Why don’t we read the fine print? Because banks know the pressure points to push

From The Conversation.

The Financial Services Royal Commission has exposed the pressure selling tactics used by the banks. They draw on simple psychological rules to target vulnerabilities among some of their most loyal customers.

One example is the high-pressure selling of add-on insurance for customers when they sign up to a credit card. The Commonwealth Bank of Australia (CBA) acknowledged that upwards of A$13 million of refunds are likely to be paid to consumers who had been pressured into buying these add-on products.

Another witness at the commission, Irene Savidis, relayed what happened when she tried to cancel this insurance:

they just kind of kept pushing it on me saying, you know, “It’s good for you, it will help you.” I just felt pressured or kind of like, you know, no matter what I said, it was the opposite. So I couldn’t – I felt like I couldn’t cancel it.

These techniques are well established in psychological research as ways to manipulate behaviour. In this single example, we can see how the representative of the CBA used trust, repetition (the more something is repeated, the more we are likely to believe that it is true), authority (the salesperson is perceived to be an expert), and scarcity (act now, or you will miss out). All of these factors are part of the marketers’ bag of tricks.

As much as trust can be useful under certain circumstances, at times it can be dangerous. When we are faced with choices or decisions where we don’t feel confident, we have a tendency to give over our decision making to somebody who we believe has those skills and authority and trust them to do the right thing by us.

How we make decisions under situations of stress

As we can see in the examples from the commission, many of these financial decisions are being made by consumers under already significant financial and psychological stress. We also know that under these conditions none of us make the best decisions.

In psychology, we know that people don’t always think through their decision making in a rational and linear way when placed under situations of stress. This becomes more pronounced when – counter intuitively – people are provided with lots of information related to a topic that they don’t have the ability to fully understand, either because it is complex and confusing, or even simply because it is in an area that they don’t have any experience in.

It’s in these situations that they rely on peripheral information to make their choices – things like colours, previous experience with similar situations, even the aesthetic layout of the information, or the way the person giving them the information is dressed.

When we feel we have less resources, we perform worse on tasks requiring high-level cognitive control, like important decision making. Logical reasoning, the kind that should occur when signing up to a loan, extending our credit, or committing to any major financial agreement, is relatively inefficient in these situations.

Responding to pressure selling techniques

So, how do we respond to the types of techniques that we have seen and any others that might be exposed by the commission over the next 12 months?

We need to accept that our decision making is flawed and not judge ourselves, or others, harshly, when they seem to make irrational decisions, or behave in a way that is counter-intuitive. We need to accept that people are complicated, and will make a decision that conforms to their emotional state of mind, at that point in time.

That said, there are some things people can do to avoid some of these manipulative tactics. One thing is to do your best to slow down when it comes to decision-making. If you do want to buy something, that’s fine, but do it outside the heat of the sales process.

Speak to someone you trust about your plans. Recognise that your emotional brain may already have convinced your rational brain that you are making a good decision, so you need to check in with someone who isn’t emotionally engaged in the decision.

And if the person offering something like add-on insurance creates a sense of scarcity, then identify the feeling, and assume you can walk away. A classic technique of traditional sales is to say something along the lines of, “I can only offer you this now”, but the best response is always to take your time. If they are offering you this today, they are more than likely to offer it to you tomorrow.

One thing that has emerged from the royal commission is the somewhat obvious fact that banks are businesses. Indeed, people should not be fooled into thinking that banks are anything other than profit-driven organisations. Banks know exactly what they are doing when it comes to the use of manipulative techniques to get customers to buy their products.

The hope is that this royal commission will be able uncover and act upon some of the practices verging on illegal, while highlighting some of the more unpleasant and unethical practices that have been occurring.

Author: Paul Harrison, Director, Centre for Employee and Consumer Wellbeing; Senior Lecturer, Deakin Business School, Deakin University; Chiara Piancatelli, PhD Candidate

Consumers need critical thinking to fend off banks’ bad behaviour

From The Conversation.

The irresponsible (if not predatory) lending and the selling of “junk” financial products highlighted by the Financial Services Royal Commission should raise concerns for regulators, educators and parents interested in financial literacy.

Research shows a strong correlation between financial literacy and literacy and numeracy skills. Literacy and numeracy are critical for, among other things, making sense of product disclosure statements and understanding the impact of loan terms and interest rates on the total amount to be repaid.

But teaching financial literacy requires going beyond these skills, by cultivating a healthy scepticism of financial institutions and the capabilities and confidence to make informed financial decisions.

There is a strong relationship between a low socioeconomic background and low financial literacy in both adolescents and adults.

It’s not just disadvantaged and vulnerable groups that struggle with financial decision-making. People who are highly educated in finance also make poor decisions – for instance, by focusing too much on growing their assets and ignoring risks.

But studies show that when regulation is effective and the financial system can be trusted, even consumers with limited financial knowledge and information-processing capabilities have the potential to deal with complex financial decisions.

