Households Hold Mortgages For Longer

Last week when we published our mortgage industry report we had a number of requests for additional trend data. Specifically, is it true that more households are holding mortgages for longer and how does this align to age cohorts? So we ran some additional detailed analysis on our household survey data, looking at 2006, 2009 and 2013, and comparing the relative distribution by household age cohorts of mortgage holders, households without mortgages and renters. This is not straight forward because we needed to correct for population growth and distribution. But the results are in.

First, lets look at the 2013 results. As expected, younger households are more likely to have a mortgage, older households are more likely to be mortgage free, and renters are most evident in middle age. There is a natural run off as households age.


We then looked in detail at owners with a mortgage, over time.  The first observation is that mortgages are being taken out at a later age in 2013, compared with 2006, a greater proportion of households are holding a mortgage for longer, and this is true even into retirement.


We then looked at households who are mortgage free. Our analysis shows that households are now less likely to be mortgage free, and if they are they will be so later in life.


Finally we looked at renters. We see a greater proportion of households renting in 2013, and this is true across the age cohorts. Our survey results indicate that many of those aspiring to buy a property cannot get on the ladder because prices are too high relative to income, even with higher LVR loans more available now.


So, putting the analysis together, we see validation of the fact that, as previously observed, households are more in debt today, they are having to wait longer to get a mortgage, and will be saddled with it for longer, despite record low rates. Its fair to assume this is because prices have grown more strongly then income for many. The current housing model appears broken.

Glenn Stevens, RBA Governor in his statement on why the bank left rates at their lows said “The pace of borrowing has remained relatively subdued overall to date, though recently there have been signs of increased demand for finance by households. There is also continuing evidence of a shift in savers’ behaviour in response to declining returns on low-risk assets.”

There may indeed be some demand (though house prices are moving faster than credit growth) but our analysis indicates that there are worrying structural trends in amongst households, and that looking for growth from the housing sector is fraught with risk at current price levels.

High LVR’s: The Latest Data

Within APRA’s voluminous quarterly ADI data is information of the flow of new loans written by value, separated into LVR bands. With the caveat of course that this does not include non-bank lending, which is rising; it paints an interesting picture of the state of play. As I have said previously, higher LVR loans may not always be a problem, but we also know of a wider range of higher LVR deals, 120% of LVR is still the record. So its interesting to dig into the data. The trends are clear.

The first chart shows the value of new loans written above 80% and 90% LVR, by lender type. As you would expect, the major banks, other banks and overseas subsidiaries have the largest footprint, with a small amount coming from credit unions and building societies. Overall, higher LVR lending is growing.


But if you look at the trend in terms of the proportion of over 90% LVR loans approved as a share of all loans approved, you can see clearly that the majors have increased their share of high LVR loans, in substitution for the smaller banks and the overseas subsidies recently.


Another way to look at this picture is variation from the average. Here I look at the trend proportion, against the average for all banks. Major banks were below trend, but that is changing now.


Finally, here is a view of just the majors (important because they have such a large market share). It shows a significant rise in higher LVR lending in the past few months.


So, what to make of all this. Well, for me it illustrates the momentum in the market thanks to demand for higher LVR deals, being translated into the majors willing to lend at higher LVR in the right circumstances. Its also suggests that regional banks and overseas subsidiaries may have had a slight advantage for a period, but this is now being wiped away, thanks to recent changes by the majors. What we cannot tell is whether this reflects just a change in mix from the market, or a change in underwriting standards, or both. Which ever, we will watch the LVR mix closely, as higher LVR loans ultimately may be equated with higher portfolio risk if house prices were to experience a correction. Whilst that in the short term is unlikely, there could be escalated risks later.

My read on this is that the majors have relaxed their criteria in response to competitive pressure.

SME Lending Down, When it Should be Up

The latest monthly statistics from the Reserve Bank reveals that residential lending (owner occupied and investment) is now running at an annual growth rate of 5%. Commercial lending grew by over 1% in the last 12 months. However, from these figures, DFA has modelled lending growth in the diverse SME sector. Here lending has fallen in the last 12 months.

