Inducing Consumer Paralysis

Do you think you are paying more than you should for energy, banking, insurance, internet and phone services? You are not alone, and you are probably right. From The Conversation.

Companies offer a growing number of deals that supposedly enable you to choose what is best for you. Every basic economics textbook tells us greater choice should deliver cheaper prices. But in reality this isn’t necessarily the case.

So what’s going on?

A big part of the answer is that businesses are taking advantage of the behavioural phenomenon of “consumer paralysis” to maximise profits.

They provide us with many plans and deals to make us feel like we are in control, but too many choices actually leads most of us to make a bad (or no) choice.

Energy pricing

Let’s consider how this works in the context of Australia’s electricity market.

In most areas of the country, residential customers have at least half a dozen retailers to choose from.

Market share by generation capacity by region, January 2018. ACCC, Retail Electricity Pricing Inquiry Final Report

Nonetheless, according to the Australian Consumer and Competition Commission, electricity prices and profit margins are among the highest in the world, and rising. The consumer watchdog calculates that in the decade to 2018 the average residential electricity bill increased by 55% (or 35% in real terms) – and only a very small part of that had to do with alleged culprits such as renewable energy.

Australia’s biggest electricity company, AGL, made a net profit of A$1.6 billion in 2018 – 194% more than the year before.

Depending on where you live, AGL offers up to 11 energy plans to residential customers. There’s the “Savers” plan, “Savers Online”, “Everyday”, “Freedom”, “Standing Offer”, “Essentials”, “Essentials Plus”, and so on.

Each plan, in turn, has four to eight tariff type options: “Flexible Price”, “Time of Use Interval”, “5 Day Time of Use”, “Single Rate”, “Two rate: single rate with controlled load”, “Single Rate Demand Opt-in”, and so on.

That adds up to literally dozens of price plans from just one retailer. Other companies are hardly better. For a customer in inner Sydney, there are more than 350 retail plans to choose from.

All this “choice” gives the appearance of a competitive market, but its effect is the opposite. It give retailers wriggle room to charge more, not less.

Experiments in choice behaviour

Many experiments over the past three decades have demonstrated the ubiquity of too much choice leading to consumer paralysis.

One classic experiment was run by psychologists Sheena Iyengar and Mark Lepper in a San Francisco supermarket in 1999. Customers visiting the store were given a chance to sample jams. Half the time they were allowed to taste up to six jams; the other half they could taste up to 24 jams.

Traditional economics says a consumer is much more likely to find a jam they really like with a sample of 24 rather than six. So offering 24 jams should lead to more jam purchases.

Yet exactly the opposite was found. Of the consumers who chose to taste jams, only 3% of those who could sample 24 jams ended up buying jam, whereas 30% (or 10 times more) of those who could sample just six jams ended up buying.

More choices provided, more paralysis.

More recently, in 2012, Iyengar’s Columbia University colleague Eric Johnson and others reported on an experiment with much greater consequences.

They asked people to choose health insurance coverage from a set of four or eight options. The options varied on monthly premiums and deductibles. When given four options, 42% of subjects chose the best value option. On average their choices cost about $200 more than the best option on offer.

When given eight options, only 21% chose the best option – no better than simply making a random choice.

Reinforcing psychological biases

Given the massive number of products and plans available in the energy, banking, insurance, internet and mobile phone sectors, the time and effort needed to choose the best deal leaves us feeling overwhelmed and overloaded. In response, we rely on shortcuts (rules of thumb) to save both time (and our sanity).

But these shortcuts can also cause biases that result in further paralysis, including:

  • Present bias – we put much greater weight on the present than the future. Since the cost of making decisions happens in the present (like the time and effort to compare options and switch services) while the benefits happen later (like saving money), we minimise the time we spend making decisions
  • Status quo bias – we tend to stick with a chosen option or default, even when a much better option may be available
  • Loss aversion – we place much greater weight on losses and often overestimate the chance of a bad outcome.

There is considerable evidence pointing to how these biases lead to consumer paralysis in the retail banking and energy sectors.