For example, when considering mortgage protection insurance, applicants stand to benefit from knowing the actual risk of events like serious illness or injury that can affect their ability to meet monthly loan repayments.

Building financial capability

One way to develop better financial literacy is through simulating real-world risks, rewards and decisions in safe and supportive environments. For instance, families can play games like Monopoly and The Game of Life.

Secondary school students also have access to more sophisticated online simulations, such as the ESSI Money Game and the ASX Sharemarket Game.

Hypothetical scenarios like these provide opportunities for role play, where students can practise drawing on evidence and using it to think and reason about situations.

A recent survey of teachers of Year 7-10 commerce students revealed that more could also be done to teach students how to compare and choose between banks and financial products and services, what to do in the case of a financial scam, and how to escalate an unresolved complaint.

But we also need to take a look at the role banks play in financial education. Programs like the Commonwealth Bank’s Dollarmites Club and Westpac’s Solve to Save teach children about money on the banks’ terms.

A key call to action in these programs is often to open a bank account and activate a savings plan. In the Solve to Save program, parents pay a $10 weekly subscription, which is “automatically refunded” to their child’s nominated Westpac account every week they complete three mathematics exercises.

Late last year, in response to criticism by the consumer advocacy group Choice, the Commonwealth Bank stopped kickback payments to schools related to its longstanding Dollarmites scheme.

While the banks may be proud of their investment in these education programs, they serve to position the banks as experts in money matters while cultivating trust and brand loyalty.

What does it really mean to be smart with money?

Misguided trust has exposed vulnerable individuals to the moral hazard of the banks – and underscores the importance of improved financial regulation and education moving forward.

Given that borrowing decisions are complex, multidimensional and often emotional, it’s important to consider any lender’s motives, or “What’s in it for them?” Banks are profit-driven. This means an important question to ask oneself is: “Where can I get information and support that is independent, comprehensive and easy to understand?”

In the current climate, teaching capabilities for a healthy scepticism and personal agency is the way forward.

We also need to change the public perception of what it means to be financially literate. The conventional focus on individual responsibility and wealth accumulation is flawed.

Arguably, this focus has contributed to the need for a Financial Services Royal Commission. Whether you are a bank, a mortgage broker or a consumer, the impact of your decisions on others must be carefully considered.

While education can contribute to preparing all Australians for informed financial participation, the task is challenging.

Authors: Carly Sawatzki, Assistant Professor, University of Canberra; Levon Ellen Blue, Lecturer, Queensland University of Technology

China’s new central bank governor will have to deal with massive debt and an ambitious economic agenda

From The Conversation.

The Chinese government has appointed a new head of its central bank. Yi Gang, currently the deputy governor of the People’s Bank of China, will take over the leadership from Zhou Xiaochuan, who had been in the position since 2002.

As China’s central bank oversees the stability of the world’s second-largest economy and the world’s largest pile of foreign reserves, this is a change the global economy is watching closely.

A US-trained economist, Yi received his doctorate in economics from the University of Illinois in 1986. He was a professor at Peking University in China following various academic positions in the US, before joining China’s central bank in 1997. Yi is known in academia for his expertise on inflation and price instability.

Yi developed his technocratic career exclusively within the headquarters of the central bank, taking up various leading positions in areas of monetary policy, exchange rate policy, and foreign reserve management. He then became the right-hand man of Zhou, who dominated Beijing’s economic policy-making for a record 15 years.

However Yi’s governorship came as a surprise, given the widely circulated rumours of other powerful contenders, such as Liu He, now announced as a vice premier of China, and Guo Shuqing, the chairman of China Banking Regulatory Commission.

But the appointment makes sense if the reshuffle of president Xi Jinping’s economic team is taken into account, as like-minded liberals lining up in key positions. Yi will actually work directly under Liu, who also trained in the US, ensuring that the government keeps in close consultation with the central bank while the bank does not stray politically.

Problems the new governor will have to confront

Now that the jockeying for the top position at the central bank is over, the new governor is bound to carry on Zhou’s liberal legacy and to tackle some of the more daunting challenges the Chinese economy faces.

First up is the need to further strengthen the central bank, which has been given extra duties in financial legislation and regulation in the latest round of administrative streamlining announced at the People’s Congress. After all, the authority of the central bank in government circles over the last two decades has largely hinged on the bank playing an indispensable role in providing professional expertise.

Yi will also work to defuse the debt bomb that has been lurking behind a series of alarming statistics of the Chinese economy. In particular, China’s total debt has almost doubled between 2008 and mid-2017, to 256% of GDP as the economy slowed down from double-digit growth to a mere 6%.

A distressed financial system could trigger a systemic economic collapse. To reign in this possibility, Yi will have to work closely with authorities in the State Council, China’s cabinet, to contain the risks to a manageable scale.

The bank will have to walk a fine line here. It must contain the shadow banking sector, which is largely beyond the radar of the authorities. At the same time it has to make sure such tightening does not choke financial innovations embodied by the burgeoning internet finance and fintech.

