the smoothed trend series, with around $33 billion of loans written in the month. Total ADI housing loans stood at $1.63 trillion, in original terms. But the percentage changes fell in NSW 0.2% and 1.4% in WA. Lending rose in VIC, up 0.6% and SA, 0.3%. The original series showed a much stronger result, up 11.4% (but this is a volatile series).

We do not think the data gives any support for the notion that regulators should loosen the lending rules, as some are suggesting. That said the “incentives” for first time buyers are having an effect – in essence, persuading people to buy in at the top, even as prices slide. I think people should be really careful, as the increased incentives are there to try and keep the balloon in the air for longer.

A highlight was the rise in first time buyer owner occupied loans, up by around 1,030 on the prior month, as buyers reacted to the incentives available, and attractor rates. This equates to 18% of all transactions. Non-first time buyers fell 0.5%. The average first time buyer loan rose again to $327,000, up 1% from last month. The proportion of fixed rate loans fell, down 5.4% to 15.8% of loans.

We saw a fall in first time buyer investors entering the market, thanks to tighter lending restrictions, and waning investor appetite. This will continue.

Overall, first time buyers are more active (though still well below the share of a few years ago).

Looking more broadly across the portfolio, trend purchase of new dwellings rose 0.2%, refinance rose 0.3%, established dwellings 0.2%, all offset by a 0.9% drop in the value of construction. The indicators are for a smaller number of new starts (despite recent higher approvals). We are concerned about apartment construction in Brisbane and Melbourne.

The share of investor loans continues to drift lower, but is still very high at around 36.4% of all loans written, but down from 44% in 2015. In fact the total value of finance, in trend terms was just $16m lower compared with last month.

The monthly movements show a rise of 5.44% in loans for investment construction ($65m), Refinance 0.3% ($16m), Purchase of new dwellings up 0.2% ($3m) but a fall of $17m (down 0.9%) for construction of dwellings. Purchase of existing property for investment fell $74m, down 0.8% and for other landlords were down 2.3% of of $21m. The overall trend movement was down $16m. In comparison the original flow was up more than $3bn or 11%.

Looking at the original loan stock data, the share of investment loans slipped again to 34.4%, so we are seeing a small fall, but still too high. Investment loans rose 0.10% or $527 million, while owner occupied loans rose $5.5 billion.or 0.52%. Relatively Building Societies lost share.

November Retail Trends Underscores Weak Growth

Australian retail turnover rose 1.2 per cent in November 2017, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures. Black Friday and iPhone X sales drove the outcome says the ABS. This follows a 0.5 per cent rise in October 2017. Some will spruke this as a positive sign.

However the more reliable trends are less positive, with the trend estimate for Australian retail turnover up 0.1 per cent in November 2017 following a rise (0.1 per cent) in October 2017. Compared to November 2016 the trend estimate rose 1.7 per cent. This is still weak, reflecting stagnant wage growth, rising costs and high levels of debt.

The state trend data showed NSW, ACT and QLD had no change, NT fell 0.2% along with WA, while VIC rose 0.3% and SA 0.4%, and TAS rose 0.2%.

“In seasonally adjusted terms, rises were led by the household goods (4.5 per cent) and other retailing (2.2 per cent) industries,” the Director of the Quarterly Economy Wide Surveys, Ben James, said. “Seasonally adjusted sales in both these industries are influenced by the release of the iPhone X and the increasing popularity of promotions in November, including Black Friday sales.”

There were also rises for clothing, footwear and personal accessory retailing (1.6 per cent) and cafes, restaurants and takeaways (0.4 per cent). Department stores fell (-1.1 per cent) whilst food was unchanged in November 2017.

In seasonally adjusted terms, all states rose. There were rises in Victoria (1.8 per cent), New South Wales (1.0 per cent), Western Australia (1.4 per cent), Queensland (0.7 per cent), South Australia (1.5 per cent), Tasmania (1.8 per cent), the Australian Capital Territory (1.2 per cent) and the Northern Territory (0.2 per cent).

Online retail turnover contributed 5.5 per cent to total retail turnover in original terms. This is the largest contribution to total retail turnover from online sales in the history of the online series.

Balance of Trade Unexpectedly Weakens In November

The latest data from the ABS highlights that in November, Australia’s widened trade deficit widened, against expectations of $550m surplus; which is close to a $1bn miss. It was largely driven by a large fall in non-monetary gold exports. This raises the possibility of weaker than expect fourth quarter growth outcomes.