In 2017, Britain’s energy regulator, Ofgem, ran a randomised control trial involving more than 130,000 electricity customers. Participants received personalised letters either from Ofgem or their current provider offering substantially better electricity deals.

The result: compared with the control group in which only 1% switched tariffs within the next month, 3.4% of those who received an offer from their electricity provider switched to a better deal. Even when presented with notable savings, more than 96% stuck with the status quo.

Results of Ofgem’s Cheaper Market Offers Letter (CMOL) trial. Ofgem

Other Ofgem research shows that among those who have not switched energy plans, 51% consider it a hassle they don’t have time for, and 48% worry that things would go wrong.

Yvette Hartfree and her colleagues at the University of Bristol’s Personal Finance Research Centre have noted similar fears among bank customers: “The biggest concern for those considering switching is that something will go wrong at some point in the process of switching.”

Taking action

We should not be surprised that energy companies and others use an avalanche of choice to confuse us. It is a brilliant business strategy: it seems more competitive from a traditional assessment, yet actually reduces competition.

So what can you do?

On your own, you will need to make a conscious effort to overcome paralysis. You need to devote the time to carefully compare offers.

Fortunately, you can find tools that can help, such as the Australian government’s energy comparison website. However, be wary of commercial “switching services” and websites that provide comparisons. These operations are often being paid by retailers. Their motives are not necessarily to direct you to the best deal.

What can we do collectively?

One option is government action to ensure switching services are trustworthy. At a minimum, there should be guidelines that switching services not take payments from retailers, and only charge you when you actually save money.

Another option is to form “consumer unions”, which can bargain collectively to get members better deals. The potential of community groups to leverage bulk-buying arrangements has been demonstrated in other contexts. In Victoria’s Gippsland region, for example, local organisations have banded together to offer discounts on renewable energy technology.

There’s no reason something similar could not be done to overcome the choice problems induced by big energy retailers and the like.

Author: Robert Slonim, Professor of Economics, University of Sydney

More Are Retiring With High Mortgage Debts

From The Conversation.

The number of mature age Australians carrying mortgage debt into retirement is soaring.

And on average each mature age Australian with a mortgage debt owes much more relative to their income than 25 years ago.

Microdata from the Bureau of Statistics survey of income and housing shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement.

More mortgaged for longer

For home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%.

Among home owners aged 45 to 54 years, it has doubled.

Source: Authors’ own calculations from the Surveys of Income and Housing

Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group.

In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82% to 169%.

For those aged 55-64 it has blown out from 72% to 132%.

Among mortgage holders. Source: Authors’ own calculations from the Surveys of Income and Housing

Three reasons why

The soaring rates of mortgage indebtedness among older Australians have been driven by three distinct factors.

First, property prices have surged ahead of incomes.

Since 1970 the national dwelling price to income ratio has doubled.

Prices and wages in 1970 are assigned an index of 100. Sources: Treasury, ABS, Committee for Economic Development of Australia

Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, potentially shortening the the remaining working life available to repay the loan.

Second, today’s home owners frequently use flexible mortgage products to draw down on their housing equity as needed for other purposes. During the first decade of this century, one in five home owners aged 45-64 years increased their mortgage debt even though they did not move house.

Third, older home owners appear to be taking on bigger mortgages or delaying paying them off in the knowledge that they can work longer than their parents did, or draw down their superannuation account balances.

Super could be changing our behaviour

For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts prolong working lives.

In 2017 around 29% of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from 25% four years earlier.

In the Netherlands, where a mandatory occupational pension scheme along the lines of Australia’s super scheme has been in place for much longer, over one-half of home owners aged 65 and over are still paying off mortgages.

The base is the total number of uses of lump sums rather than the number of people taking lump sums. ABS 6238.0 Retirement and Retirement Intentions

The implications are huge

Internationally, studies have found that indebtedness adds to psychological distress. The impacts on wellbeing are more profound for older debtors, without the ability to recover from financial shocks.

