RBA Assistant Governor, Financial System, Michele Bullock discussed household debt in a recent speech. She concludes that “Household debt in Australia has risen substantially relative to income over the past few decades and is now at a high level relative to international peers. This raises potential vulnerabilities in both bank and household balance sheets. While the risks are high, there are a number of factors that suggest widespread financial stress among households is not imminent. It is nevertheless an area that we continue to monitor closely”. She included comments on households in regional areas, who are often overlooked in discussion.
She shows that housing debt is the main issue, that risks vary across households (and income bands), and that on an international comparison basis we are right up there. Household debt-to-income ratio has increased more than for many other countries.
Also she cites HILDA data up to wave 16. The fieldwork for this report was conducted between 2001 and 2016. So not very current in my view! Perhaps the current risks are higher thanks to continued poor lending practice, flat incomes and rising costs. Our mortgage stress data suggests this.
Household debt in Australia has been rising relative to income for the past 30 years (Graph 1). This graph shows the total household debt-to-income for Australia from the early 1990s until this year. Over that time it has risen from around 70 per cent to around 190 per cent. There are three distinct periods. The first, from the early 1990s until the mid-2000s, saw the debt-to-income ratio more than double to 160 per cent. Then there was a period from around 2007 to 2013 when the ratio remained fairly steady at 160 per cent. Finally, since 2013, the debt-to-income ratio has been rising again, reaching 190 per cent by 2018.
Graph 1
Australia has not been unique in seeing debt-to-income ratios rise. The median debt-to-income ratio for a range of developed economies has also risen over the past 30 years. But the Australian debt-to-income ratio has risen more sharply. In fact, Australia has moved from having a debt-to-income ratio lower than around two thirds of countries in the sample to being in a group of countries that have debt-to-income ratios in the top quarter of the sample. This suggests that there are both international and domestic factors at play when it comes to debt-to-income ratios.
There are two key international factors that have tended to increase the ability of households in developed countries, including Australia, to take on debt over the past few decades. The first is the structural decline in the level of nominal interest rates over this period, partly reflecting a decline in inflation but also a decline in bank interest rate margins as a result of financial innovation and competition. With lower interest payments, borrowers could service a larger loan. The second is deregulation of the financial sector. Through this period, the constraints on banks’ lending were eased significantly, allowing credit constrained customers to access finance and banks to expand their provision of credit.
But as noted, in Australia the household debt-to-income ratio has increased more than for many other countries. The increase in household debt over the past few decades has been largely due to a rise in mortgage debt. And an important reason for the high level of mortgage debt in Australia is that the rental stock is mostly owned by households. Australians borrow not only to finance their own homes but also to invest in housing as an asset. This is different to many other countries where a significant proportion of the rental stock is owned by corporations or cooperatives (Graph 2). This graph shows for a number of countries the share of dwellings owned by households on the bottom axis and the average household debt-to-income ratio on the vertical axis. There is a clear tendency for countries where more of the housing stock is owned by households to have a higher household debt-to income-ratio.
Graph 2
Potential vulnerabilities
This high level of household debt relative to income raises two potential vulnerabilities. First, because mortgage lending is such an important part of bank balance sheets in Australia, any difficulties in the residential mortgage market could translate to credit quality issues for banks (Graph 3). And since all of the banks have very similar balance sheet structures, a problem for one is likely a problem for all. This graph shows the share of banks’ domestic credit as a share of total credit over the past couple of decades. Australian banks have substantially increased their exposure to housing over this period and housing credit now accounts for over 60 per cent of banks’ loans. So the Australian banking system is potentially very exposed to a decline in credit quality of outstanding mortgages.
Graph 3
The risk that difficulties in the residential real estate market translate into stability issues for the financial institutions, however, appears to be currently low. The Australian banks are well capitalised following a substantial strengthening of their capital positions over the past decade. While lending standards were not bad to begin with, they have nevertheless tightened over the past few years on two fronts. The Australian Prudential Regulation Authority (APRA) has pushed banks to more strictly apply their own lending standards. And APRA has also encouraged banks to limit higher risk lending. Lending at high loan-to-valuation ratios has declined as a share of total loans, providing protection against a decline in housing prices for both banks and households. And for loans that continue to be originated at high loan-to-valuation ratios, the use of lenders’ mortgage insurance protects financial institutions from the risk that borrowers are unable to repay their loans. Overall, arrears rates on housing loans remain very low.
But the second potential vulnerability – from high household indebtedness – is that if there were an adverse shock to the economy, households could find themselves struggling to meet the repayments on these high levels of debt. If they have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans. This could have adverse effects on the real economy – for example, in the form of lower economic growth, higher unemployment and falling house prices – which could, in turn, amplify the negative shock.
So what do the data tell us about the ability of households to service their debt? This graph shows the ratio of household mortgage debt to income (a subset of the previous graph on household total debt) on the left hand panel and various serviceability metrics on the right hand panel (Graph 4). The mortgage debt-to-income ratio shows the same pattern as total household debt-to-income – rising up until the mid-2000s then steadying for a few years before increasing again from around 2013. The dashed line represents the total mortgage debt less balances in ‘offset’ accounts. This shows that taking into account these ‘buffers’, the debt-to-income ratio has still risen, although not by as much. So households in aggregate have some ability to absorb some increase in required repayments.
Graph 4
In terms of serviceability, interest payments as a share of income rose sharply from the late 1990s until the mid-2000s reflecting both the rise in debt outstanding as well as increases in interest rates. Interest payments as a share of disposable income doubled over this period. Since the mid-2000s, however, interest payments as a share of income have declined as the effect of declines in interest rates have more than offset the effect of higher levels of debt. Indeed even total scheduled payments, which includes principal repayments, are lower than they were in the mid-2000s, as the rise in scheduled principal as a result of larger loans was more than offset by the decline in interest payments.
The risks nevertheless remain high and it is possible that the aggregate picture is obscuring rising vulnerabilities for certain types of households. Interest payments have been rising as a share of income in recent months, reflecting increases in interest rates for some borrowers, particularly those with investor and interest-only loans. Scheduled principal repayments have also continued to rise with the shift towards principal-and-interest, rather than interest-only, loans. There are therefore no doubt some households that are feeling the pressure of high debt levels. But there are a number of reasons why the situation is not as severe as these numbers suggest.
