Sydney’s housing affordability crisis is being artificially exacerbated by “lunacy” tax incentives, a new report has claimed.
According to the analysis by the UNSW’s City Futures Research Centre, up to 90,000 properties are sitting empty in some of Sydney’s most sought-after suburbs as investors chase capital gains over rental returns.
The analysis’ researchers, Professor Bill Randolph and Dr Laurence Troy, said this is thanks to the “perverse outcomes” of tax incentives such as negative gearing, Fairfax has reported.
“Leaving housing empty is both profitable and subsidised by government,” Randolph and Troy told Fairfax.
“This is taxation lunacy and a national scandal.”
According to Fairfax, the 2011 census revealed that in Sydney’s “emptiest” neighbourhood of the CBD, Haymarket and The Rocks, one in seven dwellings was vacant.
Close behind were Manly-Fairlight, Potts Point-Woolloomooloo, Darlinghurst and Neutral Bay-Kirribilli, which all had vacancy levels above 13%. These neighbourhoods, together with central Sydney, account for nearly 7,200 empty homes.
The UNSW analysis of the 90,000 unoccupied dwellings across metropolitan Sydney compared the number of empty homes in a suburb against the rate of return investors made by renting out a property.
It found that properties in neighbourhoods with lower rental yields and higher expected capital gains were more likely to be unoccupied.
Gordon-Killara on the north shore had the highest share of vacant apartments, with more than one in six unoccupied on Census night, according to Fairfax. By contrast, only one in 42 dwellings (2.4%) in Green Valley-Cecil Hills, in Sydney’s west, was unoccupied.
These results suggest property investors in some of Sydney’s most desirable areas have become indifferent to whether their investment property is rented or not. Instead, investors are chasing capital gains with rental losses offset by negative gearing and capital gains concessions.
According to Troy and Randolph, this calls into question Sydney’s housing supply and affordability problem.
“If you choose to accept that there is a housing shortage in Sydney, then the sheer scale and location of these figures strongly suggest that this is an artificially produced scarcity,” they said, according to Fairfax.
Month: March 2016
Four reasons payday lending will still flourish despite Nimble’s $1.5m penalty
The payday lending sector is under scrutiny again after the Australian Securities and Investment Commission’s investigation into Nimble.
After failing to meet responsible lending obligations, Nimble must refund more than 7,000 customers, at a cost of more than A$1.5 million. Aside from the refunds, Nimble must also pay A$50,000 to Financial Counselling Australia. Are these penalties enough to change the practices of Nimble and similar lenders?
It’s very unlikely, given these refunds represent a very small proportion of Nimble’s small loan business – 1.2% of its approximately 600,000 loans over two years (1 July 2013 – 22 July 2015).
The National Consumer Credit Protection Act 2009 and small amount lending provisions play a critical role in protecting vulnerable consumers. Credit licensees, for example, are required to “take reasonable steps to verify the consumer’s financial situation” and the suitability of the credit product. That means a consumer who is unlikely to be able to afford to repay a loan should be deemed “unsuitable”.
The problem is, regulation is just one piece of a complex puzzle in protecting consumers.
- It’s going to be difficult for the regulator to keep pace with a booming supply.Nimble ranked 55th in the BRW Fast 100 2014 list with revenue of almost A$37 million and growth of 63%. In just six months in 2014, Cash Converters’ online lending increased by 42% to A$44.6 million. And in February 2016, Money3 reported a A$7 million increase in revenue after purchasing the online lender Cash Train.
- Consumers need to have high levels of financial literacy to identify and access appropriate and affordable financial products and services.The National Financial Literacy Strategy, Money Smart and Financial Counselling Australia, among other providers and initiatives, aim to improve the financial literacy of Australians, but as a country we still have significant progress to make. According to the Financial Literacy Around the World report, 36% of adults in Australia are not financially literate.
- The demand for small loans is high and yet there are insufficient supply alternatives to payday lending in the market.The payday loan sector dominates supply. Other options, such as the Good Shepherd Microfinance No Interest Loan Scheme (NILS) or StepUP loans, are relatively small in scale. As we’ve noted previously, to seriously challenge the market, realistic alternatives must be available and be accessible, appropriate and affordable.