Equally, if not more important, the financial reforms must be taken to facilitate China’s grand economic transition. In the short to medium term, this entails a further aligning of China’s interest rates to China’s market levels.

They also need to bring its exchange rates in line with international market levels, open its financial markets in a gradual and orderly fashion, and push for the use of the Chinese currency in the global market. This is an ambitious project initiated by Zhou with the goal of seeing the renminbi’s international status on par with the greenback.

A more open and liberal financial system in China is of course good news for the world economy as well because central banks need to work together to address increasingly divergent policy priorities among advanced and emerging economies.

Whether or not Yi becomes the next “Mr RMB” (as Zhou is often dubbed), he needs to be the “Dr Reformer” at this critical stage of both the Chinese and global economy.

Author: Hui Feng, Future Fellow and Senior Research Fellow, Griffith University

Why the RBA needs to talk about future interest-rate policy

From The Conversation.

The Reserve Bank of Australia should follow the example of other central banks and be clearer about when and how rates will change, called “forward guidance”, to make its policy more effective.

At the moment the RBA follows an approach to implement monetary policy known as inflation targeting. This means it has a numerical target for inflation (an average 2-3% inflation over the medium term) and a framework to achieve that target (how it thinks monetary policy affects the economy, and how it communicates policy decisions).

Australia’s cash rate is at a historical low of 1.5%. So if there’s any adverse shock to our economy (for example, a large correction in house prices), the RBA would have little room to reduce the cash rate before getting to 0% – the zero lower bound on nominal interest rates.

At that point, you can’t cut rates anymore. Research shows economic shocks can have a more severe impact on economic activity when the policy rate is at, or near, zero.

Instead the RBA should be more explicit about the conditions that would lead to a rate change. Research shows this has stimulated economic recovery before.

How rates work at the moment

To understand forward guidance it helps to understand conventional thinking about monetary policy. The RBA controls inflation by adjusting the cash rate, which is the interest rate on overnight loans in the interbank market.

Changes in the cash rate change longer-term interest rates in the economy. These then influence households’ and businesses’ spending and investment plans. These decisions also determine demand and inflation.

For example, suppose inflation is below target. A cut in the cash rate reduces longer-term interest rates, which encourages people to buy goods and services (falls in long-term deposit rates and government bonds reduce the incentive to save) and invest (commercial and mortgage loans are cheaper). Rising demand sends prices up, which brings inflation back to target.

As with other central banks around the world, the RBA also explains the rationale for its policy decisions. For example, in the Statement of Monetary Policy, released four times a year, the bank sets out its assessment of current domestic and international economic conditions, along with an outlook for Australian inflation and output growth.

The purpose of these announcements is to enhance the credibility of the inflation target. If people trust the RBA will implement policy to achieve the inflation target, they will make plans around what they spend and how they price goods and services based on this. This makes inflation easier to control.

How being clearer about rates helps

While the RBA might not be able to influence the current cash rate, it can still influence longer-term rates by making announcements about its future policy decisions. Long-term interest rates usually change depending on what people expect of future cash rate changes.

So if monetary policy can influence these expectations, it can move long-term rates.

Of course, words are cheap. To make these declarations credible the RBA would need to communicate its plans for the future cash-rate, with modelling and forecasts justifying those plans.

Economists could then judge whether the RBA is meeting its objective through good luck or good policy. If it’s through good policy, it enhances the RBA’s credibility and, in a virtuous circle, this gives the bank policy more influence over expectations.

A prominent example of forward guidance comes from the United States’ central bank, the Federal Reserve. In December 2008, when the federal funds rate (the US equivalent of the Australian cash rate) was first at the zero lower bound, the Federal Reserve announced:

The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Translated, the Fed anticipated keeping the federal funds rate at zero for a considerable time. This communication was meant to influence the public’s expectations about the future course of US monetary policy, and to have consumers and businesses expect an expansionary monetary policy for some time.

During the recovery, the Fed refined its communication strategy to become more explicit about the economic circumstances that would lead to a change in policy. For example, in June 2013, the committee that sets rates anticipated that:

…this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-½%.

This type of announcement gives people more information about the strategy the Fed will take with rates, rather than simply providing forecasts about what it expects future economic conditions to be like (which doesn’t need to have any information about policy strategy).

Recent evidence confirms this had an impact on businesses’ expectations. Right after the June 2013 announcement by the Federal Reserve, there was an increase in the number of quarters until businesses expected the US policy rate to increase above 25 basis points.

FOMC= Federal Open Market Committee (which sets rates) Swanson and Williams: the zero bound and interest rates, Author provided

Other research also suggests forward guidance influenced private sector expectations and stimulated the economic recovery after the global financial crisis.

At the moment, the RBA doesn’t produce statements about future monetary policy and how this would change if the economic environment changed. But the bank could do this.

The RBA has the luxury to develop its communications policy during a time of economic calm, unlike the Federal Reserve, which was forced to experiment with new policies during the worst recession since the Great Depression.