SME-Lending-1DFA maintains a rolling survey of 26,000 SME’s and we asked them about their funding needs. The highest priority is funding for working capital. Business expansion is the lowest funding priority, and the trend since 2009 is down.

SME-Lending-2We drilled into their need for working capital and discovered that the most significant cause was from the time taken for their customers to pay their bills. The trend shows business expansion has declined as a motivation for working capital. There were significant differences by state and industry, but I won’t cover that here.  Businesses are primarily in survival mode, rather than expansion mode.

SME-Lending-3From the survey work, however, I conclude that there is demand from SMEs which is currently not being adequately met. I suggest this is partly caused by tighter lending criteria and higher interest rates, both of which are being influenced by the current capital adequacy rules. These make bank lending to SMEs much less profitable than to residential lending before you start.

I would argue that the Basel capital rules need to be changed to make lending to the SME sector more attractive. Banks are being quite logical in their current preferences, but every dollar lent to a business can generate a growth return to the country, whereas lending for residential purposes just inflates house prices and bank balance sheets. So why not consider a change in the relative weight of capital? Whilst there is some local discretion available to APRA, it would be argued international agreement is required. However, some countries are not strictly following the Basel Accord, so perhaps we should consider changes to make SME lending more attractive to banks. This is important because as the mining investment phase peters out, it would much better to rely on growth from commercial businesses (and there are 3 million SME’s paying wages to 4.5 million households) rather than inflating already high house prices even higher through more  residential real estate lending. Without a change it is likely SME lending will continue to languish.

Monthly Banking Statistics from APRA

The Australian Prudential Regulation Authority (APRA) just released their monthly statistics for October 2013. This includes a summary by lending institutions (this excludes non-banks of course) of owner occupied and investment loans on book. Its a picture of the current balances, and DFA tracks the relative changes each month to see which players are achieving their ambition of above system growth. Another day I will discuss further the simple fact they cannot ALL grow above system, but that’s another story.

There are two interesting details in the data. First, looking at which lenders are active, its clear the big four continue to dominate. CBA have the largest balances, then WBC, nab and ANZ. Concentration is still close to 84% amongst these four players. ING leads the smaller players.

APRANov29_1But if you calculate the relative value of owner occupied and investment loans for each lender as a proportion of their book, HSBC, Westpac and Bank of Queensland have the largest footprint.

APRANov29_2The really interesting question is whether this is by accident or design, given the strong rise in investment house purchases recently. Are there different underwriting standards in play in these banks, or are they using different origination channels?  Will we see the other players increase their exposure to investment lending bearing in mind that interest only loans are on the rise? Definitely worth watching.

A UK Lesson for Australia?

Overnight the Bank of England announced the termination of their Funding for Lending (FLS) scheme, moving to direct assistance to the small and medium business sector. The FLS was a mechanism to give funding direct to the banks to enable them to lend to borrowers in an attempt to kick-start the housing market in the UK, which had languished for several years after the GFC. The effect of FLS has been to create momentum in the property sector, but it also drove down savings rates because banks did not need to use deposit funding for their loans. House prices have risen by an average 7% this year.

The Governor, Mark Carney is quoted as saying “Given the access to credit for households now … it would no longer be appropriate or necessary for us to have our foot on the accelerator. It’s better to shift into neutral.” They are clearly worried about a developing housing bubble.

The other UK initiative is Help to Buy, where the government essentially guarantees a top up loan to allow first time borrowers to get a larger mortgage. There has been significant demand for this deal and now there is debate about how long it will run for.

What I find most significant is the change in focus to the SME sector, where firms are finding it hard to get banks to lend to them. The Bank of England is looking to assist, because there is significant long term economics benefits if SMEs are firing.

As I have said previously, in Australia banks are preferring to lend for housing, rather than to support the SME sector.

The DFA SME survey showed that many SME businesses are unable to get the funding they need. Often they are required to provide ever greater information, or a personal guarantee, if they can get funding at all. There is a strong case to make that further assistance to the SME sector could create significant growth in Australia, growth which could replace the mining investment phase as it declines. There is however a capital disadvantage to banks to lend to SME compared with housing, thanks to changes to the Basel capital adequacy rules. Lending to the inflating housing sector is, for the banks easy money. Maybe the UK provides an object lesson for Australian regulators and policy makers!