- Demand is not likely to decrease. People who face financial adversity but cannot access other credit alternatives will continue to seek out payday loans.ACOSS’s Poverty in Australia Report 2014 found that 2.5 million Australians live in poverty. Having access to credit alone is not going to help financially vulnerable Australians if they experience an economic shock and need to borrow money, but lack the economic capacity to meet their financial obligations.
Social capital can be an important resource in these situations. For example, having family or friends to reach out to. This can help when an unexpected bill, such as a fridge, washing machine or car repair, is beyond immediate financial means. Yet, according to the Australian Bureau of Statistics General Social Survey, more than one in eight (13.1%) people are unable to raise A$2,000 within a week for something important.
Coupled with regulation, these different puzzle pieces all play an important role in influencing the entire picture: regulators and regulation; the supply of accessible, affordable and appropriate financial products; the financial literacy and capacity of consumers; people’s economic circumstances; and people’s social capital.
Previous responses to financial vulnerability have often focused on financial inclusion (being able to access appropriate and affordable financial products and services), financial literacy (addressing knowledge and behaviour), providing emergency relief, or regulating the credit market. Dealing with these aspects in silos is insufficient to support vulnerable consumers.
A more holistic response is needed: one that puts the individual at the centre and understands and addresses people’s personal, economic and social contexts. At the same time, it must factor in the role of legislation, the market and technology.
The Turnbull government recently committed to “creat[ing] an environment for Australia’s FinTech sector where it can be internationally competitive”.
With more online lenders coming, it’s important we work towards strengthening people’s financial resilience.
Improving the financial resilience of the population, coupled with strong reinforced regulation, will help to protect financially vulnerable Australians from predatory lenders.
Authors: Kristy Muir, Associate Professor of Social Policy / Research Director, Centre for Social Impact, UNSW Australia; Fanny Salignac,
Research Fellow – Centre for Social Impact, UNSW Australia; Rebecca Reeve, Senior Research Fellow, Centre for Social Impact, UNSW Australia
Fed Says Future Rate Hikes Will Be Gradual
Chair Janet L. Yellen’s speech at the Economic Club of New York “The Outlook, Uncertainty, and Monetary Policy” reinforces the view that only gradual increases in the federal funds rate are likely.
In December, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate, the Federal Reserve’s main policy rate, by 1/4 percentage point. This small step marked the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery from the worst financial crisis and recession since the Great Depression. The Committee’s action recognized the considerable progress that the U.S. economy had made in restoring the jobs and incomes of millions of Americans hurt by this downturn. It also reflected an expectation that the economy would continue to strengthen and that inflation, while low, would move up to the FOMC’s 2 percent objective as the transitory influences of lower oil prices and a stronger dollar gradually dissipate and as the labor market improves further. In light of this expectation, the Committee stated in December, and reiterated at the two subsequent meetings, that it “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”
In my remarks today, I will explain why the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years, emphasizing that this guidance should be understood as a forecast for the trajectory of policy rates that the Committee anticipates will prove to be appropriate to achieve its objectives, conditional on the outlook for real economic activity and inflation. Importantly, this forecast is not a plan set in stone that will be carried out regardless of economic developments. Instead, monetary policy will, as always, respond to the economy’s twists and turns so as to promote, as best as we can in an uncertain economic environment, the employment and inflation goals assigned to us by the Congress.
The proviso that policy will evolve as needed is especially pertinent today in light of global economic and financial developments since December, which at times have included significant changes in oil prices, interest rates, and stock values. So far, these developments have not materially altered the Committee’s baseline–or most likely–outlook for economic activity and inflation over the medium term. Specifically, we continue to expect further labor market improvement and a return of inflation to our 2 percent objective over the next two or three years, consistent with data over recent months. But this is not to say that global developments since the turn of the year have been inconsequential. In part, the baseline outlook for real activity and inflation is little changed because investors responded to those developments by marking down their expectations for the future path of the federal funds rate, thereby putting downward pressure on longer-term interest rates and cushioning the adverse effects on economic activity. In addition, global developments have increased the risks associated with that outlook. In light of these considerations, the Committee decided to leave the stance of policy unchanged in both January and March.
