Author: Martin North

Martin North is the Principal of Digital Finance Analytics

Australians are saving more, but are more comfortable with debt

From The Conversation. Australians know that adequate savings can help provide for a rainy day, help a family put down a deposit on a home, or ensure a comfortable retirement.

Debt also offers a way for households to make purchases that would otherwise be impossible and to achieve a higher current standard of living. Debt invested into an asset that will also grow in real value and is able to be serviced without placing too much financial pressure on a household, is generally considered to be good debt.

The key is balance. Since the 2008 financial crisis, Australians have actually decreased their propensity to take on debt and have increased their savings. But debt rates still remain uncomfortably high and there is evidence that this savings discipline is beginning to fade. Have we grown too comfortable with debt?

Household debt is three times what it was 20 years ago. Image sourced from www.shutterstock.com

Saving more, but more indebted

Bankwest Curtin Economics Centre’s second ‘Focus on the States’ report, Beyond our Means? Household Savings a Debt in Australia finds Australians have more debt and are more comfortable with it.

While household savings portfolios have seen an increase of 54% in real terms since 2005, household debt has risen by 51% in the same period. Many households are able to access and service this debt, with higher debts associated with higher incomes. On average, Australia’s estimated 9.1 million households have savings in the form of financial assets of $340,900 and debts of $148,700.

However, there is a gulf between those at the top of the distribution and those at the bottom. The inequality in the distributions of household savings and debt are considerably worse than the much talked about inequality in incomes.

The average household disposable income of the top 20% of savers is less than four times those in the lowest savings quintile. However, their savings at an average of almost $1.3 million is 200 times the bottom 20%. This top quintile may receive one-third of all income, but they own three quarters of the total value of savings in the form of financial assets.

Average household savings by savings quintile, Australia 2015 (mean $‘000)

The trifecta of debts, low (or no) savings and low incomes presents many low economic resource families with an unenviable challenge to maintain an acceptable quality of life for themselves and their families on a day-to-day basis.

Since the global financial crisis, the household savings rate have risen, with households exhibiting discipline in their expenditure at a time when the economic outlook was uncertain. In an economic downturn income can decline quickly while reining in spending can be more difficult, for both households and governments. Debts can quickly get out of hand and become unmanageable in this situation.

Becoming used to debt

While Australian households have decreased their propensity to take on debt and have increased their savings in the post-GFC period, household debt still remains three times higher now than what it was 20 years ago. Australians are now more comfortable with debt and currently hold debt equal to 1.5 years of income, whereas in the past they had only debt equivalent to six months of annual income.

The share of debt associated with investment property loans has tripled from one-tenth to three-tenths between 1990 and 2015.

Unlike previous generations accustomed to more rigid financial products, current households can access a greater number of financial products, which have arguably become more complex and more flexible.

This flexibility delivers benefits, but with complexity comes risk and it is important to promote good financial decisions and encourage a longer term outlook. Mortgage equity withdrawal has become a popular tool to derive a higher current standard of living by using the family home as collateral.

More households now use these schemes to smooth consumption or relieve short-term financial pressures. But this may have contributed to the average mortgage debt as a proportion of property values almost tripling over the last 25 years, rising from 10% to 28% since 1990.

Ratio of housing debt to housing assets, June 1990 to December 2014

Another issue is the use of superannuation savings to pay down mortgage balances, leading retirees to rely more on the pension.

So are we living beyond our means? With household debt to income ratios three times higher now than a quarter of a century ago, household debt up by over 50% in real terms over the last decade and the debt of those approaching retirement (55-64 year olds) up 64% in real terms, it would seem on the face of it to be true.

However, the reality is more nuanced. Household savings are growing faster than income and 8.5 cents in every dollar is being saved, and there is now $2 trillion tucked away in superannuation, while riskier investments are making way for more a more conservative approach. This is far better than we were 10 years ago, but with a note of caution that savings are again on the decline.

Authors: – Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy at Curtin University and Rebecca Cassells, Adjunct Associate Professor, Bankwest Curtin Economics Centre at Curtin University

 

What Apple’s new music streaming service will mean for underpaid songwriters

From The Conversation. Earlier this month, Apple launched its long-awaited subscription-only music streaming service. Costing less than US$10 per month, Apple Music will compete head on with Pandora, Spotify, YouTube and Tidal.

Apple’s iPod revolutionized the music business. Will its streaming service do it again? Reuters

Although subscription-based music services have existed for more than a decade, many still wonder whether Apple Music will again revolutionize the music business, like iTunes. The more important question, however, is what Apple’s entry to the music streaming business will mean for underpaid songwriters.

