Latest Gross and Net Rental Yields Vary; Wildly

We can spot the best and worst investment property returns across the nation, using updated data from our household surveys. The average GROSS rental return in Australia is 3.9%, the NET rental return (after interest costs, management and repair costs etc, but before tax) is 0.4%. The average net equity held in a investment property is $161,798. This is the marked to market value of the property, minus the loans outstanding.

The data takes account of lower interest rates, and changes in rents as well as the latest property values. Things get interesting when we start to look at the segmented data. Not all investment properties are equal. Here is the average by each state.

rental-yield-oct-2016-statesThe left hand scale shows both gross rental yield (blue) and net rental yield (orange), while the line shows the average net equity in the property. We have sorted from lowest net rental return.

In VIC whilst the average gross return is still at 3.3%, the average net return is a 0.2% LOSS, while the average equity is $152,412. Compare this with QLD, with a gross return of 4.5% and a net return of 1.1%, with equity of $154,665. The best net return is to be found in TAS, where gross yield is 5.3%, net yield 1.7% and average equity $141,595.

Another way to look at the data is by our household segments. Here we find more affluent households are getting significantly better net returns (before tax) compared with those with lower incomes, including battlers, those living on the city fringes, and multicultural families.

rental-yield-oct-2016-household-segmentsCutting the data by our property segmentation, we find that portfolio investors are doing the best, with net returns well above 1%.

rental-yield-oct-2016-property-segmentLooking at our geographic bands, we find those on the urban fringe, or suburbs doing the least well. The best returns at a net yield level can be found in the CBD or CBD fringe.

rental-yield-oct-2016-geogFinally, we can drill down to individual postcodes and suburbs. To illustrate this, here is a chart of the 20 worst performers in VIC.  Households in Glenlyon (3461), a suburb of Bendigo about 86 kms from Melbourne are at the bottom.

rental-yield-oct-2016-vic-b20 The average net yield is a LOSS of 3.5%, and a net equity of just $24,000.

Remember that we are looking at the data before tax. Many investors will be willing to wear low net returns on property, to offset other income because of anticipated future capital gains. Negative investment gearing has a big impact on household investment behaviour.

The Property Worm Turns

Change is afoot, according to the latest findings from our household surveys which looks at property intentions and motivations. The results, (which includes data from as recent as last week), are showing significant changes compared with a couple of months ago, and investors, in particular, are feeling the heat, thanks to rising lending costs, flat rentals, and lower house price rise expectations.

The intent to transact is on the wain, with portfolio and solo investors signalling a fall in expected transactions. In contrast, there is a significant uplift in those seeking to refinance an existing loan (which mirrors recent rises in refinanced loans, and the current attempts by lenders to attract borrowers with attractive deals for owner occupied loans).

Survey-Nov-2015---TransactHouse prices expectations are on the turn, with investors, those eternal optimists, now more uncertain about future capital appreciation. Almost all segments are showing a fall in future expected growth compared with a couple of months ago, but investors are in the headlights. Such large changes over just a couple of months is unusual.

Survey-Nov-2015---PricesThere remains significant demand for loans, and those wishing to borrow more…

Survey-Nov-2015---Borrow… but investors are banking on tax breaks to support their investments, as the cost of finance rises, in the context of flat income growth and rentals.  Overall investors think there is still a better return to be had than from bank deposit accounts, although as we showed recently, may, in net cash flow terms, will be underwater.

Survey-Nov-2015---InvestorsFinally, looking at savings intentions, we see little change, with prospective first time buyers still saving hard, despite low returns from deposits.

Survey-Nov-2015---Buy   In the next few days we will drill further into the detailed segment specific data, but it looks as if the property worm is indeed turning.

DFA Survey Shows Property Demand Remains Strong

Following on from yesterdays video blog on the overall results from the latest household surveys, over the next few days, we will dig further into the data. We start with some cross segment observations, before in later posts, we begin to go deeper into segment specific motivations. You can read about our segmentation approach here. Many households still want to get into property – demand is strong, thanks to lower interest rates, despite high home prices and flat incomes. Future capital growth is expected by many in the market, and by those hoping to enter. This despite a fall in household confidence, as measured in our finance confidence index.

We start with savings intentions. Prospective first time buyers are saving the hardest, despite the lower interest being paid on deposits. More than 70% are actively saving to try and get into the market (though we will see later, more are switching to an investment purchase). Portfolio and solo property investors are saving the least – despite the recent changes to LVR’s on loans.

A significant proportion of those saving are actively foregoing other purchases and spending less, so they can top up their deposits. A higher proportion are also looking to the “Bank of Mum and Dad” for help.

SurveySavingJuly2015Looking next at borrowing intentions over the next 12 months (an indication of future mortgage finance demand), down-traders are slightly less likely to borrow now, compared with a year ago, whilst investors are firmly on the loan path. First time buyers will need to borrow. Refinancers are active, and one motivation we are seeing is the extraction of capital during refinance, onto a lower interest rate.