I will next describe the Committee’s baseline economic outlook and the risks that cloud that outlook, emphasizing the FOMC’s commitment to adjust monetary policy as needed to achieve our employment and inflation objectives.
Bank of England Consults On Tighter Lending Standards For Buy-To-Let
The Bank of England has released a consultation paper which seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts. The proposals also include clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages. Of note is a minimum interest rate floor of 5.5% to be used for testing repayment capacity, and tighter rules on affordability testing.
Firms should assess all buy-to-let mortgage contracts from the perspective of whether the borrower will be able to pay the sums due. The underwriting standards set out in this supervisory statement should form minimum standards, regardless of whether the borrower is an individual or a company.
To avoid existing borrowers being adversely affected when re-mortgaging, the expectations do not apply to buy-to-let remortgages where there is no additional borrowing beyond the amount currently outstanding under the existing buy-to-let contract to the firm or to a different firm. In determining the amount currently outstanding, new arrangement fees, professional fees and administration costs should be excluded.
Any reduction in buy-to-let activity and lower buy-to-let mortgage stock will lead to a reduction in short-term revenues for lenders and mortgage brokers. While affected firms may be able to recover some of the reduction in revenues by lending to owner-occupiers or other business activities in the economy, we think some more affected firms may find it difficult to recover lost revenues. Some buy-to-let investors could see an impact on their ability to obtain a buy-to-let mortgage and/or the profitability of their lending activities due to higher deposit requirements. However, affected investors may be able to find returns in other investment opportunities.
Affordability testing
Affordability tools constrain the value of the loan that a firm can extend for a given income and can reduce the probability of default on the loan particularly in an environment of rising interest rates. At higher levels of indebtedness, borrowers are more likely to encounter payment difficulties in the face of shocks to income and interest rates.
Rental income is an important factor when determining the ability of buy-to-let landlords to service their debt. Accordingly, a widespread market practice in the buy-to-let lending market is to use the mortgage’s interest coverage ratio (ICR) in assessing affordability. In addition to rental income, some borrowers use personal income to support their ability to service their debt.
The PRA is therefore proposing that all firms use an affordability test when assessing a buy-to-let mortgage contract in the form of either an ICR test; and/or an income affordability test, where firms take account of the borrower’s personal income to support the mortgage payment.
The PRA is seeking to establish a standard set of variables that should be reflected within the ICR test and the income affordability test. To ensure that firms are being prudent in their affordability assessment, the PRA is proposing that firms, among other things, give consideration to: all costs associated with renting out the property where the landlord is responsible for payment; any tax liability associated with the property; and where personal income is being used to support the rent, the borrower’s income tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs.
As affordability constrains the value of the loan a firm can extend, the PRA is not at this time proposing supervisory guidance with respect to specific loan-to-value (LTV) standards. However, the PRA does expect firms to have appropriate controls in place to monitor, manage and mitigate the risks of higher LTV lending.
Interest rate affordability stress test
The buy-to-let market is characterised by floating, or relatively short-term fixed mortgage rates typically on an interest-only basis. These attributes heighten the sensitivity of buy-to-let lending to changes in interest rates, which increase debt service costs.
Consequently, the PRA proposes that, when assessing affordability in respect of a potential buy-to-let borrower, firms should take account of likely future interest rate increases. In particular, the PRA proposes that the firm should consider the likely future interest rates over a minimum period of five years from the expected start of the term of the buy-to-let mortgage contract, unless the interest rate is fixed for a period of five years or more from that time, or for the duration of the buy-to-let mortgage contract if less than five years. In coming to a view of likely future interest rates, the PRA would expect firms to have regard to: market expectations; a minimum increase of 2 percentage points in buy-to-let mortgage interest rates; and any prevailing Financial Policy Committee (FPC) recommendation and/or direction on the appropriate interest rate stress tests for buy-to-let lending.
Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first 5 years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%.
