Social Trends – Page 124 – Digital Finance Analytics (DFA) Blog

Changes In The Private Rental Sector – AHURI

AHURI is a national independent research network with an expert not-for-profit research management company, AHURI Limited, at its centre. AHURI undertakes evidence-based policy development on a range of priority policy topics that are of interest to our audience groups, including housing and labour markets, urban growth and renewal, planning and infrastructure development, housing supply and affordability, homelessness, economic productivity, and social cohesion and wellbeing.

The have just published a report – “Navigating a changing private rental
sector: opportunities and challenges for low-income renters“, utilising data from both HILDA, and other sources and using Clapham’s (2005) ‘housing pathways’ approach. As well as presenting data they also recommend a number of policy reforms.

This included HILDA data from 2015, which whilst dated now, highlights the issues in the low-income renter sector.

They say that the Private Rental Sector:

… has been expanding and transforming in a number of ways over the past decade as renters and investors/landlords adapt to rising house prices and rents, particularly in Sydney and Melbourne markets. At the low end of the sector, key developments have been the entry and expansion of the role of online platforms and community agency intermediaries in facilitating access to and tenancy management of private rental rooms and dwellings. The profile of renters is becoming more diverse as long-term renting continues to increase across all income groups, generating high competition for the limited dwellings that are affordable on a low income. The profile of investors/landlords and the lease lengths they choose to set for rooms and dwellings is also more varied.

They find that:

The accessibility and affordability of dwellings at the low end of the PRS undoubtedly remains the central issue for vulnerable groups of renters. In seeking to understand how low-income renters navigate changing PRS institutions, we first examine their individual and household income profile, drawing on existing HILDA and Journeys Home data. This background analysis reveals the importance of understanding the connection between individual and household income for low-income renters, beyond existing measures of affordability stress at the household level, which can conceal the difficulties faced by individuals as they navigate access to the PRS. Factors to be considered include the interim solutions individuals may seek when locked out of formal rental pathways (such as more informal or supported pathways into the PRS), and the consequences of persistently low individual and household incomes over time.

Applying an individual–household income typology within the HILDA data we find that:

more than half (55%) of low-income (Q1–Q2) individuals in a low-income (Q1–Q2) household who are renting privately remain in this household group over a five-year period

this group of private renters is most likely to make a transition into social housing and is less likely to move, but when they do move it is typically ‘forced’ (i.e. their property is no longer available to rent)

low-income renters are least able, in terms of personal savings, to afford the upfront and relocation costs of a move.
In examining formal, informal and supported rental arrangements of individuals who have experience of or are at risk of homelessness, drawing on the Journeys Home longitudinal survey, we find the following.

Individuals and households in the lowest 20 per cent of the income distribution (Q1) are least likely to rent in the formal PRS, with over 70 per cent reporting a lack of affordable housing as an obstacle to finding more secure housing. The main type of living arrangements for those with Q1 individual (40%) and Q1 household (31%) incomes was renting from friends and family.

Among Q1 individuals renting in the formal PRS, the main transition between consecutive waves of the HILDA data was to move into an informal arrangement where they rent privately from friends and family (24%).

Transitions in individual income groups showed that 70 per cent of Q1 individuals and 74 per cent of Q2 individuals remained in the same income group over the data collection period (2011–14).

They state:

The formal institutions within the PRS designed to overcome barriers to accessing and managing tenancies for low-income renters have not kept up with the pace of change occurring within informal rental living arrangements. Any reforms to existing formal institutions intended to deliver better outcomes for private renters on a low-income must grapple with an increasingly complex and fragmented PRS. There is a clear need for centralised forms of assistance delivered via the statutory income system of support, but also a need for more devolved initiatives that can target informal and supported pathways through state and local government tenancy regulation and policy intervention. Within this framing, policy reform should take into account the following:

Centralised reforms of rental housing assistance and regulation must seek to redress the growing imbalance in horizontal equity (treating those with similar incomes and wealth the same) and vertical equity (reducing the divide between those at the top and bottom of the income and wealth distribution). This includes reviewing the adequacy of wages, statutory incomes and rental assistance in view of rising costs of living.

There is clear evidence that the informal pathway into the PRS is expanding through the reach of online platforms to exploit and disrupt formal paths to access and management. Regulation of informal rental practices, particularly in the context of online intermediaries and the growth of room rentals, must ensure that supply and access to urgent housing is not impeded, whilst also ensuring that tenants have adequate recourse to live in safe and secure rental housing.

