Household Decisions – Digital Finance Analytics (DFA) Blog

The Investment Property Honeypots

We have just finished updating our household surveys, and over the next few days we will be running through some of the key findings which in due course will flow into the next edition of the Property Imperative.

We start with an observation which, is at one level completely logical, yet at another level is surprising. We have been asking prospective property investors whether they are planning to purchase in the next twelve months, as usual. There is still strong appetite, thanks to strong returns, tax incentives and low interest rates. However, we have also asked about which state they were expecting to purchase in, and we have found some significant variations across the states. We conclude that NSW and VIC are investment property honeypots, attracting both local and interstate interest, especially from WA. Another reason why prices are on the rise here.

The first chart shows the relative proportion of property investors in each state, who expect to purchase in their home state. Almost all NSW based investors are expecting to buy in NSW, and those in VIC, mainly in VIC. But there are more residents in QLD, SA, ACT and WA who are expecting to buy interstate than in their home states.

We then asked those considering interstate transactions, to identify their likely target state. In NSW, the small number considering interstate investment picked VIC, whilst residents in VIC going interstate will pick NSW. Across the other states, the majority of those seeking investments interstate will pick NSW, or second VIC. A smaller number would also select ACT. These three states captured the bulk of the interstate attention.

Finally, we asked about the drivers of this decision. The prime driver related to increased capital returns, a larger property market, lending criteria and rental returns.

So, we can conclude that demand in NSW and VIC for investment property is heightened by interested interstate investors who are attracted by the higher returns in these two states. Further evidence of the two speed housing market.

Demand For Property Roars Back To Life

The results from the just updated Digital Finance Analytics Household Surveys shows that after a few wobbly months, demand for property has strengthened. The latest results supplement those found in the Property Imperative Report, which is still available on request. According to the results, lower interest rates, the removal of the negative gearing “risk”, no budget changes, and lower returns from alternative investments all lead to the same conclusion – buy property. We also note that property price rise expectations have risen for some. Over the next few days we will discuss our segment specific findings – looking especially at investors and first time buyers. Today, however we summarise the main trends.

In response to the question, are you expecting to transact in the next 12 months, we see a larger proportion of investors and refinancers expect to be active. Solo investors showed the largest movement compared with the February 2016 data.

More than half of households expect property prices to continue to rise in the next 12 months. Uptraders increased their expectations, compared with February, others were a little less bullish. But a fair degree of optimism reigns.

Looking at borrowing requirements, we see that demand for more credit remains strong – the 7% growth rate in credit will likely continue. Demand is strongest among investors, but we also see a spike in the refinance sector. This is driven by finance availability, lower and discounted rates and capital extraction.

First time buyers are saving the hardest, but uptraders also saving.

Looking at the barriers to purchase, we see that the availability of finance is now impacting more than 12% of households wishing to transact. This reflects tighter underwriting criteria now in play. Fear of unemployment has fallen as a factor, whilst the expectation of future rate rises has diminished significantly. High prices are still a significant factor.

Finally in this overview, we see that the propensity to use a mortgage brokers remains strong among investors, refinancers and first time buyers.

Next time we will look in more detail at our segment specific analysis. You can read about our segmentation methodology here.

Our Latest Survey Shows Property Siren Still Sounding Loud

The latest results from the Digital Finance Analytic Household Surveys are in, and demand has recovered somewhat after the wobble late last year. Worth also remembering that Sirens were dangerous yet beautiful creatures, who lured nearby sailors with their enchanting music and voices to shipwreck on the rocky coast of their island! Over the next few days we will present the summary results, using our household segmentation, and examine why property remains so alluring despite being in bubble territory.

By way of background, we are using data from our rolling 26,000 household data set, the most recent data is up to 20th February 2016, so this captures the state of play after the recent stock market and resource sector ructions. Today we will overview some of the main cross-segment data, and in later posts dive into more detailed analysis of specific segment behaviour. These results will then flow into the next edition of the Property Imperative – the last edition is still available from September 2015, and the new edition will be out in March.

