How Big Is The Property Demand Supply Gap?

Although new construction is up this month, DFA believes that demand for new property far outstrips supply because of planning constraints, high development costs and fees; and the inability of many construction companies to get the funding and labour they need at reasonable prices.

But, how big is the gap between what we are currently building and what we need to build to address the demand supply problems? Its not easy to assess, because as we highlighted previously, people make logical decisions. They live with parents longer, might buy an existing investment property because they cannot buy in their preferred area, or simply delay transacting. This distorts demand in a feedback loop. We also have an existing housing stock which is being changed by renovation and conversion.

In addition, demand is fueled by overseas demand, migration, and demographic changes such as older people looking to downsize, and young families looking to buy larger houses. Its a complex picture.

But undaunted, DFA made two separate calculations. First, we modelled all the available demographic data, including population growth, aging profiles, demographic shifts, household sizes, and overseas buyers, and made an estimate of the number of building approvals needed to meet this demand.

Then we took data from the DFA households surveys, as mentioned previously, in which we estimate that over the next three years we will need more than 900,000 new properties to meet demand, when over the last 12 months we achieved 183,000 units.

We retro-fitted our findings on the period from 2009. Here is the top line result of the analysis, showing the gap between what was approved, and what would need to be approved to fill the gap. We have long term under-supply.

NewDemandConstJan2104The yellow line, driven by pure demographics, indicates we need to more than double current construction rates to meet demand. The DFA survey results are a little lower, but on either measure, we are not building enough new property. As a result, demand and supply is in disequilibrium and so prices are, in some states running away.

This is why, as all the data shows, first time buyers are being squeezed out. This will only get addressed with some significant policy changes across States and Federal government. I wonder if the current Senate inquiry on Affordable Housing will make a difference?

Housing Construction Rose in January

The ABS published their Building Approvals for January, and it shows significant momentum. They report that the seasonally adjusted estimate for total dwellings approved rose 6.8% in January after falling for three months. The seasonally adjusted estimate for private sector houses rose 8.3% in January following a fall of 1.9% in the previous month and the seasonally adjusted estimate for private sector units rose 4.6% in January and has risen for two months.

Here the is chart from 2009 onwards, showing the rise in unit construction.

NewConstJan2104As we highlighted yesterday, the trend towards higher density housing continues apace.

 

Who Wants To Buy What New Property, Where

DFA’s latest household surveys are in, and we have updated our demand modelling accordingly. Overall participation in the property market continues to fall. But today, specially, we are looking at the prospective purchase of new property by segment and type. Demand is strongest from investors and down traders.

First we look at the proportion of households who are not property active. We see a continued rise in the proportion of households who are renting, living with relatives, or have other temporary living arrangements. We correct this data for population growth over time.

LatestSurvey2Next we look at the household population who are property active, using our standard segmentation models. Here are the segment definitions.

LatestSurvey3We then can assess the household distribution across these segments. We see an increasing number of Want-to-Buys, people who aspire to access the market, but for some reason cannot at the moment. Investors are well represented, and the Down-Traders are still active. There is a slight rise in households investing through superannuation.

LatestSurvey1We then asked in our surveys about their purchasing plans. Around 15% of households said they are considering buying a newly build property sometime within the next three years. We segmented these households by the geographic area in which they thought they might buy.

LatestSurvey4Most Want-to-Buys are looking on the urban fringe. Down Traders are likely to buy closer in to the city. First Time Buyers are also considering buying closer in, but many are being forced out to the far flung urban edge developments. These are national statistics, I won’t go into the state variations here.

Finally, we overlaid their preferences and expectations concerning the type of property they might purchase. We see a strong demand for units, mainly driven by the Want-To-Buys and Investors. Interestingly though a significant proportion of Down Traders are also considering an apartment, making a convenience and life-style choice. Demand for different property types vary across the geographic areas.

LatestSurvey5This indicates a significant shift towards high-density living, whether in apartments or in high density residential developments and sub-divisions. We highlighted recently how unit construction was moving ahead of house construction.

Const1

“This continues to represent a significant shift in the nature of housing in Australia, with a greater proportion of both owner occupied and investment property being built as multiple units, rather than stand alone houses. We already highlighted the fact that more first time buyers are buying units, and that the average plot size is shrinking fast. The shift in life-style that increased high-rise and medium/high density housing will have on households should be considered, as we are seeing the consequence of chronically high house prices working though to the detriment of many.”