As the community sector expands its focus, there is growing capacity to establish more formal and enduring institutions at the low end of the PRS via a supported pathway delivered through an expanded community housing and welfare sector, in a similar manner to the social rental agencies developed in Belgium (see, for example, Parkinson and Parsell 2018). However, existing policy assumptions surrounding time-limited supported housing in the PRS, including financial subsidies through head-leasing initiatives, are highly problematic for those whose individual and household incomes remain low over time. A
AHURI Final Report No. 302 87
viable supported pathway into the PRS will require appropriate incentives for landlords to set their rents to be comparable with social housing rentals.

The emergence of different types of landlords (offering properties and rooms on a short- through to long-term basis), combined with the expanded reach of online platforms, provides opportunities for policy makers to assume a more direct role in better matching landlords with tenants. This includes targeting of landlord financial and taxation incentives to encourage supply of a mix of leasing options, dwelling types and locations at the low end of the market.

The findings and directions outlined in this report, together with those from an international and national institutional review of sector change and innovation, will inform the broader Inquiry report on The future of the private rental sector to provide a more detailed blueprint for institutional reform.

No presents, please: how gift cards initiate children into the world of ‘credit’

From The Conversation.

Western children have more toys, games and possessions than ever before. And Australia has one of the highest rates of average spending per child on toys. Faced with a glut of children’s toys at home, more and more parents are presenting gift cards in lieu of presents.

Gift cards neatly bridge the risk between giving a tangible present, which might be returned or exchanged, and giving cash, which some cultures consider impersonal.

Children, and often very young children, are themselves asking for gift cards so they can choose their own presents. However, children process information very differently from adults. As a result, giving gift cards to children has implications for how they make consumer-related decisions and how they spend the “credit” a gift card provides.

How do young children decide on a purchase?

Children have a limited ability to process certain types of information. They tend to pay more attention to visual and auditory stimuli rather than textual information. At a very basic level, children are more easily influenced by colour and movement.

In terms of the developmental stages identified by Jean Piaget, children do not reach “formal operations” until around 11 or 12 years of age. Only then do they develop more abstract thinking and the ability to apply logic to all types of problems, including those inherent in purchase decisions and financial transactions. It is generally accepted that children are not “consumer literate” until they reach this stage of development.

There is evidence that children, particularly those under the age of seven, have a limited ability to detect the advertising content in a message. Indeed, they may regard an advertisement as just another type of program. They see advertisements as a type of information service to help people know what to buy and where to buy it.

It’s important to note that many children may not be able to understand the persuasive intent of advertising. To add to the problem, animated and other characters in children’s movies are increasingly merchandised as toys. An array of products, including foods and confectionery, is also being “placed” in movie content.

Depending on their age, children might not be able to discern the selling strategies being used here, nor appreciate that such content is not passive.

Gift cards represent ‘credit’

There are hundreds of different types of gift cards for use in retail stores or online. Popular gift cards for children can be exchanged for music and online games.

Australians spend around A$2.5 billion a year on gift cards. A gift card comes with responsibility for managing the “credit” that it bestows, and for children this is an important consideration. However, almost one-third of consumers (including children) who are gifted a card never actually exchange it for goods or services.

Young children also face the dilemma of overspending or underspending when they redeem the card. Overspending happens when the child selects a product that exceeds the value of the gift card and has to negotiate with their parents or carer to make up the difference, or decide on a different purchase. Conversely, they might select an item that costs less than the amount of the card, and not understand terms and conditions such as non-transference of value or non-cash redemption.

These scenarios can be problematic for adults, let alone children. Research shows that “disclaimers” are not well understood by children. This has implications for how effectively children can manage the notion of “credit”.

Another consideration is the rise in digital gift cards and e-vouchers. Although many young children are digitally literate, the digital format may present additional challenges for young consumers.

Because digital cards are sent electronically to the recipient, or in the case of a young child to their parents, in this situation children do not receive any sort of tangible gift. What impact does this have on nurturing gratitude and appreciation in young children?

Dear Santa

Researchers in the UK looked at the content of children’s letters to Santa and found a link between the amount and type of advertising they were exposed to, as well as their age. Children exposed to more advertising were more likely to include requests for branded items than children who watched less advertising.

Will we see more letters to Santa asking for gift cards? Probably. These cards continue to grow in popularity as gifts for young people, particularly at Christmas.

An Australian Youth Forum survey found some younger Australians are using gift cards in lieu of credit cards. The number of children given access to their parents’ credit cards is also growing. Children as young as eight and nine are being authorised to use credit cards. These young consumers might often not know the difference between a credit card and gift card.

