September 2016 – Page 14 – Digital Finance Analytics (DFA) Blog

Long-Run Economic Effects of Changes in the Age Dependency Ratio

A decrease in the labor force and an increase in the elderly population could slow economic growth, says economic research from the Federal Reserve Bank of St. Louis.

Important demographic changes in the developed world in recent years may have long-run economic consequences. As a result, such changes have started to play a more important role in the design of economic policies.

In a recent blog post, I analyzed changes in the age dependency ratio in the G-7 countries since 1990.¹ Thorough analysis of the evolution of this variable and its components is important because the young and old are likely to be more economically dependent on the rest of the population and changes in age composition may affect other areas of the economy.

Panel A of the figure plots the annual age dependency ratios for the G-7 countries from 1990 to 2012. The age dependency ratio is the sum of the young population (under age 15) and elderly population (age 65 and over) relative to the working-age population (ages 15 to 64). As the figure shows, dependency ratios have risen in all seven countries in the past 10 years. In some countries, however, the trend started earlier. In Japan, for instance, the increase started in the early 1990s. Changes in the age composition of the population—from increases and/or decreases in the young and elderly populations—drive the dependency ratios. As the figure shows, in all G-7 countries, the elderly populations (Panel B) have increased, while the working-age populations (Panel C) and young populations (Panel D) have decreased slightly or stayed flat. Among those countries, Japan’s age dependency ratio increased the most.

Several recent studies² suggest that high dependency ratios may have the following long-term economic
consequences:

Saving rates: As workers get close to retirement, they tend to increase their savings through pension plans, healthcare insurance, etc. Also, if younger workers anticipate changes in demographic trends, they could start saving more for the future (by investing more in private pension plans, postponing consumption decisions, or investing in private health insurance). Increased savings could have long-term economic consequences, such as a decrease in long-term interest rates. Eventually, as the elderly start retiring and birth rates start decreasing—as appears to be the recent trend—savings would start decreasing and long-term interest rates would rise. Thus, recent demographic changes could affect saving rates and long-term interest rates.

Investment rates: If savings decrease, there could be fewer funds to finance investment projects, which could decrease investment in physical capital. Decreased investment could reduce long-term economic growth.

Housing markets: A growing labor force would increase house prices. A recent article in The Economist finds that since 1960, house prices in a sample of 10 countries fell by 0.2 percent per year as the age dependency ratio increased. Because the demographic composition of the labor force contributes strongly to the trend in house prices, fewer young people, together with a large increase in the elderly population, would likely result in less investment in the housing market.

Consumption patterns: An increase in the elderly population could shift consumption from certain goods toward healthcare services and leisure.

In summary, the decrease in the labor force, due to an increase in the elderly population and a decrease in the fertility rate, could translate into lower economic growth. Long-term problems in the developed world caused by an increase in the age dependency ratio could be alleviated by either increasing productivity (to avoid an economic slow-down from a shrinking labor force) or increasing the labor force participation of the elderly (e.g., by increasing the retirement age, as several European countries have done recently, or reducing taxes on the labor income of elderly workers). These economic policies, however, would not reverse the recent demographic trends.

Notes

¹ Santacreu, Ana Maria. “How Are Populations Shifting within Developed Countries?” Federal Reserve Bank of St. Louis On The Economy Blog, August 11, 2016; https://www.stlouisfed.org/on-the-economy/2016/aug….

² Economist. “Vanishing Workers.” July 2016, 420(8999), p. 58, http://www.economist.com/news/finance-and-economic…. Karp, Nathaniel and Nash-Stacey, Boyd. “Slow Productivity Growth: Cracking the Code.” BBVA Research U.S. Economic Watch, August 4, 2016; https://www.bbvaresearch.com/wp-content/uploads/20….

What Britain can learn from how public housing is run in Europe

From The UK Conversation.

The UK government’s so-called “pay to stay” proposals for rent hikes for social housing tenants on higher incomes in England have led to a barrage of criticism, most recently from the Local Government Association, which argued that the bureaucratic costs and complexities involved would erase most income the scheme might generate.