First, the economy is growing above trend and unemployment is coming down. While incomes are still growing slowly, good employment prospects will continue to support households meeting their repayment obligations. Second, as noted earlier, households have taken the opportunity over the past decade to build prepayments in offset accounts and redraw facilities. In fact, despite the continuing rise in scheduled repayments, actual repayments relative to income have remained quite steady as the level of unscheduled repayments of principal has declined and offset the rise in scheduled repayments. Third, as noted earlier, lending standards have improved over the past few years, resulting in an improvement in the average quality of both banks’ and households’ balance sheets. Much slower growth in investor lending, and declining shares of interest-only and high-loan-to-valuation lending have also helped to reduce the riskiness of new lending. And at the insistence of the regulator, banks have been tightening their serviceability assessments. In addition, strong housing price growth in many regions over recent years will have lowered loan-to-valuation ratios for many borrowers. As noted earlier, arrears rates remain very low.
The discussion above has focussed on the average borrower but what about the marginal borrower? For example, will the tightening standards result in some households being constrained in the amount they can borrow with flow-on effects to the housing market and the economy? Our analysis suggests that while we should remain alert to this possibility, it seems unlikely to result in a widespread credit crunch. The main reason is that most households do not borrow the maximum amount anyway so will not be constrained by the tighter standards. While the changes to lending standards have tended to reduce maximum loan sizes, this has primarily affected the riskiest borrowers who seek to borrow very close to the maximum loan size and this is a very small group. Most borrowers will still be able to take out the same sized loan.
It has also been suggested that the expiry of interest-only loan terms will result in financial stress as households have to refinance into principal-and-interest loans that require higher repayments. Again, this is worth watching, but borrowers have been transitioning loans from interest-only to principal-and-interest for the past couple of years without signs of widespread stress. Our data suggest that most borrowers will either be able to meet these higher repayments, refinance their loans with a new lender, or extend their interest-only terms for long enough to enable to them to resolve their situation. There appears to be only a relatively small share of borrowers that are finding it hard to service a principal-and-interest loan, which is to be expected given that over recent years, serviceability assessments for these loans have been based on the borrower’s ability to make principal-and-interest repayments. So far, the evidence suggests that the transition of loans from interest-only to principal-and-interest repayments is not having a significant lasting effect on banks’ housing loan arrears rates.
The distribution of household debt
So far, I have focussed on data for the household sector as a whole. But an important aspect of considering the risks inherent in household debt is the distribution of that debt. If most of the debt is held by households with lower or less stable income for example, it will be more risky than if a substantial amount of the debt is held by households with higher or more stable income. In this respect, the data suggest that we can have some comfort. This graph shows the shares of household debt held by income quintiles – the bottom 20 per cent of incomes, the next 20 per cent and so on up to the top 20 per cent of incomes (Graph 5). And it shows how these shares have changed from the early 2000s until 2015, the latest period for which the data are available. Around 40 per cent of household debt is held by households that are in the top 20 per cent of the income distribution and this share has remained fairly steady for the past 20 years. Furthermore, households in the second highest quintile account for a further 25 per cent of the debt. So in total two-thirds of the debt is held by households in the top 40 per cent of the income distribution. Nevertheless, around 15 per cent of the debt is held by households in the lowest two income quintiles. Whether or not this presents risks is not clear. Retirees are typically captured in these lower income brackets and if this debt is connected with investment property from which they are earning income, it may not be particularly risky.
Graph 5
Another potential source of risk in the distribution of debt is the age of the head of the household. As noted, a regular, stable income is important for servicing debt so people in the middle stages of their careers typically have better capacity to take on and service debt. The next graph shows the shares of debt for various age groups for owner occupiers, and how they have moved over the past couple of decades (Graph 6).
Graph 6
Households in which the head is between the ages of 35 and 54 account for around 60 per cent of the debt. But there does appear over time to be a tendency for a higher share of owner occupier debt to be held by older age groups. In part, the growing share reflects structural factors like lower interest rates. More importantly, it is not clear whether the higher share of debt increases the risk that these households will experience financial stress. On the one hand, it might indicate that in recent years, people have been unable to pay down their debt by the time they retire. If they continue to have large amounts of debt at the end of their working life, they might therefore be vulnerable. On the other hand, people are now remaining in the workforce for longer, possibly a response to better health and increasing life expectancies. They also hold more assets in superannuation and have more investment properties. This improves their ability to continue to service higher debt. And there is no particular indication that older people have higher debt-to-income or debt servicing ratios than younger workers.
So while the economy wide household debt-to-income ratio is high and rising, the distribution of that debt suggests that a large proportion of it is held by households that have the ability to service it. It nevertheless bears watching.
Regional dimensions
I thought I would finish off with some remarks about regional versus metropolitan differences. From a financial stability perspective, we are mainly focussed on the economy as a whole. But we still need to be alert to pockets of risk that have the potential to spill over more broadly. These risks may have important regional dimensions, particularly to the extent that individual regions have less diversified industrial structures and are thus more vulnerable to idiosyncratic shocks. One recent example has been the impact of the downturn in the mining sector on economic conditions in Western Australia, and the subsequent deterioration in the health of household balance sheets and banks’ asset quality. The potential for the drought in eastern Australia to result in household financial stress is another.
Data limitations make it difficult to drill down too far into particular regions. So I am going to focus here on a general distinction between metropolitan areas and the rest of Australia. As noted above, there tends to be a relationship between debt and housing prices. As housing prices rise, people need to borrow more to purchase a home and with more ability to borrow, people can bid up the prices of housing. So one place to look for a metro/regional distinction might be housing prices.
While there is clearly a difference in the absolute level of housing prices in cities and regional areas, over the long sweep, movements in housing prices in the regions have pretty much kept up with those in capital cities (Graph 7). This graph shows an index of housing prices for each of the states broken down into capital city and rest of the state. While there are periods where growth in housing prices diverge, most obviously in NSW and Victoria in recent years, they follow a very similar pattern. This partly reflects the fact that some cities that are close to the capitals tend to experience similar movements in house prices as the capitals.
Graph 7
What about housing debt in regional areas? The data suggest that the incidence of household indebtedness is broadly similar in the capital cities and in the regions (Graph 8). In 2015, the latest year for which we have data, around 50 per cent of regional households were in debt compared with around 45 per cent of households in capital cities. But in previous years this was reversed. At a broad level, the proportion of households in debt seems fairly similar.