If the RBA waits until a future crisis, it would limit the power forward guidance could have in our economy.

Efrem Castelnuovo, Principal Research Fellow, Melbourne Institute of Applied Economic and Social Research, and Professor of Economics, Department of Economics, University of Melbourne;
Bruce Preston, Professor of Economics, University of Melbourne; Giovanni Pellegrino, Postdoctoral Research Fellow, University of Melbourne

Homeless numbers will keep rising until governments change course on housing

From The Conversation.

Ten years ago the Australian government launched a National Partnership Agreement on Homelessness (NPAH). It injected A$800 million into homelessness services and A$300 million to build 600 new homes for people experiencing homelessness. It was later announced that another A$400 million would be available under the National Affordable Housing Agreement (NAHA) to build new housing and supported accommodation for the homeless. Total recurrent expenditure (at 2016-17 prices) on homelessness services has increased by 28.8%, from A$634.2 million in 2012-13 to A$817.4 million in 2016-17.

But despite this, the number of people experiencing homelessness and the rate of homelessness have both increased. Our research points to problems in the public housing system as one of the more important causes of these increases.

According to census figures released on Wednesday by the Australian Bureau of Statistics (ABS), the number of homeless people in Australia has risen by 14% to 116,427. The rate of homelessness has increased from 47.6 people per 10,000 of the population in 2011, to 49.8 per 10,000 now. (The ABS defines homelessness here.)

There is some good news: the numbers of Indigenous homeless and homeless children and youth (aged 12-18) have declined by 26%, 11% and 7% respectively since 2011. But on the downside, increases are particularly pronounced in New South Wales (where the homelessness rate rose by 27% and among people aged over 65 (by just over 30%) and overseas-born migrants (by 40%).

Why are we still going backwards?

Changes in Australian housing and welfare systems and wider social and economic developments appear to have more than offset any benefits from the NPAH and NAHA. Our research sheds some light on the role played by Australia’s housing system. Using the internationally recognised and unique Journeys Home longitudinal survey, we find that public housing is the most important factor in preventing homelessness among vulnerable people.

Public housing is particularly effective because it is affordable. It has also traditionally offered a long-term refuge for precariously housed people. This is because public housing leases provide the benefits of security of tenure commonly associated with home ownership.

It is perhaps no accident that NSW was one of the first states to introduce fixed-term tenancies in public housing. This eroded one of the major attributes of tenure, in a state that has seen relatively large increases in homelessness numbers.

The empirical evidence also suggests that community housing fails to provide the same protection for people at risk of homelessness. While community housing is affordable, the security of tenure is weaker, which may explain these findings.

Despite such evidence, the stock of public housing continued to decline between the 2011 and 2016 censuses. State government-initiated transfers of stock to the community housing sector accelerated this trend. In 2013 Australia had a public housing stock of 325,226 dwellings. This declined by 3.2% to 314,864 usable dwellings in 2017.

Where are the additional homeless coming from?

One of the more alarming changes is a sharp increase in the number of homeless people over 65. This partly reflects Australia’s ageing population. However, the increase is such that the elderly’s share of the total homelessness count has also risen.

Furthermore, our research suggests that this trend could become protracted. This is because the homeless elderly have much less chance of escaping into formal housing than younger people experiencing homelessness. We have little understanding of the reasons for this, but gaps in service provision to the aged could be partly responsible.

The other group who feature prominently among the homeless are overseas migrants. They now make up 46% of the homeless, despite representing just 28% of the Australian population. The number of homeless overseas-born migrants has soared by 40% since the 2011 Census, from 38,085 to 53,606 people.

It turns out that homeless overseas-born migrants are concentrated among those living in severely overcrowded dwellings – a little over half of those living in these conditions were born overseas. We know little about these homeless people. Discrimination could be a factor, though some characterise this group as students living in group households who should not be considered homeless. But this is speculation and further study is certainly required.

In view of the latest census results, it is clear to us that governments need to reassess their approach to what is turning into an intractable social problem.

We do not deny that situational factors, such as drug abuse, domestic violence and so forth, are important here. But equally, there is strong evidence that structural problems in our housing market are a significant cause of growth in the numbers of homeless people.

Until these problems are resolved, service provision and support will remain a band-aid masking deeper social and housing system issues.

Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University; Guy Johnson, Professor, Urban Housing and Homelessness, RMIT University; Juliet Watson, Lecturer, Urban Housing and Homelessness, RMIT University; Rosanna Scutella, Senior Research Fellow, Centre for Applied Social Research, RMIT University

The Financial Services Royal Commission highlights the vulnerability of many older Australians

From The Conversation.

One worrying takeaway from the first week of the Financial Services Royal Commission is how many elderly people are being adversely affected by irresponsible lending.

Such lending is often the result of an agreement with a family member, for example an adult child, to help that person financially by entering into a joint loan. These loans are secured against the older person’s home, which is a huge risk if the loan defaults and the older person cannot service the debt.