The policy certainly raises concerns. It seems odd and unfair to on the one hand force tenants on higher incomes to pay market rents, while on the other hand offering tenants wishing to take advantage of their right to buy a significant discount to their property’s market value, whether they need it or not. As the LGA argued, it’s questionable how feasible it is to implement the means testing required, especially in the short time frame demanded (by April 2017). How should councils calculate accurate market rents, given the lack of appropriate data? And it seems incoherent for the government to demand a reduction of 1% a year in social rents, while promoting “affordable rent” properties at significantly higher rents than social housing.

But behind these details are bigger questions. If we take social housing to mean housing offered at below-market rents, can and should this ever be justified without means testing? And ultimately, what is the purpose of social housing? Are we to believe that it is only for the very poor until they are able to house themselves on the open market? Or is this approach and the ghettoisation that it entails, as Nye Bevan put it, “a wholly evil thing … a monstrous affliction upon the essential psychological and biological oneness of the whole community”. It bears noting that Bevan also acknowledged that there was still a place to ask higher rents of higher earners.

Britain has wrestled with what it wants social housing to be and how it should be run for decades, alternating between governments of different hues but also with the changing political and economic landscape. But of course other nations operate social housing and have different approaches. What can Britain learn from her European neighbours?

Vienna: using the state to keep rents down

For example, if Bevan were alive today and was disenchanted by the problems of under-supply and erosion of social housing in Britain, he would find a happy berth in Vienna, Austria. The city retains some 220,000 housing units of its own, supplemented by 136,000 units through housing associations, and requires new developments to be of mixed tenures (social rent, market rent, leasehold), with state financial support for developers and projects coming with social obligations.

The result of wide availability of affordable and secure social housing and regular new construction is that the social rent sector in Vienna actually depresses rents in the market sector, reducing the disparity that would otherwise exist and keeping rents generally more affordable. Although there are income thresholds beyond which new tenants may not access social housing, they are quite high (€44,000 for a single-person household, €66,000 for a two-person household), and once a flat is occupied the tenants enjoy security of tenure. All this leads to genuinely mixed communities, none more famous than the Karl Marx-Hof.
Vienna’s Karl Marx-Hoff. Roger Newbrook/Flickr, CC BY
Historically the Netherlands, Sweden and to some extent Germany (in east Germany and the cities) have been associated with this model, although it has come under significant political pressure in recent times.

Market answers to market problems

Such arrangements do not please everyone. In 2009, a Dutch investor succeeded in arguing to the European Commission that state aid (for social housebuilding) should only be used to support accommodation for “disadvantaged citizens”. As a result, the Dutch housing minister agreed to reduce the income threshold for access to social housing from €38,000, above the average, to well below it at €33,000 (although recent negotiations have subsequently reversed the decision).

The European Commission and the OECD in their respective country reports have frequently favoured an approach where rents are always at the market level regardless of whether the tenancy is social or private, with those on low incomes assisted through housing benefit rather than through the offer of accommodation that is cheaper per se. This comes with a clear focus on shaping social housing as something for disadvantaged groups.

If private real estate investors and right-of-centre politicians using competition policy is one pressure on the Bevanite view of social housing, the other comes simply from the fact that demand so often outstrips supply. If the state takes the (on the face of it, sensible) decision to prioritise those in greatest housing need then, de facto, social housing will progressively become the preserve of those at the lowest end of the income spectrum – a process sometimes referred to as residualisation.

This acute shortage of social housing has affected even thriving German cities such as Berlin, where social housing was privatised at a time when lack of cash was the issue not housing supply, leading to acute shortages now when both are being squeezed.

What conclusions can we draw? The debate in England about “pay to stay” is by no means unique, and reflects pressure from private investors, right-of-centre politicians and the European Commission to move away from cross-income social housing. Nevertheless politicians have a genuine choice: housing benefit might be considered a more efficient use of public money in the short term than offering lower rents for everyone living in social housing. But to restrict who may live in social housing so that it becomes the preserve only of the poorest risks concentrating deprivation in estates. It also stops social rents applying downward pressure, through competition with the private sector, on the wider market – which might increase housing benefit expenditure in the long run.