The promise of online streaming

Online streaming offers many benefits. It allows music fans to access content anytime, anywhere. If Apple Music can include a wider variety of music than Pandora and Spotify, it will move us closer to what commentators have referred to as the “celestial jukebox” – the proverbial place where music is always at our fingertips.

On-demand services also respond well to our changing habits of entertainment consumption. Gone were the days when we sat behind the television set every week waiting patiently for the latest episode of our favorite show. Instead, we now binge watch through cable on-demand, Netflix or Amazon.

Although consumers remain reluctant to pay for online content, last year the music industry received, for the first time, more revenue through online streaming than CD sales. When one takes into account the industry’s 18% equity stake in Spotify – worth about $1.5 billion – the revenue-generating potential of online streaming cannot be overlooked.

The music industry’s (relative) well-being

Music business executives remain vocal about the challenge posed by the internet and new communications technologies. The industry, however, seems to have been doing quite well recently.

Taylor Swift’s latest album 1989, for example, sold more than 1 million copies in the first week alone. Top executives also continue to receive compensation packages worth tens of millions of dollars. The problem with online streaming therefore concerns neither Billboard Top 40 artists nor industry executives.

If anything, the arrival of Apple Music will generate more revenue. Although the industry’s total income may initially decline when some iTunes downloaders switch over to the new subscription-based service – causing reduced sales in digital downloads – that amount will return and grow as the subscriber base expands.

Unfortunately, the same cannot be said about professional songwriters.

Consider Spotify. The service claims a distribution of “nearly 70%” of its revenues to rights holders. According to The New York Times, Spotify “generally pays 0.5 to 0.7 cent a stream (or $5,000 to $7,000 per million plays) for its paid tier, and as much as 90% less for its free tier.”

For a song that has been streamed 10 million times in the paid tier, the total royalties will be between $50,000 and $70,000. This arrangement sounds attractive, until the royalties are divvied up among the record label, the performer and the songwriters (including the composers of both the song and its lyric). If the songwriters receive only 10% of the total royalties, their cut will be between $5,000 and $7,000.

That amount will be further reduced if the 10 million streams also include the free tier. For example, on Pandora – a different service that has similarly meager payouts – Pharrell Williams received only $2,700 in publisher and songwriter royalties for 43 million streams of his Grammy-nominated song “Happy”.

The professional songwriters’ oft-overlooked pain

Thus far, musicians have been highly dissatisfied with the royalty payout from online music services.

For professional songwriters who do not perform, few can earn enough money through these services to put food on the table, pay for electricity and equipment and forgo part-time work. Even for those who manage to bring in additional revenue through concerts and tours, the frequent need to perform and travel takes away valuable writing and recording time.

In a recent interview, Björn Ulvaeus of ABBA said he “doubted spending all that time on writing songs would be possible in a world where Spotify is the main source of income … as [his group] would have had to spend much more time touring in order to make a living.”

If professional songwriters are to succeed in the brave new world of online streaming, a new compensation model will have to be developed.

That model could feature a minimum royalty payout or a higher rate for online streaming. It could also include a small cut of profit from the record labels’ equity in streaming services – some of which was reportedly obtained with very limited up-front investment.

Also worth reviewing is the “blackbox” from which royalties for songs from back catalogs have disappeared. Even though the record label may have received only a fixed sum for licensing its whole catalog, a songwriter whose song has yielded 10 million streams deserves some royalty.

Apple could have revolutionized the music business by charting a new course for compensating professional songwriters. Yet nothing reported thus far – other than the lack of a free service – suggests a more generous royalty payout than Pandora or Spotify.

Potential competition concerns

Apple Music will raise additional questions about competition, affecting musicians and consumers alike.

From Pandora to Spotify to Tidal, virtually all existing streaming services are technology start-ups. Apple, by contrast, is the world’s most profitable company with an enormous war chest and reportedly 800 million credit cards on file.

Once Apple enters the market, it is unclear how effectively the existing services will be able to compete or how many new players can still enter the market. It is no coincidence that iTunes remains the most dominant format for digital music. While Google can certainly stay competitive, it is doubtful that the next Pandora or Spotify could emerge.

It is therefore no surprise that the attorneys general in New York and Connecticut have already launched an antitrust investigation into the music streaming business. Although they have yet to target Apple, the timing of the launch is suggestive – not to mention the company’s recent $450 million settlement of its e-book price-fixing lawsuit.

In sum, despite the considerable attention Apple Music has recently caught, it remains to be seen how this new service will improve the lives of underpaid songwriters. If anything, the service has raised more questions than answers.