Debt-free home ownership in old age used to be known as the fourth pillar of the retirement incomes system because of its role in reducing poverty in old age. It allowed the Australian government to set the age pension at relatively low levels.

Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the age pension.

Mortgage debt burdens late in working life will also expose home owners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages.

During the first decade of this century, around half a million Australians aged 50 years and over lost their homes.

Taxpayers will be under pressure to help

Those losing home ownership are often forced to rely on rental housing assistance. Moreover, as older tenants they are unlikely to ever leave housing assistance. This will put pressure on the government to boost spending on housing assistance, which is likely to further boost demand for housing assistance.

Super and government housing assistance could become the safety nets that allow retirees to escape their mortgages.

It wasn’t the intended purpose of superannuation, and wasn’t the intended purpose of housing assistance. It is a development that ought to be front and centre of the inquiry into the retirement incomes system announced by Treasurer Josh Frydenberg.

It is a change we’ll have to come to grips with.

Authors: Rachel Ong ViforJ, Professor of Economics, School of Economics, Finance and Property, Curtin University; Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University

Homelessness soars in our biggest cities

From The Conversation.

Homelessness has increased greatly in Australian capital cities since 2001. Almost two-thirds of people experiencing homelessness are in these cities, with much of the growth associated with severely crowded dwellings and rough sleeping.

Homelessness in major cities, especially severe crowding, has risen disproportionately in areas with a shortage of affordable private rental housing and higher median rents. Severe crowding is also strongly associated with weak labour markets and poorer areas with a high proportion of males.

These are some of the key findings of our Australian Housing and Urban Research Institute (AHURI) research released today.

Extending previous AHURI work, we combine 15 years (2001-2016) of homeless estimates from the Australian Census, other customised census and the Australian Institute of Health and Welfare’s Specialist Homelessness Service Collection (SHSC) data.

People counted as homeless on census night live in: improvised dwellings, tents or sleeping out (rough sleeping); supported accommodation; staying temporarily with other households (i.e. couch surfing); boarding houses; temporary lodging; or severely crowded conditions.

How has the geography of homelessness changed?

Nationally, 63% of all homelessness is found in capital cities. That’s up from 48% in 2001.

Shares (%) of homelessness and population by area type

Authors’ panel dataset (ABS Census homelessness estimates)

At the same time, homelessness has been falling in remote and very remote areas. However, it still remains higher in these areas per head of population.

Homelessness is also becoming more dispersed across major cities.

In Sydney, a corridor of high homelessness rates stretches from the inner city westward through suburbs such as Marrickville, Canterbury, Strathfield, Auburn and Fairfield (more than 30km from the CBD).

In Melbourne, high homelessness rates are found in Dandenong (around 25km southeast of the CBD), Maribyrnong and Brimbank to the west, Moreland and Darebin to the north and Whitehorse to the east, about 15km from the CBD.

Homeless rates in Australia 2016

Authors’ panel dataset (ABS Census homelessness estimates and TSP); ABS digital Statistical Geography Boundaries, SA3, 2016

After accounting for population growth, we see a decline in homeless rates in the CBD and inner areas of Perth, Adelaide, Melbourne and to an extent Brisbane over the 15 years. At the same time, homeless rates in outer urban areas have increased. In many regions this increase outpaced population growth.

Change in homeless rate compared with population growth 2001–2016

The highest growth in homeless rates is in those areas where rates increased by 40% or more (the top two deciles) from 2001–2016. Authors’ panel dataset (ABS Census homelessness estimates and TSP); ABS digital Statistical Geography Boundaries, SA3, 2016

The numbers of households living in severely crowded dwellings in capital cities have doubled in 15 years, accounting for much of the growth in homelessness overall. In 2001, this group accounted for 35% of people experiencing homelessness, with 27% living in cities. By 2016, severe crowding rates had soared to 44% of all people experiencing homelessness, with 60% living in capital cities.

