The ACCC has instituted proceedings in the Federal Court against credit reporting body, Equifax Pty Ltd (formerly Veda Advantage Pty Ltd), alleging breaches of the Australian Consumer Law (ACL).
The ACCC alleges that from June 2013 to March 2017, Equifax made a range of false or misleading representations to consumers, including that its paid credit reports were more comprehensive than the free reports, when they were not.
Equifax also allegedly represented that consumers had to buy credit reporting packages for it to correct information held about them, or to do so quicker. In fact, Equifax was required by law to take reasonable steps to correct the information in response to a consumer’s request for free.
In addition, the ACCC alleges that Equifax represented that there was a one-off fee for its credit reporting services, when its agreement provided that customer’s subscriptions to the services automatically renewed annually unless the consumer opted out in advance. We allege this renewal term is an unfair contract term, which is void under the ACL.
In all the circumstances, it is alleged that Equifax acted unconscionably in its dealings with vulnerable consumers including by making false or misleading representations, and using unfair tactics and undue pressure when dealing with people in financial hardship.
“We allege that Equifax acted unconscionably in selling its fee-based credit reporting services to vulnerable consumers, who were often in difficult financial circumstances,” ACCC Commissioner Sarah Court said.
“We allege that Equifax told people they needed to buy credit reporting services from them in situations when they did not. It is important for consumers to know they have the legal right to obtain their credit report and to correct any wrong information for free.”
By law, consumers are entitled to access their credit reporting information for free once a year, or if they have applied for, and been refused, credit within the past 90 days, or where the request for access relates to a decision by a credit reporting body or a credit provider to correct information included in the credit report.
One worrying takeaway from the first week of the Financial Services Royal Commission is how many elderly people are being adversely affected by irresponsible lending.
Such lending is often the result of an agreement with a family member, for example an adult child, to help that person financially by entering into a joint loan. These loans are secured against the older person’s home, which is a huge risk if the loan defaults and the older person cannot service the debt.
To ensure that older people contemplating joint loans are aware of the downside of transactions, there needs to be greater access to legal and financial advice prior to the transaction and better training for bank employees and loan officers about responsible lending obligations and the potential “unsuitabilty” of such loans.
Consideration should also be given to larger penalties for banks that provide unsuitable loans to older people.
On the face of it, there are laws that should safeguard elderly consumers from “getting in over their head”.
When a consumer applies for credit, the National Consumer Credit Protection Act obliges a credit provider to make reasonable inquiries about the consumer’s financial situation and their requirements and objectives.
However, the Consumer Action Law Centre says that “it is common that these steps are not adequately followed by lenders”.
Even if these steps are followed, the legislation does not define “substantial hardship”. There is a presumption that if a consumer must sell their principal residence to pay back a loan, this demonstrates substantial hardship.
Emotional lending
Of particular concern is when an older person is persuaded to enter into a joint loan with a third party, such as their son or daughter. These loans are invariably secured by the older person’s property, with the younger person agreeing to pay off the debt.
If the adult child does not pay off the debt, the older person – who is often asset-rich but income-poor – may be unable to service the loan. The older person’s property will be repossessed by the lender, forcing them to relocate, enter the rental market, or even become homeless.
The loans may arise simply because the older person wants to help their adult child through a difficult financial period. It is understandable that a parent would want to help if a business is failing or a child is at risk of losing their house.
But such loans often arise within an atmosphere of crisis (real or exaggerated), in which the adult child pressures the older person into entering into the loan.
In extreme cases, older people have been told that they will be unable to see their grandchildren if they do not enter into loans.
It is not always that the older person is vulnerable per se, but that they are “situationally vulnerable” because of concern for the well-being of a child, or the desire to maintain relationships.
The reality is that it is often difficult for the older person to refuse.
Karen Cox of the Financial Rights Legal Centre noted at the Royal Commission that these loans are:
outright exploitative … elderly persons [are] left in dire circumstances as a result of a loan for which they’ve seen absolutely no benefit.
Similar comments apply to other financial transactions made for the benefit of a third party such as entering into a “reverse mortgage”. This is where the older person takes out a loan against the equity built up in a home (or other asset), with the money given to a child to buy a house or prop up their business.
What could be done?
Advocates are rightly concerned about the financial consequences for older people who enter into such loans. However, the property does belong to the older person and they are entitled to make whatever decisions they want, including risky ones.
Elderly people should be fully informed of their obligations and the potential consequences, should a transaction goes wrong. Banks could lead the way with this.
One initiative would be for the banks to contribute to legal and financial advice for older people, or subsidise the provision of such advice at community legal centres.
Loan assessors and brokers must also be made aware of the risks of such transactions.
The Australian Bankers Association is introducing enhanced measures to address elder financial abuse and the risks associated with such loans should be emphasised.
Finally, the government should consider tougher penalties against credit providers who disregard responsible lending obligations. Presently, if a bank is found to have lent irresponsibly they will simply compensate the consumer for the loss. Meaningful penalties that deter reckless lending should be considered.
Author: Eileen Webb, Professor, Curtin Law School, Curtin University
Australia has a housing affordability problem. There’s no doubt about that. Unfortunately, one of the reasons the problem has become so entrenched is that the policy conversation appears increasingly confused. It’s time to debunk some policy clichés that keep re-emerging.