The ABS says that in trend terms, the balance on goods and services was a deficit of $194m in November 2017, a turnaround of $296m on the surplus in October 2017. In seasonally adjusted terms, the balance on goods and services was a deficit of $628m in November 2017, an increase of $326m on the deficit in October 2017.

In seasonally adjusted terms, goods and services credits rose $141m to $31,853m. Non-rural goods rose $394m (2%) and rural goods rose $25m (1%). Non-monetary gold fell $425m (23%). Net exports of goods under merchanting remained steady at $53m. Services credits rose $147m (2%).

In seasonally adjusted terms, goods and services debits rose $467m (1%) to $32,481m. Consumption goods rose $213m (3%), capital goods rose $190m (3%) and intermediate and other merchandise goods rose $81m (1%). Non-monetary gold fell $100m (25%). Services debits rose $83m (1%).

Bad data collection means we don’t know how much the middle class is being squeezed by the wealthy

From The Conversation.

Australia is falling behind other nations and international bodies in measuring inequality, particularly the concentration of wealth. This also means we are in the dark about the trends affecting Australia’s middle class.

The main source of local data is the Australian Bureau of Statistics (ABS), which publishes a Survey of Income and Housing every two years. The survey provides no information on the wealth of Australia’s top 10%, let alone the top 1% or the top 0.1%. Nor does it quantify the bottom 50%.

The ABS also publishes an index known as the “Gini coefficient”, but as the recent World Inequality Report points out, this indicator can produce the same score for radically different distributions of wealth and downplays the distribution’s top end.

Studying the different groups (such as the top 10%, the middle 40% and the bottom 50%) has become standard in the flourishing international literature on inequality. It has also been embraced by international agencies such as the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund, the World Bank and increasingly, the United Nations.

As a sign of how far Australia has slipped behind, when we reported on wealth inequality in 2016, we had to draw on data for the top 10% that the ABS had supplied to the OECD but which were not published here in Australia.

Why looking at the middle class matters

The World Inequality Report finds that the share of the world’s wealth owned by the richest 10% of adult individuals is now over 70%. Meanwhile the poorest 50% of people owns under 2% of the total wealth. This is extreme economic inequality.

Changes in recent decades have been driven by a surge in wealth accumulation at the very top of the distribution. Worldwide, the wealthiest 1% now owns 33% of the total, up from 28% in 1980. In the United States, the top 1% share has risen from a little over 20% to almost 40%.

This is not a simple story of growing extremities between the global rich and poor. On the contrary, the wealth-share of the bottom 50% has barely changed since 1980.

This means the rise in the top share has come at the expense of that held by the middle class, defined as the 40% of people whose wealth-share lies between the median and the top 10%.

This middle-class squeeze is a long-established trend. The wealth of the top 1% exceeded that of the middle class in the early 1990s, and is projected to reach almost 40% by 2050.

Most gains have accrued to the top 0.1%, a tiny elite whose wealth is projected to equal that of the middle class around the same year. This crossing point has already been reached in the United States, where the top 0.1% now has about the same wealth-share as the bottom 90%.

The squeezed global wealth middle class, 1980-2050

Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez and Gabriel Zucman, _World Inequality Report 2018, World Inequality Lab. 2017, Figure E9, p. 13

Better data collection

There is a glaring need to reform Australia’s archaic wealth inequality statistics to make them commensurate with international practice. The political implications are significant.

If there is a squeeze on middle-class wealth, as is happening in many other countries, it is likely to create greater political volatility. Access to more and better data is the key to understanding the trends, and will help ground debate, deliberations and policy decisions. The ABS’ household survey needs to be restructured and integrated with the national accounts and, ideally, tax data.

Perhaps the current Australian government, responsible for funding the ABS, is unconcerned. In that case, it is worth remembering that the ABS is charged with servicing both the Commonwealth and the states, most of whom transferred their statistical agencies to the national body in the 1950s on the understanding that their data requirements would continue to be met. The limitations in the existing data hinder the ability of the states to frame policies for their vital housing, education and health services.

The Council of Australian Governments could be a suitable forum to advance reform, particularly in the event of continued federal inertia. Alternatively, given the revolutionary advances in data collection since the 1950s, it might be feasible for the states to again think about establishing their own statistical agencies to ensure their needs – which is to say, our needs – are properly met.