Portfolio landlords
The PRA is seeking to establish a standard definition of what constitutes a ‘Portfolio landlord’. Under this proposal, a landlord would be considered to be a Portfolio landlord where they have four or more mortgaged buy-to-let properties across all lenders in aggregate. Data gathered by the PRA shows that there is an increase in observed arrears rates of landlords with buy-to-let portfolios of four or more mortgaged properties.
The PRA is expecting that firms conducting lending to Portfolio landlords do so according to a specialist underwriting process that accounts for the complex nature of the borrower and their portfolio of properties.
Risk management
The PRA is proposing that firms have robust risk management, systems and controls in place specifically tailored to their buy-to-let portfolios. These should include risk appetite statements governing how core risks will be identified, mitigated and managed and monitoring of portfolio concentrations and high risk segments.
The buy-to-let market is dominated by lending originated through intermediaries. There is some concern that firms with weaker underwriting standards may be adversely selected which could result in a concentration of a particular risk on individual firms’ balance sheets. Consequently, the PRA expects firms to have appropriate oversight and monitoring capabilities with respect to their intermediary business.
The SME supporting factor in relation to buy-to-let mortgages
The PRA proposes to enhance the transparency and consistency of the PRA’s regulatory approach by clarifying the PRA’s expectations in relation to application of the SME supporting factor on buy-to-let mortgages.
Under Article 501 of the CRR the SME supporting factor is used to reduce by approximately 24% the capital requirements on loans to SMEs on qualifying retail, corporate and real estate exposures. The PRA does not consider that buy-to-let borrowing falls within the objective of the SME supporting factor described in Article 501 CRR. The PRA proposes to clarify in the supervisory statement that it expects firms to consider the intended purpose of a loan before applying the SME supporting factor. The SME supporting factor should not be applied where the purpose of the borrowing is to support buy-to-let business. The PRA would expect firms to comply with the spirit and intent of this statement.
UK Outlook for Financial Stability has Deteriorated – Bank of England
The Bank of England’s Financial Policy Committee (FPC) assesses the outlook for financial stability by identifying the risks faced by the financial system and weighing them against the resilience of the system. In doing so, its aim is to ensure the financial system can continue to provide essential services to the real economy, even in adverse circumstances. In today’s release, they highlight financial stability risks, raise the counter-cyclical capital buffer in 2017 and underscore potential threats to financial stability from rapid growth in buy-to-let mortgage lending.
The FPC judges that the outlook for financial stability in the United Kingdom has deteriorated since it last met in November 2015. Some pre-existing risks have crystallised, drawing on the resilience of the system. Other risks stemming from the global environment have increased. Domestic risks have been supplemented by risks around the EU referendum. Weighed against these developments, the resilience of the core banking system has improved further since November 2015, though investor expectations of future profitability have weakened, with possible implications for banks’ ability to build resilience in the future. In some financial markets, underlying liquidity conditions have continued to deteriorate.
In December, the Committee signalled its intention to set the UK countercyclical capital buffer rate in the region of 1% in a standard risk environment. Consistent with the Committee’s assessment of the current risk environment, and its intention to move gradually, the Committee has decided to increase the UK countercyclical capital buffer rate from 0% to 0.5% of risk-weighted assets. This new setting will become binding with effect from 29 March 2017, at which time the overlapping aspects of Pillar 2 supervisory capital buffers will be lifted. This will increase transparency and sharpen the incentives of the buffer system.
The FPC also took account of the review by the PRA Board of the overlap between the risks captured by current supervisory capital buffers and a positive UK countercyclical capital buffer. Following its review, the PRA Board has concluded that existing Pillar 2 supervisory capital buffers should be reduced, where possible, by the full 0.5% UK countercyclical capital buffer. This is a one-off adjustment reflecting the transition to the new capital framework and will take place when the new setting of the UK countercyclical capital buffer rate comes into force in March 2017.
The removal of any overlap means that banks accounting for around three quarters of the outstanding stock of UK lending will not see their overall regulatory capital buffers increase as a result of the UK countercyclical capital buffer rate being increased to 0.5%. Other banks will effectively have the period over which they must meet new requirements extended. This will be documented in a forthcoming statement by the PRA Board. The FPC’s action will raise the future regulatory capital buffer of some banks, including many smaller banks that have contributed around half of the increase in net lending to the real economy over the past year. Almost all of these banks currently carry capital in excess of the 2019 Basel III requirements and the 0.5% UK countercyclical capital buffer. The FPC recognises that these banks may wish to build capital over time in order to retain some excess over regulatory capital buffers, but their current position means that any such action will be able to take place gradually.