Latest Foreign Investment Property Data Shows More Approvals Granted

The Treasury just released the Foreign Investment Review Board (FIRB) Annual Report 2002-2013, which provides some data on overseas property investors. The real estate sector was the largest by value, with approvals in 2012‑13 of $51.9 billion and FIRB recorded 12,025 approvals, compared with 10,118 approvals in 2011‑12. In 2012‑13, no proposals were rejected (compared with 13 real estate related proposals rejected in 2011‑12). Real estate was 38% of the total FIRB proposals approved.

FIRB1303 Within the real estate investments categories we saw an increase in developed approvals and individual new purchases and vacant land. The numbers of applications continues to grow each year.

FIRB1304

To clarify, the FIRB definitions, residential real estate:

Developed – The category of developed residential real estate consists primarily of temporary residents in Australia acquiring one existing residential property for use as their residence in Australia.
For development – Acquisitions of residential real estate for development include a number of categories. The vacant land category consists primarily of individual blocks of land purchased for single dwelling construction. These are normally approved subject to conditions (such as, that construction begins within 24 months). It also includes broadacre land for residential subdivision and multiple-dwelling residential developments (such as townhouses and units).
The new dwellings and off-the-plan category – consists of applications by individuals to acquire newly constructed dwellings directly from developers and applications by developers to sell up to 100 per cent of new residences in a development to foreign interests (the developer is also required to market the dwellings locally). Applications from individuals are normally approved without conditions. If a developer is given approval, individuals need not apply for approval. The approved investment figures for off-the-plan approvals for developers and annual programs overstate the likely extent of actual foreign purchases. The value of investment reported against annual program approvals represents the maximum amount foreign persons may acquire under the program.
Developed property for redevelopment – involves the acquisition of existing property for the purpose of demolition and  construction of new residential dwellings. These are normally approved as long as the redevelopment increases Australia’s housing stock (at least two dwellings built for the one demolished) or where it can be shown that the existing dwelling is derelict or uninhabitable. Approvals are usually subject to conditions (such as, that construction begins within 24 months).”

In real estate, approved proposed investment was $51.9 billion in 2012‑13, compared with $59.1 billion in 2011‑12. The highest value segments were developed properties, and new developed off plans, though the actual value for this category fell by half  compared with 2012.

FIRB1305The FIRB do not give approvals by country by category, but overall, across all industry categories, China was the largest, with 6,102 approvals, up from 4,752 in 2012.

FIRB1302Looking at real estate by value we find “other” is the largest category (!). China accounted for $5,932 million in real estate.  Note that FIRB does not separate commercial and residential real estate in these numbers. We think they should.

FIRB1301Nothing in this data changes our view expressed in our previous post on this subject:

“We are essentially becoming part of a more globalised property market and it is unlikely this will change. Given what we know about the state of the market, and that locals are being priced out by other purchasers, including investors and overseas purchasers, we need to be wary of these current trends – so I think the Chinese Factor is a critical issue. With limited supply, continued overseas investment in our market will drive prices higher, that is, until conditions change. If China caught an economic cold, it is possible we would see a reversal in property fortunes in Australia, so we are probably more leveraged to China through property than we know or realise.

I would advocate capturing more comprehensive data so we can at least get a handle on overseas property investments. I do not think we are able to stop globalisation, but we need to understand the implications a whole lot better.”

I also find it interesting that not one application was refused. Does the FIRB do more than tick the box? Do they have any real teeth? I suspect we are seeing a rise in the number of individual foreign investors, offset by a fall in some commercial categories. The rising number of individual applications are hard to process effectively. Developed “temporary residents in Australia acquiring one existing residential property for use as their residence in Australia” is the largest category.

DFA Makes Submission to Senate Inquiry into Affordable Housing

Digital Finance Analytics (DFA) welcomes the current inquiry into the affordability and accessibility of housing in Australia. We wish to make the following submission.

