Up-Traders – Digital Finance Analytics (DFA) Blog

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.

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.