Children do not have the cognitive skills to evaluate the marketing messages for toys and other products with the same scepticism as adults. Nor do they have the maturity to make many of the decisions required for spending the “credit” from gift cards. This makes them a particularly vulnerable group.

Authors: Louise Grimmer Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania; Martin Grimmer Professor of Marketing, Tasmanian School of Business and Economics, University of Tasmania

FactCheck: is Australia’s population the ‘highest growing in the world’?

From The Conversation.

One Nation leader Pauline Hanson has proposed a plebiscite be held in tandem with the next federal election to allow voters to have “a say in the level of migration coming into Australia”.

Hanson has suggested cutting Australia’s Migration Programme cap from the current 190,000 people per year to around 75,000-100,000 per year.

On Sky News, Hanson said Australia is “the highest growing country in the world”.

The senator added that at 1.6%, Australia’s population growth was “double [that of] a lot of other countries”.

Are those statements correct?

Checking the source

In response to The Conversation’s request for sources and comment, a spokesperson for Pauline Hanson said the senator “talks about population growth in the context of our high level of immigration because in recent years, immigration has accounted for around 60% of Australia’s population growth”.

The spokesperson added:

Australian Bureau of Statistics migration data for 2015-16 show that Australians born overseas represent 28% of the population, far higher than comparable countries like Canada (22%), UK (13%) or the US (14%).

World Bank data for 2017 show that Australia’s population growth was 1.6%, much higher than comparable countries with immigration programs like Canada (1.2%), the UK (0.6%) and the US (0.7%).

Verdict

One Nation leader Pauline Hanson was correct to say Australia’s population grew by 1.6% in the year to June 2017. But she was incorrect to say Australia is “the highest growing country in the world”.

According to the most accurate international data, the country with the fastest growing population is Oman, on the Arabian Peninsula.

Senator Hanson said Australia’s 1.6% population growth was “double than a lot of other countries”. It is fair to say that Australia’s population growth rate is double that of many other countries, including the United States (0.7%) and United Kingdom (0.7%), for example.

Since Hanson’s statement, Australia’s population growth rate for the period ending June 2017 has been revised upwards to 1.7%. But Hanson’s number was correct at the time of her statement, and the revision doesn’t change the outcome of this FactCheck.

In terms of the 35 countries in the Organisation for Economic Cooperation and Development (OECD), Luxemberg was the fastest growing country in 2016, with Australia coming in fifth.

Caution must be used when making international population comparisons. It’s important to put the growth rates in the context of the total size, density and demographic makeup of the population, and the economic stage of the country.

How do we calculate population growth?

A country’s population growth, or decline, is determined by the change in the estimated number of residents. Those changes include the number of births and deaths (known as natural increase), and net overseas migration.

In Australia, both temporary and permanent overseas migrants are included in the calculation of population size.

According to Australian Bureau of Statistics data, Australia’s population grew by 1.6% in the year to June 2017 – as Senator Hanson said.

Since Hanson’s statement, Australia’s population growth rate for the period ending June 2017 has been revised upwards to 1.7%. But as said in the verdict, Hanson’s number was correct at the time of her statement, and the revision doesn’t change any of the other outcomes of this FactCheck.

That’s an increase of 407,000 people in a population of 24.6 million.

All states and territories saw positive population growth in the year to June 2017, with Victoria recording the fastest growth rate (2.4%), and South Australia recording the slowest growth rate (0.6%).

Is Australia’s population the ‘highest growing in the world’?

No, it’s not.

There are different ways of reporting population data.

Population projections are statements about future populations based on certain assumptions regarding the future of births, deaths and migration.

Population estimates are statistics based on data from a population for a previous time period. Population estimates provide a more accurate representation of actual dynamics.

World Bank data for 2016 (based on population estimates) provide us with the most accurate international comparison.

According to those data, Australia’s growth rate – 1.5% for 2016 – placed it at 86th in the world. The top 10 ranked countries grew by between 3-5%.

How does Australia’s growth compare to other OECD countries?

Comparison of Australia’s average annual population growth with other OECD countries shows Australia’s rate of population growth is among the highest in the OECD, but not the highest.

This is true whether we look at annual averages for five year bands between 1990 and 2015, or single year data.

Looking again at the World Bank data, Australia’s rate of population growth for 2016, at 1.5%, was double that of many other OECD countries, including the United Kingdom (0.7%) and United States (0.7%).

Permanent vs temporary migration levels

Hanson has proposed a national vote on what she describes as Australia’s “run away rates of immigration”.

