Deleveraging defies house price expectations

Via Martin North:

In the final part of our October 2019 Household Survey we look at the results through the lens of our segmentation models. What is clear is there is a disconnect between future home price expectations (much more positive) and proposed activity (lower demand for credit, and intentions to transact). This is at the heart of the weirdness in the market at the moment, and it helps to explain the low levels of listings and transactions (and hence the high auction clearance rates on those low volumes). There is nothing in the latest results however which flags significant momentum increases ahead.

We start with the cross-segment trends. First there is a significant hike in those expecting home prices to be higher in the next 12 months. It reached a low around the election, and has been rising since the cash rate cuts. Portfolio Investors (those with multiple investor properties are the most bullish). But the expectations are there across the board.

However, this does not necessarily translate into intention to transact. First Time Buyers and Down Traders (around 900k) are most likely to be in the market, the former aided by the extra incentives available and the latter by the need to pull equity from existing properties. Property investors remain largely on the sidelines. There is also a slight downward inflection in the past quarter.

Another lens is demand for credit which shows stubborn resistance other than from First Time Buyers ~around 150k actively looking) and Up Traders (around 550k actively looking). Refinancing is tracking at levels we have seen for some time. This suggests that banks will have to compete hard for meager pickings, and refinancing and first time buyers will be the targets for special deals.

Those Wanting to Buy say that availability of finance (40%) and costs of living (30%) are the main barriers, although high home prices at 16% still registers. Interest rates and fear of unemployment are low relatively speaking.

First time buyers are being driven by a range of factors including the need for shelter and a place to live (28%), greater security (14%), tax advantage (17%) and to take advantage of the FHOG (12%). But that said there are significant barriers as well.

Barriers include home prices too high (26%), availability of finance (39%) and costs of living (24%). On the other hand finding a place to buy and rising interest rates hardly registered.

Household seeking to refinance are being driven by reducing monthly repayments (50%), for a better rate (22%) and extra capital withdrawal 20%.

Down Traders are driven by the desire to release capital for retirement (50%), increased convenience (30%) and illness or death of spouse (11%). Interest in investment property has faded to 6%.

Up Traders are being driven by the desire for more change (41%), job change (16%), property investment (22%) and life-style changes 20%).

Turning to investors 45% are driven by tax benefits, better returns than deposits (25%) and appreciating property values (14%).

On the other hand, investors face a number of barriers including cannot getting finance (49%), and they have already bought (13%).

And finally across the segments the prime selection point is price, although it varies, and loyalty is not seen as significant or rewarded.

Standing back, it appears that property sector momentum is likely to remain patchy at best, with more action at the more expensive end of the value spectrum, and first time buyers remaining as the primary “canon fodder” with regards to new transactions. It will be interesting to see how the Government scheme due in January changes the picture.

As we have said before, a house price boom at ZIRP may be the Government’s idea of good time, but for households the prospect of it ending with no more rate cuts left in the can is a very serious problem.

David Llewellyn-Smith
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  1. First time buyers are being driven by a range of factors including the need for shelter and a place to live

    And therein lies the great tragedy for a whole generation of Australians. These people are stuffed because houses are largely no longer a place to raise a family while keeping the rain off our heads. They are a speculative asset class that has been financialised up the ar$e, and then inflated massively through lies, corruption, mammoth debt and and a tsunami of money laundered foreign money.

    We are stuffed.

  2. Talking to a mate yesterday who spends time in the US.
    He’s gobsmacked how high property has got and how low wages have gotten.
    Similar joint in US less than half, yet there wages going nowhere also

    • Wages nowhere in the UK, or anywhere globally… we are truly in a deflationary environment.

      If History any guide, wages will soon fall globally. Thats when people get into real trouble. Post the Napoleonic era, it wiped out the entire landed gentry.

  3. Jumping jack flash

    Interesting to see that availability of finance is growing as an issue why people aren’t buying.

    I think that needs to be taken with the view that people really do want to buy, and of course they would, but having no deposit or wages large enough to take on the necessary debt to be able to buy is the problem.

    It is also very interesting to note that house prices being too high is reducing as a problem. That should also be taken with the view that it now matters not what house prices are, they can be millions of dollars each. It doesn’t matter.

    Our houses are worth whatever we say they are worth.

    It doesn’t mean they are too expensive, it just means that the banks need to be able to stump up the debt that is required to buy them at the income levels and deposit sizes that people have.

    So it makes perfect sense that “availability of finance” is effectively replacing “houses too expensive” as a reason why people aren’t buying.