Author: Peter K Yu – Professor of Law and Co-Director of the Center for Law and Intellectual Property at Texas A&M University

Applying an Inflation Targeting Lens to Macroprudential Policy `Institutions’

The Reserve Bank of NZ just released a discussion paper on inflation targetting in the light of the macroprudential role of supervisory organisations.

Inflation targeting has been an influential and durable monetary policy framework. It has been widely adopted, and the attributes of inflation targeting have been widely lauded for their contribution to price stability. Yet in recent years the global financial crisis and the sovereign debt crisis have challenged macroeconomic frameworks, providing substantial impetus to concerns about financial stability. In this paper we examine macroprudential policy frameworks through an inflation targeting lens, to understand whether the positive attributes of inflation targeting can and should inform macroprudential frameworks.

We use the four attributes of inflation targeting –  independence, transparency, accountability and the explicit inflation objective –  to help frame debate about the institutions used to govern macroprudential policies. Overall, we argue that these attributes are important for effective macroprudential frameworks. There are, however, some points of difference.

First, the merits of independence are not as clear for macroprudential policy. One reason to appoint an independent policymaker is to take advantage of `expertness’. However, this advantage must be balanced against the possibility that the policymaker may pursue tradeoffs at odds with the mandate provided by government and the public at large. The scope for such tradeoffs is exacerbated if outcomes are not directly observable or if outcomes are not self-evidently related to the policies that have been implemented. These problems seem more substantial for macroprudential policy than for monetary policy.

We have also argued that macroprudential policies are interdependent and cannot be pursued entirely `independently’. Monetary and macroprudential policies are unified by their connection to social welfare, and policies should be implemented to optimize their marginal contribution to this overarching notion of welfare. In principle, policies must be coordinated if they are to be set optimally, but whether the interdependencies are material remains uncertain. Of course, macroprudential and monetary policy could be coordinated even if they were housed in separate institutions. There is a strong case for monetary authorities to be independent and/or for other constraints that prevent political authorities from monetizing budget deficits (since political authorities may have little regard to the inflationary consequences of doing so). While political authorities could use macroprudential policies indirectly to stimulate the economy and therefore increase tax revenue, it may be more difficult to use macroprudential policies to deal with such funding issues. Thus, the case for appointing an agent to run macroprudential policy independently of political authorities is arguably somewhat weaker.

The second observation we make is that financial stability objectives and intermediate targets should be made more explicit. Policymaking involves strategic interaction between policymakers and private agents, and is an exercise in influencing the behaviour and expectations of private agents. While announcing objectives can foster coordination in strategic games, we do not see that financial stability objectives, as commonly expressed, provide enough guidance about the macroprudential policies that will be implemented in future.

Our third observation is that macroprudential policymakers need to consciously address their communication of future policy actions. As advocates for transparency, we suggest that the institutions of policymaking should explicitly address when policy decisions will be announced and/or implemented, and greater attention should be paid to the menu of macroprudential policies. Macroprudential policies governed by principled rules-based behaviour would make clear what policies will be pursued and how they will be adjusted through time, but much work needs to be done before operational, state-contingent macroprudential rules can be identified.

Our fourth observation is that applying the accountability mechanisms of inflation targeting to macroprudential policies has been a desirable development, though these mechanisms should be strengthened further. We remain convinced that transparent communication to the general public remains a significant element in ensuring accountability.

Lastly, while the accountability institutions for macroprudential and monetary policies are well developed, oversight and accountability are materially constrained by the quality of current analytical frameworks. Such uncertainty makes it difficult to provide objective assessments of macroprudential policies. Looking forward, we must fully expect that macroprudential policies will evolve as views solidify about the most important distortions and the most important macroprudential mechanisms. Institutional frameworks should be flexible enough to accommodate such changes.

 

Note: The views expressed in this paper are those of the author(s) and do not necessarily reflect the views of the Reserve Bank of New Zealand

 

 

Who Reads Social Media Small Print?

From The Conversation. Most of us don’t read the social media small print – and it’s a data goldmine for third parties

You may read paper, online is no different. Signing by Shutterstock

The history of human experiments often focuses on biomedical research and the gradual changes in acceptable practice and ethical considerations. But another class of human experiments that has had its own share of controversies is the study of human behaviour.

Internet Mediate Human Behaviour Research (IMHBR) is primarily defined by its use of the internet to obtain data about participants. While some of the research involves active participation with research subjects directly engaging with the research, for example through online surveys or experimental tasks, many studies take advantage of “found text” in blogs, discussion forums or other online spaces, analyses of hits on websites, or observation of other types of online activity such as search engine histories or logs of actions in online games.

It’s big business and the pervasive use of these methodologies is not only by academics but also corporations and governments seeking to support evidence-based policy decisions or to nudge societal behaviour.