The senator has suggested reducing Australia’s Migration Programme cap from the current level of 190,000 people per year to 75-100,000 people per year. The expected intake of 190,000 permanent migrants was not met over the last few years. Permanent migration for 2017-18 has dropped to 162,400 people, due to changes in vetting processes.

The greatest contribution to the growth of the Australian population (63%) currently comes from overseas migration, as Hanson’s office noted in their response to The Conversation.

The origin countries of migrants are becoming more diverse, posing socioeconomic benefits and infrastructure challenges for Australia.

Sometimes people confuse net overseas migration (the total of all people moving in and out of Australia in a certain time frame), with permanent migration (the number of people who come to Australia to live). They are not the same thing.

Net overseas migration includes temporary migration. And net overseas migration is included in population data. This means our population growth reflects our permanent population, plus more.

Temporary migrants are a major contributor to population growth in Australia – in particular, international students.

In the most recent data (2014-15), net temporary migrants numbered just under 132,000, a figure that included just over 77,000 net temporary students.

The international student market is Australia’s third largest export.

Looking back at Australia’s population growth

Population changes track the history of the nation. This includes events like post-war rebuilding – including the baby boom and resettlement of displaced European nationals – to subsequent fluctuations in birth rates, and net overseas migration.

We can see these events reflected in the rates of growth from 1945 to the present.

The rate of population growth in Australia increased markedly in 2007, before peaking at 2.1% in 2009 (after the height of the global financial crisis, in which the Australian economy fared better than many others).

Since 2009, annual population growth has bounced around between a low of 1.4% and a high of 1.8%.

The longer term average for population growth rates since 1947 is 1.6% (the same as it is currently).

Interpreting population numbers

It’s worth remembering that a higher growth rate per annum coming from a lower population base is usually still lower growth in terms of actual numbers of people, when compared to a lower growth rate on a higher population base.

There can also be significant fluctuations in population growth rates from year to year – so we need to use caution when making assessments based on changes in annual rates.

Economic factors, government policies, and special events are just some of the things that can influence year-on-year population movements.

Other factors we should consider when making international comparisons include the:

total size of the population
population density
demographic composition, or age distribution, of the population, and
the economic stage of the country (for example, post industrialisation or otherwise).

Any changes to the migration program should be considered alongside the best available research. – Liz Allen

Blind review

The FactCheck is fair and correct.

The statement about Australia’s population growth rate over the year to June 30, 2017, is correct. The preliminary growth rate published by the Australian Bureau of Statistics at the time of Senator Hanson’s statement was 1.60%; the rate was subsequently revised to 1.68%.

It is also true that many developed countries have lower population growth rates than Australia, but some have higher rates. According to United Nations Population Division population estimates, Oman had the fastest growing population between 2014 and 2015 (the latest data available).

With regards to misinterpretations of net overseas migration, it should also be stated that some people think this refers to the number of people migrating to Australia. It is actually immigration minus emigration – the difference between the number arriving and the number leaving. – Tom Wilson

Author: Liz Allen Demographer, ANU Centre for Social Research and Methods, Australian National University; Reviewer
Tom Wilson Principal Research Fellow, Charles Darwin University

All About Home Lending

Today the ABS published their housing lending statistics for May 2018, and APRA Chair Wayne Byers spoke on the resilience in the financial sector. Interesting timing.

APRA pretty much says they called it just right, and their tightening has not really impacted overall growth, and any further tightening will be marginal.

First, the changes in lending practices to date do not seem to have had an obvious impact on housing credit flows in aggregate. Total housing lending grew at around 6 per cent in the year to May 2018, which is only marginally below long-run averages and roughly in line with the average run rate since 2011 (covering the period since house prices last went through a period of softening in Australia). Indeed, cumulative credit growth in the roughly three and a half years since APRA stepped up the intensity of its actions was greater than cumulative credit growth in the preceding three and a half years. Credit growth appears to be slowing somewhat at the moment, but that is not surprising in an environment of softening house prices and rising interest rates.

Second, it is evident that the composition of housing credit has shifted notably. Lending to investors is certainly now growing more slowly compared to three or four years ago. But despite the tightening in lending standards – which, it’s important to remember, also apply to owner-occupiers – lending to owner-occupiers grew at a very healthy 8 per cent over the past year. This relatively high rate of rate of growth for owner-occupiers (running broadly at almost 3x household income growth) has been sustained during a period in which lending policies and practices have been gradually strengthened.

Despite the prominence it has been given, our goal in seeking to reinforce standards and practices has been relatively modest: ensuring that internal policies are followed in practice, and applying what is, in most cases, a healthy dose of common sense. This has been an orderly adjustment, and we expect it to continue over time. While there is more “good housekeeping” to do, the heavy lifting on lending standards has largely been done. Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments.