To ensure that older people contemplating joint loans are aware of the downside of transactions, there needs to be greater access to legal and financial advice prior to the transaction and better training for bank employees and loan officers about responsible lending obligations and the potential “unsuitabilty” of such loans.

Consideration should also be given to larger penalties for banks that provide unsuitable loans to older people.

Other examples we have seen this week include an elderly woman who has been paying off the same A$1,000 since the 1990s, and a 72-year-old nurse who was permitted to borrow more than A$3 million to buy 11 investment properties.

On the face of it, there are laws that should safeguard elderly consumers from “getting in over their head”.

When a consumer applies for credit, the National Consumer Credit Protection Act obliges a credit provider to make reasonable inquiries about the consumer’s financial situation and their requirements and objectives.

In so doing, the credit provider must take reasonable steps to verify the consumer’s financial situation. This means that payments must be able to be made without substantial hardship to the consumer.

However, the Consumer Action Law Centre says that “it is common that these steps are not adequately followed by lenders”.

Even if these steps are followed, the legislation does not define “substantial hardship”. There is a presumption that if a consumer must sell their principal residence to pay back a loan, this demonstrates substantial hardship.

Emotional lending

Of particular concern is when an older person is persuaded to enter into a joint loan with a third party, such as their son or daughter. These loans are invariably secured by the older person’s property, with the younger person agreeing to pay off the debt.

If the adult child does not pay off the debt, the older person – who is often asset-rich but income-poor – may be unable to service the loan. The older person’s property will be repossessed by the lender, forcing them to relocate, enter the rental market, or even become homeless.

The loans may arise simply because the older person wants to help their adult child through a difficult financial period. It is understandable that a parent would want to help if a business is failing or a child is at risk of losing their house.

But such loans often arise within an atmosphere of crisis (real or exaggerated), in which the adult child pressures the older person into entering into the loan.

In extreme cases, older people have been told that they will be unable to see their grandchildren if they do not enter into loans.

It is not always that the older person is vulnerable per se, but that they are “situationally vulnerable” because of concern for the well-being of a child, or the desire to maintain relationships.

The reality is that it is often difficult for the older person to refuse.

Karen Cox of the Financial Rights Legal Centre noted at the Royal Commission that these loans are:

outright exploitative … elderly persons [are] left in dire circumstances as a result of a loan for which they’ve seen absolutely no benefit.

Similar comments apply to other financial transactions made for the benefit of a third party such as entering into a “reverse mortgage”. This is where the older person takes out a loan against the equity built up in a home (or other asset), with the money given to a child to buy a house or prop up their business.

What could be done?

Advocates are rightly concerned about the financial consequences for older people who enter into such loans. However, the property does belong to the older person and they are entitled to make whatever decisions they want, including risky ones.

Elderly people should be fully informed of their obligations and the potential consequences, should a transaction goes wrong. Banks could lead the way with this.

One initiative would be for the banks to contribute to legal and financial advice for older people, or subsidise the provision of such advice at community legal centres.

Loan assessors and brokers must also be made aware of the risks of such transactions.

The Australian Bankers Association is introducing enhanced measures to address elder financial abuse and the risks associated with such loans should be emphasised.

Finally, the government should consider tougher penalties against credit providers who disregard responsible lending obligations. Presently, if a bank is found to have lent irresponsibly they will simply compensate the consumer for the loss. Meaningful penalties that deter reckless lending should be considered.

Author: Eileen Webb, Professor, Curtin Law School, Curtin University

Affordable housing policy failure still being fuelled by flawed analysis

From The Conversation.

Australia has a housing affordability problem. There’s no doubt about that. Unfortunately, one of the reasons the problem has become so entrenched is that the policy conversation appears increasingly confused. It’s time to debunk some policy clichés that keep re-emerging.

Is ‘zoning’ to blame?

It can be tempting to frame the housing affordability problem as all about inadequate new supply. According to this argument, the “demand side” drivers – such as low interest rates and tax incentives for property investment – have combined with population growth in the capital cities to fuel house prices, and new housing construction simply hasn’t kept up.

“Zoning” is often blamed. There is little hard evidence, though, to show systematic regulatory constraint.

Supply is at record highs, and in the right places

Australia’s new housing supply per capita is actually very strong by international standards. Over the past decade, supply of new units and apartments has been flowing in job-rich metropolitan areas with dense populations, which are also higher-value locations.

According to the cliché, this supply response should have cooled prices. Yet dwelling price inflation has surged even in metropolitan areas where new housing supply has exceeded population growth.

The fallacies of ‘filtering’

One of the great hopes underpinning the supply cliché is that new housing stock improves affordability even if these homes are not affordable for lower-income groups. This faith is based on a theory called “filtering” whereby older housing moves down to the affordable end of the market over time.

The empirical data on filtering are thin. Indeed, the academic literature has historically cast doubt on the theory. However, some commentators continue to claim that American rental housing markets provide evidence that “filtering” can occur in practice.