Authors:Christopher Sheil, Visiting Fellow in History, UNSW; Frank Stilwell, Emeritus Professor, Department of Political Economy, University of Sydney

Business Finance Still Skewed Towards Property

The final piece of the October 2017 lending finance data came from the ABS today. It is not pretty. As usual we will focus on the trend series which irons out some of the statistical bumps.

Owner occupied housing lending excluding alterations and additions fell 0.1% in trend terms. Personal finance commitments rose 1.3%. Fixed lending commitments rose 2.2%, while revolving credit commitments fell 0.1%.

Total commercial finance commitments fell 1.1%. Fixed lending commitments fell 2.5% (which includes mortgage lending for investment purposes), while revolving credit commitments rose 3.7%.

The trend series for the value of total lease finance commitments fell 0.7%.

Here is the summary with the relative percentage for owner occupied housing and personal finance rising (so putting more pressure on household debt ratios in a flat income, rising cost market). Overall lending to business, relative to all lending fell again.

Personal credit is rising, now, as households find their cash flow is under pressure, many are now seeking fixed loans to help bridge the gap left by falling savings. In prior years there was a fall at this time of year, before the Christmas binge, but that is different this year. This does not bode well for Christmas spending, and we see signs of the New Year sales already underway!

Then finally, if we look at the fixed business lending, and split it into lending for property investment and other business lending, the horrible truth is that even with all the investment lending tightening, relatively the proportion for this purpose grew, while fixed business lending as a proportion of all lending fell.

These a clear signs of a sick economy (in the sense of unwell!), with business investment still sluggish, still too much lending on property investment, and as we showed above, too much additional debt pressure on households.

I will repeat. Lending growth for housing which is running at three times income and cpi is simply not sustainable. Households will continue to drift deeper into debt, at these ultra low interest rates. This makes the RBA’s job of normalising rates even harder.

The mid-year economic forecast, later in the week will likely simply underscore the fact the economic settings are not appropriate. And, by the way, tax cuts, even if they could be paid for, will not help.

Sydney Leads Home Prices Lower

Further evidence of a fall in home prices in Sydney, as lending restrictions begin to bite, and property investors lose confidence in never-ending growth. So now the question becomes – is this a temporary fall, or does it mark the start of something more sustained? Frankly, I can give you reasons for further falls, but it is hard to argue for any improvement anytime soon. Melbourne momentum is also weakening, but is about 6 months behind Sydney.

The Residential Property Price Index (RPPI) for Sydney fell 1.4 per cent in the September quarter 2017 following positive growth over the last five quarters, according to figures released today by the Australian Bureau of Statistics (ABS).

Sydney established house prices fell 1.3 per cent and attached dwellings prices fell 1.4 per cent in the September quarter 2017.

Hobart leads the annual growth rates (13.8%), from a lower base, followed by Melbourne (13.2%) and Sydney (9.4%). Darwin dropped 6.3% and Perth 2.4%.

“The fall in Sydney property prices this quarter was consistent with market indicators,” Chief Economist for the ABS, Bruce Hockman said.

Falls in the RPPI were also seen in Perth (-1.0 per cent), Darwin (-2.6 per cent) and Canberra (-0.2 per cent). These were offset by rises in Melbourne (+1.1 per cent), Brisbane (+0.7 per cent), Adelaide (+0.7 per cent) and Hobart (+3.4 per cent).

For the weighted average of the eight capital cities, the RPPI fell 0.2 per cent in the September quarter 2017. This was the first fall in the RPPI since the March quarter 2016.

“Residential property prices have continued to moderate across most capital cities this quarter,” Mr Hockman said.

The total value of Australia’s 10.0 million residential dwellings increased $14.8 billion to $6.8 trillion. The mean price of dwellings in Australia fell by $1,200 over the quarter to $681,100.

Being middle class depends on where you live

From The Conversation.

Politicians are fond of pitching to the “average Australian” but judging by the income of Australians, whether you are middle class depends on where you live. And where we live tells a rich story of who we are as a nation – socially, culturally and economically.

Income is at the heart of access to services and opportunities, which are differing and unequal based on where you live.

Our ability to afford housing that meets our needs largely determines where we live. In turn, where we live influences access to other important features of our lives which shape lifelong and intergenerational opportunities. For example, student performance is associated with everything from where a student lives to their parent’s occupation.

Household incomes in capital cities are typically among the highest, with incomes declining the further you live from major cities. So it’s understandable why Australians living outside or on the fringes of cities might feel somewhat left behind.