The Fate of Australian Securitisers

I have had a number of requests to discuss the re-invigoration of securitisation as a factor in the current momentum of the property market. Securitisation is the mechanism by which parcels of loans are repacked into new securities, and sold to investors. Pre 2007, securitisation was one of the main mechanisms which enabled lenders to stretch their capital further, and property markets were supported globally by non-banks who funded their business using securitised liabilities. It was also one of the main triggers for the GFC, as banks and ratings agencies did not accurately appraise the risks in the financial structures of many deals.

Today the Australian Bureau of Statistics published their latest data on Australian Securitisers, to September 2013. DFA has analysed their data, and we conclude that securitisation may be a factor in the current environment, but its influence is not that significant. Since 2007, when the capital markets all but collapsed, the value of assets securitised, and instruments issued have fallen, and currently remains at about half their previous peak.

AssetSecLooking at the issuance pattern, securitisers overseas issuance is down, as are short term Australian transactions and placements. Long term issues were up slightly (up $3.2bn).

SecLiabThere is some demand for long term investments in Australia, (especially when RBA rates are so low), but I conclude that securitisation is only a bit part player in the current mortgage funding environment. Some of the non-banks are issuing paper directly or are being supported by other investors, and most banks have reshaped their portfolios to fund mortgages from deposits (up from around 30% pre GFC to 60% or more). The concept of building new securities by financial engineering is still attractive to the bankers, but potential investors are much more cautious these days.


The Truth about House Price and Income Growth

Data is often cited to show that on average, the ratio of debt to disposable income verses house prices track quite closely and so we are not in a house price bubble. However, the problem with averaging data is that in can mask important differences. DFA has completed analysis in the NSW market looking directly at the rise over time of house prices and comparing this with average disposable income growth across income bands. The net conclusion is that house prices are rising faster than average incomes. It shows that lower income groups have not enjoyed such strong growth when compared with the higher earning groups. Actually, the average disposable income in NSW since 2008 has only grown a little. This leads to the conclusion that the price income ratio have deteriorated. This in my mind suggests we should be concerned about the current house price momentum.

NSWIncomeandPriceNow, the debate has been on about whether we are in a house price bubble or not. Often a bubble is not recognized until price deflation corrects it. The classic bubble shape of the South Sea Bubble is often cited and is an interesting case study.

South Sea BubbleWe do not have the same rapid rise in house prices, so technically we may not be in a bubble. Actually what we have is worse, as it is long term systematic issue, with property absorbing an ever greater proportion of household income. This is both people saving for property and servicing debt. My earlier posts references the recent ABS study on this.

As the drive to own property in Australia remains strong, households will do what they can to get into the market, and this means directing more income to acquiring property, leaving less for other activities.  High and rising house prices are a bad thing for the broader economy as it blots up otherwise discretionary spending. Retail and other sectors are being negatively impacted by this need to spend.

But my main point is we need to move away from averaging statements, and dive into the detail to see what is really going on.

More Households Have More Debt Than Ever

The Australian Bureau of Statistics published an interesting report today, based on recent census data. The report “Perspectives on Regional Australia, Housing Arrangements – Homes Owned with a Mortgage in Local Government Areas, 2011″ does a deep dive on the Australian Housing landscape. I am interested in their analysis because the DFA market model used much of the same underlying data. We come to similar conclusions.

Using census data (2011) they looked at mortgage repayment data. This is the actual amount people are paying (either to simply service the debt, or to make capital reductions as well). Average housing costs were 18% of income (this included rates and water) but of course interest rates were higher than now and the average masks some very stark variations.

The proportion of households with a mortgage rose from 34.1% in 2006 to 34.9% in 2011, meaning that the total owning their property outright fell.  Whilst most states showed an increase in the proportion of dwellings owned with a mortgage, in 2011 the proportion of homes owned with a mortgage was highest in ACT (38.9%) and WA (37.8%).  The largest growth in repayments was in a number of WA areas, increasing from $1,213 in 2006 by 60.8% to $1,950 in 2011. New South Wales and Victoria had the slowest growth in median monthly mortgage repayments, with 31.4% and 35.6% respectively. These are all well above average household income growth in the same period.