But whatever might happen in the US, in Australia there’s still no evidence to suggest new housing supply has filtered across the housing stock to expand affordable housing opportunities for low-income Australians, or that it will do so any time soon.

Prominent economists continue to produce data that suggest the potential impact of new supply on price is minimal. The shortage of affordable housing opportunities for low-income households in Australia remains persistent. And the evidence indicates that low-income working households in our cities consistently face housing costs well above accepted affordability levels regardless of the quality of the housing they live in.

Sustaining supply in a cooling market?

Some commentators cite cooling house prices as evidence that the supply response is taking effect. Whether or not that is so (above and beyond demand-side factors like higher interest rates for investor loans), expect the pipeline to start slowing down. Private sector development is driven by profit and risk and, as we have seen over many years, is characterised by speculative booms and busts.

Developers can turn off the new supply tap much more quickly than they can turn it on. Falling prices, weak consumer sentiment and economic uncertainty mean many developers will not follow through on building approvals until the market recovers.

This means that high levels of supply output are rarely sustained. Recent housing data in Western Australia provide a case in point. WA recorded rising completions in 2014, 2015 and 2016. But 2017 completion figures are expected to show a drop of around a third as prices have shaded off since the end of the mining boom.

Put simply, the market on its own will never solve Australia’s housing affordability problem. Expecting developers to keep building in order to reduce house prices is pure fantasy.

Planning reform is not an affordable housing strategy

We’ve written before about the political appeal of calling for planning reform instead of real solutions to housing affordability pressures. In fact, Australian states have embarked on more than a decade of planning reforms.

They have aimed to: standardise and simplify planning rules; promote mixed use and higher-density housing near train stations; and overcome local political opposition to development through the use of independent expert panels.

Housing targets for both urban infill and new greenfield areas have been a feature of metropolitan plans to drive dwelling approval rates since at least 2000.

These reforms have been effective in overcoming regulatory constraints. The scale of the recent supply response shows clearly that zoning and development assessment processes are not inhibiting residential development approvals in cities like Sydney and Melbourne.

But trying to accommodate Australia’s population growth in towers around railway stations will fail as an affordable housing strategy – even if “zoning” and height rules were completely scrapped.

Rather than narrow deregulation agendas, bigger picture reforms are needed. Aligning infrastructure funding with metropolitan and regional decentralisation is a critical long-term strategy. Reforms to deliver affordable housing in communities supported by new infrastructure are long overdue.

A bigger affordable housing sector is needed

Australia needs a more realistic assessment of the housing problem. We can clearly generate significant dwelling approvals and dwellings in the right economic circumstances. Yet there is little evidence this new supply improves affordability for lower-income households. Three years after the peak of the WA housing boom, these households are no better off in terms of affordability.

In part, this may reflect that fact that significant numbers of new homes appear not to house anyone at all. A recent CBA report estimated that 17% of dwellings built in the four years to 2016 remained unoccupied.

If we are serious about delivering greater affordability for lower-income Australians, then policy needs to deliver housing supply directly to such households. This will include more affordable supply in the private rental sector, ideally through investment driven by large institutions such as super funds. And for those who cannot afford to rent in this sector, investment in the community housing sector is needed.

In capital city markets, new housing built for sale to either home buyers or landlords is simply not going to deliver affordable housing options unless a portion is reserved for those on low or moderate incomes.

Authors: Nicole Gurran, Professor of Urban and Regional Planning, University of Sydney; Bill Randolph, Director, City Futures Research Centre, Faculty of the Built Environment, UNSW; Peter Phibbs, Director, Henry Halloran Trust, University of Sydney; Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University; Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University

Voice assistants will have to build trust before we’re comfortable with them tracking us

From The Conversation.

We’re all used to targeted advertisements on the internet. But the introduction of voice assistants like Apple’s Siri and Google Assistant mean that companies are capturing all new kinds of data on us, and could build much more detailed “behaviour profiles” with which to target us.

There is already a lot of scaremongering and pushback, as there was with targeted online advertising.

But over time consumers have come to not only accept targeted advertising and personalisation, but to see it as valuable. When advertising is relevant to our interests and needs, we have the opportunity to discover new brands and products. This is a win for both consumers and brands.

A behavioural profile is a summary of a consumer’s preferences and interests based on their online behaviour. Google, Facebook and other platforms use this personalised data and activities to target advertising.

Currently these profiles are built using data on search and internet activity, what device you are using, as well as data from our photos and stated preferences on things like movies and music (among many other things).

But voice adds a whole other dimension to the kind of data that can be collected – our voice assistants could pick up conversations, know who is home, what time we cook dinner, and even our personalities through how we ask questions and what we ask about.

However, Google says its virtual assistant only listens for specific words (such as “ok Google”) and that you can delete any recordings afterwards.

Remarkably, many young consumers evidently once believed that their information wasn’t being used to target advertising at all. This 2010 study showed that even though young people knew all about tracking and social media, they were still amazed at the thought of their information being used.

The people in the study thought that if their accounts were on private then no one else had access to their information.