Share of severe crowding by area type, 2001–2016

Authors’ panel dataset (ABS Census homelessness estimates)

Rough sleeping has also transformed into an urban phenomenon — nearly half of all rough sleepers in Australia are now found in capital cities.

What is driving these changes?

Homelessness has risen disproportionately in areas with a shortage of affordable private rental housing and higher median rents. That’s especially the case in Sydney, Hobart and Melbourne. In capital city areas with a shortage of affordable private rentals in both 2001 and 2016, severe crowding grew rapidly (by 290.5%) against all homelessness growth (32.6%).

Changes in share of homeless and population by city and region, 2001-16

Authors’ panel dataset (ABS Census homelessness estimates and TSP), Author provided

The effects of rental affordability on homelessness rates still hold after controlling for other area characteristics. We also find that these rates are strongly correlated with higher shares of particular demographic groups in an area, including males, younger age groups, young families, those with an Indigenous or ethnic background, and unmarried persons.

Severe crowding in capital cities is also strongly associated with weak labour markets and poorer areas with a high proportion of males. However, these associations do not hold for severe crowding in remote areas.

What should governments and services do?

The way our cities are becoming more unequal over time is shaping the changes in the geography of homelessness.

Governments must find ways to urgently increase both the supply and size of affordable rental dwellings for people with the lowest incomes. We also require better integration of planning, labour, income support and housing policies targeted to areas of high need.

Rates of severe crowding remain highest in remote areas, and continued efforts to increase housing supply in remote areas, such as the National Partnership on Remote Housing (NPRH), are needed. Targeted responses are required to combat its growth in major cities.

It is critical that specialist homelessness services, as a first response to homelessness, are well located to respond in areas where demand is highest.

The AHURI report can be downloaded here.

Authors: Sharon Parkinson, Senior Research Fellow, Centre for Urban Transitions, Swinburne University of Technology; Deb Batterham, PhD Candidate, Centre for Urban Transitions, Swinburne University of Technology; Margaret Reynolds, Researcher, Centre for Urban Transitions, Swinburne University of Technology

Under The Debt Volcano

I discuss how Ireland navigated their financial crisis a decade ago with Eddie Hobbs, the financial writer, adviser and. broadcaster, who lived through the crash and commented on the events in Ireland.

He wrote and presented a programme on state broadcaster RTE entitled Rip-Off Republic in 2005.

Specifically we discuss how Australia should be preparing…. now….

Eddie’s earlier show:

ASIC puts spotlight on the rapidly growing buy now pay later industry

ASIC has released its first review of the rapidly growing buy now pay later industry. The review of this diverse and evolving market has found that buy now pay later arrangements are influencing the spending habits of consumers, especially younger consumers. One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement.

They estimate 2 million active buyers use these services.

… and transactions are increasing.

They show that much of the revenue generated comes from merchant fees, but also includes some missed payment and other consumer fees.

A buy now pay later arrangement allows consumers to purchase and obtain goods and services immediately but pay for that purchase over time. While some buy now pay later providers offer fixed term contracts up to 56 days for amounts up to $2,000, other providers offer a line of credit for amounts up to $30,000.

ASIC found that the number of consumers who have used buy now pay later has increased five-fold from 400,000 to 2 million over the financial years 2015-2016 to 2017-2018. The number of transactions has increased from about 50,000 during the month of April 2016 to 1.9 million in June 2018. At 30 June 2018, there was $903m in outstanding buy now pay later balances.

ASIC Commissioner Danielle Press said ‘Although our review found many consumers enjoy using buy now pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products.

‘The typical buy now pay later consumer is young with 60% of buy now pay later users aged between 18 to 34 years old.  We found that buy now pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees.’

One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement. Most consumers believe that these arrangements allow them to buy more expensive items than they would otherwise and spend more than they normally would. Providers also use behavioural techniques which can influence consumers to make a purchase without careful consideration of the costs.

‘The exponential growth in this industry, along with the risks we have identified, means this will remain an area of ongoing focus for ASIC. One area we will be targeting is where consumers are paying more than they need to for using a buy now pay later arrangement’, said Ms Press.