Graph 8
Incomes and housing prices tend to be lower on average in regional areas than cities so we might expect debt to also be lower. But how do debt-to-income ratios compare? This next graph shows debt-to-income ratios for cities and regional areas at various points over the past 15 years (Graph 9). In general, average debt-to-income ratios for indebted households in capital cities tend to be a bit higher than those for indebted households in regional Australia. But it is not a huge difference and it mostly reflects the fact that people with the highest incomes – and therefore, higher capacity to manage higher debt-to-income ratios – tend to be more concentrated in cities. In general, it seems that regional households’ appetite for debt is very similar to that of their city counterparts.
Welcome to the Property Imperative weekly to 8th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
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Watch the video, listen to the podcast, or read the transcript.
The big news this week was that after Westpac blinked last week, ANZ then CBA both lifted their standard variable mortgage rates for existing borrowers by 16 and 15 basis points (or 0.16% and 0.15% respectively). This was exactly as I had predicted. They both blamed the rising interbank funding rates, claimed that mortgage rates were still lower than three years ago, and that though it was regrettable, the impact would be minimal.
Let’s be clear, existing borrowers are being caned, and whilst some may be able to shop around for a new loan at those attractive teaser rates, many cannot so they are being milked. And there are more rises to come in my opinion.
To put this in perspective, on a typical mortgage this represents an extra $35 a month, but if you are sitting on a big Sydney or Melbourne mortgage it could be much more. We discussed the shift in rates on our posts this week, including “More Bank’s Follow Suit”, and our discussions with people on the industry front line, including Sally Tindal from RateCity and Mandeep Sodhi from HashChing.
NAB of course has not followed the herd so far, so it will be interesting to see whether they will. But the main point to make is this is just another burden on borrowing households at a time when according to our surveys, household finances remain under pressure.
On Tuesday, leaving the cash rate unchanged, the RBA said” One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high”; and last week “the main risks to financial stability will most likely continue to relate to credit quality. Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue”.
Our analysis of household finance confirms this and the latest responsible lending determinations, where Westpac agreed to pay a very small $35m civil penalty also highlight the issues. Their mortgage hikes will more than cover the penalty.
So no surprise to see mortgage stress continuing to rise. Across Australia, more than 996,000 households are estimated to be now in mortgage stress (last month 990,000). This equates to 30.5% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 59,000 households risk 30-day default in the next 12 months. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead. You can watch our show “August 2018 Mortgage Stress Update” for more details. We also did a number of radio interviews on this.
And have no doubt the credit crunch continues to intensify. The latest ABS lending data for July showed a fall in investor mortgages, and a slowing of first time buyers and owner occupied lending. In fact, apart from a small rise in construction finance, all indicators were down. We discussed this in our post “More Negative Lending Indicators”.
Pile on the reduction of borrowing power of households by as much as 40%, the number of refinanced applications being rejected, still running at 40%, so creating mortgage prisoners now that the banks are finally obeying the lending law, plus property investors now seeing capital being eroded, all this combined means lending will be compressed, and this in turn will drive home prices lower. The latest data shows both home prices and auction clearances are still failing.
One other observation worth making. Though hardly reported, the ABS released their June 2018 data relating the securitised loans in Australia “Assets and Liabilities of Australian Securitisers“. It showed that in the past year residential mortgages securitised rose by 8.9% to $108.8 billion. Overall securitised assets rose by 8.2%, which shows mortgage assets grew stronger than system.
This reflects what we have seen in the market with non-bank and some bank lenders using this funding channel. The rise of non-bank securitisation is a significant element in the structure of the market. As major lenders throttle back their lending standards, higher risk loans are moving into the non-bank and securitised sectors. Of course a decade ago it was the securitised loans which took lenders down in the US and Europe.
The growth we are seeing here is in our view concerning, bearing in mind the more limited regulatory oversight. Plus. on the liabilities side of the balance sheet, around 90% of the securities are held by Australian investors, a record.
This includes a range of sophisticated investors, including super funds, wealth managers, banks, and high-net worth individuals. But the point to make is that if home price falls continue, the risks in the securitised pools will grow, and this risk is fed back to the investor pools.
This is yet another risk-laden feedback loop linked to the housing sector, and one which is not fully disclosed nor widely understood. The fact that the securitised pools are rated by the agencies does not fill me with great confidence either!
Even the broader economic data, which showed that Australian economy grew 0.9 per cent in seasonally adjusted chain volume terms in the June quarter 2018, showed that new dwelling investment continued to prop up the numbers, along with government and domestic consumption.
But the two key, and concerning trends are a significant fall in the households’ savings ratio (as they dip into them to support their spending), and the slower GDP per capita growth, which shows that much of the GDP momentum is simply population related. This is based in trend data.
Plus, real national disposable income per capita fell by 0.2% over the quarter though it was up 2.1% over the year. Worse, the real average compensation per employee fell another 0.4% in the year to June 2018 to be 4.2% lower since March 2012. And average remuneration per employee rose by only 1.7% in the year to June, so remains underwater after adjusting for inflation (2.1%). Households remain under the gun. Economist John Adams and I discussed this in our show “A Disastrous Set of Results”.
Of course GDP is a really poor set of measures by which to assess the economy in any case….
One emerging question is the real risks in the banks’ mortgage portfolios as home values fall, and poor lending practices are revealed.
UBS said this week in their latest Australian Banking Sector Update, which involved an anonymous survey of 1,008 consumers, there was a “sharp fall” in the number of “misstatements” reported in mortgage applications over the fourth quarter of 2018 (4Q18). The survey revealed that 76 per cent of respondents reported that the mortgage applications were “completely factual and accurate”, up from 65 per cent throughout the first three quarters of 2018. According to UBS, the improvement in lending standards was largely driven by the scrutiny placed on the industry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and not off the back of regulatory intervention.
Despite the improvement, UBS claimed that it’s concerned about the 10 per cent of respondents that reported that their broker-originated applications were “partially factual and accurate”, which it considers a “low benchmark”. Moreover, UBS stated that it continues to find that a “substantial number of applicant’s state that their mortgage consultant suggested that they misrepresent on their mortgage applications”. According to the figures, of those who misstated their broker-originated loan applications, 40 per cent said that their broker suggested that they misrepresent their application, which UBS claimed implies that 15 per cent of all mortgages secured via the broker channel were “factually inaccurate following the suggestion of their broker”.
“This is concerning given the heightened scrutiny on the industry, in particular following findings of broker misconduct and broker fraud in the royal commission,” UBS added.