Even though the basic principles of “respect for the autonomy and dignity of persons”, “scientific value”, “social responsibility” and “maximising benefits and minimising harm” are the same for this type of research method as for any other, the following issues often pose particular challenges for internet-mediated research: the distinction between public and private information, confidentiality, and informed consent. There is an urgently need to establish clear codes of ethical conduct for IMHBR.

Whose information is it?

The distinction between public and private domains is vitally important since this greatly affects the level of responsibility and obligation of the researcher. For human behaviour research online, however, it is often difficult to determine if participants perceive an online forum as “private” or “public”. While almost all internet communication is recorded and accessible to the mediating platform, such as Facebook and Twitter, and much of it even publicly accessible, users of these platforms may nevertheless consider those communications to be private, despite click-signing the terms and conditions of the service provider.

To quote professor John Preston’s testimony to the House of Commons science and technology committee on responsible use of data:

People treat social media a bit like they treat the pub. They feel that if they go into a pub and have a private conversation, it does not belong to the pub; it is their conversation. They interpret Twitter or Facebook in the same way – as a place to have a conversation.

This was also one of the contributing factors in the Samaritans’ radar debacle where they proposed an alert system to flag when people were tweeting potential distress and suicidal messages. In its post-investigation communication by the Information Commissioner’s Office to the Samaritans, the ICO stated:

On your website you [Samaritans] say that ‘all the data is public, so user privacy is not an issue. Samaritans Radar analyses the tweets of people you follow, which are public tweets. It does not look at private tweets.’ It is our view that if organisations collect information from the internet and use it in a way that’s unfair, they could still breach the data protection principles even though the information was obtained from a publicly available source.

Read the small print. Terms and conditions by Shutterstock

Confidentiality

Anonymisation is one of the most basic steps for maintaining confidentiality and showing respect for the dignity of research participants. It is also a requirement imposed by the Data Protection Act 1998 when dealing with personal data. The need to protect the anonymity of participants is even more pressing when the research uses data from online sources where access to the raw data cannot be controlled by the researcher.

At the same time, the wealth of secondary information sources that can be mined in connection to any hint at the identity of a participant is making it increasingly easy to de-anonymise data. This was publicly shown by journalists for the New York Times who followed the web tail of user No. 4417749 in the AOL Search Log in 2006 and were able to identify her – and also by the lawsuit against Netflix for insufficient anonymisation of information disclosed in a prize competition database.

Terms and conditions that no one reads

In order for informed consent to take place, it is vital that the participant is fully aware of what is being consented to. Unfortunately, current online business practice has heavily eroded the concept of informed consent by habituating people to click-sign terms and conditions forms that are too long and unintelligible to understand.

Sometimes driven by social pressure to join the network their peers are using, people readily skip over the details and give their consent for allowing corporations to access their data for a wide range of purposes. A hint at the dangers of normalising such attitudes towards the concept of informed consent was given by the statement in the controversial 2014 “Facebook news feed manipulation experiment” – a secret study on “emotional contagion” that involved changing what 689,000 users saw from their friends’ feeds to see if it influenced mood.

One of the researchers attempted to defend the study, saying that participants had provided consent because “it was consistent with Facebook’s data use policy, to which all users agree prior to creating an account on Facebook, constituting informed consent for this research”. The data use policy, however, does not provide any information about the nature of that specific study, instead speaking only of “research” in general terms.

Various organisations and learned societies, such as the British Psychological Society, the Association of Internet Researchers, the British Association for Applied Linguistics, the Information Commissioner’s Office, as well as our own research group at Nottingham University and many others are currently actively engaged in formulating and improving the guidelines for internet-mediated research.

As part of this work we are currently running a survey to ask citizens which conditions they would like to impose on researchers for making their social media data available to research studies. Ultimately, without clear guidelines and transparency, we’re hiving out decisions about us and our information to companies, governments and researchers, without us knowing what it will be used for.

Author – Ansgar Koene – Senior Research Fellow, Horizon Digital Economy, CaSMa at University of Nottingham

Westpac To Reduce BT Holding

Westpac today announced the intention to sell part of its shareholding in BT Investment Management (BTIM). DFA comments this is in part a move ahead of the tighter capital requirements which are in train and it is likely we will see other divestments across the industry as the screws are tightened.

The Westpac Group’s holding will reduce from its current 59% of BTIM’s issued capital to between 31% and 40%.

The sell-down will generate a post-tax accounting gain on sale of between $0.6 and $0.7 billion for Westpac. Westpac’s common equity Tier one capital ratio is also estimated to increase by between 10 and 15 basis points. The accounting gain will be treated as a cash earnings adjustment in Westpac’s full year 2015 accounts.