Given the potential risks to consumers, ASIC supports extending the proposed product intervention powers to all credit facilities regulated under the ASIC Act. Product intervention powers will provide ASIC with a flexible tool kit to address emerging products and services such as buy now pay later arrangements. This will ensure ASIC can take appropriate action where significant consumer detriment is identified.

Background

Buy now pay later arrangements allow consumers to defer payment for purchases from participating merchants and obtain the goods and services immediately.

Under the arrangement, consumers are generally not charged interest. However, some arrangements have an establishment fee and account-keeping fees. Consumers may also be charged a fee if they miss a payment.

Buy now pay later arrangements are available from a range of merchants. For example, these arrangements could be used to finance high-value purchases such as solar power products, health services, travel, and electronics. Buy now pay later arrangements are also available for everyday purchases from retailers such as Big W, Target, Harris Scarfe and Kmart.

These arrangements are not regulated under the National Credit Act and as a result providers are not required to be licensed or to comply with the responsible lending laws that prohibit a lender from providing credit that would be ‘unsuitable’ for the consumer. However, these arrangements are considered ‘credit facilities’ under the ASIC Act meaning that ASIC can take action where a buy now pay later provider engages in conduct that is misleading or unconscionable.

ASIC’s review

ASIC undertook a proactive review of these arrangements to develop a broad understanding of this growing industry and to identify potential risks for consumers. The review examined six providers, four of which are part of larger ASX-listed companies. The buy now pay later arrangements we reviewed were: Afterpay, zipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay.

To better understand how this industry is working in practice, we considered qualitative and quantitative data from July 2016 to June 2018. We also relied on independent consumer research which involved a survey of 600 randomly selected consumers who had recently used a buy now pay later arrangement.

ASIC also tested each of the providers performance in areas such as transparency, dispute resolution and hardship. As a result, all of the providers have made improvements that will benefit consumers. For example, all of the providers are now members of the new Australian Financial Complaints Authority, and all of the providers are reviewing their standard form contracts for potentially unfair contract terms.

ASIC will continue to collect data to monitor the adequacy of consumer protections in this sector and review changes made by buy now pay later providers.

ASIC’s MoneySmart website explains how buy now pay later services work and how consumers can avoid getting into financial trouble when using them.

The Baby Boomers Time Bomb

New Zealand based property expert Joe Wilkes and I discuss the latest insights, with specific reference to the Kiwi market.

Are Baby Boomers in for a rude shock?

Please consider supporting our work via Patreon

Please share this post to help to spread the word about the state of things….

Grattan Institute rejects super industry spin

The Grattan Institute has rejected the ‘fear factor’ of the financial service industry that encourages Australians to stress about their retirement, via InvestorDaily.

A recently released report by the Grattan Institute, Money in Retirement: More than Enough, reveals that most Australians will be financially comfortable in retirement.

The report shows that retirees are less likely than working-age Australians to suffer financial stress and more likely to have extras like annual holidays.

Grattan Institute chief executive John Daley said that the institute’s models showed that Australians would actually be able to retire in comfort.

“The financial services industry ‘fear factory’ encourages Australians to worry unnecessarily about whether they’ll have enough money in retirement,” he said.

The Institute modelling, even allowing for inflation showed that workers today could expect a retirement income of 91 per cent of their pre-retirement income.

Grattan’s report called on the government to scrap the plan to increase compulsory contributions from 9.5 per cent to 12 per cent as most Australians would be comfortable in retirement.

The report instead called for a 40 per cent increase in the maximum rate of Commonwealth Rent Assistance and for a loosening of the Age Pension assets test which would boost retirement incomes for 70 per cent of future retirees.

The Association of Superannuation Funds of Australia denounced the report calling it an unprecedented attack on the retirement aspirations of ordinary Australians.

ASFA chief executive Dr Martin Fahy said the report was about two Australia’s, one with fully-funded, high-earning retirees and the rest with reliance on the state.