  1. DFA is a boutique consulting and research company, specializing in the financial services and housing industry. We execute primary consumer research, segmentation and industry modelling. As well as completing research for our clients, we post regularly to our blog .
  2. We believe that the current long term trends in housing are detrimental to Australians, and this is having a significant negative impact on the economic performance of the country.
  3. We are not in a housing bubble, but we have a chronic problem. This is because the rapid growth in prices in recent years has not kept pace with many households ability to pay, forcing significant numbers into high debt to income ratio’s, the selection of properties in less accessible and less convenient locations and the exclusion of considerable numbers from the market. In total 2.3 million households are not active in the property market at all.
  4. In addition, discretionary spending has been blotted up by higher housing costs. Households are highly leveraged today, and if interest rates were to rise, mortgage stress would become more significant.
  5. Banks have grown their balance sheets in-line with growth in demand – especially supporting high levels of investment loans, and as a result they are not adequately providing reasonable lending services to a considerable number of small and medium enterprises, who could create economic value to the country. This is influenced by the relative capital costs of housing lending versus commercial lending under the Basel rules. Lending ever more loans to households to purchase property does not create real growth, it just inflates prices.
  6. We believe there are significant supply-side issue, with at least 200,000 properties required to meet current and expected demand. A significant proportion of these should be aligned with the needs of the large number of “Want-to-Buy” households, who cannot access the market today. Today 1.2 million households are directly excluded from the market. Many of these are younger, less well-off and in rental property at the moment.
  7. Local government policies and reliance on stamp duties are part of the problem, together with planning restrictions and high development fees and charges, all leading to poor supply of affordable homes. The proportion of high-rise developments is increasing.
  8. Many First Time Buyers are only able to access the market with direct financial assistance from family or friends.  The focus of First Time Buyer incentives being aligned to new-builds is welcome, but we believe that these incentives actually lift prices, and do long term harm.
  9. In addition, we note there is considerable demand from both local and overseas investors, contenting with potential First Time buyers.
  10. Ultra-low interest rates are not helping because it is stimulating demand from the investment sector, lifting the size of loans, and negatively impacting affordability. Note that the banks rightly utilize buffers to test for affordability, so low rates do not flow into greater loan availability.
  11. Negative gearing has been one of the most significant incentives for many investors, but it is widely accepted as a costly tax advantage which has pushed up prices, and driven First Time Buyers from the market.
  12. For many, property has ceased to be primarily a place to live, it is rather an investment first and foremost. This is a concerning trend. Self-Managed Super Funds are also accessing investment property, thanks to the attractive tax sheltering which exists today.

Details of our research have been published in our report “The Property Imperative” which is attached as appendix 1. There we go into significant detail by customer segment, leveraging our primary research.

B.    Suggested Policy Options

DFA recommends the consideration of the following to help address affordability and accessibility of housing in Australia.

  1. Australia should develop a strategic housing plan which guides ongoing development, be it in current centres, or expansion into new towns. Current tactical plans are not sufficient. The plan should specifically address the supply of affordable housing.
  2. Strategies should be devised to increase land supply. State governments should reduce the current high levels of access fees for new development and revise planning criteria and processes. This has the potential to create considerable economic growth.
  3. Overseas investors should not be able to access first-time buyer incentive schemes, and the Foreign Investment Review board rules should be strengthened to reduce the impact of foreign investors on the local market.
  4. The RBA should have a direct multi-segmented housing affordability metric within its measurement framework. Affordability should be targeted at trend average, not rates experienced since the debt explosion of the 2000 onwards.
  5. Macro-prudential policies should be employment to control the growth in lending. In line with the recommendations from the Bank of International Settlement debt to income servicing ratios should be employed as the policy tool of choice.
  6. Negative gearing should be tapered away and removed for new transactions.
  7. Joint equity schemes like the UK’s Help to Buy Scheme  should be considered as a tactical step to assist some of the “Want-to-Buys.”

 

The Rise and Rise of the Internet

The ABS today published its latest data on internet use in Australia. The data shows the continual rise in internet penetration and usage, spread across all demographic groups. We highlight some of the most significant findings, highly relevant in the context of our recently released report “The Quiet Revolution”, which studies household channel preferences for banking, and underscores the online migration underway.

First we look at trend growth. We see ACT persons have the highest penetration, at close to 90%. TAS is the lowest, a little below 80%. But from 2006 onwards, we see continued growth.