There was an important video out this week, courtesy of the CEC in which Denise Brailey of the Banking and Finance Consumers Support Association (BFCSA), a real consumers champion, discussed mortgage fraud in the system. To cut to the chase, she says that many lenders deliberately built systems and processes to trick customers into loans they should never had got. The central issue is the way the Loan Application Form (LAF) was used. But she also touches on the cultural issues and fake statistics endemic in the system. You can watch the whole story. It is frankly disturbing.
Add to the substantial “liar loans” issue, the fact home price values continue to fall, and funding costs are rising, and we conclude the risks to the banking system are significant. Yet the regulators and bank auditors are not in our view doing their job. As more of this is exposed, expect bank share prices to slide further.
The ASX 200 was down 0.27% on Friday, to 6,144, having reacted to the latest GDP numbers and the bank mortgage repricing. CBA ended the week at 70.5 up 0.53% but was down on recent numbers. Westpac ended at 27.80 down 0.14% and only slightly above the low of 27.30. ANZ was also lower at 28.40, down 0.46%. Expect more downside, as the Royal Commission reports, and more mortgage related issues emerge.
The Aussie fell against the US Dollar, down 1.29% to 71.05 A New Low. While AUD/USD’s descent was not as potent as last week, the pair breached under the December and May 2016 lows below 71.452. Technically, its now cleared to descend to the January 2016 lows at 68.274.
Indeed, not only broken through 71.452, but it also fell under a descending range of support which helped control its decline since May. However, the pair stopped just short of the 61.80% Fibonacci extension at 70.888 which might as well stand as immediate support going forward.
The push through range support also marked the pair’s single largest decline in a day since August 23rd which was over two weeks ago. If the dominant downtrend in AUD/USD once again resumes, a push under 70.888 exposes the 78.6% Fibonacci extension at 70.092.
Meanwhile, near-term resistance is a combination of the December/May 2016 lows and the descending range. Pushing above 71.60 then opens the door to testing the 38.2% extension at 72.007 followed by the 23.6% level at 72.699. With that in mind, the descent through key support levels prolongs the bearish AUD/USD technical outlook.
Moody’s said this week The U.S. economy and financial markets have been pulling away from the rest of the world. Of special importance is the lagging performance of emerging market economies, which, not too long ago, had been the primary driver of world economic growth. The combination of higher U.S. interest rates and the relatively stronger performance of the U.S. economy has triggered a notable and potentially destabilizing appreciation of the dollar versus a host of emerging market currencies.
Excluding the collapse of Venezuela’s currency, other noteworthy appreciations by the dollar since yearend 2008 include the dollar’s 102% surge against Argentina’s peso, the 74% advance in terms of Turkish lira, the 25% climb versus Brazil’s real, the 24% ascent against South Africa’s rand, the 15% increase versus India’s rupee, the 10% climb in terms of Indonesia’s rupiah, and the 11% increase vis-à-vis Pakistan’s rupee.
Emerging market countries having especially large current account deficits relative to GDP are vulnerable to dollar exchange rate appreciation. The funding of large current account deficits requires large amounts of foreign-currency debt that is often denominated in U.S. dollars. As the dollar appreciates vis-à-vis emerging market currencies, it becomes costlier to service dollar-denominated debt in terms of emerging market currencies.
So to the US markets, where the Dow Jones Industrial Average fell 0.31%, to 25,917 while the S&P 500 ended at 2,871, down 0.22%. On the corporate news front, Tesla stock dropped 6.3% after Chief Accounting Officer Dave Morton resigned as the “the level of public attention placed on the company,” prompted him to rethink his future. It ended at 263.24
Gripped by fear the United States and China are heading further down the path toward a full-blown trade war, investors reined in their bets on riskier assets like stocks, pressuring the broader averages. With the administration already expected to impose tariffs on $200 billion worth of goods from China, Trump upped the ante on trade, threatening levies on another $267 billion of goods. The levies on the list of goods could reportedly cover a wide range of products from popular tech companies, including Apple, according to Bloomberg. Apple later confirmed in a letter that the tariffs would affect the Apple Watch, AirPods and Apple Pencil.
“It is difficult to see how tariffs that hurt U.S. companies and U.S. consumers will advance the Government’s objectives with respect to China’s technology policies,” Apple said in the letter.
Apple Inc. fell 0.81% to 221.30 fell on the news, exerting further pressure on the beaten-up tech sector. The NASDAQ slide further, down 0.25% to 7.903 and twitter continued its fall, down 1.04% to 30.49 as a number of the big social media tech stocks were hit after testaments to congress on election interference and moderating content, including charges of censorship.
There were also no new developments as Canada negotiated with the U.S. about a revamp of NAFTA.
The U.S. employment report for August augured strong economic growth. But markets were spooked by an acceleration in wage inflation, which boosted expectations for the Federal Reserve to hike rates twice more this year. Beyond the creation of 201,000 jobs in August and a jobless rate holding near 18-year lows, at 3.9% the focus was on the 2.9% increase in wage inflation, its fastest since April 2009. Although a quarter-point rate hike was already fully priced in for the Sept. 25-26 Fed meeting, odds for an additional increase in December rose to about 76% compared to 70% ahead of the report.
Energy, meanwhile, did little to stem losses in the broader market after ending the day roughly unchanged, as oil prices were pressured by a rising dollar and concerns about oil-demand growth, amid rising trade tensions. On the New York Mercantile Exchange crude futures for October delivery settled at $67.84 a barrel, towards the top the price range. Gold was down 0.21% to 1,202, driven by strength of the US dollar, despite rumours of buying by a number of central banks, including China.
Bitcoin dropped on Friday down 1.31% to 6,420, having plunged from 7385 to 6830, or 7.5%, on Wednesday in reaction to a Business Insider report that Goldman Sachs as decided to drop a year-ago decision to create a crypto-currency trading desk. Apparently Goldman is “uncertain” about the regulatory environment.
Before I go, a couple of reminders, first is that next Sunday 16th September Nine’s 60 Minutes will be running a segment on the outlook for the Property Market. You may recall I was in Sydney a couple of weeks back for a recording. A couple of days ago they came back to get some additional material, as the market is evolving so quickly. It will be interesting to see how they tell the story.
Next we will be launching our new series on the capital markets next week, where we will look at the concepts of the time value of money, bonds and derivatives. Given the size of these markets, and the risks embedded within them, this will be an important series.
And finally, our next live stream Q&A event is scheduled for Tuesday 18th September at 20:00 Sydney, you can set a reminder and also send me questions ahead of time. We will be looking in detail at the property market in the session. I look forward to your questions in the live chat.
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Australian women are missing opportunities to optimise their credit health and make themselves look good to lenders, according to research from consumer education website, CreditSmart.