The UK countercyclical capital buffer rate will apply to all UK banks and building societies and to investment firms that have not been exempted by the Financial Conduct Authority. Under European Systemic Risk Board rules, it will apply to branches of EU banks lending into the United Kingdom. The FPC will work with other authorities to achieve reciprocity, consistent with its own policy on reciprocity.
The Committee assesses the risks around the referendum to be the most significant near-term domestic risks to financial stability. It will continue to monitor the channels of risk closely and support mitigating actions where possible. In that regard, the FPC has considered the results of the 2014 stress test of major UK banks, which incorporated an abrupt change in capital flows, a sharp depreciation of sterling, a marked increase in unemployment and a prolonged recession. The results of that test, when combined with revised bank capital plans, suggested that the banking system was strong enough to continue to serve households and businesses during the severe shock1. Since then, UK banks’ resilience has increased further.
The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending. The outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4. The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress.
Overall, the Committee judges that, although measures of bank resilience have improved since November 2015, investors expect weaker future profitability.
Measures of bank resilience have continued to strengthen. Major UK banks’ aggregate common equity Tier 1 (CET1) ratio has increased further, to 12.6% at end-2015. The aggregate Tier 1 capital ratio of major UK banks reached 13.8% and the Tier 1 leverage ratio reached 4.8% – both a little higher than the FPC’s view of the steady state capital requirements for the major UK banks as currently measured3.
At the same time, investors expect future bank profitability to be weaker. UK bank share prices have fallen by around 15% since November 2015, though there are significant differences in expectations of performance across bank business models. If expectations of weaker earnings were to materialise, the future capacity of the system to withstand shocks through internal capital generation would be reduced.
APRA Conglomerate Supervision Framework (Level 3) Consultation
The Australian Prudential Regulation Authority (APRA) has today released for consultation clarifications to the governance and risk management components of the framework for supervision of conglomerate groups (Level 3 framework).
This includes clarifications to nine prudential standards, intended to become effective on 1 July 2017, and two prudential practice guides. These clarifications are not changes in policy position.
APRA released the Level 3 framework1 in August 2014, but considered it appropriate to wait until the findings of the Financial System Inquiry (FSI) and the Government’s response to FSI recommendations before settling on the final form of the conglomerate framework.
APRA has also announced today that it has deferred the implementation of conglomerate capital requirements until a number of other domestic and international policy initiatives are further progressed. These policy initiatives include:
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APRA’s implementation of the FSI recommendation on unquestionably strong capital ratios for ADIs (FSI recommendation 1);
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consideration of proposals in relation to loss absorption and recapitalisation capacity (FSI recommendation 3); and
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proposed legislative changes to strengthen APRA’s crisis management powers (FSI recommendation 5).
Taken together, these initiatives will influence APRA’s final views on the appropriate requirements with respect to the strength, resilience, recovery and resolution capacity of conglomerate groups.
APRA Chairman Wayne Byres said: ‘The group governance and risk management requirements released today will further strengthen conglomerate groups, by enhancing oversight of group risks and exposures, and limiting potential contagion and systemic risks.’
‘While the timetable for the implementation of the conglomerate capital requirements has been extended, in APRA’s view this is the most appropriate course of action. To finalise the conglomerate capital requirements at this stage would introduce the possibility of needing to amend them within a few years, and this would be unnecessarily disruptive and inefficient for the groups directly affected.’
Given some time has passed since the prudential standards were released in August 2014, APRA is providing a six-week consultation period (until 13 May) for comments on the clarifications to the nine non-capital prudential standards. APRA also invites submissions on the two prudential practice guides by 27 May. As the consultation largely deals with issues of clarification, APRA is not expecting any changes to the underlying policy positions
While the clarifications to the cross-industry standards of Risk Management, Outsourcing, Governance, Business Continuity Management, and Fit and Proper largely relate to their application to conglomerates, these standards also apply to all authorised deposit-taking institutions (ADIs), general insurers and life companies. As such, APRA encourages all entities covered by these standards to review the clarifications.