The Australian Bureau of Statistics presents “average” income as a range based on where you live. This range is marked by a lower number (30% of incomes) at the beginning and the higher number (80% of incomes) at the top.

This “average” income varies substantially between different rural areas from A$78,548 – A$163,265 in Forrest (ACT) to A$10,507 – A$26,431 in Thamarrurr (NT). This is actually an equivalised household income which factors in the economic resources like the number of people and their characteristics, between households.

The difference between the top and bottom of this range of “average” household income also shows greater inequality within areas.

Even within the greater Sydney metropolitan area, there’s significant differences in household income between areas. The average household equivalised income in Lavender Bay is around A$40,000 – A$95,000 higher than it is in Marayong.

The difference in income is marked, and there are other differences too. People in Marayong are on average younger than Lavendar Bay. Family size is smaller in Lavendar Bay. Over half of the Lavendar Bay residents hold university degrees, compared to a more skill-based workforce in Marayong.

Why there is no one “average” Australian

Cities offer access to myriad employment options. Industries associated with relatively high incomes are typically concentrated in cities to take advantage of global connections.

Sydney, Melbourne and Canberra are notable standouts based on household income. So if you live close to these major cities you’d be getting the most opportunities in terms of employment and income, given the you’re the right candidate.

But not everyone wants to live in the centre of cities. Housing, lifestyle and neighbourhood preferences also play a role in where we live, but are still influenced by income and proximity to such things as employment and family and friends.

Also, infrastructure which supports social and economic wellbeing is essential in communities, regardless of where we live.

What politicians should be talking about instead

Improving the different and unequal access across areas requires better internet connectivity and advances in the way we work. Policies around housing and family-friendly workplaces go some way to supporting Australians in work.

Any measures to redress inequalities require understanding the needs and wants of communities. Proposed planning to reconfigure the greater city of Sydney around population and socioeconomic infrastructure offers an example of a data-driven approach to planning. Whether the proposed reconfiguration of Sydney leads to improvements or greater segmentation will be revealed in practice.

Politicians rarely reflect the characteristics of the people they represent, particularly when we consider the remuneration, entitlements and perks of political office. The longer politicians are in office, and somewhat removed from the people they represent, the further they potentially become from gauging their electorate.

Yet politicians profess to know what the average Australians they represent needs and wants. They apply this to a range of things from service delivery to representation on political matters. And this is within reason.

But without current experience we struggle to see things from perspectives other than our own. Take for example the way some have come to label themselves outsiders from the social and political elite to advance their credibility with average Australians.

Bringing politicians in touch with the diversity of needs and wants of Australians starts with a self-check and recognition of individual bias (conscious or unconscious). This is the first step toward really understanding and connecting with Australians – be it in the “average” or otherwise.

Author: Liz Allen, Demographer, ANU Centre for Social Research and Methods, Australian National University

First Time Buyers Keep The Property Market Afloat – The Property Imperative Weekly – 9th Dec 2017

First Time Buyers are keeping the property ship afloat for now, but what are the consequences?

Welcome to the Property Imperative weekly to 9^th December 2017. Watch the video, or read the transcript.

In our weekly digest of property and finance news, we start this week with the latest housing lending finance from the ABS. The monthly flows show that owner occupied lending fell $23m compared with the previous month, down 0.15%, while investment lending flows fell 0.5%, down $60m in trend terms. Refinanced loans slipped 0.13% down $7.5 million. The proportion of loans excluding refinanced loans for investment purposes slipped from a recent high of 53.4% in January 2015, down to 44.6% (so investment property lending is far from dead!)

While overall lending was pretty flat, first time buyers lifted in response to the increased incentives in some states, by 4.5% in original terms to 10,061 new loans nationally. At a state level, FTB’s accounted for a 19% per cent share in Victoria and 13.7% in New South Wales, where in both states, a more favourable stamp duty regime and enhanced grants were introduced this year. But, other states showed a higher FTB share, with NT at 24.8%, WA at 24.6%, ACT at 20.1% and QLD 19.7%. SA stood at 13% and TAS at 13.3%. There was an upward shift in the relative numbers of first time buyers compared with other buyers (17.6% compared with 17.4% last month), still small beer compared with the record 31.4% in 2009. These are original numbers, so they move around each month. The number of first time buyer property investors slipped a little, using data from our household surveys, down 0.8% this past month. Together with the OO lift, total first time buyer participation has helped support the market.