Is ‘zoning’ to blame?
It can be tempting to frame the housing affordability problem as all about inadequate new supply. According to this argument, the “demand side” drivers – such as low interest rates and tax incentives for property investment – have combined with population growth in the capital cities to fuel house prices, and new housing construction simply hasn’t kept up.
“Zoning” is often blamed. There is little hard evidence, though, to show systematic regulatory constraint.
Supply is at record highs, and in the right places
According to the cliché, this supply response should have cooled prices. Yet dwelling price inflation has surged even in metropolitan areas where new housing supply has exceeded population growth.
The fallacies of ‘filtering’
One of the great hopes underpinning the supply cliché is that new housing stock improves affordability even if these homes are not affordable for lower-income groups. This faith is based on a theory called “filtering” whereby older housing moves down to the affordable end of the market over time.
The empirical data on filtering are thin. Indeed, the academic literature has historically cast doubt on the theory. However, some commentators continue to claim that American rental housing markets provide evidence that “filtering” can occur in practice.
But whatever might happen in the US, in Australia there’s still no evidence to suggest new housing supply has filtered across the housing stock to expand affordable housing opportunities for low-income Australians, or that it will do so any time soon.
Some commentators cite cooling house prices as evidence that the supply response is taking effect. Whether or not that is so (above and beyond demand-side factors like higher interest rates for investor loans), expect the pipeline to start slowing down. Private sector development is driven by profit and risk and, as we have seen over many years, is characterised by speculative booms and busts.
Developers can turn off the new supply tap much more quickly than they can turn it on. Falling prices, weak consumer sentiment and economic uncertainty mean many developers will not follow through on building approvals until the market recovers.
This means that high levels of supply output are rarely sustained. Recent housing data in Western Australia provide a case in point. WA recorded rising completions in 2014, 2015 and 2016. But 2017 completion figures are expected to show a drop of around a third as prices have shaded off since the end of the mining boom.
Put simply, the market on its own will never solve Australia’s housing affordability problem. Expecting developers to keep building in order to reduce house prices is pure fantasy.
Planning reform is not an affordable housing strategy
They have aimed to: standardise and simplify planning rules; promote mixed use and higher-density housing near train stations; and overcome local political opposition to development through the use of independent expert panels.
Housing targets for both urban infill and new greenfield areas have been a feature of metropolitan plans to drive dwelling approval rates since at least 2000.
These reforms have been effective in overcoming regulatory constraints. The scale of the recent supply response shows clearly that zoning and development assessment processes are not inhibiting residential development approvals in cities like Sydney and Melbourne.
But trying to accommodate Australia’s population growth in towers around railway stations will fail as an affordable housing strategy – even if “zoning” and height rules were completely scrapped.
Rather than narrow deregulation agendas, bigger picture reforms are needed. Aligning infrastructure funding with metropolitan and regional decentralisation is a critical long-term strategy. Reforms to deliver affordable housing in communities supported by new infrastructure are long overdue.
A bigger affordable housing sector is needed
Australia needs a more realistic assessment of the housing problem. We can clearly generate significant dwelling approvals and dwellings in the right economic circumstances. Yet there is little evidence this new supply improves affordability for lower-income households. Three years after the peak of the WA housing boom, these households are no better off in terms of affordability.
In part, this may reflect that fact that significant numbers of new homes appear not to house anyone at all. A recent CBA report estimated that 17% of dwellings built in the four years to 2016 remained unoccupied.
If we are serious about delivering greater affordability for lower-income Australians, then policy needs to deliver housing supply directly to such households. This will include more affordable supply in the private rental sector, ideally through investment driven by large institutions such as super funds. And for those who cannot afford to rent in this sector, investment in the community housing sector is needed.
In capital city markets, new housing built for sale to either home buyers or landlords is simply not going to deliver affordable housing options unless a portion is reserved for those on low or moderate incomes.
Authors: Nicole Gurran, Professor of Urban and Regional Planning, University of Sydney; Bill Randolph, Director, City Futures Research Centre, Faculty of the Built Environment, UNSW; Peter Phibbs, Director, Henry Halloran Trust, University of Sydney; Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University; Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University
Today we discuss the Impossible Property Equation.
Welcome to the Property Imperative Weekly to 10th March 2018. Watch the video or read the transcript.
In this week’s review of property and finance news we start with CoreLogic who reported that last week, the combined capital cities returned a 63.6 per cent final auction clearance rate across 3,026 auctions, down from the 66.8 per cent across 3,313 auctions the week prior. Last year the clearance rate last year was a significantly higher at 74.6 per cent. Last week, Melbourne returned a final auction clearance rate of 66.5 per cent across 1,524 auctions, down from the 70.6 per cent over the week prior. In Sydney, both volumes and clearance rate also fell last week across the city, when 1,088 properties went to market and a 62.4 per cent success rate was recorded, down from 65.1 per cent across 1,259 auctions the week prior. Across the remaining auction markets clearance rates improved in Canberra and Perth, while Adelaide, Brisbane and Tasmania’s clearance rate fell over the week. Auction activity is expected to be somewhat sedate this week, with a long weekend in Melbourne, Canberra, Adelaide and Tasmania. Just 1,526 homes are scheduled for auction, down 50 per cent on last week’s final results.