InternetTrend1Turning to City versus Country, we do see higher penetration in the cities, but people in rural areas are also trending up. The gap is actually closing.

InternetTrend2Turning to the data to December 2012, there are significant age differences. Those 65 and older are less likely to be internet users, but most younger people are.

InternetDemo1Those in the lower income groups are less likely to be connected. There is a large “unknown income” group in the ABS data though.

InternetDemo2Those with higher levels of education are more likely to be connected. However, a very significant number of people with more limited education also access regularly.

InternetDemo5The state and remoteness data highlights the fact that internet penetration is strong in all states, and geographies. NSW has the largest number of non-internet users, thanks to its larger population.

InternetDemo4 InternetDemo3Turning to purchasing on-line, we see a considerable proportion of people are willing to buy good or services.

InternetPurch1The range of goods and services does vary by age, with clothes and cosmetics most sought out by younger groups, whilst travel, accommodation and tickets are strongly represented in older groups.

InternetPurchSo, drawing this together, we see how mainstream the internet has become. Evidence of a digital divide is less strong, as penetration rates improve, though it is still true that less well off and poorly educated people are less likely to connect. However, the strongest determiner is age, with those over 65 still less likely to be connected.

In our “Quiet Revolution” report, we highlighted that age was key in determining how connected people are.

TimeConnected1We also showed that younger people were connected more intensely.

TimeConnectedThe revolution which the internet represents in well underway, but in our opinion many businesses have yet to understand the full implications and opportunities which are represented by the seismic shift.  Read more in “The Quiet Revolution”.

Is There A First Time Buyer Data Problem?

First Time Buyers appear to be sitting on the sidelines of the property market. The latest ABS data reports this, but is the data correct? Today we look at the latest findings from our households surveys, and also the data collection processes which are used to feed the ABS data. In doing so, we can make an assessment of whether we have the full story.

In our latest households survey, we updated first time buyer preferences. We see that high prices remain the most significant barrier to purchase. You can read more in our updated report, published this week – The Property Imperative – Volume II.

FTB2014-1We also have a data reconciliation problem between our survey and the ABS data, as we think first time buyers are more active, especially those purchasing an existing property. It varies by state, but could be as much as 20% above the official numbers. This is more than a survey sample error, and is getting bigger.

In addition, we also recently highlighted that some first time buyers were being smart and leaping directly into the investment market:

“Units, are more likely to be purchased as an investment, not for the purposes of moving into later, but as a long term investment.”

We estimate that these first time buyers account for perhaps another 20% of activity, which is not separately identified in the statistics.

FTBAll1If the true picture was around 40% above the reported data in December, then first time buyers would be more active, and the long term down trend less pronounced. This is my best estimate, using the ABS data as a baseline, and adding in results from the DFA surveys. It shows first time owner occupied and investment loans combined.

FTB2014-2But is this feasible? To answer this, we need to look at the data collection processes for both owner occupied and investment data.

According to the ABS, data is collected from the banks for owner occupied loans using the APRA form ARF 392. Looking at the form, and the instructions, each bank is asked to report:

“Part C requests the value of total new housing commitments broken down by the type of loan that has been arranged, with a further split of these items into First Home Buyer loans and others. A First Home Buyer is a borrower entering the home ownership market for the first time.”

So the banks must determine which loans are first time buyer loans. How do they do this? Well, having make a few calls it seems that it varies. Some have a tick-box on the application form, others use the first owner grant as the proxy for being a first time buyer.

However, most states now have now switched first owner grants to buyers of new properties.  In NSW, for example, before concessions for first homeowner grants on existing homes were scrapped last year, 16,474 grants were written, worth $82.37 million. By contrast, after the change, first homeowner approvals in November were down more than 67%, even accounting for foreign buyers who can also apply!

It looks like the reporting could be off somewhat, if first time owner occupier buyers of existing properties are not being correctly identified in the returns by some of the banks.

On the investment loan side, the ABS uses data from the APRA form ARF 391. There is no requirement for banks to split out first time buyers in the investment category.

So, I conclude that currently, we cannot rely on the data to provide an accurate picture of the status of first time buyers. Our own research suggests that there are more buying than the data might suggest.