We start with transaction intentions. The most significant move is the rise in those expecting to refinance their existing mortgage, from 29% last time to 34% now. This despite record refinance volumes which have already been written. We found that many households were reacting to the strong discounts available for existing borrowers, especially with loan-to-value ratios below 80%. Three quarters of these households will use a broker, so no surprise we see brokers volumes on the rise. First time buyers are still in the market, from 8.2% to 8.9% this time. Property investors, whether holding a portfolio of properties, or just one, are still in the market, despite the rise in interest rates for investment loans, and tighter lending criteria. Portfolio investors moved form 63% to 64% this time, whilst solo investors moved from 37% to 38%. Up traders and down traders are a little less inclined to transact, whilst those wanting to buy, but who cannot, remain on the sidelines.

House price rise expectations are still quite strong, though lower than at their peak last year. More than half of property investors still think the market will go higher in the next 12 months. Down traders are the least optimistic with only 20% expecting further price hikes. First time buyers are still bullish, with 53% expecting a rise, though a fall from 67% last year.

Savings behaviour has not changed that much, with first time buyers still saving the hardest. Some of those wanting to buy are also saving, but it continues to sit at around 20%.

Of note is the significant rise in households who say that availability of finance is now a barrier to transacting, with nearly 10% saying finding a loan is now a problem compared with just 1.5% last year. Of course house prices remains high, so 43% say this is a barrier to transacting, down from 49% last year. On the other hand, unemployment fears are down compared with last year, down from 15% to 11%.

Prospective purchasers are still looking for finance, with investors and first time buyers seeking to borrow more. Around 15% of those refinancing will look to increase the size of their loan, which explains some of the ongoing loan portfolio growth noted in recent statistics.

Finally, in this over view, we note the importance of mortgage brokers as noted in the recent APRA data, with first time buyers and those seeking to refinance the most likely to consult a broker. Investors are also still broker aligned, especially portfolio investors.

So, the expectations are for ongoing demand for property still to be strong, and refinance volumes will remain elevated. Banks are competing hard to offer deep discounts for owner occupied loans. Next time we will look in more detail at first time buyers, and then those seeking to refinance.

Households Still Want Property, But Its Becoming More Challenging

Contained in the latest edition of the Property Imperative, released today is an update on households and their attitude towards property. Over the next few days we will post some specific findings from the report. Today we look at aggregate demand.

To understand the current dynamics of the residential housing market we need to examine the behaviours of different household segments, because generic averaging across these diverse segments hides important differences. There are about 8.98 million households in Australia , and using analysis from the Australian Bureau of Statistics, and our own survey, we have segmented these households looking specifically at their property owning behaviour.

First we split the households into those which are property inactive, and those who are property active. Property inactive households were defined as those who currently rent, live with parents, or are homeless, with no plans to enter the market.

Property active households are those who own, or actively desire to own property, either as an owner occupier, or as an investor, and either own the property outright, have a mortgage or are actively looking. The analysis shows that about 26.1% percent of households are property inactive, which equates to about 2.35 million households. Examining past data, and applying the same analysis, we discovered that even correcting for population growth and migration, the property inactive proportion of the household population has been steadily increasing.

A similar fall in home ownership rates have been confirmed by others and it is suggested that the main reason for this trend is that house prices have simply grown faster than average incomes, thus making it harder to buy into the market.

This signals an important underlying social issue, and is not being adequately addressed. Actually, we are seeing more households becoming tenants of the growing band of property investors, whilst many younger Australians are unable to buy for themselves, or are becoming property investors first. We note that in New Zealand, the Reserve Bank is consulting on changing the capital ratios for investment loans.

However, we will focus our attention on the property active household segments. To assist in our analysis we have segmented the property active segments by motivation and type. Below we outline our segments, and how they are defined.

Want-to-Buys Household s who want to buy a property, are saving, but have not yet committed
First Timers Households who are buying, or have bought for the first time
Refinancers Households who are restructuring their finances, but not moving house
Holders Households with no plans to move or refinance
Up-Traders Households looking to buy a larger place
Down-Traders Households looking to buy a smaller place
Solo Investors Households with a single investment property
Portfolio Investors Households with a portfolio of investment property

In our survey, we also mapped these segments across owner occupied and investment property types. The chart below shows the current number of households by segment distribution, as at September 2015 .