In terms of prices, Sydney, Australia’s largest market is a bellwether. There, CoreLogic’s dwelling values index fell another 0.13% this week, so values are down 4.0% over the past 26-weeks. Also, Sydney’s annual dwelling value is down 1.04%, the first annual negative number since August 2012. Within that, the monthly tiered index showed that the top third of properties by value in Sydney have fallen hardest – down 3.2% over the February quarter – whereas the lowest third of properties have held up relatively well (i.e. down 0.9% over the quarter), thanks to a 68% rise in first time buyers. My theory is Melbourne is following, but 9-12 months behind.
The RBA published a paper on the Effects of Zoning on Housing Prices. Based on detailed analysis they suggest that development restrictions (interacting with increasing demand) have contributed materially to the significant rise in housing prices in Australia’s largest cities since the late 1990s, pushing prices substantially above the supply costs of their physical inputs. They estimate that zoning restrictions raise detached house prices by 73 per cent of marginal costs in Sydney, 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth. There is also a large gap opening up between apartment sale prices and construction costs over recent years, especially in Sydney. This suggests that zoning constraints are also important in the market for high-density dwellings. They say that policy changes that make zoning restrictions less binding, whether directly (e.g. increasing building height limits) or indirectly, via reducing underlying demand for land in areas where restrictions are binding (e.g. improving transport infrastructure), could reduce this upward pressure on housing prices.
At its February meeting, the RBA Board decided to leave the cash rate unchanged at 1.50 per cent. Their statement was quite positive on employment, but not on wages growth. They are expecting inflation to rise a little ahead, above 2%. They said that the housing markets in Sydney and Melbourne have slowed and that in the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.
The RBA quietly revised down the household debt to income ratio stats contained in E2 statistical releases and their chart pack. It has dropped by 6% from 199.7 down to 188.4, attributing the change to revised data from the ABS. But it is still very high. By the way, Norway, one of the countries mirroring the Australian mortgage debt bubble, at 223 has just taken steps to tighten mortgage lending further. This includes a limit of 5x gross annual income and a 5% interest rate buffer.
We released our February Mortgage Stress data, which showed across Australia, more than 924,500 households are estimated to be now in mortgage stress, up 500 from last month. This equates to 29.8% of households. In addition, more than 21,000 of these are in severe stress, up 1,000 from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months, up 5,000 from last month. You can watch our separate video on this. Our surveys showed significant refinancing is in train, to try to reduce monthly repayments. We publish our Financial Confidence Indices next week.
The retail sector is still under pressure, as shown in the ABS trend estimates for Australian retail turnover which rose just 0.3 per cent in January 2018 following a similar rise in December. Many households just do not have money to spend. Separately, the number of dwellings approved rose 0.1 per cent in January, driven by a lift in approvals for apartments. Dwelling approvals increased in Victoria, Tasmania, Queensland and Western Australia, but decreased in the Australian Capital Territory, the Northern Territory, South Australia and importantly New South Wales.
The ABS also released the account aggregates to December 2017. Overall the trend data is still pretty weak. GDP has moved up just a tad, but GDP per capita is growing at just 0.9% per annum, and continues to fall. Much of the upside is to do just with population growth. But net per capita disposable income rose at just 0.4% over the past year. Housing business investment and trade were all brakes on the economy. Real remuneration is still growing at below inflation, so incomes remains stalled. More than two in three households have seen no increase. It rose by 0.3% in the December quarter and was up just 1.3% over the year to December 2017, compared with inflation of 1.9%. In fact, households continue to raid their savings to support a small increase in consumption, but this is not sustainable. The household savings ratio recovered slightly to 2.7% from 2.5% in seasonally adjusted terms. Debt remains very high. These are not indicators of an economy in prime health!
Another crack appeared in the property market wall this week when Deposit Power, which provided interim finance to property buyers, closed its doors leaving an estimated 10,000 residential, commercial and property investors in the lurch about the fate of nearly $300 million worth of deposits. This is after the collapse of New Zealand’s CBL’s insurance, which was an issuer and guarantor of deposit bonds. You can watch my separate video on this important and concerning event.
The public hearings which the Productivity Commission has been running in relationship to Competition in Financial Services covered a wide range of issues. One which has surfaced is the Lenders Mortgage Insurance (LMI) sector. With 20% of borrowing households required to take LMI, and just two external providers (Genworth and QBE LMI), the Commission has explored the dynamics of the industry. They called it “an unusual market”, where there is little competitive pricing nor competition in its traditional form. Is the market for LMI functioning they asked? Could consumers effectively be paying twice? On one hand, potential borrowers are required to pay a premium for insurance which protects the bank above a certain loan to value hurdle. That cost is often added to the loan taken, and the prospective borrower has no ability to seek alternatives from a pricing point of view. Banks who use external LMI’s appear not to tender competitively. On the other hand, ANZ, for example has an internal LMI equivalent, and said it would be concerned about the concentration risk of placing insurance with just one of the two external players, as the bank has more ability to spread the risks. The Commission probed into whether pricing of loans might be better in this case, but the bank said there were many other factors driving pricing. All highly relevant given the recent APRA suggestion that IRB banks might get benefit from lower capital for LMI’s loans, whereas today there is little capital benefit. This will be an interesting discussion to watch as it develops towards the release of the final report. They had already noted that consumers should expect to receive a refund on their LMI premium if they repay the loan.
