Down-Traders – Digital Finance Analytics (DFA) Blog

The Downsizers Dilemma…

There are more than one million households who are considering Downsizing over the next couple of years. But in the current environment where prices were driven higher by loose lending, low rates and Government policy over the past couple of years – but this has now started to unwind, with significant falls, along with lower supply.

So the issue for Downsizers is trying to sell quick (and accept a lower price) to crystalize past gains or wait it out. And there are also some tax effective options relating to superannuation which need to be part of a plan.

Given the complexity, Downsizers need to ensure they get the best advice.

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The Trading Up and Trading Down Imbalance

Just rounding out our analysis of households and their property buying inventions, having looked at investors and first time buyers we now turn to those seeking to trade up (sell their current property and buy bigger) and those trading down (sell their current property and buy smaller).

Those trading up are driven by expectations of greater capital growth (42%), for more space, 27%, life-style change (14%) and job change (11%).

Those seeking to trade down are driven by the desire to release capital for retirement (37%), to move to a place which is more convenient (either location, or for easier maintenance) (31%), or a desire to switch to, or invest in an investment property (18%).

In the past we saw a relative balance between those seeking to trade up and those seeking to trade down, but this is now changing.

Intention to transact, highlights that relatively more down traders are expecting to transact in the next year, compared with up traders.

Given that there around 1.2 million Down Traders and around 800,000 Up Traders, we think there will be more seeking to sell, than buyers able to buy. As a result, this will provide a further drag on future price growth, especially in the middle and upper segments of the markets, where first time buyers are less likely to transact. This simple demand/supply curve provides another reason why prices may soon pass their peaks. Up Traders have more reason to delay, while Down Traders are seeking to extract capital, and as a result they have more of a burning platform.

This analysis will be taken further in the next edition of the Property Imperative, due out in a month or so. Meantime, you can still get the April 2017 edition.

Why older Australians don’t downsize and the limits to what the government can do about it

From The Conversation.

Encouraging senior Australians to downsize their homes is one of the more popular ideas to make housing more affordable. The trouble is, incentives for downsizing would hit the budget, but make little difference to housing affordability.

It sounds good: new incentives would encourage seniors to move to housing that better suits their needs, while freeing up equity for their retirement and larger homes for younger families.

But the reality is different. Research shows most seniors are emotionally attached to their home and neighbourhood and don’t want to downsize.

When people do downsize, financial incentives are generally not the big things on their minds. And so most of the budget’s financial incentives will go to those who were going to downsize anyway.

Financial barriers to downsizing

There are three financial hurdles to downsizing. Downsizers risk losing some or all of their Age Pension, because the family home is exempt from the pension assets test, but any home equity unlocked by downsizing is not.

Downsizers also have to stump up the stamp duty on any new home they buy. For a senior purchasing the median-priced home in Sydney that’s now A$32,000. Finally earnings from the cash released are taxed, whereas capital gains on the home are not.

The Turnbull government has flagged the possibility of financial incentives in next week’s federal budget for superannuants and pensioners to downsize their home.

One proposal would exempt downsizers from the A$1.6 million cap on super balances eligible for tax-free earnings in retirement, or from the A$100,000 annual cap on post-tax contributions. But this would benefit only the very wealthiest retirees – just 60,000 retirees have super fund balances exceeding A$1.6 million.

More seniors would benefit from a proposal to exempt them from stamp duty when purchasing a smaller home. And many would benefit from a Property Council proposal to quarantine some portion of the proceeds from the pension assets test for up to a decade.

The trouble with all these proposals is that they would hit the budget – because everyone who downsized would get the benefits – but they would not encourage many more seniors to downsize.

Staying – or downsizing – is seldom about the money

Research shows that for two-thirds of older Australians, the desire to “age in place” is the most important reason for not selling the family home. Often they stay put because they can’t find suitable housing in the same local area.