Targeting, good or bad?

Most of us are not fully aware of how and when our data are being collected, and we rarely bother to read privacy policies before we sign up to a new platform.

Research shows that we find the personalisation of our services and advertisements valuable, although some experts suggest that companies aren’t really using the full extent of targeting capabilities, for fear of “over personalising” the messages and customers responding negatively.

However, many of us have had the experience of having a conversation about a product or brand, only to be served up an ad for that product or brand a short time later. Some people fear that the microphones are always listening, although it is likely a coincidence.

There is even a theory in academia called Baader-Meinhof phenomenon. This is when you become aware of a brand or product and all of a sudden you start to notice that brand around you, for example in the ads. This is similar to the way that once you are in the market for a new red car, all you seem to see are shiny red cars on the road.

Baader-Meinhof theory or not, the reality is that the shift towards voice-activated search brings the potential for this information to form part of your behavioural profile. After all, if the speakers know more about you, they can cater to your needs more seamlessly than ever before.

Will we accept this use of data as readily as we accepted our online information being used to target us? Or is this new technology going to inflame our privacy concerns?

Online privacy concerns are influenced by consumers’ ability to control their information and also their perception of vulnerability. Some researchers have theorised that because speakers seem human, they need to build trust like a human would – through time and self-disclosure.

However, for many of us the benefits and rewards such as finding information in a quick and convenient manner far outweigh potential privacy concerns that result from their personal data being used.

What could be more convenient or comfortable than calling out to an all-knowing omnipresent “someone”, in the same way you might ask a quick question of your spouse or flatmate?

At the moment, these technologies are still novel enough that we notice them (for instance, when Alexa suddenly started “cackling” last week). But after some time, perhaps we will come to take this personalisation for granted, always expecting ads to be targeted to us based on what we want right now.

What it comes down to is that brands need to build trust by being transparent about how they collect data. If consumers are unsure of how that data was collected and used they are likely to reject the personalised content.

Author: Louise Kelly, Lecturer, Queensland University of Technology; Kate Letheren, Postdoctoral Research Fellow, Queensland University of Technology

Why Trump’s tariffs will have little impact on Australia and a trade war is unlikely

From The Conversation.

US President Donald Trump has levied a 25% tariff on steel and a 10% tariff on aluminium imported from all countries except Canada and Mexico. Trump had hinted that the trade protections would exclude Australia, but it wasn’t explicitly exempted.

Regardless, import tariffs on steel and aluminium will have only a small impact on the Australian economy, as Australia isn’t a large exporter of steel or aluminium. What Australia does export to the United States is covered by a free trade agreement.

Even though the European Union, China and other countries will have tariffs levied on their steel and aluminium exports, the US move is unlikely to escalate into a trade war. The World Trade Organisation has powers to sanction countries that arbitrarily impose tariffs.

And Trump’s justification for the tariffs in the first place, that the United States is losing something due to running trade deficits, has been thoroughly debunked by modern economics.

A tariff imposed on any good is an extra tax that raises its sale price equivalently, making it less attractive to buyers than the domestically made product.

There could be some concern if the United States extends tariffs to beef, other meat products, aircraft parts, pharmaceuticals and alcoholic beverages. These goods comprise the top five Australian exports to the United States and account for considerably larger trade volumes than steel and aluminium.

Yet there is no reason to expect tariffs will suddenly be imposed on these major exports, given the provisions of the Australia–United States Free Trade Agreement.

This agreement comprehensively covers trade in goods and services, as well as investment flows, between the two nations. It eliminated many of the pre-existing tariffs affecting trade.

US Vice President Mike Pence has even described this free trade agreement as “a model for the world”.

The World Trade Organisation to the rescue?

In 2002, President George W. Bush imposed tariffs of up to 30% on imported steel in the midst of major structural change in the US steel industry. Major steel exporters Canada and Mexico were exempt from the Bush tariffs under the provisions of the North America Free Trade Agreement.

The World Trade Organisation rejected the Bush administration’s claim that the tariffs were justifiable due to a surge in steel imports. The justification for the Trump tariffs is based on national security grounds, so it remains to be seen how the the World Trade Organisation will decide on the tariffs.

But there are grounds for hoping history will repeat and the World Trade Organisation will slap down the new tariffs, given the possible trade ramifications if countries retaliate with their own tariffs.

If the World Trade Organisation upholds the Trump tariffs, it could herald the end of the international trading system that has operated passably well over recent decades.

Trump’s new mercantilism?

Trump frequently laments the persistent trade deficits the United States runs against other major economies, notably China, Japan and Germany, and refers to these deficits to justify protectionist measures.

But this argument isn’t new – the idea that trade deficits are “bad” for an economy has been around since economics as an academic discipline began.

For instance, one strand of economics from Elizabethan England advocated achieving trade surpluses as the means to national prosperity. In the words of a leading proponent, Thomas Mun, it was necessary to “sell more to strangers yearly than we consume of theirs in value”.