The largest growth in average repayments was in WA is directly linked to high growth corridors in places like Serpentine-Jarrahdale, Wanneroo and Chittering. Similar high growth areas in Victoria were the fringe areas of Melton, Casey, Golden Plains and Wyndham. In comparison, many NT areas had very low rates of growth.

The average across Australia was $1,300. The average mortgage repayment in NSW was $1,517 a month and the lowest was in Tasmania at $867.  In contrast, the highest monthly repayments were in places like Woollahra ($3,250), Manley and Mosman in Sydney, followed by Cottesloe, Nedlands and Roebourne in WA.

My take-out is that as a nation we are more in hoc today than ever before, that this indebtedness is not equally spread across household segments or geographies, and whilst some can afford to make monthly repayments greater than the minimum required, others are not so lucky. With LVR’s on the rise and house prices rising, and with lending now motoring along at 5% growth p.a., we appear not be have taken the de-leveraging mantra of the post GFC world to heart. We are as a nation more in debt today than ever. Perhaps this is one reason why a retail recovery is so patchy, many households just do not have the cash to spend.

The chart below (fully attributed to the ABS) shows the map of Median Monthly Repayments by Local Government Area.



DFA 2013 Channel Preference Analysis – Are Bank Branches Obsolete?

The results from the DFA 2013 Channel Preference Research Program are just in. This program captures data from our 26,000 households over 12 months on their current and ideal channel preferences. This is segmented analysis, and we are already finding some strong themes emerging as we complete the data dive. The final report is some weeks away, but here is our initial take on what we are seeing.

First, we see that households are on average more connected than ever. The Young are connected for more than 100 hours each week, up 10% on the 2011 baseline, whereas Self-Funded Retirees have doubled their time online, to about 30 hours a week. We know what proportion of time is spend in social media sites (up), online media (well up) and other web sites (down).


We also looked at household preferences with respect to bank channels. Many segments are now rapidly moving online, and the young are leading the way. The way we show this is using the DFA proprietary Channel Preference Radar. We look at sales and service preferences by channel, and map these against the average. Our take-away is that bank branches are now obsolete for some of the most online and profitable segments. It is a challenge for banks and other financial institutions because the branch will increasingly become the ghetto of less profitable and older Australians.  This same digital migration is also having an impact in Mortgage Brokers and Financial Advisers. It seems to us that households are voting with their devices (mostly smart phones and tablets) and are way ahead of most of the industry in terms of migration. There are profound economic implications for the banks, and a potential impact on the high street, and on the customers of these financial institutions.


First Time Buyer Incentives Are Bad News

In the DFA Property Imperative Report we highlighted the fact that First Time Buyers (FTB) are having difficulty buying in some markets, especially NSW and VIC. In Tasmania, where FTB are still active, the Government there recently lifted the FTB grant to $30,000 (close to 10% of the average first home in TAS). We have looked at what happened when Labor lifted the grant as part of the post GFC stimulus, and the results are clear. There was a spike in new FTB sales, (close to 30% of all new loans at its peak) as buyers accelerated their plans to buy and take advantage of the deal. But prices lifted by the amount of the grant, or more, and there was no adjustment back after. First Time Buyer transactions had a small trickle down effect on households looking to trade-up, and this flowed into price increases up the market. The increase in transactions flowed stamp duty revenue to State Governments. We also know that about 30% of those FTB who entered leveraging the incentive scheme are still in financial difficulty, thanks to rising power, water and rates, and this despite a current record low RBA bank rate.

Our net conclusion is that a broad based FTB incentive scheme is bad for the market and for households. Those targeting only new builds are better, but new builds only make up a small proportion of the total, and these properties are often on the outskirts of Cities without good transport links to work places. The better option would be to take away barriers which exist on the supply side of property, especially on brown field sites. We need another 250-300,000 residential units nationally to meet current demand. Supply side strategies could lower prices in the process. However, as the most significant barriers relate to State Government charges for new development, there would be resistance to turning off this revenue supply anytime soon. I fear more Governments will look to expand FTB incentives on existing property and take the cash generated from stamp duty and development charges, rather than adopt a more strategic approach. This will lift property prices even higher.