Westpac Group Chief Financial Officer, Peter King, said the transaction delivers benefits to both Westpac and BTIM.

“The sale allows the Group to realise a part of the investment in BTIM, increasing our capital ratios, while still maintaining a significant interest in BTIM.

“The strength and importance of the relationship remains unchanged. Wealth remains a strategically important focus for the Westpac Group and our continued investment in BTIM sees us maintain a stake in asset management which is a key factor in having a strong and diversified wealth business.”

Mr King said the sale is also important for BTIM shareholders.

“The transaction increases the proportion of BTIM’s shares that are readily tradable, improving liquidity and helping facilitate inclusion in key equity indices,” he said.

Westpac currently intends to retain a shareholding between 31% and 40%, with the CEO of BT Financial Group, Brad Cooper, remaining as a Non-Executive Director on the BTIM Board.

BT pays $20,400 penalty for misleading statements

According to ASIC, BT Funds Management Ltd (BT) has paid $20,400 in penalties after ASIC issued two infringement notices for misleading statements contained in the online advertising of BT Super.

The misleading statements were contained in two separate online advertising campaigns. Each infringement notice imposed a penalty of $10,200.

The first infringement notice was issued for the statement “BT Super Has Outperformed Industry Super Funds Over the Last 5 Years*” published on search results pages generated via www.google.com.au from 26 June 2014 to 18 September 2014.

ASIC was concerned that BT misled consumers by representing that superannuation products issued by BT had generated greater returns than those generated by all industry super funds during the stated period. In reality, BT’s superannuation products had not generated greater returns during the stated period.

The second infringement notice was issued for the inclusion of the words “Industry Super Australia” in the headlines of BT advertisements published on search result pages generated via www.google.com.au from 29 October 2014 to 17 November 2014.

ASIC was concerned that BT misled consumers into believing that BT had an affiliation with Industry Super Australia (ISA), an organisation which manages collective projects on behalf of fifteen industry super funds. BT has never had an affiliation with ISA.

ASIC Deputy Chairman Peter Kell said, ‘The advertising of financial products and services must be clear, accurate and  balanced and should be presented in a way that avoids potentially misleading or deceiving consumers.

‘ASIC has provided guidance to help promoters comply with their legal obligations when advertising financial products and services. We continue to actively monitor advertising in this area and will take appropriate action where we consider consumers may be misinformed,’ Mr Kell said.

The payment of an infringement notice is not an admission of a contravention of the ASIC Act consumer protection provisions. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection  laws.

RBA Minutes For June Meeting Released

The latest minutes tells us little about future prospects for rate changes, the RBA is waiting to see what happens but with overall growth expectation weak. They recognise risks in the housing sector in some centres, but also see slow business investment and spare capacity in the system. Between a rock and a hard place!

International Economic Conditions

Members noted that data released over the past month confirmed that growth of Australia’s major trading partners had eased a little in the March quarter and were consistent with around-average growth in the period ahead. Measures of global headline and core inflation rates had remained subdued in April.

Following a moderation in growth in the March quarter, some of the recent Chinese data had been more positive. Growth of industrial production and retail sales had picked up a little and conditions in the property market had improved somewhat, particularly in the larger cities. However, growth of fixed asset investment, particularly in the real estate sector, had eased further. While the production of steel had increased over recent months, its rate of growth remained significantly lower than earlier trends. The Chinese trade data had indicated weakness in both exports and imports in recent months, although imports of Australian iron ore had continued to rise. Members noted that the Chinese authorities had eased a number of policies and announced initiatives intended to support growth.

In Japan, national accounts data for the March quarter showed that economic activity had grown at a moderate pace. Wage growth had increased over the past year and the unemployment rate had declined to its lowest level in almost 20 years. For the remainder of east Asia, GDP had grown slightly below its average pace of recent years in the March quarter and both headline and core inflation had eased. In India, economic conditions had improved over the past year or so.

In the United States, indicators of activity had been mixed, though more positive than suggested by the weak March quarter GDP data, which had largely reflected temporary factors. Labour market conditions had continued to improve and consumption growth had remained relatively strong. Business activity indicators had generally remained positive, though they were a little weaker than late in the preceding year.

Economic conditions in the euro area had continued to improve, but the recovery remained modest and inflation continued to be well below the European Central Bank’s target.

Overall, commodity prices had been little changed since the previous meeting. The prices of coal and base metals had fallen, while the price of iron ore had increased.