ASIC told the Productivity Commission that there is now “an industry of referrers” who are often being paid the same amount as mortgage brokers despite doing less work. They said – in our work on [broker] commissions, there were a separate category of people who are paid commission who don’t arrange the loan but just refer the borrower to the lender. It seems to be that professionals — lawyers, accountants, financial advisers — are reasonably prominent among people who are acting as referrers and that strangely the commissions they were paid for just a referral was almost as large as that [for a] mortgage broker doing all the extra [work]. More evidence of the complexity of the market, and of the multiple parties clipping the ticket.
The role of mortgage brokers remains in the spotlight, with both the Productivity Commission sessions this week, and the Royal Commission next week focussing in on this area. In draft recommendation 8.1 of its report, the Productivity Commission called for the ASIC to impose a “clear legal duty” on lender-owned aggregators, which should also “apply to mortgage brokers working under them”. ANZ CEO Shayne Elliott said applying best interest obligations to brokers could help preserve the integrity of the third-party channel and that despite the absence of a legal duty of care, consumers may be under the impression that such obligations already exist. He also said there was merit in considering a fixed fee model as opposed to a volume-based commission paid to brokers. The ANZ chief said that there is “absolute merit” in exploring such a model, and he pointed to the use of a fixed fee structure in Europe.
Industry insiders on the other hand argue that a push to argue a switch from mortgage broker commission payments, which normally includes an upfront fee and a trailing payment for the life of the loan paid by the lender to the broker, to a fixed fee for advice would be “anti-competitive. The discussion of trailing commissions centered on whether there was downstream value being added to mortgage broker clients, for example, annual financial reviews, or being the first port of call when the borrower has a mortgage related question. The interesting question is how many broker transactions truly include these services, or is the loan a set and forget, whilst the commissions keep flowing? There is very little data on this. In the UK, mortgage brokers work within a range of payment models. Many mortgage brokers are paid a commission by lenders of around 0.38% of the total transaction and some mortgage brokers also charge a fee to their customers.
Still on, Mortgage Brokers they say they expect to write more non-conforming loans over the next 12 months according to non-Bank Pepper Money. They commissioned a survey of 948 mortgage brokers which showed that 70 per cent expect to write more non-conforming loans in the coming year, while 66 per cent predict a decline in the number of prime loans written. Surveyed respondents expect the demand for non-conforming loans to rise as a result of tighter prime lending criteria (22 per cent), changing customer needs (21 per cent) and changing legislation/regulations (13 per cent). The survey also found that the number of brokers who have yet to write a non-conforming loan has also reduced, falling by 6 per cent from 18 per cent in 2016 to 12 per cent in 2018.
Another non-Bank, Bluestone Mortgages cut its interest rates by 75 to 105 basis points across its Crystal Blue products. The Crystal Blue portfolio includes a range of full and alt doc products that provide lending solutions to established self-employed borrowers (with greater than 24 months trading history), and PAYG borrowers with a clear credit history. The lender expects the rate reduction, coupled with the 85% low doc option, to drive the uptake of the portfolio. The rate cuts come shortly after the company was acquired by private equity firm Cerberus Capital Management. Parent company Bluestone Group UK is fully divesting its interest in Bluestone Mortgages Asia Pacific as part of the acquisition deal.
The ABS released their latest data on the Assets and Liabilities of Australian Securitisers. At 31 December 2017, total assets of Australian securitisers were $132.5b, up $7.3b (5.9%) on 30 September 2017. During the December quarter 2017, the rise in total assets was primarily due to an increase in residential mortgage assets (up $6.0b, 6.0%) and by an increase in other loans assets (up $0.9b, 6.1%). You can see the annual growth rates accelerating towards 13%. This is explained by a rise in securitisation from both the non-bank sector, which is going gangbusters at the moment, and also some mainstream lenders returning to the securitised funding channels, as costs have fallen. There is also a shift towards longer term funding, and a growth is securitised assets held by Australian investors. Asset backed securities issued overseas as a proportion of total liabilities decreased to 2.6%. Finally, at 31 December 2017, asset backed securities issued in Australia as a proportion of total liabilities increased to 89.8%. The non-banks are loosely being supervised by APRA (under their new powers), but are much freer to lend compared with ADI’s. A significant proportion of business will be investment loans.
It’s not just the non-banks cutting mortgage rates to attract new business. The story so far. Banks were lending up to 40%+ of mortgages with interest only loans, some even more. The regulator eventually put a 30% cap on these loans and the volume has fallen well below the limit. Some banks almost stopped writing IO loans. They also repriced their IO book by up to 100 basis points, so creating a windfall profit. This is subject to an ACCC investigation to report soon. The RBA and APRA both warn of the higher risks on IO loans, especially on investment properties, in a down turn. APRA has confirmed the “temporary” 30% cap will stay for now, although the 10% growth cap in investment loans is now redundant, thanks to better underwriting standards. Banks have now started to ramp up their selling of new IO loans, to customers who fit within current underwriting standards and are offering significant discounts. Borrowers will be encouraged to churn to this lower rate. For example, CBA will cut fixed interest rates for property investors across one-, two-, three-, and four-year terms. The cuts, which range from 5 basis points to 50 basis points, apply to both interest-only investor loans and principal-and-interest investor loans. CBA is also cutting some of its fixed rates for owner-occupiers, including a reduction on owner-occupied principal-and-interest fixed-rate loans by 10 basis points over terms of one to two years, landing at 3.89% for borrowers on package deals. Key rival Westpac also unveiled a suite of fixed-rate changes, including some cuts to fixed-rate interest-only mortgages, another area where banks have been forced to apply the brakes. They also hiked rates across various fixed terms for owner-occupiers. So the chase is on for investor loans now, with a focus on acquiring good credit customers from other banks. Other smaller lenders, such as ING, Mortgage House, and Virgin Money have also dropped some interest-only rates.