The Level 3 framework, including prudential standards, prudential reporting forms, and draft prudential practice guides can be found on the APRA website at:
www.apra.gov.au/CrossIndustry/Pages/Supervision-of-conglomerate-groups-L3-March-2016.aspx.
The Transport Sector Shakedown Has Real Consequences
In less than a week (4 April 2016), transport costs could rise significantly, thanks to the Road Safety Remuneration Tribunal (RSRT) order which implements a minimum rate for contractor drivers through the Contractor Driver Minimum Payments Road Safety Remuneration Order. This sets a national minimum payments for contractor drivers in the road transport industry. A few key points about the order:
- You will not be allowed to trade as either a sole trader or partnership you must use a company.
- The company that owns the truck cannot be owned by either yourself, a family member or friend.
- Driver rates from the RSRT apply only to “owner operators” not ASX listed transport operators, so an OO will have to charge a lot more.
- Freight rates will have to go up at least 40% which will flow through to the entire economy.
- The Road Safety Remuneration Tribunal (RSRT) will be around for 3 years before undergoing a review.
Many are saying that if the changes to minimum rates proceed, it will price smaller operators out of the industry, though the Transport Workers Union (TWU) is a vocal supporter of the Order. It says an increase in minimum rates will make the industry safer, and that’s worth paying for.
However, according to Business Spectator, some 35,000 people, mostly men, drive their own long-haul trucks. They have borrowed around $15 billion from Australian banks and other financiers to fund their vehicles. Most of the loans are also secured on the family home.
So, consider the implications. First, the average cost of a truck is ~200k. The Personal Property Securities Register regime means that lenders would have the power to sell the asset at once – and if they cannot on-sell the vehicle, then its scrap value of ~$23 a tonne is the going rate. Then they can turn to the borrowers other assets. We could see a spate of forced home sales.
Second, the finance sector has dedicated resources servicing the truck finance and insurance sector, plus there is a network of dealers, repairers, accommodation providers, and other services which will be impacted as demand falls for their services.
Third, who will still be on the road to provide transport services – the big guys, of course. But will they want to provide the range of services currently available? Possibly not. So will there be significant transport disruption?
At very least, what was an invisible cost is certainly going to become visible, but we wonder if the knock-on effects have really be thought through.
ASIC facilitates easier electronic disclosure under the ePayments Code
ASIC has today announced changes to the ePayments Code that will make it easier for businesses to give information to their customers in a digital form.
Under the changes, subscribers to the ePayments Code will be able to give information to their customers by making it available electronically and notifying the consumer. This follows similar changes ASIC made last year to the Corporations Act.
ASIC Deputy Chair Peter Kell said, ‘The changes mean that documents under the ePayments Code can be delivered to consumers digitally as the default option, unless the consumer opts out. This will reduce the costs of printing and mailing for businesses while preserving choice for those consumers who wish to receive paper.
‘Promoting the delivery of information in an electronic form is consistent with ASIC’s objectives, as well as the nature of payments governed by the Code.
‘ASIC encourages industry to harness the opportunities of digitisation and to adopt the use of more engaging forms of communication that can boost consumers’ understanding of financial services and products’, Mr Kell said
A summary of amendments made to the ePayments Code is available on the ASIC website.
Updated guidance on digital disclosure
ASIC has also released an updated version of Regulatory Guide 221 Facilitating digital financial services disclosure (RG 221). We have made minor changes to RG 221 that:
- refer to our modification of the ePayments Code;
- indicate that our general guidance on digital disclosure is also relevant to information given under the ePayments Code; and
- update our guidance to include recent technical amendments we made to our relief under the Corporations Act.