In the end, when the situation is as it is in Britain and a growing number of other countries, the whole debate becomes insignificant when the overwhelming problem is the shortage of housing supply.

Author: Ed Turner, Senior Lecturer in Politics, Head of Politics and International Relations, Aston University

No Change to RBA Cash Rate Today

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers have been supporting growth, but the underlying pace of China’s growth appears to be moderating.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

Financial markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports. Labour market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term.

Inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The best available information suggests that dwelling prices overall have risen moderately over the past year and growth in lending for housing purposes has slowed. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

The Top Digital Suburbs In Melbourne

We continue our series on where most digitally active households reside. Today we look in the Melbourne district. The largest number of digitally active households reside in the post code of 3977 which includes Botanic Ridge, Cannons Creek, Cranbourne, Cranbourne East, Cranbourne North, Cranbourne South, Cranbourne West, Devon Meadows, Devon Meadows, Five Ways, Junction Village, Junction Village, Sandhurst and Skye.

The location of digitally active households is becoming an increasingly important question, as mobile penetration and use climbs. It fundamentally changes the optimal marketing approach and channel strategy.

Using data from our household surveys we track the proportion of households with a preference for using digital devices – especially smartphones – for their banking interactions and other online activities. The latest data, which will flow in due course to our next edition of the Quiet Revolution – our channel analysis report – shows that there are large numbers of digitally savvy consumers and small businesses who want more digital, and less branch. They want a “mobile first” offering.

To illustrate this we map the current branch representation, based on the latest APRA points of Presence report.

Then we mapped the number of households by digital segments – identifying those seeking a mobile first solution – to postcodes. There is a striking mismatch between the two.

Here is the top 10 listing by number of digitally aligned – mobile first – households in VIC. They vary by segment, age, zone and region.

This information is useful to anyone wishing to engage with these households because it highlights where the centre of gravity for online initiatives should be focussed. The point is that although households are in the digital world, they still have a geographic centre. Digital still has a geographic sense.

Looking at the banks, it seems that they are not heeding the geographic concentration of mobile first households, and nor are they fully comprehending the changes afoot. We think it likely there will be significant stranded costs in the branch network, and insufficient focus on “mobile first”banking offerings.

Households are leading the way.

Next time we will look at the state of play in Brisbane and subsequently explore developments in other regions, before revealing the top ten digital suburbs across Australia.

Former Aussie mortgage broker convicted of submitting false or misleading documents

ASIC says Mr Madhvan Nair, a former mortgage broker with AHL Investments Pty Ltd (trading as Aussie Home Loans), was convicted and sentenced in the Downing Centre Local Court last week on eighteen charges involving the submission of false or misleading information to banks.

Mr Nair was convicted after admitting to providing documents in support of eighteen loan applications to Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) knowing that they contained false or misleading information.

The applications contained documents which purported to be from the applicant’s employer. These documents were false and in most instances, the loan applicant had never worked for the particular employer.

For each and all eighteen charges, Mr Nair was convicted and released upon entering into a recognizance in the amount of $1,000 on the condition that he be of good behaviour for three years.

In sentencing Mr Nair, Magistrate Atkinson noted that it was a serious matter and that there are tough laws for good reason.

Magistrate Atkinson described the nature of the offending in submitting 18 separate loan applications containing false information or documents as very troubling. Noting Mr Nair had no prior convictions, his ill health, the relatively small financial benefit he received, his plea of guilty and high level of cooperation with ASIC, Magistrate Atkinson stated that had any of the factors been different, the defendant may have faced full-time imprisonment.

ASIC Deputy Chair Peter Kell said, ‘ASIC wants to ensure that dishonest brokers are removed from the industry and we will take all necessary steps to achieve this.’

The Commonwealth Director of Public Prosecutions (CDPP) prosecuted the matter.

Background

ASIC’s investigation found that between September 2012 and June 2014, Mr Nair submitted eighteen loan applications containing false borrower employment documents. Of the eighteen loan applications, twelve were approved and disbursed, totaling $3,256,684.