Finally, The Grattan Institute released some important research on the migration and housing affordability saying Australia’s migration policy is its de-facto population policy. The population is growing by about 350,000 a year. More than half of this is due to immigration. The pick-up in immigration coincides with Australia’s most recent housing price boom. Sydney and Melbourne are taking more migrants than ever. Australian house prices have increased 50% in the past five years, and by 70% in Sydney. Housing demand from immigration shouldn’t lead to higher prices if enough dwellings are built quickly and at low cost. In post-war Australia, record rates of home building matched rapid population growth. House prices barely moved. But over the last decade, home building did not keep pace with increases in demand, and prices rose. Through the 1990s, Australian cities built about 800 new homes for every extra 1,000 people. They built half as many over the past eight years. So there is no point denying that housing affordability is worse because of a combination of rapid immigration and poor planning policy. Rather than tackling these issues, much of the debate has focused on policies that are unlikely to make a real difference. Unless governments own up to the real problems, and start explaining the policy changes that will make a real difference, Australia’s housing affordability woes are likely to get worse.
So the complex equation of supply and demand, loan availability and home prices, will remain unsolved until the focus moves from tactical near term issues to strategy. Meantime, my expectation is that prices will continue south for some time yet, despite all the industry hype.
Household debt in Australia continues to rise. But the strongest growth at 15%, is found in the sub prime Alternative Lending Personal Credit sector.
So it is worth considering the personal credit market holistically.
Drawing data from our cure market models we estimate total personal credit to the ~9.2 million Australian households currently amounts to $164 billion. This is separate from the $1.7 trillion secured debt for owner occupied and investment housing.
Within that banks and mutuals (ADI’s) hold $42 billion in credit cards, and $66 billion in personal loans of all types. But this leaves Alternative Lenders, (non-banks) with around $56 billion, or 34% of all personal credit. The chart below shows the relative shares since 2006. The Alternative Lending sector is growing faster than credit from ADI’s.
Relatively, overall personal credit has grown at around 2.6% in the past 3 years. Within that, credit card debt has been static, ADI personal credit rose 2% but Alternative Lending credit rose 5%.
In fact ADI’s have stepped up their personal lending as mortgage lending has eased, with an 8% rise in the past 12 months. We expect this momentum to continue, with a strong focus on vehicle credit, another risk area!
Alternative Lenders include many large well established companies, as well as a rising tide of new online lenders, including P2P loan providers. In fact online has become the predominate origination channel. As they are not banks, ASIC is the primary regulatory body.
But looking in more detail, the sub prime segment of Alternative Lending has growing significantly faster at around 15% per annum over the past three years, compared with 5% for all Alternative Lending. We define sub prime as households with VedaScore/Equifax Score below 622, or a poor credit history, or adverse personal circumstances.
There are a range of products taken by households in the sub prime segment, including unsecured personal loans, Medium Amount Credit Contracts (MACC), Small Amount Credit Contracts (SACC), secured and unsecured car loans or loans on other capital goods, and loans secured by assets, such as cars post purchase.
Our surveys show that a considerable number of highly in debt households with mortgages also hold loans with Alternative Lenders. Such loans might be difficult spot during an assessment of a mortgage loan application, thanks to the negative credit records which are only now morphing into comprehensive credit.
This is a concerning trend and is further evidence of the debt laden state of many households. It also helps to explain the gap between stated finances on a mortgage loan application and the real state of household finances.
The U.S. economy is currently experiencing a prolonged productivity slowdown, comparable to another slowdown during in the 1970s.
Economists have debated the causes for these slowdowns: The reasons range from the 1970s oil price shock to the 2007-08 financial crisis.
But did the baby boom generation partly cause both periods of slowing productivity growth?
A Demographic Shift
Guillaume Vandenbroucke, an economist at the St. Louis Fed, explored the role of the baby boom generation—specifically, those born in the period of 1946 to 1957 when the birth rate increased by 20 percent—in these slowdowns.
In a recent article in the Regional Economist, he pointed out a demographic shift: Many baby boomers began entering the labor market as young, inexperienced workers during the 1970s, and now they’ve begun retiring after becoming skilled, experienced workers.
“This hypothesis is not to say that the baby boom was entirely responsible for these two episodes of low productivity growth,” the author wrote. “Rather, it is to point out the mechanism through which the baby boom contributed to both.”