Background
In July 2015, ASIC published RG 221 and two relief instruments under the Corporations Act (see 15-198MR). Among other things, this work facilitated the use of innovative digital disclosures by:
- explaining our view that providers do not need ASIC relief in most instances to use clients’ electronic addresses for delivery of disclosures;
- giving relief to create a new method of digital delivery under the Corporations Act enabling financial services providers to publish disclosures digitally and notify the client that it is available;
- providing additional good practice guidance for digital disclosure (Appendix D of RG 221) to help ensure that clients continue to receive clear, concise and effective information when disclosures are delivered digitally and that consumer protections are retained in the digital environment.
Download
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The ePayments Code (as modified 29 March 2016)
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Regulatory Guide 221 Facilitating digital financial services disclosure (RG 221)
Australians intend to work longer than ever before – ABS
Australians aged 45 years and over are intending to work longer than ever before, according to figures released by the Australian Bureau of Statistics (ABS) today.
In the survey conducted in 2014-15, 71 per cent of persons intended to retire at the age of 65 years or over, up from 66 per cent in last survey result of 2012-13 and 48 per cent in 2004-05.
“The survey found that 23 per cent of the persons aged 45 years and over are intending to retire at the age of 70 years or over compared with only eight per cent in 2004-05,” said Jennifer Humphrys from the ABS.
The average intended retirement age is 65 years (66 years for men and 65 years for women).
“The majority of Australians intend to retire between 65-69 years, but the results show that now over a quarter of males 45 years and over plan to work past 70 years.”
The survey commenced a few months after the government announced changes to the current qualification age for the Age Pension.
For those in the labour force who intended to retire, the most common factors influencing their decision were ‘financial security’ (40 per cent for men and 35 per cent for women) and ‘personal health or physical abilities’ (23 per cent for both men and women).
Just over half (53 per cent) reported their main expected source of personal income at retirement as ‘superannuation/annuity/allocated pension’.
“There were some differences reported by those who had already retired compared with those who intended to retire regarding their main (expected) source of personal income at retirement,” said Ms Humphrys.
“While 47 per cent of persons aged 45 years and over who had retired reported a ‘government pension or allowance’ as their main source of income at retirement, only 27 per cent of persons aged 45 years and over who were intending to retire indicated that this would be their main expected source of income at retirement.”
The survey also highlighted the importance of partner’s income as one of the main expected source of funds for meeting living costs at retirement.
“Although personal income was a common expected source for both men (81 per cent) and women (70 per cent), 13 per cent of women expected to rely on ‘partner’s income’ in contrast to only three per cent of men. However, while only seven per cent of those intending to retire were expected to rely on partner’s income, this was reported as the main source of funds for meeting living costs by 26 per cent of the retirees,” said Ms Humphrys.
More details are available in Retirement and Retirement Intentions, Australia (cat. no. 6238.0),
Household Portfolios in a Secular Stagnation World
A recent working paper from the Bank of Japan paints a concerning picture of how households react to an economy in stagflation and offers important insights relevant to other economies struggling with similar economic conditions. Their modelling suggests that persistently low interest rates damage the wealth of savers and compresses the wealth distribution. In a low interest rate/low growth environment, households tend to invest less in stocks and shares, or business ventures, and tend to hold more of their savings in cash deposits (even at low or zero rates). In other words, economic growth in suppressed further, in a feedback loop, thus sustaining stagflation for longer (and in our view tending to create conditions which become impossible to escape from – and cutting rates into negative territory will not offer an escape path).
Japan experienced a stock market boom (bust) in the 1980s (1990s) followed by a financial crises. The Bank of Japan’s response to the collapse of the bubble and subsequent deflation is an early version of the kinds of quantitative easing programs now pursued by other major central banks. Despite this policy stimulus, Japan has gone through two decades of low growth, low interest rates and low inflation.
In this paper we set out to understand the way these macroeconomic events affected Japanese household financial decisions. This is interesting because the Japanese experience can provide some indication of how the developed world may be affcted by the onset of such a ‘secular stagnation’ episode characterised by persistently weak rates of inflation and economic growth.