Domestic Economic Conditions

Members noted that the March quarter national accounts would be released the day after the meeting. The data available prior to the meeting suggested that GDP growth had been close to average in the quarter, although below average on a year-ended basis. Growth in household consumption for the March quarter was expected to have been around average, while both dwelling investment and resource exports appeared to have been growing strongly. In contrast, business investment was likely to have contracted. There continued to be spare capacity in product and labour markets, despite some improvement in labour market conditions over the past six months or so.

Members observed that the Australian Government Budget for 2015/16 had outlined a number of years of slightly larger deficits than had been forecast in the Mid-Year Economic and Fiscal Outlook update in December 2014. This mainly reflected lower commodity prices and weaker-than-expected growth of incomes. Members were informed that the budget policies were little different from what had been assumed for the forecasts presented in the May Statement on Monetary Policy. Members discussed the importance of including the fiscal positions of the states and territories in any assessment of the effect of fiscal consolidation on the aggregate economy.

Growth of retail sales volumes had been around average in the March quarter. Measures of consumer sentiment had picked up noticeably in May to be a bit above average. Much of this had been attributed to the Australian Government Budget and, in particular, the announcement of tax concessions for small businesses. Liaison suggested that there had been little change in the year-ended growth of the value of retail sales in April and May.

Dwelling investment looked to have grown strongly in the March quarter and forward-looking indicators of construction activity pointed to a further pick-up. Members noted that conditions in the established housing market had continued to vary across the country. Although housing price inflation had remained high in Sydney and, to a lesser extent, in Melbourne over recent months, there had been some divergence in price developments for different segments of these markets; price inflation of detached houses had increased, whereas price inflation for units had eased in both cities. Noting that housing price growth in other cities and regional areas had declined over recent months, members discussed the strength and composition of underlying supply and demand conditions in different parts of the housing market. They also observed that there was a relatively low stock of dwellings for sale in Sydney and Melbourne and that dwellings took only a short time to sell.

Members noted that housing credit growth overall had been broadly steady at around 7 per cent (on a six-month-ended annualised basis), though the latest data on loan approvals had showed a pick-up. Over the past six months or so, growth in investor credit had eased back to be running at an annualised pace of a bit above 10 per cent. However, over more recent months there had been solid increases in housing loan approvals to both owner-occupiers and investors, particularly in New South Wales, following earlier declines.

The available data suggested that private business investment had declined further in the March quarter, consistent with the forecast presented in the May Statement on Monetary Policy. Mining investment appeared to have fallen further, while non-mining investment looked to have been little changed over recent quarters. Members observed that there were diverging trends within the non-mining sector. Investment in some sectors, such as real estate and retail trade, had picked up in response to stronger growth in domestic demand, but investment had continued to fall in other sectors, such as manufacturing, where the rate of investment had been lower than the rate of depreciation in recent years. Members noted that a lower exchange rate would have an immediate beneficial effect on some sectors, such as tourism, but that it would need to be lower for a sustained period to have a significant effect on large investment decisions in other trade-exposed sectors.

Surveys of business conditions remained a bit above their long-run averages in April. In contrast, an economy-wide measure of business confidence had remained below its long-run average level, along with various measures of capacity utilisation. Also, the second reading from the ABS capital expenditure survey of businesses’ investment intentions for 2015/16 implied a fall in non-mining investment.

Trade data suggested that export volumes had increased strongly in the March quarter across most categories, including bulk commodities. Import volumes also appeared to have increased strongly, though capital imports had remained lower than their peak in 2012.

The labour force data continued to suggest that growth in employment and hours worked had been stronger over the past six months or so than the preceding period and the unemployment rate had been relatively stable at around 6¼ per cent. In April, employment had been little changed, the participation rate had ticked down and the unemployment rate had increased slightly to 6.2 per cent. Forward-looking indicators suggested that employment growth would be only modest in the coming months and most measures of job advertisements and vacancies were little changed since mid to late 2014.

Wage growth had declined a little further in the March quarter and remained lower than suggested by the historical relationship between wage growth and the unemployment rate. The rise in the private sector component of the wage price index had been the lowest outcome for many years (with the exception of the September quarter 2009) and wage growth over the year to March was below its decade average in all industries. Wage growth in the public sector had also remained low, in part because of delayed negotiations over enterprise bargaining agreements. Members considered several possible explanations for the slow growth of wages, including a more flexible labour market, the relatively long period of gradually rising unemployment over recent years and below-average levels of inflation expectations generally.

Financial Markets

Financial markets continued to focus on the current negotiations between Greece and its official sector creditors and the likely timing of interest rate rises in the United States. A sharp rise in 10-year bond yields was the main development across the major financial markets over the past month.