SurveyBorrowJuly2015Many households are still bullish on house price growth. Investors are the most optimistic, whilst down-traders the least. There are significant state differences, with those in the eastern states more positive than those elsewhere.

SurveyPricesJuly2015So, who is most likely to transact? Portfolio investors are most likely, then down-traders, and solo investors. There is also a lift in the number of households looking to refinance, to take advantage of lower interest rates. The recent public announcements by the banks, about tightening lending criteria appears to have encouraged some to bring forward their plans to purchase, in the expectation that later it may be more difficult to get a loan.

SurveyTransactJuly2015The recent tweaks in rates are having no impact on household plans, as the absolute rates are still very low – lower than ever – for many. We conclude that the demand side of the property and mortgage markets are still intact.

Next time we will look in detail at data from first time buyers, and then investors.

The Benefits of Combining Content Marketing and Segmentation

Interesting segment from marketingsherpa on how customer segmentation and targeted content can work.

One of the most talked-about marketing trends at the moment may also be one of the most effective. According to Demand Metric, content marketing generates three times as many leads as traditional outbound marketing while costing 62% less.

At MarketingSherpa Email Summit 2015, Courtney Eckerle, Manager of Editorial Content, MarketingSherpa, sat down with Stephen Bruner, Marketing Manager, Precor, to discuss the value of content marketing and segmentation as well as the benefits of implementing a strategy using both of these marketing methods.

Precor is the second largest fitness equipment manufacturer in the U.S. and third in the world. Its clients are primarily fitness clubs and consumers. The company focuses on helping each of these consumer segments find the best products for their needs.

Watch the video excerpt from the MarketingSherpa Media Center to learn more about the relationship between content marketing and segmentation:

ASIC Launches a ‘Women’s Money Toolkit’

ASIC has launched a ‘Women’s Money Toolkit’, a free online resource designed to help Australian women manage their finances, make money decisions at key life stages and enhance their financial wellbeing.

The toolkit was developed in response to the particular needs of women who face financial issues and challenges as a result of factors such as their greater likelihood of variable workforce participation, longer life expectancy and on average lower superannuation balances. Research suggests there are differences in the way that women and men generally interact with finances, indicating the need for a tailored approach to financial education.

The Women’s Money Toolkit is available on ASIC’s MoneySmart website at

Image of the Womens Money Toolkit

Relevant facts and figures that informed the development of ASIC’s Women’s money toolkit:

  • 46.1% of women in employment work part time hours, compared to 16.8% of men.
  • In 2013, the life expectancy of Australian women was 84.3 and the life expectancy of men was 80.1
  • At age 60-64, women have on average $104,734 in their super balance while men have $197,054).

The ANZ’s Survey of Adult Financial Literacy in Australia revealed differences in the financial attitudes and behaviours of Australian women and men including:

  • Women aged 28 to 59 had higher scores than men on keeping track of finances
  • Women of all ages were more likely than men of all ages to agree that ‘money dealing is stressful’
  • Women of all ages had lower scores than men on impulsivity.

Latest Edition Of The Property Imperative Released Today

The Property Imperative, Fourth Edition, published April 2015 is available free on request. This report which summarises the key findings for our research into one easy to read publication. We continue to explore some of the factors in play in the Australian residential property market by looking at the activities of different household groups using our recent primary research, customer segmentation and other available data. Specifically we look at the property investment juggernaut and how we are becoming a nation of  property speculators. It contains:

  • results from the DFA Household Survey to end March 2015
  • a focus on first time buyer behaviour and overseas property investors
  • an update of the DFA Household Finance Confidence Index

PropertyImperativeLargeGo here to request a copy.

From the introduction:

This report is published twice each year, drawing data from our ongoing consumer surveys and blog. This edition dates from April 2015.

The Australian Residential Property market is valued at over $5.4 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia. The Reserve Bank (RBA) has recently highlighted their concerns about potential excesses in the housing market is on their mind, when considering future interest rate cuts.

According to the Reserve Bank (RBA), as at February 2015, total housing loans were a record $1.43 trillion , with investment lending now at a record 34.4%, and representing more than half of all loans made last month. There were more than 5.2 million housing loans outstanding with an average balance of about $241,000. Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 36.9% of new loans issued were interest-only loans. This report will explore some of the factors in play in the Australian Residential Property market. We will begin by describing the current state of the market by looking at the activities of different household groups leveraging recent primary research and other available data. We also, in this edition, feature recent research into first time buyers and foreign investors; and look at household finance confidence.

Digital Disruption and P2P Lending

DFA research was featured in a Sydney Morning Heald feature today “Banks look vulnerable as lucrative loans market gets personal online” by banking reporter Clancy Yates. The article nicely highlights some of the interesting and potentially disruptive plays in the evolving Australian market, including the peer-to-peer lending sector.

Latest DFA Survey – House Prices Expected To Rise [Still]

Today we continue our analysis of the DFA household survey data to March 2015 by looking at the cross segment comparative data. We use the DFA segment definitions and have updated our models to take account of changes in population, and property purchase type. The proportion of households who are excluded from property rose again, and the investment sector continues to grow strongly. The current distribution of households by segment are shown below.

