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.

survey-sep-2016-uptradeThe 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%).

survey-sep-2016-down-traderWe 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.

DFA-Survey-Jul-2016---DownTraderNext 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.

DFA-Survey-Jul-2016---UptradersThen 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.

DFA-Survey-Jul-2016---RefinanceWhen 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.

DFA-Survey-Jul-2016---Refinance-DriversTypically, the refinanced loan will sit in the $250-500k range

DFA-Survey-Jul-2016---Refinance-Loan-SizeFinally, we found that larger loans, even now, were more likely to be refinanced to interest only, rather than a principal and interest loan.

DFA-Survey-Jul-2016---Refinance-TypeThis 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.

DFA-Sept-UpTraders
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.

DFA-Sept-Down-Traders

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.

Mum-and-Bank-1We 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.

Mum-and-Bank-2We 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.

Mum-and-Bank-3We 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!

In Mortgage Land, Price Is King!

We just updated our household surveys, and examined the consumer drivers in play when they purchase a mortgage. You can read about our approach to the survey here.

One of the interesting aspects of the research is how consumers select a lender. More 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. But 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.

Drivers1Not surprising then that in the current competitive environment, when credit growth is lower than house price growth, we are seeing some deep discounting in play. We captured data in our survey, and we charted the relative discounts achieved by real-life borrowers, against the bank cash rate. This is an average across large and small banks, and non-banks. Discounting is back up to high levels, if you are not getting close to 100 basis points off the headline rate, you are not getting the best deal!

Drivers4We also looked at household expectation on house prices. Generally they believe prices will continue to rise over the next 12 months.

Drivers3As a result, many segments are still expecting to transact. We are seeing slightly less appetite from investors, but they are still strongly in the market. Down traders are a little more active, and refinancers are looking to lock in low rate deals, in the expectation that the next rate rise will be up. First time buyers are even less inclined to purchase, because of high prices and affordability issues.

Drivers2We will update our research report “The Property Imperative” in the next few days, and will publish a research alert when it is available. The earlier edition from later 2013, is still available here and contains detailed segmentals.

Down Trader Motivations and Needs

Today we examine the motivations of Down Traders, a household segment which we identified in our household survey. They are people looking to sell their current property and buy smaller, so releasing capital to add to their savings. We have looked further at the data from our surveys, and can paint an interesting picture, which varies across the main urban centres which we feature in this post. More than half of these households are between 50 and 70 years. As some are planning to move interstate, we use their intended destination to define their location.

DownT5We asked about their plans in terms of what type of property they planned to buy. In Sydney and Perth for example, more were looking for an apartment, whereas in Hobart and Adelaide a smaller house was preferred. Some were undecided, others considering a retirement village or residential care.

DownT1Average price varied by location. In Sydney the planned median spend was in excess of $1m. Hobart was cheaper.

DownT2We asked about the factors which would influence their decision about where and what to buy. Households in different areas had different priorities. In Sydney, convenience and life style were important, in Hobart the community rated, whereas in Perth facilities were less important.

DownT3We unpacked the convenience driver. Sports facilities were most important in Melbourne, Access to public transport varied, with Melbourne rating lower, because they have better transport. Access to shops rated in Adelaide, but was less important in Perth. Availability of high speed internet was a factor in the decision matrix.

DownT4So, we find that within the Down Traders, there are considerable variations between locations, and accurate sub-segmentation is required to really pull out the insights. We see, for example, high demand in Sydney for convenient and well appointed apartments, close to public transport and shops, with good technology. There, Down Traders will be competing with property investors for similar properties. Elsewhere, they will be looking at property which would normally be attractive to first time buyers, who are being frozen out of the market. Planners and builders would do well to understand the variations, and focus on meeting the needs of Down Traders, an important and motivated group.

 

The Truth About Savings – Part 1

There has been much discussion about the savings behaviour of households recently. The starting point is the ABS Savings Ratio Data, which is derived from the national accounts statistics. It shows that after the 2007/2008 GFC hiatus Australian households started to saving, and save hard. The following chart shows the trend from 2000, both in terms of gross disposable income, and the savings ratio, which on average is at over 10%.

Saving1

There are a series of questions flying about, for example, are the calculations accurate, or should elements like obligatory superannuation contributions be ignored, as they are forced savings? How to account for advanced mortgage repayments? Will the trend continue, or given the low current savings rates, flip to consumers spending more, and saving less, as the RBA seems to want to encourage?