The APRA Quarterly data to September 2017 shows that bank profitability rose 29.5% on 2016 and the return on equity was 12.3% compared with 9.9% last year. Loans grew 4.1%, thanks to mortgage growth, provisions were down although past due items were $14.3 billion as at 30 September 2017. This is an increase of $1.5 billion (11.8 per cent) on 30 September 2016. The major banks remain highly leveraged.

The property statistics showed that third party origination rose with origination to foreign banks sitting at 70% of new loans, mutuals around 20% and other banks around the 50% mark. Investment loan volumes have fallen, though major banks still have the largest relative share, above 30%. Mutuals are sitting around 10%. Interest only loans have fallen from around 40% in total value to 35%, but this represents a fall from around 30% of the loan count, to 27%. This reflects the higher average loan values for IO borrowers. The average loan balance for interest only loans currently stands at $347,000 against the average balance of $264,000. No surprise of course, as these loans do not contain any capital repayments (hence the inherent risks involved, especially in a falling market).

But there has been a spike in loans being approved outside serviceability, with major banks reporting 5% or so in September. This may well reflect a tightening of standard serviceability criteria and the wish to continue to grow their loan books. We discussed this on Perth 6PR Radio. So overall, we see the impact of regulatory intervention. The net impact is to slow lending momentum. As lenders tighten their lending standards, new borrowers will find their ability to access larger loans will diminish. But the loose standards we have had for several years will take up to a decade to work through, and with low income growth, high living costs and the risk of an interest rate rise, the risks in the system remain.

On the economic front, GDP from the ABS National Accounts was 0.6%. This was below the 0.7% expected. This gives an annual read of 2.3%, in trend terms, well short of the hoped for 3%+. Seasonally adjusted, growth was 2.8%. Business investment apart, this is a weak and concerning result. The terms of trade fell. GDP per capita and net disposable income per capita both fell, which highlights the basic problem the economy faces. The dollar fell on the news. Households savings also fell. No surprise then that according to the ABS, retail turnover remained stagnant in October. The trend estimate for Australian retail turnover fell 0.1 per cent in October 2017 following a relatively unchanged estimate (0.0 per cent) in September 2017. Compared to October 2016 the trend estimate rose 1.8 per cent. Trend estimates smooth the statistical noise.

So no surprise the RBA held the cash rate once again for the 16^th month in a row.

The latest BIS data on Debt Servicing ratios shows Australia is second highest after the Netherlands. We are above Norway and Denmark, and the trajectory continues higher. Further evidence that current regulatory settings in Australia are not correct. As the BIS said, such high debt is a significant structural risk to future prosperity. They published a special feature on household debt, in the December 2017 Quarterly Review. They call out the risks from high mortgage lending, high debt servicing ratios, and the risks to financial stability and economic growth. All themes we have already explored on the DFA Blog, but it is a well-argued summary. Also note Australia figures as a higher risk case study. They say Central banks are increasingly concerned that high household debt may pose a threat to macroeconomic and financial stability and highlighted some of the mechanisms through which household debt may threaten both. Australia is put in the “high and rising” category. The debt ratio now exceeds 120% in both Australia and Switzerland. Mortgages make up the lion’s share of debt. In Australia mortgage debt has risen from 86% of household debt in 2007 to 92% in 2017.

Basel III was finally agreed this week by the Central Bankers Banker – the Bank for International Settlements – many months later than expected and somewhat watered down. Banks will have to 2022 to adopt the new more complex framework, though APRA said that in Australia, they will be releasing a paper in the new year, and banks here should be planning to become “unquestionably strong” by 1 January 2020. We note that banks using standard capital weights will need to add different risk weights for loans depending on their loan to value ratio, advanced banks will have some floors raised, and investor category mortgages (now redefined as loans secured again income generating property) will need higher weights. Net, net, there will be two effects. Overall capital will probably lift a little, and the gap between banks on the standard and internal methods narrowed. Those caught transitioning from standard to advanced will need to think carefully about the impact. This if anything will put some upwards pressure on mortgage rates.