“The Grattan Institute wants to dismantle our world class retirement funding system and replace it with a model that has two thirds of the population relying on the Age Pension,” said Dr Fahy.

Dr Fahy also slammed the reports recommendation that the retirement age be raised to 70 and that the government reviewing the adequacy of Australians’ retirement incomes.

The institute’s report did recommend the government review the adequacy of Australians’ retirement income and called for a new standard.

“The Productivity Commission should establish a new standard for retirement income adequacy and assess how well Australians of different ages and incomes will meet that standard. References to the ASFA comfortable retirement standard should be removed,” the report read.

“The ASFA Retirement Standard provides a detailed account of living expenses in retirement.

“The Grattan analysis in effect wants people in retirement not to have heating in winter, not to take vacations, to get rid of the car, and skimp on prescriptions and other out-of-pocket health care costs,” said Dr Fahy.

The report for its part has said that reform is needed by the government to be able to fund aged care and health in the future.

“Unless governments have the courage to make these reforms, future budgets will not be able to fund aged care and health at the same level as today, which is the real threat to adequate retirement incomes in future,” it said.

Renters Beware: how the pension and super could leave you behind

How we fund retirement in an ageing century ought to worry all of us, via The Conversation.

But one group of us should be much more worried than the rest.

In a new set of research briefs published by the Centre of Excellence of Population Ageing Research, we report that most people do well out of our retirement income system and that the living standard of retirees has improved over the past decade.

In international comparisons, our system ranks highly, for good reason.

Most retirees do well

About 60% of older Australians can afford a lifestyle better than that deemed to be “modest” by widely used standards.

Households headed by baby boomers reaching retirement age between 2006 and 2016 did so with incomes 45% higher than those who retired a decade earlier.

Typical boomer households aged in their late 60s earn almost as much as they did when they were still working – only 20% less, that is, with about 80% of their working income maintained.

And their needs are lower. Lower spending in retirement is common because older households need to pay less for transport, less for working clothes, and have more time to cook.

Many continue to save while in retirement.

And they tend to spend less over time, rather than more over time as benchmarks publicised by the superannuation industry assume.

When we included the value of living rent-free for the 80% or more of retirees who own their own home (about A$10,000 per year on average), we found older Australians live in no more poverty than working age Australians.

But not renters

The living standards of those who rent in retirement are very different. Only about 15% of older renters can afford a lifestyle better than “modest”.

Single renters are particularly badly off.

Among all older people only about 10% fall below the poverty line set at half the median income.

Among older Australians who rent, 40% fall below.

Among older Australians who rent alone, it’s more than 60%.

If that relative poverty measure seems too abstract, an absolute dollar figure might help.

Alarming research aired on the ABC in September found that, on average, aged care homes were spending $6.08 per day on food per resident.

Our research finds that among pensioners who rent alone, one quarter spend even less than that per day.

And it’s getting worse

The pension has always favoured home owners.

On the one hand it is insufficient for renters and on the other it doesn’t cut pension payments to the owners of very valuable homes, because the value of any home – no matter how big – is excluded from the pension means test.

Rental assistance, introduced to complement the pension in the 1980s, was meant to alleviate this, and to some extent it does.

But it climbs only in line with the consumer price index every six months, which usually fails to keep pace with rents.

Sydney rents have doubled over the past two decades. The consumer price index has climbed 68%.

As a result, rental assistance is less effective in reducing financial stress than it was when it was introduced, and is set to become even less effective if rents continue to climb more quickly than the price index.

And more of us look set to rent

Households headed by Australians aged 35 to 44 are now 10 percentage points less likely to own their own home than were households headed by people of the same age a generation earlier.

They might be merely postponing buying homes until they are older as more of what would have been their income is sequestered into super and they enter the workforce and retire later.

If so, they might end up owning and paying off homes by retirement at the same rate as boomer households did before them.

If not, more and more of them could end up in poverty in retirement.

Author: Rafal Chomik Senior Research Fellow, ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW

An open letter on rental housing reform

From The Conversation.