In established suburbs where many seniors live, there are relatively few smaller dwellings because planning laws restrict subdivision. And even if the new house is next door, there’s an emotional cost to leaving a long-standing home, and to packing and moving.

And so, few older Australians downsize their home. According to the Productivity Commission, about 20% aged 60 or over have sold their home and purchased a less expensive one since turning 50. Another 15% have “strong intentions” to do so in the future.

When older Australians do downsize, their decision is dominated by non-financial considerations, such as a preference for a different style of house and living, a concern that it is getting too hard to maintain the house and garden, or the loss of a partner.

These emotional factors typically dwarf financial considerations. According to surveys, no more than 15% of downsizers are motivated by financial gain. Stamp duty costs were a barrier for only about 5% of those thinking of downsizing. Only 1% of seniors listed the impact on their pension as their main reason for not downsizing.

There are better and cheaper ways to encourage seniors to downsize

If governments do want to use financial incentives to encourage downsizing, budget sticks would be cheaper and fairer than budget carrots. Even if they have little effect on downsizing rates, at least they would contribute to much-needed budget repair and economic growth.

The federal government should include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage a few more seniors to downsize. More importantly, it would make pension arrangements fairer, and contribute up to A$7 billion a year to the budget.

Asset-rich, income-poor retirees could continue to receive a full pension by borrowing against the value of the home until the house is sold. The federal government would then recover the cost from the proceeds of the sale. If well designed, this scheme would have almost no effect on retirees – instead it would primarily reduce inheritances.

State governments should abolish stamp duties on property, and replace them with a general property tax, as the ACT Government is doing. This would encourage downsizing, although only at the margins.

But the real policy justification is that it would help working age households to take a better job that’s only accessible by moving house, and so improve economic growth. It’s a big prize: a national shift from stamp duties to broad-based property taxes could add up to A$9 billion a year to the economy.

In short, the downsizing debate is a prime example of how governments prefer politically easy options with cosmetic appeal, but little real effect, on housing affordability. If they’re serious about making it easier for young Australians to buy a home, they will have to make tougher policy choices.

Authors: Brendan Coates, Fellow, Grattan Institute; John Daley, Chief Executive Officer, Grattan Institute

Budget may encourage downsizing with superannuation breaks

From The Real Estate Conversation.

The government is considering offering exemptions to new superannuation limits for retirees who downsize from their family home, according to reports.

The upcoming Federal Budget could contain measures that allow elderly Australians who sell the family home to be exempt from new superannuation caps, according to media reports.

A report in The Australian Financial Review is claiming that proceeds from the sale of the family home could be quarantined from both the $1.6 million cap on super retirement funds, and the non-concessional amount that can be contributed to super annually.

It’s widely expected that proceeds from the sale of the family home will not be excluded from the age pension assets test.

The anticipated policy is designed to tackle housing affordability problems by freeing up more housing stock on the market, in particular housing for families.

The Federal Budget, which will be handed down on 9 May, is widely expected to contain several measures aimed at tackling housing affordability.

Read the The Australian Financial Review article here (subscription only).

Trading Up and Trading Down

We finish our household survey update by looking at holders, up-traders and down-traders. Importantly, there are more households seeking to trade down compared with those trading up. You can read the full analysis in the Property Imperative 7, released today.

Holders – More than 780,000 households are holding property, with 81% owner occupied and 21% investment. 418,000 of these properties are owned outright and are mortgage free. Of these households 54% expect house prices to rise in the next year, but under 1% would consider using a mortgage broker because they are by definition not intending to transact in the next year (99%).

Up Traders – Our survey identified about 1,045,000 households who are considering buying a larger property. Most (92%) are owner occupied. Of these households 12% are expecting to transact within the next 12 months, whilst 56% of households expect house prices to rise in this period.