The Treasury issues a report “Analysis of Wages Growth” which paints a gloomy story. Wage growth, they say, is low, across all regions and sectors of the economy, subdued wage growth has been experienced by the majority of employees, regardless of income or occupation, and this mirrors similar developments in other developed western economies. Whilst the underlying causes are far from clear, it looks like a set of structural issues are driving this outcome, which means we probably cannot expect a return to “more normal” conditions anytime some. This despite Treasury forecasts of higher wage growth later (in line with many other countries). We think this has profound implications for economic growth, tax take, household finances and even mortgage underwriting standards, which all need to be adjusted to this low income growth world.

Mortgage Underwriting standards are very much in focus, and rightly, given flat income growth. There was a good piece on this from Sam Richardson at Mortgage Professional Australia which featured DFA. He said that over four days in late September two major banks added extra checks to an already-extensive application process. ANZ introduced a Customer Interview Guide requiring brokers to ask questions about everything from a customer’s Netflix subscription to whether they were planning to start a family. Three days later CBA introduced a simulator that would show interest-only borrowers how their repayments would change and affect their lifestyle. Customers would be required to fill in an ‘acknowledgement form’ to proceed with an interest-only application.

Getting good information from customers is hard work, not least because as we point out, only half of households have formal budgeting. So, when complete the mortgage application, households may be stating their financial position to the best of their ability, or they may be elaborating to help get the loan. It is hard to know. Certainly banks are looking for more evidence now, which is a good thing, but this may make the loan underwriting processes longer and harder. Improvements in technology could improve underwriting standards for banks while pre-populating interactive application forms for consumers and offering time-saving solutions to brokers and Open Banking may help, but while Applications can be made easier, this does not necessarily mean shorter.

More data this week on households, with a survey showing Australians have become more cautious of interest only loans with online panel research revealing that 46 per cent of Australians are Adamant Decliners of interest-only home loans according to research from the Gateway Credit Union. In addition, a further quarter of respondents are Resistant Approvers, acknowledging the benefits of interest-only loans yet choosing not to utilise them. Of the generations, Baby Boomers are most likely to be Adamant Decliners and therefore, less likely to use interest-only products. While Gen Y are most likely to be Enthusiastic Users.

Banks continue to offer attractive rates for new home loans, seeking to pull borrows from competitors. Westpac for example, announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans. Rates for both new fixed rate loans and variable rate loans were reduced. For example, the bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

The RBA released their latest Bulletin and it contained an interesting section on Housing Accessibility For First Time Buyers. They suggest that in many centers, new buyers are able to access the market, thanks to the current low interest rates. But the barriers are significantly higher in Melbourne, Sydney and Perth. They also highlight that FHBs (generally being the most financially constrained buyers) are not always able to increase their loan size in response to lower interest rates because of lenders’ policies. Indeed, the average FHB loan size has been little changed over recent years while the gap between repeat buyers and FHBs’ average loan sizes has widened. They also showed that in aggregate, rents have grown broadly in line with household incomes, although rent-to-income ratios suggest housing costs for lower-income households have increased over the past decade.

Housing affordability has improved somewhat across all states and territories, allowing for a large increase in the number of loans to first-home buyers, according to the September quarter edition of the Adelaide Bank/REIA Housing Affordability Report. The report showed the proportion of median family income required to meet average loan repayments decreased by 1.2 percentage points over the quarter to 30.3 per cent. The result was decrease of 0.6 percentage points compared with the same quarter in 2016. However, Housing affordability is still a major issue in Sydney and Melbourne they said. In addition, over the quarter, the proportion of median family income required to meet rent payments increased by 0.3 percentage points to 24.6 per cent.

Our own Financial Confidence Index for November fell to 96.1, which is below the 100 neutral metric, down from 96.9 in October 2017. This is the sixth month in succession the index has been below the neutral point. Owner Occupied households are the most positive, scoring 102, whilst those with investment property are at 94.3, as they react to higher mortgage repayments (rate rises and switching from interest only mortgages), while rental yields fall, and capital growth is stalling – especially in Sydney. Households who are not holding property – our Property Inactive segment – will be renting or living with friends or family, and they scored 81.2. So those with property are still more positive overall. Looking at the FCI score card, job security is on the improve, reflecting rising employment participation, and the lower unemployment rate. Around 20% of households feel less secure, especially those with multiple part time jobs. Savings are being depleted to fill the gap between income and expenditure – as we see in the falling savings ratio. As a result, nearly 40% of households are less comfortable with the amount they are saving. This is reinforced by the lower returns on deposit accounts as banks seek to protect margins. More households are uncomfortable with the amount of debt they hold with 40% of households concerned. The pressure of higher interest rates on loans, tighter lending conditions, and low income growth all adds to the discomfort. More households reported their real incomes had fallen in the past year, with 50% seeing a fall, while 40% see no change. Only those on very high incomes reported real income growth.