The study was conducted online between 15-18 March 2018, with a sample size of 1,026 of Australians aged 18 years and older throughout Australia, out of which 51% of the sample were women.
A huge 89% of women are unaware of changes currently happening in the credit reporting system, and a third of these feel the changes will not impact them in any way. A quarter of Australian women are completely unaware of what a credit score is, and 65% have never checked their credit report.
Rebecca Murray, General Manager of Australian Retail Credit Association (ARCA), which founded CreditSmart, said the results showed a worrying gap in women’s knowledge of their credit health.
It is really important for women to be across these upcoming changes, so they can take advantage of the changes rather than potentially be negatively impacted”, Ms Murray said.
“Going forward, your credit report will become a personal asset which will hold you in good stead for when you need to take out a loan, as lenders will be able to track your account repayment habits on your accounts to assess your creditworthiness,” Ms Murray said.
It is important to understand that your credit score and credit report are both indicators of your credit health. Our research found that men are overall 10% more likely to check their credit report compared to women.
The research, undertaken by YouGov Galaxy, was done ahead of important changes to Australia’s credit reporting system which will see lenders move to comprehensive credit reporting (CCR). As part of this, the Government has introduced legislation that will mean the four major banks will be required to supply half of their customers’ comprehensive credit reporting data with credit reporting bodies by this September and the rest by September 30 next year, to ensure lenders have a complete picture when those individuals apply for credit.
Optimise your credit health
CreditSmart research found that 55% of women either don’t know or have incorrect perceptions on the cost of accessing a copy of their credit report.
Ms Murray stresses the importance of knowing your credit rights, which includes free access to your credit report annually from each of the credit reporting bodies.
“How to use credit responsibly is everybody’s business, irrespective of gender. People with good credit health will be rewarded with more choices of loan products and possibly lower interest rates, so get to know your credit report, fix it if there is something wrong and pay your accounts on time to get the credit you want, when you need it,” she added.
For information on how to optimise your credit health, Ms Murray suggested women should go to the CreditSmart website (http://www.creditsmart.org.au), set up by credit experts to help you understand how recent credit reporting reforms affect you.
CreditSmart has five top tips for keeping your credit report healthy:
Know what’s on your credit report: You can get a free copy of your credit report annually from each of the three main credit reporting bodies Experian, Illion (formerly Dun & Bradstreet), and Equifax.
Keep track of your credit score: Your credit score is like a summary of what’s on your credit report and can give you a quick indication of how credit providers see you. For free credit scores you can refer to CreditSmart.
Don’t let forgetfulness make you miss payments: Talk to your credit provider about setting up an automatic payment, i.e. direct debit, to make sure your regular payments are paid on time.
Fix anything that is incorrect: If you think something is incorrect, you can ask any credit provider or credit reporting body for help to fix that error, so long as they hold some kind of personal credit information about you. This is a free service.
Only borrow what you need: Having too much credit may make it harder for you to get credit for what you really need. If you have more credit than you can comfortably afford, try to close any accounts that you don’t use or decrease your credit limit. Your credit report will show credit providers how much credit you have available, even if you don’t use it.
The editorial in the Australian Financial Review of August 30 says questions about whether inequality is increasing are “abstract”, taught in universities as “an article of faith”, and a “political truncheon”.
Here I should disclose that I teach courses covering inequality as well as undertaking research on the topic. Also, I was one of the external referees for this week’s Productivity Commission report.
It adds to a growing pile of high quality research on trends in income distribution in Australia, including a recent Australian Council of Social Service (ACOSS) and University of New South Wales study using data from the Australian Bureau of Statistics (ABS) that provides an in-depth analysis of income and wealth inequality in 2015-16 and an analysis of trends since 2000.
Also released at the end of July was the latest HILDA Statistical Report that analyses how things have changed over time for individuals between 2001 and 2016.
The Productivity Commission survey takes the deliberately ambitious approach of assessing a wider range of outcomes than income, including indicators of household consumption and wealth, their components, and changes over time and in response to events such as transitions to work, divorce and retirement.
Much of the reporting seems to have misread the messages the survey and the Chairman’s speech to the National Press Club were trying to emphasise. For example, the editorial in the Financial Review argues the Commission’s report shows “economic growth has made everyone in Australia in every income group better off”.
Well, no, it doesn’t.
The finding that every income group has benefited from income growth should not be interpreted as meaning every person in Australia is better off. The discussion of mobility in the report makes the point that the incomes of households and individuals fall as well as rise.
Put simply, not everyone – in fact very few (about 1%) – stay in exactly the same place. Table 5.1 (page 96) shows more than 40% of the Australian population were in a lower income group in 2016 than they had been in 2001, for reasons ranging from retirement to disability to unemployment to family breakdown.
Single adults on Newstart, although not the same people, have fallen down the income distribution over the past 25 years, from around the bottom 10% to the bottom 5%. As another example, someone who worked on a manufacturing production line until it was closed and then got a job as a sales assistant would be better paid than a sales assistant used to be but most certainly not better paid than they used to be. They would have little reason to believe the Financial Review.
And as the Commission was at pains to point out, the stabilisation and slight decline in overall inequality over the past decade is to a large extent the result of specific government decisions.
One of the most important was the one-off increase in age pensions by the Rudd government in 2009. The 2016 ACOSS report on poverty found the relative poverty rate (before housing costs) for people aged 65 and over fell from around 30% in 2007-08 to 11% in 2013-14, due to the “historic increase” in pension rates.
ABS income surveys show the average incomes of households headed by people aged 65 and over climbed by 16% in real terms between 2007-08 and 2015-16, while for the population as a whole the increase was about 3%. As a result, the average incomes of older households jumped from 69% to 78% of those of households generally.
While economic prosperity was needed to fund that increase, it didn’t automatically fund it. That needed deliberate government intervention.
In his speech releasing the report, Commission chairman Peter Harris specifically noted “growth alone is no guarantee against widening disparity between rich and poor”.
Some forms of poverty for children “have actually risen”.
The slide in inequality resulting from the increase in the age pension is likely to have disguised increases in inequality elsewhere.
According to the Bureau since the global financial crisis the number of workers who are underemployed – working part time and wanting more hours – has climbed from about 680,000 to 1.1 million; from 6.3% to 8.9% of the workforce.