Using data from the Japanese Survey of Household Finance (SHF) from 1981 to 2014, we start by documenting several key household portfolio facts that are unique to Japan. First, stock market participation is considerably lower than in the US: in 2014, 15.5% of all households participate in the stock market. Second, conditional on participation, stockholders hold a relatively small share of wealth in stocks as a percentage of total financial wealth, and a relatively large share of financial wealth in bonds and money. Third, whether one focusses on stockholders or non-stockholders, the share of wealth allocated to cash-like financial instruments is very high. For instance, even for stockholders the share of liquid bank accounts in total financial assets is between 20% and 40% (depending on the age group). Fourth, the gap between the
average wealth of stockholders relative to that of non-stockholders is much smaller in Japan than in the US.What can account for these facts? To answer this question we rely on counterfactual analysis based on a structural, quantitative, life-cycle portfolio choice model with an explicit role for inflation and money demand. Understanding money demand is essential to match Japanese household portfolios given the strong prevalence of money-like financial instruments in Japanese portfolios. Portfolio choice models that incorporate monetary assets are not readily available. Instead, we make explicit the choice between money (that earns a zero nominal return) and other assets like bonds and stocks that earn the historically observed rates of return.
Given that our purpose is to develop a tractable, quantitative, model that can be confronted with the data, we introduce money demand through the shopping time approach. Specifically, we assume that money provides liquidity services: a higher amount of money lowers the cost from having to undertake a given transaction for consumption purposes. Everything else we assume is similar to recent life-cycle models that feature intermediate consumption and stochastic uninsurable labor income.
We calibrate the structural parameters of the model by matching key data moments from the Japanese Survey of Household Finances. Using fixed costs of stock market entry and preference heterogeneity, the calibrated model matches quantitatively limited stock market participation, and the share of wealth in money, bonds and stocks over the later parts of the life cycle. Understanding the portfolio choices associated with that part of the life cycle becomes extremely important in counterfactual analysis as most wealth accumulation takes place at that stage of the life cycle. Armed with this model we can now run counterfactual experiments to better understand the key drivers of Japanese household portfolios. Our counterfactual analysis can informatively address our key questions: why do Japanese households hold so few stocks and such high money balances?
Perhaps the single most widely discussed aspect of Japan’s economic performance since 1990 has been its persistently low level of inflation which has averaged close to zero for almost 15 years. It has been argued that a low level of inflation encourages investors to hold nominal assets (such as money) rather than real assets (such as equities). Our counterfactual experiments confirm this intuition. Had inflation in Japan averaged 2% (as in the US) stock market participation would have risen from 15.3% in the baseline simulation to around 20%. Moreover, the share of stocks in young and middle aged stockholders’ portfolios would have been significantly higher mainly at the expense of lower money holdings, while the share of stocks in elderly households’ portfolios would remain unaffcted . Therefore, low inflation plays an important role in keeping the share of money in Japanese household financial assets very high and contributes to crowding out stocks and bonds from household portfolios.
The second legacy of Japan’s long stagnation since 1990 has been its poor history of realized (and plausibly expected) stock returns as compared to other countries. In the baseline calibration, the mean equity premium for Japan is set to 1.8%. Increasing this to 4% (a typical choice in many life-cycle models calibrated to US data) raises the mean financial wealth to income ratio substantially and increases the stock market participation rate to 50%, a rate that is very close to the recent US experience.
Another important feature of the calibrated structural model is the relatively high cost of stock market entry. Reducing this fixed cost from our estimate (9%) to 5% (as estimated for the US in the literature) leads to an increase in the stock market participation rate from 15.3% to 43% indicating that frictions in equity market participation can be a very important factor in limiting Japanese households’ investment in equities.
The final interesting aspect of the Japanese household portfolio data is the puzzling low mean wealth of stockholders relative to non-stockholders at least in comparison with the US Survey of Consumer Finances (SCF). As before, low realized (and expected) stock returns play an important role in explaining this fact. Returns to capital (the stock market) have important long term implications for the wealth distribution. In the US, realized equity returns have been high, benefitting stock owners. In Japan, by comparison, realized stock returns have been low, and the wealth of those who own stocks relative to those who do not, has not risen to the same extent, generating lower wealth differences. This is especially interesting given the finite nature of the life cycle: one need not rely on an infinite horizon model to generate substantial differences in the wealth distribution. Moreover, these substantial wealth differences can arise even from a relatively low mean differential in expected stock returns (2%).
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