Mr Nair received commission on those twelve loans of $7,583.49. In addition, Mr Nair received cash payments totalling $2,500 from two of the loan applicants upon approval of their loan applications. Mr Nair received a total financial benefit of $10,083.49 as a result of the approved loan applications.

The eighteen loan applications ranged in value from $10,000 to $490,875.

Mr Nair received his commission through Smee & Pree Nair Enterprises Pty Ltd (ACN 091 014 756), a company controlled and owned by Mr Nair.

On 5 July 2016, Mr Nair appeared at the Downing Centre Local Court and pleaded guilty to seventeen charges under sections 160D and one charge under the former section 33(2) of the National Consumer Credit Protection Act 2009.

Section 160D (formerly section 33(2)) makes it an offence for a person engaging in credit activities to give information or documents to another person which is false in a material particular or materially misleading.

Mr Nair was sentenced on 30 August 2016.

Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has taken 80 actions involving loan fraud, including 61 actions to ban individuals and companies from providing or engaging in credit services or holding an Australian credit licence. ASIC has also commenced 14 criminal proceedings involving loan fraud.

Sydney property market spreads price shocks to other capital cities

From The Conversation.

The Sydney property market creates shocks that spill over to other capital cities, and Hobart is one of the worst affected, new research from the University of New South Wales shows.

The study looked at all eight Australian capital cities. Perth and Darwin’s housing market appeared to be the least affected by shocks originating in other capitals.

“We shouldn’t think of Australian housing markets as being completely isolated. It’s not the case that whatever happens in Sydney doesn’t have any implications for what happens in other housing markets,” says Associate Professor Glenn Otto, the author of the research.

Professor Otto examined data on median house prices and rents, from the early 1980s till 2015, released quarterly by the Real Estate Institute of Australia.

He modelled how variations in capital gains and rental returns in each of the cities affected returns in other cities, over twelve month periods.

“You historically don’t see a big share of Brisbane or Melbourne type shocks spilling over to other markets,” Professor Otto noted.

The spillover effects to different capital city housing markets have been increasing over time since the mid 1990s and account for about 40 to 50% of the variance in forecast property returns to houses and units.

“From time to time you’ll get predictions that we’ve built too many units in the Melbourne housing market and there’s an oversupply and its specific to these markets, so we’ll see some price correction.

“The thing I was interested in was, looking at the historical data, was to what extent that correction won’t be specific to the particular market but also will feed through to other markets,” said Professor Otto.

The research also examined the split between houses and units. Although there wasn’t a huge difference in results for the two different dwelling types, the cities most affected by shocks in terms of units were Brisbane and Hobart and for houses it’s Canberra and Hobart.

Professor Otto is now planning to research what causes these spillover effects and what that can tell us about volatility in Australia’s housing market.

“Australian cities are quite isolated so we wouldn’t necessarily expect people to be picking up and moving between cities in response to changes in property prices, but what we might see is investors thinking about where they want to buy and sell property.

“To that extent investors may be becoming an increasingly important part of the housing market, maybe that’s one mechanism by which we can see this kind of effect of one city being transferred to another city,” Professor Otto said.

The research was funded by an Australian Research Council Linkage Project Grant.

Jenni Henderson, Assistant Editor, Business and Economy, The Conversation interviewed Glenn Otto, Associate Professor, UNSW Australia

ANZ to refund $28.8 million to more than 390,000 accounts as a result of unclear fee disclosures

ASIC says Australia and New Zealand Banking Group Limited (ANZ) is refunding $28.8 million to 376,570 retail accounts, and 17,230 business accounts, after it failed to clearly disclose when certain periodical payment fees would apply.

Periodical payments are automatic ‘set and forget’ fixed-amount payments put in place by the customer. They are an alternative to direct debit arrangements, and allow customers to establish a regular payment to another account (for example, to make fortnightly rental payments). Banks may charge a fee for this service, depending on the terms and conditions for the account.