The main reasons for these households to transact are as a property investment (42% – up from 40% last year), to obtain more space (29% – down from 33% last year), because of a job move (12%) and for a life-style change (13%). Many of these households will require further finance (74% – up from 70% last year) and a quarter will consider using a mortgage broker (22%), whilst 35% of these households are actively saving to facilitate a transaction. We note that prospective future capital gains rated most strongly, the view of property as an investment continues to drive behaviour. The trend is getting stronger.

Down Traders – More than 1.2 million households are considering selling and buying a smaller property, up by 100,000 from last year. Of these 71% are considering an owner occupied property, and 29% an investment property. Of these 680,000 currently have no mortgage and own the property outright. Around 20% of these households expect house prices to rise over the next year, a consistently low figure compared with other segments, whilst 38% expect to transact within 12 months, 10% will consider using a mortgage broker and 8% will need to borrow more. Households will transact to facilitate increased convenience (31%), to release capital for retirement (33%), because of unemployment (2%) or because of illness or death of a spouse (10%).

We see a continued sense among down traders that an investment property is likely to be a factor in their ongoing wealth management strategy, especially given the saving crunch underway at the moment, with deposit rates falling, and the inherent quest for yield.

Trading Down Households Drive The Property Market

This is the final post in our series which updates the latest Digital Finance Analytics Household Surveys. This is data which will feed into the next edition of our flagship publication “The Property Imperative“. The March edition of which is still available on request.

Having looked at first time buyers and investors, today we look at households already owning a property. One important group are down-traders. This segment, of more than 1.2 million households have an existing owner occupied property. Many will have paid down their mortgage, and will have enjoyed significant capital gains in recent years. Now they want to sell, and buy something smaller, and sometimes also an investment property.

There are two key drivers. First, one third are driver by a desire for more convenient living (perhaps a smaller or no garden, or a move into an apartment, or somewhere with better public transport and services). Next we find one third transacting in connection with planning for retirement. Around 20 per cent are looking to switch their investments into property, whilst others are dealing with the death of a spouse or other factors. In total this group is a very significant influence on the market, with an appetite for quality apartments.

Next we look at up-traders. This is a significant, smaller, but important group, seeking to purchase a larger, and probably more expensive property. One third are driven by a desire for more space, but more – close to 45 per cent – are influenced by the prospect of capital appreciation, so a purchase is more an investment-related decision. Others are influenced by a life-style change, or a change in employment.

Then finally, we look at those seeking to refinance an existing loan. This is a large and significant group, which are being teased by ultra low rates and special offers. The most important reason to refinance is to reduce monthly payments, no surprise given flat income growth, and large loans. However, around 15 per cent are motivated by the opportunity to realise capital gains created by recent price growth. This flow of funds may go towards a holiday, building works, or other purchases, or to pay off other debts.

When we analyse the drive to refinance by loan size, we see that those with larger loans are more driven by cash release, whilst those with smaller loans are more concerned about reducing payments. We also note that brokers are more directly involved in the refinance of larger loans.

Typically, the refinanced loan will sit in the $250-500k range

Finally, we found that larger loans, even now, were more likely to be refinanced to interest only, rather than a principal and interest loan.

This concludes the latest updates. We will continue to run the surveys, and we expect to publish the next edition of The Property Imperative, with the latest results, in September or October this year.

Does Trading Down Trump Trading Up?

As we continue to look over the results of the latest household surveys, as captured in the recently released Property Imperative report to September 2015, we look at households who are wanted to trade up and trade down. These are important segments of the market because they have reason to transact, and access to funding if they decide to trade. In fact they tend to underpin the market, and the balance between the two tell us something about demand and supply, and also which sectors are more likely to be on the up.

So looking first at those seeking to trade up, our survey identified about 1,077,000 households who are considering buying a larger property. Most (91%) are owner occupied. Of these households 12% are expecting to transact within the next 12 months, whilst 64% of households expect house prices to rise in this period.