Following a review of the New South Wales Residential Tenancies Act 2010 in 2016 and extended consultations, the NSW government has introduced a number of reforms to parliament. Debate is expected to occur this week. However, without reform to current eviction proceedings, many housing advocates have expressed concern that these generally good proposals will have little effect. Today, 45 housing researchers from a range of disciplines have signed the following open letter.

We are academics who research and teach about housing. We come from a range of disciplines – for example law, economics, social sciences, planning – and many of us have worked variously with housing providers, tenants’ groups and government agencies on housing issues. We have in common commitment to the principle that everyone should have a secure, affordable home of decent standard, whether they own or rent.

Too often, however, our rental housing sector fails to deliver on this principle. There are numerous reasons for this; one of them is the legal insecurity of tenants under current New South Wales residential tenancy laws. In particular, the provision for landlords to give termination notices, with no grounds, at the end of a fixed-term tenancy or during a continuing tenancy is contrary to genuine security.

“No grounds” termination notices give cover for bad reasons for seeking termination, such as retaliation and discrimination. The prospect that a “no grounds” termination notice may be given hangs over all tenancies, discouraging tenants from raising concerns with agents and landlords and undermining the legal rights otherwise provided for by their leases and the legislation.

The deficiencies of our current laws are becoming worse, as more households rent, and rent for longer into their lives. About 32% of NSW households rent and this proportion is growing. Over the five years to 2016, 63% of the net growth in the number of NSW households was households in rental housing. And 42% of NSW renter households include children.

Our deficient current laws are also increasingly out of step with tenancy laws in comparable jurisdictions. Many European countries, as well as most of the Canadian provinces and the largest US cities, do not provide for “no grounds” terminations by landlords.

Last year, Scotland reformed its tenancy laws to remove provisions for “no grounds” terminations and replace them with prescribed reasonable grounds for termination. In Australia, Tasmania has for some years not allowed “no grounds” terminations of continuing tenancies. This month, the Victorian Parliament amended its residential tenancies legislation to remove provision for “no grounds” termination notices for continuing tenancies and for fixed-term tenancies, except at the end of the first fixed term.

We call on the NSW state government to improve security for renters, by legislating to end no-grounds termination by landlords and providing instead for a prescribed set of reasonable grounds for terminations.

These reasonable grounds would include grounds already in the legislation, such as rent arrears and other breaches by the tenant, and sale of the premises, as well as new grounds, such as where the landlord needs the premises for their own housing, and where the premises are to be renovated, demolished or changed to a non-residential use.

The prescribed reasonable grounds should have different notice periods, reflecting their different degrees of urgency and priority. Proceedings on notices should go, as they currently do, to the NSW Civil and Administrative Tribunal, and the tribunal should determine whether the ground exists and whether termination is justified in all the circumstances.

This reform would make all tenants feel more secure, without unduly restricting landlords in reasonable uses of their properties. The only inconvenience would be to the retaliators, the discriminators and those who cannot cope with even a modest level of accountability. If the reform prompted these landlords to leave the sector, they would sell to a new home owner or to a more professionally minded landlord – either of which is to the good.

There is more to be done across a range of policy areas to improve the functioning of all aspects of our housing system. We need more accessible home ownership, a differently structured and more professional market rental sector and a revitalised social housing sector. These changes require a comprehensive housing policy, coordinated across areas and levels of government and carried out over a long term.

But, in tenancy law, the single most important reform is ending “no grounds” termination by landlords. And the parliament could do it now.

When falling home ownership and ageing baby boomers collide

From The Conversation.

Until now, the majority of older people in Australia have achieved the goal of owning their own home outright. Hence, policymakers have typically shown little concern about the size and budget costs of rental housing assistance programs for seniors. However, two major societal shifts are set to propel such programs into the spotlight as a prominent government subsidy for older Australians.

The first trend is population ageing. We anticipate that baby boomers will place growing pressure on housing assistance programs as they age.