Members noted that the global rise in sovereign bond yields had been led by longer-maturity German Bunds, with those yields rising by as much as 65 basis points after reaching a historic low in mid April. The rise in yields was viewed primarily as a correction from unduly low levels, rather than a reaction to economic developments, and the sell-off only returned yields to their still low levels of late last year.

Longer-term sovereign yields in most other developed countries, including Australia, also rose significantly, while increases in yields on emerging market sovereign debt were generally smaller. Following the release of the Australian Government Budget, the Australian Office of Financial Management announced updated financing requirements for 2015/16, with net issuance of Australian Government Securities expected to be around $40 billion and net debt peaking at around 18 per cent of GDP in 2016/17.

In relation to the continuing negotiations between Greece and its official sector creditors, members observed that sizeable differences remained regarding the most substantive issues, including pensions and labour market reforms. Greece had been able to meet its scheduled payments to the International Monetary Fund (IMF) in May, but Greek officials had cautioned that payments due to the IMF in June would be difficult to make without an agreement being reached with the official sector creditors. Members also noted that, consistent with reports of deposit outflows, Greek banks’ use of emergency liquidity assistance had increased further during April and May.

In the United States, expectations about the timing of the first increase in the federal funds rate had changed little over the past month, with market pricing suggesting it would happen around the end of 2015, even though comments from the Federal Reserve suggested that the first increase would occur a little sooner than that. The People’s Bank of China had moved to ease monetary policy further in May when it announced another reduction in both benchmark lending and deposit rates in response to low inflation and slower growth in economic activity.

Turning to foreign exchange markets, members noted that the US dollar had reversed its recent modest depreciation against most currencies, reaching its highest level against the yen since December 2002. The Chinese renminbi was little changed against the US dollar over the past month, although it had appreciated further on a trade-weighted basis and had been assessed by the IMF as being no longer undervalued. The Australian dollar had depreciated over May to be a little above its trough in early April on a trade-weighted basis.

Equity prices in the major markets had shown little net change since the previous meeting. The broad index for Chinese equities had increased by 2 per cent over the past month, although the index had been volatile. Members also noted the high-profile collapses in the prices of two Hong Kong-listed Chinese companies in mid May. Australian equity prices had underperformed the major markets over May.

Pass-through of the reduction in the Australian cash rate target in May to lending and deposit rates had varied across domestic financial institutions and products. At the same time, a number of banks were reported to have tightened conditions on new loans to property investors and imposed restrictions on the extent of interest rate discounts. Members noted that it would take some time for the full effects of such changes to be evident in the housing loan approvals and credit data.

Market pricing indicated that the cash rate target was expected to remain unchanged at the present meeting.

Considerations for Monetary Policy

Members noted that information becoming available over the past month had not led to any material change to the global outlook, which was for growth of Australia’s major trading partners to be around average over the period ahead. After somewhat weaker-than-expected economic conditions in China earlier in the year, the authorities had eased a range of policies and announced initiatives to support growth, and some of the recent data had been slightly more positive. The Federal Reserve was expected to begin the process of raising its policy interest rate later this year, but some other major central banks were continuing to ease policy. Commodity prices had been mixed over the month and little changed overall, and were significantly lower than a year earlier.

Domestically, the available data suggested that output growth had continued at a below-trend pace over the past year and would remain a little below trend in the period ahead before picking up to around trend in the latter part of 2016. The national accounts data for the March quarter were expected to show that the key forces operating on the economy were much as they had been for some time. After picking up late last year, growth of household expenditure was expected to have remained strong, supported by low interest rates and strong population growth. Conditions in the housing market in Sydney and parts of Melbourne had remained very strong, though trends were more mixed in other cities. Survey-based measures of business conditions had remained around average levels. There continued to be spare capacity in labour and product markets, although there had been some improvement in labour market conditions over the past six months or so. Inflationary pressures remained well contained and were likely to remain so in the period ahead.

The exchange rate was close to the lowest levels seen earlier in the year, but members noted that the current level of the exchange rate, particularly on a trade-weighted basis, continued to offer less assistance than would normally be expected in achieving balanced growth in the economy. A further depreciation therefore seemed both likely and necessary, particularly given the significant declines in commodity prices over the past year.

Overall, in assessing domestic conditions and the international environment, the Board’s assessment was that the stance of monetary policy should be accommodative. Having eased policy at the previous meeting, members judged that it was appropriate to leave the cash rate unchanged and to assess information on economic and financial conditions as it became available. These data would inform the Board’s assessment of the state of the economy and the outlook and hence whether the current stance of policy would most effectively foster sustainable growth and inflation consistent with the target.