In our surveys, we looked across a number of dimensions, within the segments. This included whether they were actively saving to buy, intending to transact, borrowing needs and house price expectations. We will outline findings from each of these.
Portfolio Investors are more likely to transact in the next 12 months (over 77%), then solo investors (43%), then down traders (47%) and refinancers (23%). First time buyers (9%) and want to buys were least likely to transact (9%). Overall demand for property is still very strong, but headwinds are slowing momentum.

That said, first time buyers are saving the hardest (72%), although want to buys (21%) and up traders (32%) are also saving.

Turning to borrowing expectations, portfolio investors are most likely to borrow more (87%), up traders (73%), first time buyers (60%) and sole investors (51%) are also in the market.

Most segments are bullish on house prices over the next 12 months, with down traders being the least excited (24%). Investors have the strongest view of potential future growth, whilst the trends across other segments suggests a weakening of expectation, at the margin.

Some segments are more likely to use a mortgage broker than others, with refinancers mostly likely to (75%), then first time buyers (55%) then investors (36%).

One of the interesting aspects of the research is how consumers select a lender. More than ever, households do initial research online, using comparison sites, or social media before making a choice, either via a broker (who are doing well just now ), or direct with lenders. However these traditional business models are now at significant risk from digital disruption. The key selection criteria is price, price and then price. Below is segmented data, showing the relative importance of price, brand, flexibility, loyalty and trust. Apart for holders, who are not in the market currently, on average 80% of purchasers will make their final decision on the price of the deal. Brand is largely irrelevant.

The average new loan has grown again, to over $428,000 for a NSW non-first time buyer, according to the ABS data to July 2015 . The growth in loan size is running more slowly than house price growth (circa 13% in NSW), but significantly above average income growth.

About 10% of loans have a fixed rate (thanks to the current low RBA cash rate and expectation of lower rates to come).

The proportion of interest only loans written continues to grow, according to APRA data. The latest data to June 2015 indicates that more than 40% of new loans are interest only.

Next time we will look in more detail at some of the segment specific data.

Refinancing Will Be The Next Big Thing

As the banks dial back investor lending to meet the speed limit set by APRA, owner occupied loans are becoming the focus. Within that, we are already seeing very attractive refinance deals – including low rates and cash backs. One lender has announced a 4.19% home loan variable rate for owner occupiers, with an LVR 80-85% LMI refund offer for new owner occupier home loans and $2000 cashback for owner occupiers purchasing or refinancing their own home.

We think refinancing, will become the centre of attention, so the latest findings from our household surveys include detailed analysis of the dynamics of refinancing households. There are around 535,000 owner occupied households in our refinance segment, plus 134,000 who are investors, and 3,300 who have property in a SMSF account. This is a significant number. The latest monthly transaction data from the ABS shows a lift in refinancing, and we think this will continue as investment lending tightens.

Trend-Lending-Flows-May-2015

First we look at underlying drivers. The most significant reason to consider a refinance is to reduce monthly repayments with 40% of households considering refinance looking for lower rates. The recent rate reductions for such deals will help stoke the market. We also see a rise in those looking to refinance to facilitate withdrawing capital thanks to recent house price gains. The capital is being used for a range of activities, including paying off credit card debt, paying for renovations, a holiday, or a wedding. For many, this makes economic sense, as interest rates on a mortgage are lower than short-term finance. However, it lifts the LVR and raises household debt, not necessarily without risk. Some will fix a rate, but more are thinking rates may go lower yet, so are preferring to go for a variable rate. Not a bad call in the current conditions.

Looking at the refinance drives across the loan value, we see that those with the largest loans are most likely to release capital, and those with loans between $250-500k most likely to seek to reduce monthly payments, and also will reset a fixed term loan.

Larger loans are more likely to be refinanced to interest only, whereas smaller loans are more likely to be principal and interest refinancing,

Finally, those seeking to refinance are most likely of any segment to use a broker in the transaction. So brokers need to be honing their refinancing discussion (having spend the last few months focussing on the investment sector).