Productivity 101
One measure of productivity is labor productivity, which can be measured as gross domestic product (GDP) per worker. By this measure, the growth of labor productivity was low in the 1970s. Between 1980 and 2000, this growth accelerated, but then has slowed since 2000.
“It is interesting to note that the current state of low labor productivity growth is comparable to that of the 1970s and that it results from a decline that started before the 2007 recession,” Vandenbroucke wrote.
How does a worker’s age affect an individual’s productivity? According to economic theory, young workers have relatively low human capital; as they grow older, they accumulate human capital, Vandenbroucke wrote.
“Human capital is what makes a worker productive: The more human capital, the more output a worker produces in a day’s work,” the author wrote.
The Demographic Link
Vandenbroucke gave an example of how this simple idea could affect overall productivity. His example looked at a world in which there are only young and old workers. Each young worker produces one unit of a good, while the older worker—who has more human capital—can produce two goods. If there were 50 young workers and 50 old workers in this simple economy, the total number of goods produced would be by 150, which gives labor productivity of 1.5 goods per worker.
Now, suppose the demographics changed, with this economy having 75 young workers and 25 old workers. Overall output would be only 125 goods. Therefore, labor productivity would be 1.25.
“Thus, the increased proportion of young workers reduces labor productivity as we measure it via output per worker,” he wrote. “The mechanism just described is exactly how the baby boom may have affected the growth rate of U.S. labor productivity.”
The Link between Boomers and Productivity Growth
Vandenbroucke then compared the growth rate of GDP per worker (labor productivity) with the share of the population 23 to 33 years old, which he used as a proxy for young workers.
This measure of young workers began steadily increasing in the late 1960s before peaking circa 1980, which represented the time when baby boomers entered the labor force.
Looking at these variables from 1955 to 2014, he found the two lines move mostly in opposite directions (the share of young people growing as labor productivity growth declined) except in the 2000s.
“The correlation between the two lines is, indeed, –37 percent,” Vandenbroucke wrote.1
The share of the population who were 23 to 33 years old began to increase in the late 2000s, which can be viewed as the result of baby boomers retiring and making the working-age population younger.
“This trend is noticeably less pronounced, however, during the 2000s than it was during the 1970s,” the author wrote. “Thus, the mechanism discussed here is likely to be a stronger contributor to the 1970s slowdown than to the current one.”
Conclusion
If this theory is correct, it may be that the productivity of individual workers did not change at all during the 1970s, but that the change in the composition of the workforce caused the productivity slowdown, he wrote.
“In a way, therefore, there is nothing to be fixed via government programs,” Vandenbroucke wrote. “Productivity slows down because of the changing composition of the labor force, and that results from births that took place at least 20 years before.”
Notes and References
1 A correlation of 100 percent means a perfect positive relationship, zero percent means no relationship and -100 percent means a perfect negative relationship.
Once taken for granted by the mainstream, home ownership is increasingly precarious. At the margins, which are wide, it is as if a whole new form of tenure has emerged.
Whatever the drivers, significant and lasting shifts are shaking the foundations of home ownership. The effects are far-reaching and could undermine both the financial and wider well-being of all Australian households.
Over the course of 100 years, Australians became accustomed to smooth housing pathways from leaving the parental home to owning their house outright. However, not only did the 2008-09 global financial crisis (GFC) underline the risk of dropping out along the way, but more recent Australian evidence has shown that the old pathways have been displaced by more uncertain routes that waver between owning and renting.
The Household, Income and Labour Dynamics in Australia (HILDA) Survey indicates that, during the first decade of the new millennium, 1.9 million spells of home ownership ended with a move into renting (one-fifth of all home ownership spells that were ongoing in that period). It also shows that among those who dropped out, nearly two-thirds had returned to owning by 2010. Astonishingly, some 7% “churned” in and out of ownership more than once. Many households no longer either own or rent; they hover between sectors in a “third” way.
The drivers of this transformation include an ongoing imperative to own, vying with the factors that oppose this – rising divorce rates, soaring house prices, growing mortgage debt, insecure employment and other circumstances that make it difficult to meet home ownership’s outlays.
Those who use the family home as an “ATM” are at added risk. This relatively new way of juggling mortgage payments, savings and pressing spending needs makes some styles of owner occupation more marginal – as the tendency is to borrow up, rather than pay down, mortgage debts over the life course.
A retirement incomes system under threat
Since its inception, the means-tested age pension system has been set at a low fixed amount. Retired Australians could nevertheless get by provided they achieved outright home ownership soon enough. The low housing costs associated with outright ownership in older age were effectively a central plank of Australian social policy.
Moreover, developments in the Australian housing system could undermine a second retirement incomes pillar – the superannuation guarantee. An important goal of the superannuation guarantee is financial independence in old age. But if superannuation pay-outs are used to repay mortgage debts on retirement, reliance on age pensions will grow rather than recede.
Such policy interest is not surprising. Housing wealth dominates the asset portfolios of the majority of Australian households, boosted by soaring house prices. If home owners can be encouraged or even compelled to draw on their housing assets to fund spending needs in retirement, this will ease fiscal pressures in an era of population ageing.
However, the welfare role of home ownership is already important in the earlier stages of life cycles. Financial products are increasingly being used to release housing equity in pre-retirement years. This adds to the debt overhang as retirement age approaches. It also increases exposure to credit and investment risks that could undermine stability in housing markets.