Finally, we also released the November mortgage stress and default analysis update. You can watch our video counting down the most stressed postcodes in the country. But in summary, across Australia, more than 913,000 households are estimated to be now in mortgage stress (last month 910,000) and more than 21,000 of these in severe stress, the same as last month. Stress is sitting on a high plateau. This equates to 29.4% of households. We see continued default pressure building in Western Australia, as well as among more affluent household, beyond the traditional mortgage belts across the country. Stress eased a little in Queensland, thanks to better employment prospects. We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points.

So, the housing market is being supported by first time buyers seeking to gain a foothold in the market, but despite record low interest rates, and special offer attractor rates, many will be committing a large share of their income to repay the mortgage, at a time when income growth looks like it will remain static, costs of living are rising, and mortgage rates will rise at some point. All the recent data suggests that underwriting standards are still pretty loose, and household debt overall is still climbing. This still looks like a high risk recipe, and we think households should do their own financial assessments if they are considering buying at the moment – for home prices are likely to slide, and the affordability equation may well be worse than expected. Just because a lender is willing to offer a large mortgage, do not take this a confirmation of your ability to repay. The reality is much more complex than that. Getting mortgage underwriting standards calibrated right has perhaps never been more important than in the current environment!

And that’s the Property Imperative to 9^th December 2017. If you found this useful, do leave a comment, sign up to receive future research and check back next week for the latest update. Many thanks for taking the time to watch.

First Time Buyers Keep The Property Ship Afloat [For Now]

The ABS released their housing finance data to October 2017 yesterday.

Overall lending was pretty flat, but first time buyers lifted in response to the increased incentives in some states, by 4.5% in original terms to 10,061 new loans nationally.

At a state level, FTB’s accounted for a 19% per cent share in Victoria and 13.7% in New South Wales, where in both states, more favourable stamp duty regime and enhanced grants were introduced this year. But, other states showed a higher FTB share, with NT at 24.8%, WA at 24.6%, ACT at 20.1% and QLD 19.7%. SA stood at 13% and TAS at 13.3%.

There was a shift upward shift in the relative numbers of first time buyers compared with other buyers (17.6% compared with 17.4% last month) , still small beer compared with the record 31.4% in 2009. These are original numbers, so they move around each month.

The number of first time buyer property investors slipped a little, using data from our household surveys, down 0.8% this past month. Together with the OO lift, but total first time buyer participation has helped support the market.

Looking across the data, the trend estimate for the total value of dwelling finance commitments excluding alterations and additions fell 0.3%. Owner occupied housing commitments fell 0.1% and investment housing commitments fell 0.5%. However, in seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 0.6%.

The monthly flows show that owner occupied lending fell $23m compared with the previous month, down 0.15%, while investment lending flows fell 0.5%, down $60m in trend terms. Refinanced loans slipped 0.13% down $7.5 million. The proportion of loans excluding refinanced loans for investment purposes slipped from a recent high of 53.4% in January 2015, down to 44.6% (so investment property lending is far from dead!)

Here is the breakout by category.

We see that from a trend monthly perspective, only secured finance for owner occupied purchase of new dwellings, and construction for rent rose.

In trend terms, the number of commitments for the purchase of new dwellings rose 1.0% and the number of commitments for the purchase of established dwellings rose 0.3% while the number of commitments for the construction of dwellings fell 0.5%.

The stock data shows the value of all loans rose 0.49% or $7.8 billion (still an annual equivalent rate of three times income or inflation). Investor stock was 34.5% of all loans, slightly down from last month, but still a substantial proportion of the total.

The stock data (in original terms) showed a 0.67% rise in owner occupied loans worth around $7.1 billion and investor loans rose by 0.14% of $764 million.

So, overall the market is being supported by first time buyers, and some refinancing, reflecting the attractor rates currently on offer and recent incentives. But the fact is overall housing debts are rising, creating problems later as household debt rises, relative to income.

Worth also highlighting that many will not see their property lift in value, if the trends in Sydney continue and spread. So many first time buyers are coming in close to the top and when wages are static. So it is important to allow sufficient capacity to handle these risks and that underwriting standards are adjusted accordingly. Trends here continue to mirror events in the USA in 2005/6. Caveat Emptor!