This is simply because of their larger numbers compared to earlier generations. Applying ABS population projections to data from the 2011 Household, Income and Labour Dynamics in Australia (HILDA) Survey, we project the population of Australians aged 55 years and over will increase from 5.1 million to 7.9 million between 2011 and 2031 – a 55% increase.

A second shift – falling rates of home ownership – could further increase the demands on the housing system. The HILDA Survey reveals rates of home ownership have fallen from 72% in 2001 to 66% in 2016.

This decline is in part due to younger Australians finding it more difficult to become owner-occupiers. It is also due to growing numbers of Australians dropping out of home ownership.

Estimates from the ABS Surveys of Income and Housing show that from 1982 to 2013 the home ownership rate fell 7.3 percentage points among the 45-54 age group. It fell by 5.1 percentage points for the 55-64 age group.

These trends are likely to continue.

A growing divide among older Australians

To analyse the implications of these shifts, we forecast the changing profile of Australians aged 55 and over by housing tenure. We apply demographic projections to the 2011 HILDA Survey and describe tenure profiles based on hypothetical declines of 5 and 15 percentage points in home ownership rates by 2031, as well as a stagnant stock of public housing.

Our findings point to a growing divide among older Australians. For older Australians, home ownership will increasingly become the preserve of higher-income married couples (see table 1). Older people on lower incomes – especially women and those affected by marital breakdown or bereavement – will rent.

The divide is especially stark if the home ownership rate falls by 15 percentage points. In this scenario, 27.4% of people aged 55 and over will be private renters by 2031.

Budget impacts of housing assistance

Older Australians’ demand for housing assistance could spike as a result of population ageing and falling home ownership rates.

Even demographic change on its own would lift real government spending on housing assistance for Australians aged 55 and over by 64% by 2031 (see table 2).

If home ownership rates also decline by 5 percentage points, then real government spending is projected to blow out to three times its 2011 level.

A steep fall in the home ownership rate of 15 percentage points would send real government spending on housing assistance soaring to around six times the 2011 level. That would increase real spending on housing assistance for older Australians from a tiny 0.043% of real GDP in 2011 to 0.16% of forecast real GDP in 2031.

The implications of demographic change coupled with falling home ownership rates are obvious for the housing sector:

  • the private rental tenure is set to expand
  • demand for housing assistance will grow
  • spending on housing assistance programs will increase the strain on government budgets.

Challenges beyond housing policy

There are also important ramifications for retirement incomes policy. The age pension system assumes most Australians will retire as outright home owners with no mortgage payments to meet. They can therefore get by on low age pensions. But growing numbers of older renters struggling to meet rental payments will call into question the adequacy of our age pension benefits.

There is an alternative scenario. By 2031, the superannuation system will have matured. Growing numbers of older renters – especially those with steady employment records – could accumulate big enough balances in defined contribution schemes to become home buyers in later life.

Dipping into superannuation savings to finance a home purchase is attractive on various fronts:

  1. it offers the prospect of secure and affordable housing in old age
  2. it helps with access to the age pension as owner-occupied housing assets are exempt from the age pension assets test and are not deemed to generate an income return under the income test
  3. under aged care assets test rules, the equity stored in what was an aged care client’s family home is either exempt from the assets test (if a spouse or dependent children is still living in the home), or subject to a cap ($165,271.20 as at March 20 2018), and is not assessed for age care deeming purposes.

On the other hand, superannuation balances are an assessable asset under age pension and aged care assets test provisions, as well as for age pension and aged care deeming purposes.

Should growing numbers of Australians approach retirement as renters these anomalies offer them potentially powerful motives to substitute assets away from superannuation and into owner-occupied housing in later life. But, in doing so, they could undermine a key objective of Australia’s superannuation guarantee – that of promoting financial independence and reducing reliance on public pensions in old age.

Authors: Rachel Ong ViforJ Professor of Economics, School of Economics, Finance and Property, Curtin University; Gavin Wood Emeritus Professor of Housing and Housing Studies, RMIT University; Melek Cigdem-Bayram Research Fellow, RMIT University