Older Households More At Risk In Housing Downturn

Just released is a Canadian Economic Analysis Department working paper “On the Welfare Cost of Rare Housing Disasters“, which shows that in a significant housing downturn the welfare costs are large and this risk varies considerably across age groups, with a welfare cost as high as 10 percent of annual nonhousing consumption for the old, but near zero for the young. Given the risks to the housing sector in Australia at the moment, this is potentially important and applicable research.

Since the early 2000s, house prices have increased significantly in Canada.This ongoing housing boom has become an important consideration for the conduct of monetary policy and financial regulation, since currently high levels of house prices are potentially increasing the risk of a large housing market correction, which could have an adverse effect on the economy. This paper investigates the likelihood and magnitude of housing market disasters, and the value of limiting this disaster risk for the Canadian economy.

The study will be useful for both economic researchers and policy-makers to better understand the macroeconomic implications of this important market risk. This paper estimates the unconditional probability and the size of housing market disasters using the cross-country housing market experiences of twenty OECD countries.

I find that in a given OECD country, housing market disasters – defined as cumulative peak-to-trough declines in real house prices of 20 percent or more – occur with a probability of 3 percent every year, corresponding to about one disaster occurring every 34 years. A housing disaster on average lasts about 6.4 years, and house price declines range from 25 to 68 percent, with an average decline of 34 percent.

This paper quantifies the welfare impact of the housing disaster risk in an overlapping generations general equilibrium housing model. The analysis yields the following two main findings. First, despite their statistical rarity, the aggregate welfare cost of housing disasters is large, since Canadian households would willingly give up around 5 percent of their non-housing consumption each year to eliminate the housing disaster risk. The sizable welfare cost is due to the large wealth loss during the long-lasting recessions triggered by housing disasters. Second, the welfare evaluation of this risk varies considerably across age groups, with a welfare cost as high as 10 percent of annual nonhousing consumption for the old, but near zero for the young. This asymmetry stems from the fact that, compared to the old, younger households suffer less from house price declines in disaster periods, due to smaller holdings of housing assets, and benefit from being able to buy homes at the resulting lower house prices in normal periods.

The main findings from the model are twofold. First, despite their rarity, the aggregate welfare cost of housing disasters is large, since Canadian households would be willing to give up around 5 percent of their non-housing consumption each year to eliminate the housing disaster risk. Compared to the no-disaster economy, the presence of this disaster risk has two opposite welfare effects on households. On the one hand, due to a wealth effect, a realized housing disaster leads to a long-lasting economic recession. The loss in housing wealth once a disaster occurs reduces the aggregate household savings and thus the capital supply. As a consequence, the interest rate goes up and the firm cuts back its investment, leading to declines in wages, output and consumption. On the other hand, due to a substitution effect, a non-trivial disaster probability results in risk-averse householdsresource reallocation from the housing sector to the production sector in normal periods. This lowers both house prices and the interest rate, with declining borrowing costs leading to higher investment, output and consumption. However, due to diminishing marginal utility of consumption, the welfare gain from this resource reallocation in normal periods is dominated by the welfare loss from large recessions triggered by housing disasters, explaining why the society is willing to devote a sizable amount of resources to eliminating this disaster risk.

The second major finding is that the welfare evaluation of the housing disaster risk differs considerably in magnitude across age groups, with a welfare cost as high as 10 percent of annual non-housing consumption for the old, but near zero for the young. This asymmetry is mainly due to the hump-shaped prole of life-cycle housing consumption, with older households typically holding more housing assets than the young. In disaster periods, declines in house prices favor the young, who purchase houses at depressed prices, but hurt the old, who rely on house sales to finance non-housing consumption. In normal periods, younger households also benefit more than the old from purchasing houses at lower cost, thanks to the resource reallocation from the housing sector to the production sector as discussed above. Therefore, younger households are less averse to the presence of the housing disaster risk than the old.

Note: Bank of Canada working papers are theoretical or empirical works-in-progress on subjects in economics and finance. The views expressed in this paper are those of the author. No responsibility for them should be attributed to the Bank of Canada.