The Decision

The Board decided to leave the cash rate unchanged at 2.0 per cent.

A home of your own: dream or delusion?

From The Conversation. The appeal of owning a home seems deeply embedded in the psyche of Australians. Yet psychologically, it is not clear the home ownership dream is entirely rational. Achieving the dream may not be all we might have hoped, and chasing it may even do damage.

We’d all like a castle of our own, one day. Image sourced from Shutterstock.com

The psychological reason Australians want to own their own home is perhaps best expressed by Darryl Kerrigan in the uniquely Australian film, The Castle. It continues to be celebrated globally for showing that the house is just a shell that holds heart. To own your own home has a strong sentimental value, as Darryl says: “You can’t buy what I’ve got.”

According to data on social trends from the ABS, the dream is not merely a distant aspiration, but one achieved by a majority of the Australian population. More than two out of every three Australians are living in their own home, a figure that has been maintained across a number of decades (see below).

Australian Bureau of Statistics ABS Australian Social Trends 6530.0 & 4102.0

However, the data also show that the proportion who own with a mortgage is increasing (and the proportion without is decreasing). So the dream continues to be made a reality even if home buyers need to borrow more money to achieve it.

Dare to dream

What harm can there be in having dreams? Well, there is a sizeable minority who perhaps do not achieve their dreams. And dreams that keep us awake at night are not good.

Joe Hockey’s recent remarks suggesting would-be home owners “get a good job” were labelled as insensitive and drew a great deal of ire.

The public reaction reinforced the fact that we have a strong attachment to the dream of owning our own home. But why this attachment? While we need a place to live, and housing is for many a form of retirement saving, the desire to own our own home goes beyond these needs.

It’s a global desire, judging by the substantial home-ownership rates around the world – from 98.7% in Romania to 44.0% in Switzerland.

Across cultures and across age groups, one of the motivations for possession of anything is to have the ability to control that possession. In the case of a house, this might be to nail up pictures, paint walls and remodel the place.

The real cost of ownership

But this desire to own, the wish to possess, comes at a cost. First, there is considerable research suggesting we tend to overweight the value of owning stuff as opposed to simply having access to use. Called the endowment effect, it describes the way in which we tend to place a higher value on an item that is owned than on an identical item which is not owned.

Surprisingly, and perhaps of greater concern, is that ownership of a home does not appear to necessarily make people happier. One researcher found that women who owned their own home were no happier than those who rented.

More generally, the rent vs buy debate seems to focus the issue on elements that turn out to be less relevant to our longer-term happiness. We make choices based on big differences (such as rent or buy) when the two dwellings are in most other respects, very much the same.

In this case, we are falling for the focusing illusion whereby we exaggerate the joys of home ownership. Psychologist Daniel Kahneman explains this concept with regard to the myth of California happiness.

And once we get to be a home owner, the pleasure we so anticipated can quickly disappear through the phenomenon of hedonic adaptation. We imagine that owning our own home will make us very happy, and while this may be true in the short run, our happiness levels return quickly to whatever they were before the event.

Hedonic adaptation diminishes both acute negative and positive experiences. And this may explain why home ownership rates and desires bounced back quickly in the US despite the punishing lessons delivered during the global financial crisis of 2008 when many held mortgages of greater value than their home.

We might be inclined to argue that home ownership is a good investment, that “rent money is money down the toilet”, but we may be engaging in a confirmation bias. That is, interest and council rates are a similar “waste”, but we discount this argument because we already believe home ownership is good.

In any case, the walls and roof within which we live do not make the home. While we may justify our dreams with reasons, the truth of the home ownership dream is probably closer to the heart than the head.

Author – Stephen S Holden Associate professor at Bond University

US Industrial Production Wobbles

According to the FED, industrial production decreased 0.2 percent in May after falling 0.5 percent in April. The decline in April was larger than previously reported, but the rates of change for previous months were generally revised higher, leaving the level of the index in April slightly above its initial estimate. Manufacturing output decreased 0.2 percent in May and was little changed, on net, from its level in January. In May, the index for mining moved down 0.3 percent after declining more than 1 percent per month, on average, in the previous four months. The slower rate of decrease for mining output last month was due in part to a reduced pace of decline in the index for oil and gas well drilling and servicing. The output of utilities increased 0.2 percent in May. At 105.1 percent of its 2007 average, total industrial production in May was 1.4 percent above its year-earlier level. Capacity utilization for the industrial sector decreased 0.2 percentage point in May to 78.1 percent, a rate that is 2.0 percentage points below its long-run (1972–2014) average.

Probably not enough negative news to hold off on interest rates rises in the US later in the year, but was enough to drive the markets lower overnight.