A gender equity issue
A commonly overlooked angle relates to gender equity. Australian women own less wealth than men, and they also hold more housing-centric asset portfolios.
Hence, women are more exposed to housing market instability associated with precarious home ownership. Single women are especially vulnerable to investment risk when they seek to realise their assets.
A neglected economic lever
Housing and mortgage markets played a central role in the GFC. Today, it is widely agreed that resilient housing and mortgage markets are important for overall economic and financial stability. There are also concerns that the post-GFC debt overhang is a drag on economic growth.
However, the policy stance in the wake of the GFC has been “business as usual”. There has been very little real innovation in the world of housing finance or mortgage contract design in recent years. This might change if housing were steered from the periphery to a more central place in national economic debates.
Forward-looking policy response is needed
Growing numbers of Australians clearly face an uncertain future in a changing housing system. The traditional tenure divide has been displaced by unprecedented fluidity as people juggle with costs, benefits, assets and debts “in between” renting and owning.
This expanding arena is strangely neglected by policy instruments and financial products. Politicians cling to an outdated vision of linear housing careers that does little to meet the needs of “at risk” home owners, locked-out renters, or churners caught between the two.
The hazards of a destabilising home ownership sector are wide-ranging, rippling well beyond the realm of housing. Part of the answer is a new drive for sustainability, based on a housing system for Australia that is more inclusive and less tenure-bound.
Author: Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University; Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University; Susan Smith,
Honorary Professor of Geography, University of Cambridge
Several industry participants have voiced concern over mortgage stress and the rising risk of defaults, as wage growth fails to keep pace with the costs of living.
Approximately 51,500 borrowers could be at risk of defaulting on their mortgages in the coming year, with over 30 per cent of Australians experiencing mortgage stress, finder.com.au has suggested, after analysing research from Digital Finance Analytics’ (DFA) Household Survey.
Speaking to Mortgage Business, the principal of DFA, Martin North, noted that “at risk” borrowers were most prevalent in mining-centred regions across Queensland and Western Australia. He added that “severe” mortgage stress could be on the rise in other parts of the country.
“There are more people currently at risk in Western Australia and in Queensland, which is an outfall from the mining downturn, but we’re also seeing a significant rise in severe stress in Western Sydney, on the outskirts of Melbourne and around Brisbane,” Mr North said.
“Defaults over the next two years are not necessarily going to be centred in the West or in Queensland, but we’re going to see some more significant risks in and around the main urban centres in Brisbane and Melbourne.”
Mr North attributed the increased risk of mortgage defaults to slow wage growth, cost of living pressures and high mortgage repayment costs for borrowers that were issued with home loans prior to regulatory tightening.
The principal said: “There are a few drivers. The first is that incomes are not growing in real terms, particularly if you’re in the private sector. The income growth is on average 1.9 per cent. A lot of people haven’t had a pay rise in a long time, so income is compressed.
“Secondly, cost of living is rising and that includes everything from electricity bills, child-care costs, cost of fuel, [etc]. So, it’s the impact of incomes versus costs not going in the right direction.
“The third thing is that the costs of the mortgage, particularly in the major urban areas around Sydney and Melbourne, are a lot bigger because home prices have gone up a lot, so people are leveraged. They’ve got very large mortgages and very little wiggle room as a result.”
The market analyst also noted that a lack of financial awareness and household budgeting is to blame for rising levels of mortgage stress. Indeed, according to Mortgage Choice’s Financial Savviness Whitepaper, 54.9 per cent of Australians fail to review their finances at least once a week.
“The finding that more than one in two Australians are not checking their bank accounts on a weekly basis at minimum is quite alarming and it suggests that many people are keeping themselves in the dark when it comes to their finances,” CEO of Mortgage Choice John Flavell said.
The Mortgage Choice CEO added that “keeping a close eye” on finances could allow households to identify savings opportunities.
He said: “Keeping a close eye on your finances is essential in helping you better manage and understand where your money is going, where you can cut back on spending and improve your savings.
“When you know how much money you have available in your account, you will avoid overspending or withdrawing beyond your balance and being hit with an overdraft fee. Moreover, when you’re actively tracking your finances, you will benefit from having greater control and confidence to make decisions, whether they be small discretional expenses or a significant purchase such as a car or property.”
Mr Flavell continued: “[Being] aware of your spending patterns helps you catch any unusual expenses, fees or declined transactions you may not have otherwise been aware of.”
The topic of mortgage stress has been in the spotlight recently, after the Reserve Bank of Australia said that it was keeping a watchful eye on interest-only mortgagors whose terms are due to expire between this year and 2022, as it fears some may find the “step-up” to P&I repayments “difficult to manage”.
In her address to the Responsible Lending and Borrowing Summit this year, the assistant governor of the Reserve Bank of Australia (RBA), Michele Bullock, spoke about household indebtedness and mortgage stress.
Ms Bullock said that while mortgage stress has declined since 2011 (largely as a reflection of the fall in interest rates since that time) and that the number of those classed as being in some financial stress is “not growing rapidly”, around 12 per cent of owner-occupiers with mortgage debt indicated that they would expect difficulty raising funds in an emergency.