SMSF Property Investment Continues – DFA Survey

We updated our household surveys with the September data. Today we focus in on SMSF property transactions, which is a small, but rising factor in the market. We start by looking at the reason why trustees for SMSF’s are considering retail property. The strongest incentives are the tax efficient nature of the investment, and appreciating property values. Low rates also have part to play. I have excluded commercial property from the analysis.

We also asked where the trustees were getting advice from regarding retail property investment. Most interesting is a fall in advice from financial planners (maybe a reaction to FOFA, CBA etc?), and a rise in advice from real estate agents. Mortgage brokers also figure in the mix, alongside internet sources and own knowledge. We wonder how well qualified these sources are to provide the right advice, bearing in mind the long term nature of super.

Finally, we looked at changes in relative distribution of property in super funds, and of those who were investing in property (about 3% of all funds are investing in retail property, and another 3% are considering it). We see retail property making up quite a significant share of superannuation savings for some. The blue bar is last year, the orange bar is to September 2014.Others can decide if this a good or bad thing, but it does highlight the linkages between property and super, and demonstrates that if house prices fall, then some super funds will be impacted, just at the time house valves are also falling. The impact of the double whammy is potentially significant and concerning.

RBA Comments On Housing Have Impact – DFA Survey

We have updated our household surveys with the results for September. This forward-looking research revealed some significant changes in sentiment amongst households thinking of transacting, and many of these changes can be traced to recent comments made by the RBA in respect of investment housing. Our approach to household segmentation and our surveys is described in an earlier post. Today we will discuss some of the most important recent findings, which updates the results from our Property Imperative report.

So first we look at which segments are most likely to transact in the next 12 months. The changes over time are significant, with first time buyer ever less likely to purchase whilst investors, especially portfolio investors, more likely to buy. The impact of down-traders (remember there are more than one million households in this category) are also significant.

Demand for mortgage funding sits firmly with certain segments, especially investors, first time buyers and up-traders. Note that the bulk of down-traders do not need to borrow. This goes some way to explaining why house prices are moving faster than loan growth, and why investment loans are making up a large proportion of lending, especially in Sydney.

We found that first time buyers are still saving hard, though chasing ever higher prices, want-to-buys are saving less now, seeing the aspiration of owning a property evaporating fast.

We found that across the board, there was a little less certainty on house prices growth, though generally investors remain more bullish.

The want-to-buys find the biggest barrier relates to the high price of housing. No change here.

This barrier is also echoed in the first time buyer segment, with 50% seeing price as the main issue, the highest result in recent times.

Many refinancers will have now locked in at low rates, as the main reason is to reduce monthly outgoings. The proportion locking in at fixed rates is down a little.

We found that up-traders are still active, and there was an increase in those in this segment who are motivated by the prospect of capital appreciation, which is now running ahead, just, of buying to get more space. As shown above, the proportion of up-traders ready to transact is down a little.

Down-traders continue to seek to sell and buy smaller, driven by a quest to release capital for retirement, and for increased convenience. They were slightly more likely to incorporate an investment property in their strategy. We think the impact of down-traders on the market is understated by many observers, but the continuing release of capital from larger property, and buying smaller, plus investment, aligns with the growth in investment property demand, and yet lower rates of financing elsewhere.

Looking at investors, we see continued interest, driven by the tax-efficient nature of investment lending (a.k.a negative gearing, and SMSF investing). They remain confident about capital appreciation into the future, though less strongly than previously.

Finally, we looked at the potential barriers to investors, and we see a significant change. We ask about a range of barriers. One related to RBA warning, which this month have reach a new, high pitch. Investors are responding, and a proportion are concerned about potential regulatory changes. We also saw a tick up in the concerns about interest rates rising in coming months.

Overall then we still see demand strong, and focused in particular segments, especially investors and down-traders. However, the RBA warning are having an impact, even before they actually do anything to intervene further in the market. We do not believe that words alone will address the underlying systemic issues, but they can have a short term impact on sentiment, and may make some prospective purchasers think again – we therefore expect to see some small slowdown in coming weeks. That said, the market remains hot, and stoked by investors, and we believe there is a case for more direct intervention by the regulators. We also expect the RBA to keep up the verbal barrage.