And the ABS finds wage disparities have increased. The ratio of the earnings of a worker at the 90th percentile (earning more than 90% of workers) to the earnings of a worker at the tenth percentile grew from 7.75 times in 2008 to 8.24 times in 2016. This was due to widening wage differentials for both full-time and part-time workers and an increase in the proportion of part-time workers
We often hear about Australia as a “miracle economy” enjoying 27 years of economic growth. In fact, the Commission report (Figure 1.2 page 13) shows real net national disposable income per person – a better measure of individual economic well-being than GDP – actually fell in six out of the last 27 years.
The income survey data show an even more mixed record. The Our World in Data database shows that by 2003 the real income of the median Australian household was only about 5% higher in real terms than in 1989, while the second and third decile households – mainly headed by those on low wages and some on social security – were actually no better-off than in 1989, largely due to the effects of the early 1990s recession.
Virtually all of the increase in real disposable household incomes enjoyed since 1989 (or 1981 for that matter) came in one five-year period, between 2003 and 2008 during the first mining boom.
What is striking about Australia compared to other countries is that since the global financial crisis we have largely maintained the income lift from the boom.
Will we be blessed by another boom to pump up the figures? Or might we be less lucky?
Despite the way it’s been spun, the Commission’s main message is that in the decades ahead we will need both policies that generate economic growth and policies that ensure it’s well spread. One without the other could leave many of us worse off.
Author: Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University
Increased inequality and low wage growth are constraining economic growth. But why is wage growth so low? And how should policymakers respond?
Income inequality has increased significantly in most advanced economies since the early 1980s. In particular, very low rates of wage increase are widely blamed for the weak growth in aggregate demand this century and secular stagnation since the Global Financial Crisis. The GFC was itself brought on by the rise in consumer debt that was used at first to support demand in an attempt to offset the impact of weak wage growth.
Fairfax columnist Ross Gittins recently noted that “many economists were disappointed by this week’s news … that consumer prices rose only 2.1%”. That was because low inflation is “usually a symptom of weak growth in economic activity and, in particular, of weak growth in wages”.
Thus, today it is widely agreed that wages need to increase faster. The OECD, the IMF, leading US scholars, former US Treasury Secretary Larry Summers, Nobel prize winner Joseph Stiglitz and most recently Stephen Bell and I in our book, Fair Share, have all argued that increasing inequality is bad for economic growth.
To solve this problem, the critical issue for policymakers is what is causing this rising inequality and weak wage growth? Unless we better understand the causes, we are unlikely to achieve an effective policy solution.
First, we can quickly dismiss the explanation offered by federal Treasurer Scott Morrison, whose so-called “economic plan” assumes present low wage growth will respond positively to higher company profits. According to Morrison, a company tax cut will lead to more investment and thus more jobs, so eventually the benefits will trickle down and increase wages.
Unfortunately, this logic is the reverse of reality. It ignores the evidence that slow wage growth across all the developed economies has been a problem over a couple of decades now.
Slow wage growth is a continuing long-term problem in the developed economies.CC BY-ND
In fact, the evidence strongly suggests higher profits will not drive higher wages. The benefits of a company tax cut will largely be returned to shareholders, while the only wages that increase will be those of senior management.
Instead, higher investment will require increased consumer demand. And that in turn depends on stronger wage growth. In short, aggregate demand in a flat economy, like ours, is wages-led. Wages drive investment, not the other way around.
Broadly speaking, there are two serious schools of thought about what is causing weak wage growth and rising inequality.
One explanation puts most of the blame on a weakening of trade-union power.
The other explanation emphasises the impacts of technological change and, to a lesser extent, globalisation on the labour market. Together technology and globalisation are said to have changed job structures and demands for skills. They have reduced the share of middle-level jobs, which has directly increased income inequality, and they can depress the demand for labour more generally and thus wages in developed countries, but especially for less skilled labour.
These two explanations are not mutually exclusive – both may have played a role. However, I want to consider their relative significance as the basis for arguing which policy responses should be given priority.
Trade union power in Australia and its impact
A very distinguished professor of labour economics and former Industrial Relations Commission deputy president, Joe Isaac, recently argued persuasively that an important explanation of slow wage growth is “to be found in the change in the balance of power in favour of employers and against workers and unions”.
Isaac starts by noting that union membership in Australia has fallen from about 50% of all employees in the 1970s to the present 15%. This is one of the lowest rates in the OECD.
Isaac also finds some correlation between income inequality (measured by the Gini coefficient) and trade union density for 11 OECD countries. More relevant, though, would be the change in inequality relative to the change in union membership, especially as Australia has always had a relatively high Gini coefficient.
Isaac argues that this loss of membership and the reduced authority of the Fair Work Commission has weakened the bargaining power of organised labour in Australia. Employers are now able “to determine no wage increase or an increase less than their profits would warrant, with less resistance from workers and unions”. Although Isaac admits that “this conclusion is based on the association over time of union power decline and slow wages growth”, he concludes that “it seems reasonable to claim, at least prima facie, a causal connection between them”.
I am more sceptical. While I wouldn’t rule out any impact on wages and employee conditions from a decline in trade union membership and the possibly associated changes in the power of the Fair Work Commission, I question Isaac’s analysis for the following reasons.
First, it is uncertain how much trade union power has declined as a result of loss of membership. Another test of trade union power is the proportion of wages determined by awards and collective agreements – as Isaac shows, this proportion has largely remained the same in Australia. Indeed, in some countries, such as France, trade union membership has always been very low, but they have a highly centralised system of wage determination, which allows the unions a lot of influence.
Second, other countries have also experienced increases in inequality – much greater than in Australia in most cases – but don’t seem to have experienced any notable loss of union power. For example, some of the biggest increases in inequality over the last 30 years, as measured by the Gini coefficient for final disposable income, have occurred in countries like Sweden, Finland and Germany, which are not associated with any loss of trade union power.
Third, Isaac’s analysis of wage inequality focuses entirely on a decline in the wage share of total factor income. This ignores changes within the distribution of earnings. These latter changes are more important in many countries, and certainly for Australia.
While the wage share in Australia has declined since the 1970s and early 1980s, this was at least partly a result of deliberate policy under the Hawke/Keating governments’ Accord with the trade unions, when it was accepted that the wage share had been too high. Even today the wage share is still higher than in 1960, when the economy was generally considered to be performing exceptionally well.
Fourth, the changes in the distribution of earnings largely reflect changes in the structure of occupations rather than changes in relative wage rates. But trade unions seek to influence wage rates, and it is difficult to see how they can exert much direct influence over the structure of jobs.