I would like APRA to tighten its instructions to ensure that banks provide a full picture, and ask for a split in the investment category also. Then if ABS updates their reporting, we will know. Until then, take the statistics with a healthy pinch of salt!

That said, my estimate shows that the initial research is correct, many first time buyers are being excluded by current prices.  Its just not quite so bad….

So Thats Where The First Time Buyers Are!

The ABS Finance data today tells the continuing rise in investment housing, and we we already know of a fall in first time buyer owner occupied purchases. But, that is not the full story. Actually, we see a significant rise in first time buyers jumping direct into investment housing, whilst still living at home, or with friends. We have been looking at this via our households surveys, and have begun to piece together an alternative narrative, which shows that first time buyers are smarter than many think!

To dive right in, here is the true picture of first time buyers, including those buying their first investment property:

FTBAll1The blue line is the important one, as it shows that in the past few months there has been a significant rise in the number of first time buyers who have bypassed the owner occupied market and gone straight into the investment market. We estimated the number based on our survey responses, so the exact number may be a little out, but the overall trend is clear.

We asked what type of property first time buyers are likely to go for:

FTBAll3… and what proportion of each would be investment related:

FTBAll2Units, are more likely to be purchased as an investment, not for the purposes of moving into later, but as a long term investment. In our interviews, we found the following:

  • First time buyers are attracted by the tax efficient nature of property investment, and were able to borrow more easily, because they purchased the investment in a place they did not want to live in.
  • 8% were using superannuation to facilitate the purchase because of the expense offsets available.
  • 23% of investment first time buyers borrowed funds for the deposit from family or relatives
  • The average age of these investors is 31 years
  • More than 60% saw the investment as a long term hold, whilst 32% expected to sell within 2 years, take a capital gain (even after tax) and use this for a deposit on their own property.
  • 76% of these first time buyer investors continue to live at home.
  • 91.5% thought property prices are set to rise over the next 12 months.

This is smart thinking, and shows that there are some sassy first time buyers out there. It also means we should be careful in reading the statistics; and first time investment buyers are not identified – they should be.

Just for the record, here are the more normal sets of data on owner occupied and investment housing from the ABS data.

FTBAll4

 

 

Unemployment Hits 6%

The ABS data today shows that the unemployment rate rose to 6%, the first time it has reached this level since 2003.

UnempJan2014The ABS says:

“Australia’s seasonally adjusted unemployment rate increased by 0.1 percentage points to 6.0 per cent in January, as announced by the Australian Bureau of Statistics (ABS) today.

The ABS reported the number of people employed decreased by 3,700 to 11,459,500 in January. The decrease in employment was due to decreased full-time employment, down 7,100 people to 7,953,000, offset by increased part-time employment, up 3,400 to 3,506,500. The decrease in total employment was driven by decreases in male and female full-time employment and female part-time employment.

The number of people unemployed increased by 16,600 people to 728,600 in January, the ABS reported.

The ABS monthly seasonally adjusted aggregate hours worked series increased in January, up 20.5 million hours to 1,635.8 million hours.

The ABS reported the seasonally adjusted labour force participation rate was unchanged at 64.5 per cent in January. “

As unemployment is the single biggest factor in changes to mortgage stress, we will be watching this closely. Our stress models assumed a 6% rate this month, so we do not need to change our current stress estimates.

StressFeb14-1For more details about our mortgage stress models, go here.

 

First Time Buyers, No Change

Yesterday’s ABS data on housing was greeted by some as showing that first time buyers are returning to the market. However, analysis shows this is a statistical blip, and that in reality they continue to sit on the sidelines.

The relative share of first time versus other owner occupied investors is shown below, with the orange line showing a small uptick in December.

ABSDecTr1However, looking at the number of deals, we see a different story:

ABSDecTr2First time buyer loans remain at a low level, its just the other loans dropped, thanks to Christmas I suspect, lifting the relative percentage slightly. So, there is no evidence here of first time buyers coming back. These are not seasonably adjusted numbers from the ABS.

We also see a continued rise in average loan sizes:

ABSDecTr3… and quite a high proportion of fixed loans, as households lock in the low rates on offer:

ABSDecTr4We are seeing the same consistent trends as we previously reported. First time buyers are trading off life style if they do try to buy, or are sitting it out.