The main reasons for these households to transact are as a property investment (40%), to obtain more space (33%), because of a job move (12%) and for a life-style change (12%). Many of these households will require further finance (72%) and a quarter will consider using a mortgage broker (22%), whilst 33% of these households are actively saving to facilitate a transaction. We note that prospective future capital gains rated most strongly, the view of property as an investment continues to drive behaviour. We also note that the majority of up-traders are seeking houses rather than apartments. Given the focus on owner occupied finance now, lenders and brokers would do well to consider their strategies to assist this market segment.

Turning to down-traders, more than 1.25 million households are considering selling and buying a smaller property. These households tend to be older, and with higher net worth. Of these 71% are considering an owner occupied property, and 29% an investment property. Of these 670,000 currently have no mortgage and own the property outright. Many will not need bank finance to transact. Some however may seek investment finance.

Around 24% of these households expect house prices to rise over the next year, whilst 51% expect to transact within 12 months, 9% will consider using a mortgage broker and 9% will need to borrow more. Households will transact to facilitate increased convenience (30%), to release capital for retirement (28%), because of unemployment (7%) or because of illness or death of a spouse (9%). Down traders tend to be seeking smaller more convenient property, are more likely to go for an apartment with good access to central facilities, such as shops and healthcare, and some may, as part of a wealth management strategy be seeking to release capital (as they have seen significant upside in recent times) and opt for an investment property (sometime with negative gearing).

But, if we put these two segments together, there are about 765,000 households looking to trade in the next year. Of these, nearly 80% are down traders. We think this will have an impact on the supply and demand footprint in the market, with smaller property being supported by the high number of down traders, and poor supply, whilst those with larger places, and wanting to sell may find a lack of buyers and a saturated market, so price differentials will moderate, with continue growth in the middle market, but more sluggish growth, or even a fall at the top end. This could well also distort prices in specific geographic areas. In other words, down traders may have to give a little on the price they get to sell their current place, and pay more for their next property, because of the higher level of demand. Up-traders will find good supply of property if they choose to transact, and will be able to negotiate hard on price.

Next time we look at the investment sector.

DFA Video Blog On Why Savers Are Getting Crunched

Savers are seeing deposit rates falling according to our household surveys. This short video explains why, and which households in particular are most impacted.

There is bad news for those households with bank deposits. We have already seem a range of deposit repricing initiates by the banks, as they trim their deposit rates. But it is likely to get worst, as international sources of funding get cheaper, and changes to capital requirements are likely to translate to further rate cuts for savers down the track.

We see that Down-Traders hold the largest relative share of savings, up from 32% last year to 38% this year. All other segments are at the same relative values as last year, or at lower levels. This highlights that people looking to sell and move to smaller properties are hold the most significant savings.

In this analysis, savings includes balances in current accounts, call and term deposit accounts, and other liquid savings vehicles, but excludes property, shares are superannuation.

Looking at savings intentions, we see that Down-Traders are expecting to save more next year (55%), and only 5% are expecting to be savings smaller amounts. Investors, Portfolio Investors and Refinancers are more likely to be saving less next year. Want to Buys and First Time Buyers are also quite likely to do the same next year.

There will be a realignment of savings vehicles, thanks to the low bank deposit rates, many savers are looking at shares or property as an alternative. Actually this is introducing more risks into savings portfolios, something which the RBA seems quite happy about. As Glenn Stevens said in his opening remarks to the House of Representatives Standing Committee on Economics last year “The returns to savers for holding safe assets have commensurately declined, and this has clearly prompted substitution towards other assets, including equities and dwellings”.

Our survey suggests that households who are in savings mode will continue to save, and actually lower interest may well encourage even greater saving. Low interest rates are not a path to stimulate spending in the current environment for many.

Finally, I think we see significant inter-generational issues in play. Some say it has always been this way, but the relative wealth distribution seems more skewed in 2014, thanks to rising property values, significant savings by some, and significant borrowing by others.

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!