For these various reasons, I don’t think the loss, if any, of trade union power can explain much of the increase in inequality in most countries over the last 30 years. It is necessary to look elsewhere for the explanation, and the main driver seems to have been the impact of technological change.
Impacts of technology and globalisation
In Fair Share, Stephen Bell and I examine the causes of increased inequality over the last 30 years in most of the advanced economies. A critical starting point is to distinguish between changes in the job structure and changes in relative wage rates. As we note:
Even if there were no change in relative wage rates, but employment increased faster for both high-paid and low-paid jobs, the earnings distribution would show up as more unequal. What would have happened is that the composition of the top and lowest deciles of earnings would have altered, which would increase the median income of the top decile and reduce the median income of the lowest decile, which would in turn be reported as an increase in the inequality of earnings.
The consensus in the studies we reviewed is that increased inequality of earnings largely reflects the impact of technological change. Globalisation and increased participation in global value chains may also have played a role, but less so in Australia, which we attribute to Australia having a more flexible labour market than, say, America.
We also surmise that increased financialisation and the capture of rents generated by technological change may help explain the very large increase in remuneration for the top 1%.
Interestingly, the OECD specifically rejected the hypothesis that regulatory changes have helped drive any significant increase in inequality. It found that “the net effect of regulatory reforms on trends in ‘overall earnings inequality’ remains indeterminant in most cases”.
Technological change has also driven the fall in the relative price of capital goods. This has led to some substitution of capital for labour. Again, this is “particularly pronounced in industries with a high predominance of routine tasks”, as the OECD notes.
These changes in job structure and the relative decline in the middle-level jobs have been the most important cause of increasing inequality in many countries, including Australia. Technological progress has also led to an increase in the demand for skills. In some countries that has increased the premium paid for skilled labour, but the extent of this depends upon the policy response affecting the supply of skills.
In Australia’s case, Bell and I find that the premium for skills, and consequently relative wage rates, did not change much because of the increase in education and training effort. Accordingly, much of the increase in earnings inequality in Australia reflects changes in the job structure rather than changes in relative wage rates (see also Keating and Coelli & Borland).
So what does this mean for policy?
Consistent with his view that a weakening of trade union power has driven the increase in inequality, Isaac recommends changing the Fair Work Act to rectify “the unbalanced industrial power in the labour market”. I can support most of Isaac’s recommended changes, and especially greater rights of union entry, which should help better police adherence to awards and wage agreements.
I also agree that Isaac’s recommended legislative changes are unlikely to result in unions abusing their increased power. This is because, as he puts it, “there are now prevailing forces, such as global competition and structural changes, which will continue to keep union power in check”.
However, these “prevailing forces” are what really caused most of the increase in inequality, as discussed above. I therefore doubt that these legislative changes will do much to reverse the increase in earnings inequality.
Instead, the best way to respond to the impact of technological change on the job structure and possible associated changes in wage premiums is to improve education and training. Enhanced education, training and labour market policies will help workers adjust to the challenges posed by new technologies and will also spur the adoption of those technologies.
In addition, if the supply of skills thereby increases in line with the increase in their demand, there should not need to be any change in relative wage rates. Although these types of reforms take time, in the end they can boost both aggregate demand and potential output, with benefits all round.
There’s a common link between the many things that have promoted insecurity at work: the growth of franchising; labour hire; contracting out; spin-off firms; outsourcing; global supply chains; the gig economy; and so on. It’s money.
At first, that seems too obvious to say. But I’m talking about the way financial concerns have taken control of seemingly every aspect of organisational decision-making.
And behind that lies the rise and rise of finance capital.
One way to see this is in the chart below. It shows the income shares of labour and capital, and the breakdown for each between the finance and non-finance (“industrial”) sectors, in two four-year periods. They were 1990-91 to 1993-94 (when the ABS started publishing income by industry) and, most recently, 2013-14 to 2016-17. (I use four-year periods to reduce annual fluctuations and show the longer-term trends. Here is more detail and explanation of methods.)
Income shares of labour and capital
Factor shares by industry, 1990-94 and 2013-17.Source: ABS Cat No 5206.0
The key thing to notice in the chart is that finance capital’s share of national income doubled (it’s the dark red boxes in the lower right-hand side of the chart), while everyone else’s went down.
So, over that quarter-century, the share of labour income (wages, salaries and supplements) in national income fell. In the early 1990s it totalled 55.02% — that’s what you get when you add labour income in finance, 3.21%, to labour income in “industrial” sectors, 51.81%. In recent years this fell to 53.58%. There were falls in both finance labour income (from 3.81 to 2.83% of national income) and industrial labour income.
The total share of profits and “mixed income” accordingly rose from 44.99% to 46.42%. The thing is, all of that increase (and a bit more) went to finance capital. Profits in finance went from 3.16% to 6.16% of the economy.
At the same time there has been a large increase in the share of national income going to the very wealthy — the top 0.1% — in Australia and many other countries.
This shift in resources does not reflect more people being needed to do important finance jobs. Nor is it higher rewards for workers in finance. The portion of national income, and for that matter employment, devoted to labour in the financial sector actually fell from 3.21% to 2.83%.
The economy devotes proportionately no more labour time now to financial services than it did a quarter century ago. Yet rewards to finance have increased immensely. The share of national income going to “industrial” sector profits and “mixed income” has declined.
In short, the widely recognisedshift in income from labour to capital is really a net shift in income from labour, and from capital (including unincorporated enterprises) in other industries, to finance capital.
Finance matters
You may have heard about “financialisation”. It’s not really about more financial activity. It is about the growth of finance capital and its impact on the behaviour of other actors.
Financialisation has led to finance capital taking the lead shareholdings in most large corporations, not just in Australia but in other major countries (to varying degrees) as well.
This role as main shareholder and, of course, chief lender to industrial capital has driven the corporate restructuring over the past three decades that has led to greater worker insecurity and low wages growth (as I recently discussed here).
When “industrial capital” has been restructured over recent decades — to promote franchising, labour hire, contracting out, spin-off firms, outsourcing, global supply chains, and even the emergence of the gig economy — it has been driven by the demands of finance capital. Casualisation is just one manifestation of this.
Short-term logic
Now there’s no conspiracy here (or, at least, the system doesn’t rely on one). There is actually a lot of competitive mindset in the financial sector. This is just the logic of how the system increasingly has come to work. Financial returns, particularly over the short term, have become the principal (really, the only) fact driving corporate behaviour.
This has come at the expense of human considerations.
That same logic is behind resistance to action on climate change. Continuing carbon emissions are the perfect, and deadly, example of short-term profits overriding longer-term interests.