Well, DFA has started to unpick this complex picture. The starting point is to apply segmented analysis to the data. So today, we present some of our segmented findings, using the data from our household survey. At once, we find averages are hiding important differences. So for example, Down Traders, those looking to sell and release capital, and possibly make additional property investments, reveal very significant income growth, and have a savings ratio of about 15%. They are the most cashed up sector of the population, partly in preparation for retirement, and partly thanks to recent property price gains.

Saving2

Compare this with First Time Buyers. These households have not seen much income growth in recent times, and their net savings ratio has fallen close to zero. As we have highlighted previously, many first time buyers are struggling with rising credit card debts. They have little left in the tank for emergencies, like sudden illness or unemployment.

Saving4FTB

Our “Want to Buy” segment shows quite similar trends to the First Time Buyer, though with slightly more savings, revealing a savings ratio of 3%, but falling.

Saving5WTB

We won’t present the analysis of all the segments in our survey, but the data from the Investor segment is enlightening. Here we see quite significant income growth, but savings are falling. This could be because they have been spending hard to grab more property. We need to look at detailed survey responses to check this.

Saving3Inv

So, the conclusion we have reached is that whilst overall savings may be up, it is split across different household groups, some are savings hard, still, others are seeing the cost of living eat into free cash, so savings are down. The key question for me is, how to encourage down traders to spend more, when they are saving for retirement, turning more of their assets into cash. and building a defence against future uncertainty. In addition, we should not assume that because average savings ratios are high, everything is fine. It’s not, because, again, averages mask important differences.

In part 2 of our analysis, probably the last post before the Christmas break, we will look at where segments are saving, and also examine segmented household plans for saving in 2014. This will help to answer some of the questions raised above.

 

Retiring Times?

Yesterday the Australian Bureau of Statistics published their latest edition of Retirement and Retirement Intentions. The data was from their Multipurpose Household Survey in 2012-2013 and examines the retirement status and retirement intentions of people aged 45 years and over who have, at some time, worked for two weeks or more.

They split out the data by housing tenure type showing that 45% have a mortgage, 39% own their home outright, and 14% rent.

Retire2

Interestingly those with a mortgage aspire to retire younger, compared with renters, or even those without a mortgage.

Retire3

Splitting the data by preferred age ranges for retirement, we see that mortgages are represented across all ages, and that a significant proportion does not know when they will retire. This raises the question for me as to how those with mortgages will pay them off (or will they keep them into retirement?)

Retire1

DFA went back to our household survey data and ran queries on the same groups, looking specifically at how those with a mortgage plan to pay it off. Many will become Down-Traders, (24%), which as we have explained is one of the main drivers behind the recent property momentum, others will use superannuation (17%), sell shares (12%) or wait for a redundancy payment (10%). Almost a quarter (24%) had no plans. Just making repayments to maturity is within the 4% other category.

Retire4

When we followed up those with no plans, we found that 56% of the “Do Not Knows” expected to continue to make mortgage repayments into retirement, whilst 34% simply had no plans as to how to deal with the mortgage.

Retire5

We know that households are more in debt, and are holding mortgages for longer. The presence of a mortgage looks as if it will have an impact on retirement plans. However, many households have yet to figure out how to deal with the burden of mortgage debt, and as a result, many will find their plans at risk. Will they be able to maintain employment through to retirement, to keep mortgage payments up? Also, many others are relying on capital returns from property, shares or other investments to get out of jail. There could be havoc wrought by an asset price correction created thanks to the US tapering, or failing local economic conditions!

Down-Traders are on the Move Too

Continuing the discussion about the findings from our Household Survey, we turn to the Down-Traders. Typically they are older, often baby-boomers looking to sell their current property, at a hansom capital gain and buying something smaller, paying off their mortgage along the way, and laying the foundations for their retirement income. They may even purchase an investment property with some of the sale proceeds.

Our survey identified that more than 1.3 million households are considering selling and buying a smaller property. Of these 71% are considering an Owner Occupied Property, and 29% an Investment Property. Of these 677,000 currently have no mortgage and own the property outright. Around 43% of these households expect house prices to rise over the next year, whilst 45% expect to transact within 12 months, 14% will consider using a mortgage broker and 16% will need to borrow more. Households will transact to facilitate increased convenience (27%), to release capital for retirement (24%), because of unemployment (15%) or because of illness or death of a spouse (9%).

DownTradersA

What makes this segment so significant is that they are transacting to capitalise on the lift in house prices, but without the need for significant housing finance. This is one of the main reasons why the growth of house prices and the slower growth in credit do not align. It also means that low interest rates is not a direct catalyst for this group.  They are in fact competing with first time buyers and investors for property of very similar type.  It could well be that as Down-Traders are so active, we will see an over supply of larger more expensive property and an under supply of smaller houses and units, with differential price inflation to match.