HouseholdsMar2015There is still significant expectation that house prices will continue to rise in the next 12 months, despite the recent gains, though Sydney centric households are most bullish. Investors have high expectations, and as we will see when we drill into this segment, capital gains are top of mind. Down traders are relatively less confident of prices continuing to rise, which explains why this segment still wants to sell now, to crystalise recent gains.

PricesRiseMar2015Looking at plans over the next 12 months, more investors are piling in, so we would expect to see this translate into further momentum in the investment sector. Last month more than half of loans were for investment purposes.

TransactMar2015In terms of borrowing plans, investors, up-traders and first time buyers are the most likely to borrow. Those down traders who are thinking of grabbing an investment property are quite likely to gear, to take advantage of tax breaks.

BorrowMore-Mar2015We see that up-traders, first time buyers and want to buys are most likely to be saving to buy, although the lower returns on deposits are proving to be a real problem for many.

Buy-Mar2015Finally, segments have different propensities to use a mortgage broker. Whilst refinancers, and first time buyers are most likely to use a broker, we also see a continued rise in the number of portfolio investors using a broker. However we see in the survey data a high level of dissatisfaction from this segment with the quality and range of advice from brokers as their needs are more complex, and many brokers tend to focus on simple binary transactions. We think there is an opportunity for brokers to better tailor their services to portfolio (a.k.a. more sophisticated) customers.

BrokerMar2015Next time we will look at the segment specific data drawn from the surveys.

Property Momentum On The Slide

We just updated the DFA household surveys, with data to end November, and there are some interesting transitions in play, which taken together with potential action on foreign buyers, suggests we will see property momentum easing in the next few months. This actually may be a “get out of jail card” for the RBA and provide reasons why macroprudential may not be required after all, and why interest rates may need to be cut further next year, not lifted. Today we look at our cross segment summaries. You can read about our segment definitions and survey approach here. This update will later be incorporated on the next edition of the Property Imperative Report.

We begin with the updated estimate of the number of households by DFA segment. We find that there are 6.5 million households who are property active, and 2.25 million households who are property inactive (meaning they live in rentals, with family, friends or other accommodation). Those who are inactive continues to increase, with 26% of all households in this group now.

Of those who are active, we split them out into those with owner occupied property, those with investment property, and those who invest via SMSF. This is the national picture, to end November 2014. Of those households who are property active, 68.2% are owner occupiers, 31% have investment properties, and 0.8% have property investments via SMSF.

SegmentCountsDec2014Looking at the cross segment results, we are seeing a steady decrease in those saving in order to enter the property market. This includes the Want-to-Buys and the First Timers, the latter who are to some extent active in market exploration. Up-Traders and Down-Traders are saving a little more, but the lack of momentum in savings means households are less likely to try and enter the marker later. Three factors have influenced this trend. First, low deposit interest rates, second lower disposable incomes, and third, a view that prices are so high they will never be able to enter the market.

SavingDec2014Looking at the need to borrow, we see a continual rise in the demand for loans from those expecting to transact. Only Down-Traders are less likely to borrow. The need to borrow more is a reflection of higher prices in many states, though as we highlighted yesterday, there appears to be a change in the wind with regards to property prices. Lending for investment property will continue, so we may see additional controls on this type of lending coming though in due course as part of the regulatory review, but overall demand is unlikely to grow significantly beyond this.

BorrowMoreDec2014In our surveys, we see a consistent lowering of expectations, across the segments in relation to whether prices will rise in the next 12 months. Property investors are also a little more sanguine on house price growth, though still more optimistic that owner occupiers. That said, more than half across the board still are expecting a further rise, despite stretched loan to income ratios and high benchmarks.

PriceExpectationsDec2014So, turning to question of whether households will transact in the next year, we see falls in several significant segments – Portfolio Investors, and Down-Traders are most likely to transact. In sheer volume terms, it is the Down-Traders who are most likely to keep the property ship afloat as they attempt to liquidate some of the capital locked away in their property. We see a supply/demand re-balancing ahead, and as a result, a slowing in house price growth. If investors get cold feet, prices will fall from current levels.

Transact12MonthDec2014In the next few days we will delve into our segment specific results.

Household Ratios By Segment

Yesterday DFA posted the most recent RBA household ratios showing that overall debt for households is higher than its ever been. Today we take the argument further, with detailed analysis across our segmentation, looking at loan to income ratios. The DFA segmentation positions households on a multi-factorial basis, including demographics, wealth and life-stage. The data here is the average across Australia by segment, there are significant state variations, which we won’t cover today. We see that the average is around 137. However, first time buyers have a more adverse ratio well above 200, and young families, just below 200. On the other hand, suburban families have a ratio around 100, and down traders are even lower. So my point is (once again) that averages can hide a world of differences. It is also worth noting that different household segments tend to live in different suburbs, so the net economic impact on an area will be different. One final point, the incomes are current ones (to take account of falling incomes in real terms) for our segments.