Yet even finance capital is not monolithic. There are parts of finance capital that have a longer-term perspective (“there’s no business on a dead planet”). So they are effectively in battle with those parts of finance capital for which the short term is everything. The former want governments to intervene in, for example, carbon pricing.
Policy questions
All this leaves some big questions for policymakers about how to redress the new imbalance of power.
In part, it requires changing institutional arrangements (including industrial relations laws) that in recent years have made it much harder for workers to obtain a fair share of increases in national income. It requires rethinking of how we regulate work.
But it also requires rethinking of how we regulate product markets and financial markets.
Do you feel that, overall, you’re “better off” than you were in the past? Or that things are getting worse, or have plateaued?
We now have the data to get us a pretty good answer to that question, right down to the detail by “family types”, as categorised by the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Starting in 2001, this longitudinal survey now tracks more than 17,500 people in 9,500 households.
The interactive below lets you drag and drop your family members into the house to see what the HILDA data reveal.
One measure we’re showing is what economists call “equivalised income”. That’s different to your total household income; here’s how the HILDA report explains it:
Overall, median equivalised incomes have gone up since 2001 for all family types, but some have fared better than others, as this chart from the full HILDA report shows:
For the purposes of interpreting the HILDA data, you might need to be a bit flexible when deciding which “family type” applies to you. For example, a household with two single, adult sisters living together will be classified as two single-person “families”, even though they might see themselves as a family unit.
And it’s worth remembering, as the HILDA report notes:
… some households will contain multiple “families”. For example, a household containing a non-elderly couple living with a non-dependent son will contain a non-elderly couple family and a non-elderly single male. Both of these families will, of course, have the same household equivalised income. Also note that, to be classified as having dependent children, the children must live with the parent or guardian at least 50% of the time. Consequently, individuals with dependent children who reside with them less than 50% of the time will not be classified as having resident dependent children.
Digital Finance Analytics (DFA) has released the July 2018 mortgage stress and default analysis update. The latest RBA data on household debt to income to March reached a new high of 190.1[1], and CBA today said in their results announcement ”there has been an uptick in home loan arrears as some households experienced difficulties with rising essential costs and limited income growth, leading to some pockets of stress”.
So no surprise to see mortgage stress continuing to rise. Across Australia, more than 990,000 households are estimated to be now in mortgage stress (last month 970,000). This equates to 30.4% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 57,900 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.7 basis points, though losses in WA are higher at 5.1 basis points. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.
Martin North, Principal of Digital Finance Analytics says “households remain under pressure, with many coping with very large mortgages against stretched incomes, reflecting the over generous lending standards which existed until recently. Some who are less stretched are able to refinance to cut their monthly repayments, but we find that the more stretched households are locked in to existing higher rate loans”.
“Given that lending for housing continues to rise at more than 6% on an annualised basis, household pressure is still set to get more intense. In addition, prices are falling in some post codes, and the threat of negative equity is now rearing its ugly head”.
“The caustic formula of coping with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment is causing significant pain. Many households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, and now prices are slipping. While mortgage interest rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises. Many are dipping into savings to support their finances.”
Recent easing interest rate pressures on the banks has decreased the need for them to lift rates higher by reference to the Bank Bill Swap Rates (BBSW), despite the fact that a number of smaller players have done so already.
Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end June 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.
Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. They may or may not have access to other available assets, and some have paid ahead, but households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home. Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.
Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes. Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households, contrary to the popular belief that affluent households are well protected.
The outlined data and analysis on mortgage stress does not occur in a vacuum. The revelations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission) have highlighted deep issues in the regulatory environment that have contributed to the household debt “stress bomb”. However, most of the media commentary on the regulatory framework has been superficial or poorly informed. For example, several commentators have strongly criticised the Australian Securities and Investments Commission (ASIC) for not doing enough but have failed to explain what ASIC has in fact done, and what it ought to have done.
The Commission has highlighted major concerns regarding the law and practice of responsible lending. North has published widely on responsible lending law, standards and practices over the last 3-4 years, and continues to do so. Her latest work (which is co-authored with Therese Wilson from Griffith University) outlines and critiques the responsible lending actions taken ASIC from the beginning of 2014 until the end of June 2017. This paper was published by the Federal Law Review, a top ranked law journal, this month. A draft version of the paper can be downloaded at https://ssrn.com/author=905894.
The responsible lending study by North and Wilson found that ASIC proactively engaged with lenders, encouraged tighter lending standards, and sought or imposed severe penalties for egregious conduct. Further, ASIC strategically targeted credit products commonly acknowledged as the riskiest or most material from a borrower’s perspective, such as small amount credit contracts (commonly referred to as payday loans), interest only home loans, and car loans. North suggests “ASIC deserves commendation for these efforts but could (and should) have done more given the very high levels of household debt. The area of lending of most concern, and that ASIC should have targeted more robustly and systematically, is home mortgages (including investment and owner occupier loans).”
Reported concerns regarding actions taken by the other major regulator of the finance sector, the Australian Prudential Regulation Authority (APRA), have been muted so far. However, an upcoming paper by North and Wilson suggests APRA (rather than ASIC) should be the primary focus of regulatory criticism. This paper concludes that “APRA failed to reasonably prevent or constrain the accumulation of major systemic risks across the financial system and its regulatory approach was light touch at best.”
Stress by The Numbers.
Regional analysis shows that NSW has 267,298 households in stress (264,737 last month), VIC 279,207 (266,958 last month), QLD 174,137 (172,088 last month) and WA has 132,035 (129,741 last month). The probability of default over the next 12 months rose, with around 11,000 in WA, around 10,500 in QLD, 14,500 in VIC and 15,300 in NSW.
The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($943 million) from Owner Occupied Borrowers, which equates to 2.10 and 2.7 basis points respectively. Losses are likely to be highest in WA at 5.1 basis points, which equates to $744 million from Owner Occupied borrowers.
Top Post Codes By Stressed Households
[1] RBA E2 Household Finances – Selected Ratios March 2018
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In the latest edition, John Adams, the Economist, and I discuss the recent data on household debt, and look at some commentators view that the current accepted high debt is not a problem at all. Fake news or fact?Watch the video, or read John’s original article.
Also she cites HILDA data up to wave 16. The fieldwork for this report was conducted between 2001 and 2016. So not very current in my view! Perhaps the current risks are higher thanks to continued poor lending practice, flat incomes and rising costs. Our mortgage stress data suggests this.