Noting that “the increasing popularity of interest-only loans over recent years meant that, by early 2017, 40 per cent of the debt did not require principal repayments”, the assistant governor said that “this presents a potential source of financial stress if a household’s circumstances were to take a negative turn”.
Ms Bullock noted that as a “large portion” of principal-free periods begin to expire, some borrowers may therefore struggle to service their mortgages.
She said: “[A] large proportion of interest-only loans are due to expire between 2018 and 2022. Some borrowers in this situation will simply move to principal and interest repayments as originally contracted.
“Others may choose to extend the interest-free period, provided that they meet the current lending standards. There may, however, be some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage.
“This third group might find themselves in some financial stress. While we think this is a relatively small proportion of borrowers, it will be an area to watch.”
What makes China’s citizens so thrifty, and why does that matter for China and the rest of the world? The country’s saving rate, at 46 percent of GDP, is among the world’s highest. Households account for about half of savings, with corporations and the government making up the rest.
Saving is good, right? Up to a point. But too much saving by individuals can be bad for society. That’s because the flip side of high savings is low consumption and low household welfare. High savings can also fuel excessive investment, resulting in a buildup of debt in China. And because people in China save so much, they buy fewer imported goods than they sell abroad. That contributes to global imbalances, according to a recent IMF paper, China’s High Savings: Drivers, Prospects, and Policies. The country’s authorities are aware of the issue and are taking steps to address it.
China’s saving rate started to soar in the late 1970s. A look at some of the causes of the increase points to some potential remedies.
Demographics explain about half the increase in saving, the Chart of the Week shows. China’s average family size dropped dramatically after the introduction of the “one child” policy. That influenced household budgets in two ways. Parents spent less money raising their children. At the same time, because children were traditionally a source of support in old age, having fewer children prompted parents to save more for retirement.
Greater income inequality, resulting from China’s transition to a more market-driven economy, is also a big contributor. A wider gap between rich and poor increases saving because the wealthy spend a smaller proportion of their income on necessities and put more money in the bank.
Economic reform has boosted saving in other ways. More Chinese now live in their own homes, as opposed to housing provided by state-owned enterprises. So they must save for a down payment and for mortgage payments. (Household debt, while still low, has risen rapidly in recent years, linked largely to asset price speculation.) And a decline in government spending on social services during the economic transition in the 1980s and 90s has meant that Chinese must save more for retirement or to pay for health care.
There are several things the government can do to encourage more spending:
Make the income tax more progressive and family friendly;
Spend more on health care, pensions and education;
Spend more on assistance to the poor, which would reduce income inequality.
Of course, China will need more revenue to pay for all of this. One answer would be to increase the dividends paid by state owned enterprises. Another would be to transfer shares of these firms to social security funds. With the right policies, China can encourage spending while avoiding the fate predicted by Confucius: “He who does not economize must agonize.”
On Feb. 6, the Wall Street Journal published a startling statistic: Between June 2016 and June 2017, more than 1,700 U.S. bank branches were closed, the largest 12-month decline on record.1
Structural Shift
That large drop, while surprising, is part of a trend in net branch closures that began in 2009. It follows a profound structural shift in the number and size of independent U.S. banking headquarters, or charters, over the past three decades.
In 1980, nearly 20,000 commercial banks and thrifts with more than 42,000 branches were operating in the nation. Since then, the number of bank and thrift headquarters has steadily declined.
The reasons for the decline in charters and branches are varied. Regarding charters, the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994 played a significant role in their decline. Banks operating in more than one state took advantage of the opportunity to consolidate individual state charters into one entity and convert the remaining banks into branches. Almost all states opted in to a provision in the law permitting interstate branching, which led to a steady increase in branches.
Trend Reversal
Even before the number of charters declined, however, the number of branches grew steadily throughout the 1980s, 1990s and early 2000s. It peaked in 2009, when the trend reversed, as seen in the figure below.
Since 2009, the number of commercial bank and thrift branches has shrunk nearly 10 percent, or just over 1 percent per year.
The initial wave of closings can be attributed to a wave of mergers and failed bank acquisitions following the financial crisis. There was an immediate opportunity to reduce cost through the shuttering of inefficient office locations. Branch closings were also influenced by earnings pressure from low interest rates and rising regulatory costs.
More recently, changing consumer preferences and improvements in financial technology have further spurred the reduction in branches. Customers increasingly use ATMs, online banking and mobile apps to conduct routine banking business, meaning banks can close less profitable branches without sacrificing market share.
Uneven Changes
The reduction in offices has not been uniform. According to the Federal Deposit Insurance Corp., less than one-fifth of banks reported a net decline in offices between 2012 and 2017, and slightly more than one-fifth reported an increase in offices.
Just 15 percent of community banks reported branch office closures between 2012 and 2017. And though closures outnumber them, new branches continue to be opened. It’s also important to note that deposits continue to grow—especially at community banks—even as the number of institutions and branches decline.
The Industry of the Future
It seems inevitable that this long-term trend in branch closings will continue as consumer preferences evolve and financial technology becomes further ingrained in credit and payment services.
Although it is unlikely that the U.S. will end up resembling other countries with relatively few bank charters, it seems certain that consumers and businesses will increasingly access services with technology, no matter the size or location of bank offices. This change creates opportunities as well as operational risks that will need to be managed by banks and regulators alike.