In ANZ’s case, the account terms and conditions stated that a periodical payment was a transaction to ‘another person or business.’ This meant that transactions made by the customer to another account in the customer’s own name, whether with ANZ or another financial institution, were not covered by ANZ’s own definition of a periodical payment and could not be charged the fees that could otherwise apply to periodical payments.

ANZ discovered that it was charging fees on payments made between accounts held in the customer’s own name, contrary to its definition of a ‘periodical payment’. ANZ subsequently reported the matter to ASIC as a significant breach of its financial services obligations. ASIC acknowledges the cooperative approach taken by ANZ in its handling of this matter, and its appropriate reporting of the matter to ASIC.

As a result, ANZ will refund fees that were charged to customers for payments into another account in the customer’s own name. These fees include:

non-payment fees charged on personal and commercial accounts when the payment did not proceed because of insufficient funds held in the ANZ deposit account; and

payment fees charged on commercial accoumts when a payment is processed from the ANZ deposit account.

The total amount being refunded includes approximately $25.8 million of fees, with an additional $3 million in interest.

ANZ has subsequently changed its terms and conditions to clarify instances where fees for periodical payments apply to an ANZ deposit account.

ASIC Deputy Chairman Peter Kell said, ‘Good fee disclosure is integral to ensuring that consumers are in an informed position about how best to manage the cost of their banking.’

ANZ has commenced contacting affected customers to explain the impact and the reimbursement and expects to complete the remediation process by the end of September 2016.

In a separate release, ANZ confirmed it has begun refunding around 390,000 accounts in relation to unclear fee disclosures for certain periodical payments. For the majority of impacted accounts, the fee refunds are below $50.

The issue relates to fees being charged for periodical payments to a customer’s own accounts.

ANZ Group Executive Australia Fred Ohlsson said: “When we identify an issue where we haven’t got things right, we will make sure our customers are not left out of pocket.”

“We proactively reported this matter to ASIC and have been working hard to ensure customers are repaid as soon as possible. We’ve already begun making payments to our customers and expect all customers will be refunded by the end of September.

“I’d like to apologise to all our impacted customers for the concern that we know issues like this can cause,” Mr Ohlsson said.

A total of $28 million is being paid that includes fee refunds and around $3 million in additional compensation. ANZ has already refunded around $11 million to 192,000 accounts.

Fintechs and Incumbents – Synergy or Conflict?

In the second episode of a three-part series on the future of fintech, Baker & McKenzie looks at the established financial institutions facing the choice of competing or collaborating – using their own resources to explore cutting edge products and smarter use of data, or nurturing promising tech start-ups.

Job Adverts Rebound In August – ANZ

ANZ says after falling in July, job advertisements bounced a solid 1.8% m/m in August and are up 8% over the past year. In trend terms, job ads were up 0.5% m/m, suggesting a moderate pace of labour market improvement.

“The bounce in ANZ job ads in August is an encouraging sign that the improvement in labour market conditions is continuing. The rise in job ads is consistent with the ongoing strength in business conditions and increasing capacity utilisation reported in the business surveys.

The pace of improvement in job ads suggests that labour market conditions are improving moderately. While it does not suggest a rapid turnaround in the unemployment rate, it points to ongoing growth in employment. At current levels, the rate of job ads growth is consistent with employment growing at an annual pace of close to 2% y/y.

Overall, this is consistent with our view that the unemployment rate will slowly improve over the next year, supported by low interest rates and solid business conditions.”

Capital City Auction Clearance Rate Reached a New Year to Date High

According to CoreLogic, the first weekend of spring sees preliminary capital city clearance rate reach a new year to date high of 78.4 per cent.

The number of homes taken to auction this week fell slightly to 1,858, compared to the 2,153 auctions held last week and 2,297 one year ago. The preliminary clearance rate was higher than the previous week’s result of 74.5 per cent and up from last year, when the clearance rate was recorded at 73.2 per cent.

Preliminary results this week are the highest recorded this year. The results show that Melbourne and Sydney recorded the highest clearance rates of (79.3 per cent) and (83.9 per cent) respectively, however both cities were host to fewer auctions this week when compared to last week.

This is consistent with the APM data we reported on Saturday.