But this doctrine has been soundly debunked, first by the father of economics, Adam Smith, and modern economic theory has since confirmed Smith’s position.

Modern economics shows that trade and current account deficits (a broader measure of trade that includes international money flows) are not problematic. This is because they are inflows of capital that can lead to increased domestic investment.

In other words, running a trade or current account deficit can actually assist economic growth, just as it has for Australia, by enabling lower long-term interest rates and higher capital accumulation than otherwise.

The major exception to this is when foreign capital inflow finances government budget deficits, thereby strengthening the local currency and worsening international competitiveness.

Ironically, the American manufacturing sector could suffer greater damage from lost international competitiveness than from cheap steel and aluminium imports.

Author: Tony Makin, Professor of Economics, Griffith University

How the government can pay for its proposed company tax cuts

From The Conversation.

There are ways the government can pay for a cut in the company tax rate. In a recent working paper, we worked with researcher Chris Murphy to model three different options: reforming Australia’s system of giving shareholders tax credits, allowing less tax deductions on interest for companies, and introducing a tax on the super-profits of banks and miners.

After taking economic growth into account, the budget cost of the tax cut could be net A$5 billion a year.

In the US, a company tax cut to 21% continues an inexorable global trend of cutting rates, making international tax competition even more pressing. As our working paper noted, Australia’s rate is now higher than most other countries, making tax avoidance even more attractive and deterring inbound foreign investment.

A cut in the Australian company tax rate to 25 or even 20% is important because it will attract foreign investment, boosting wages and the economy in Australia.

Remove dividend imputation

Australia has an unusual system of integrated company and personal tax, called dividend imputation. It has been in place since the 1980s.

Australian shareholders receive franking (imputation) credits for company tax. If shareholders are on a personal tax rate less than 30%, they receive a refund.

The company tax cut could be financed by removing dividend imputation. Our modelling indicates a company tax rate of 20% would mean the government breaks even, while halving imputation could finance a 25% rate.

It would be simpler to abolish dividend imputation and replace it with a discount for dividend tax, at the personal level.

Dividend imputation only makes sense if we assume Australia is a closed economy with no foreign investors. In reality, Australia depends on inflows of foreign investment. About one-third of the corporate sector is foreign owned.

The likely source of additional finance, especially for large Australian businesses, is a foreigner who does not benefit from dividend imputation. So the company tax pushes up the cost of capital and domestic investors benefit from franking credits for a tax they don’t actually bear.

But the politics of making a change to the system are difficult, because domestic investors, especially retirees on low incomes and superannuation funds would lose out. But this approach could benefit workers, jobs and Australian businesses.

Broaden company tax by removing interest deductibility for companies

Another approach is to remove or limit deductibility of interest for companies. This can raise the same revenue at a lower rate, by allowing less deductions. Excessive interest deductions are used by multinationals to reduce their Australian tax bill, as shown in the recent Chevron case.

This would be like imposing a withholding tax on interest paid offshore. We explore a comprehensive business income tax on all corporate income. Modelling shows that this tax would finance the rate cut to 25%.

The comprehensive business income tax raises some difficult issues for taxing banks. This is because their profit is interest income less interest expense.

But there are numerous policies to restrict interest deductions already in place, here and around the world. These restrictions could be expanded. For example the thin capitalisation rules limit of the amount of loans a business can have relative to equity.

We still need anti-abuse rules because businesses can use other methods to minimise tax, as canvassed by the OECD in its Base Erosion and Profit Shifting project, including transfer pricing, and deductible payments offshore for intellectual property fees.

A rent tax or allowance for equity

A third option for a company tax cut is to change to a tax with a lower effective marginal rate. This means that the return on a new investment is taxed less heavily than under a company income tax.

We could introduce an allowance for corporate equity, or corporate capital, which provides a deduction for the “normal” or risk-free return for capital investment. This is also called an economic rent tax because it only taxes the above-normal profit.

Modelling shows that the allowance for corporate capital encourages new investment, which helps economic growth, but there is a large budget cost. The extra deduction reduces the overall tax take and so a higher rate is needed for the same revenue.

It is unlikely Australia would want to maintain or increase our company tax rate, as this directly contrary to the global trend and can lead to even more tax planning by businesses.

For Australia, a supplementary rent tax aimed at the financial and mining sectors – where above-normal returns are known to occur – could be combined with a lower company income tax. Modelling this option for the finance sector shows a large welfare gain and sufficient revenue to fund the rate cut to 25%.

The government has a lot of choices

We show that the government has many options available to finance the needed corporate rate cut and improve efficiency of the company tax.

Policymakers could mix and match these options. Dividend imputation could be replaced with a discount and combined with a comprehensive business income tax. Limits on interest deductibility could be combined with a part allowance for corporate capital.

Replacing dividend imputation with a dividend discount at the personal level could be the best initial step. Other options for major reform of Australia’s company tax need to remain on the table, as company taxes drop to a new low and systems are reformed around the world.

David Ingles, Senior Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University; Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University