The ABS data shows that total lending stock grew again in May. This is original data split between owner occupied and investment loans.

Total housing loan stock rose 0.5% in the month to $1.66 trillion. Within that owner occupied lending rose 0.5% to $1.1 trillion and and investment lending rose just 0.1% to $563 billion. Investment loans fell to be 33.8% of all loans. Overall growth is circa 6% annualised. As for whether growth at 3 times income is “healthy” to quote Wayne Byers; well that’s another story. Remember debt has to be repaid, eventually.

Growth has been strongest in owner occupied lending, but investment lending was also higher.

The trend housing flows were down month on month with a fall of 0.1% in owner occupied lending to $14.7 billion and investment lending down 1.9% to $10.7 billion. There was$6.3 billion of refinancing, a drop of 0.4%. 42% of lending was for investment purposes (excluding refinancing) and 19.9% of lending was refinancing, this proportion rose a little.

Looking in more detail at the trend movements by category, only owner occupied purchase of established dwellings rose, all other categories fell back. Investor lending continued to slide on a relative basis.

The month on month changes show the movements, and we note a slower rate of decline in investor lending.

First time buyers continue to support the market, with a 17.6% share of all loans written but a significant rise in the absolute number of first time loans written (up 20.5% on last months) as well as a rise in non first time buyer borrowers. These are original numbers, so they do move around from month to month, and does reflect the incentives for first time buyers in some states.

The number of investor first time buyers continues to fall.

The month on month movements show the additional 1,750 buyers in the month. Worth noting also that the average loan size continues to grow, at $412,000 for non-first time buyers, up 0.4% on the previous month and $344,000 for a first time buyer, up 0.5%. There are some variations across the states, but I won’t include those here. There was also a further fall in the number of fixed rate loans being written, down to 12.1% from 13.2% last month.

To me this begs the question, if credit is still running at these levels, and APRA says the tightening is all but done, will we see home prices starting to trend higher? Clearly the plan is to keep the debt bomb ticking for yet longer.

But this may well mean the RBA will lift rates sooner than I expected.

Nearly half of financial services employees facing ‘ongoing stress’ in their job

The Financial and Insurance Services Industry Profile Report, is an industry snapshot taken from SuperFriend’s annual ‘Indicators of Thriving Workplace’ survey of 5000 workers. It examines the current state of workplace mental health in the Australian financial services industry and compares it to the national average across all industries.

The study revealed that nearly half of all financial services employees (47%) are experiencing ongoing stress in their job, which is 9% higher than the national average. Further, 44% of those working in the industry say they have left a job due to a poor mental health environment.

SuperFriend Chief Executive Officer, Margo Lydon said: “Not only is financial services a highly competitive industry, but the staff across the industry are often engaging with members and customers during some really tough moments in their lives, such as redundancy, illness, death or major life changes like retirement. All of these moments require staff to be empathetic, supportive as well as know the technical components of their job. This can create pressures and stress if staff are not trained or well supported

“However, a number of organisations have made great improvements to their culture and workplace through a range of programs, by investing in mental health awareness and prevention initiatives including mental health training. It is clearly work in progress for the industry,” continued Ms Lydon.

Improving productivity and positivity in the workplace

Half of those surveyed believe that their employer is making enough time to take action, and a third (31%) describe their employer as the best, or one of the best, in creating a mentally healthy workplace.

According to the study, over 66% of employees in the industry believe that investment in workplace mental health and wellbeing would improve productivity, and 63% believe that it would reduce absenteeism (both of which are 5% above national average).

An additional 62% of respondents believe that investment in workplace mental health and wellbeing would improve staff retention (6% above national result).

“Employers stand to benefit from improving the mental health of their workplace, with bottom line benefits including greater productivity, talent retention and long-term cost savings.

“Particularly with financial services businesses, there is a need for greater focus on preventative measures such as, mental health policies, training for managers and staff, flexible work arrangements and recognition programs which can help to prevent issues from developing in the first place,” Ms Lydon added.

Workplaces that prioritise mental health see positive outcomes across their business

In industries across Australia, thriving and positive workers are more committed to their organisation’s goals, build better relationships with their peers and produce higher levels of output as dedicated employees, according to Ms Lydon.

“Those businesses already implementing best practice for their employees were found to actively encourage employees to identify ways to improve the workplace. More importantly, these business leaders are setting good examples and creating a culture that enables workers to be happy, healthy and productive. They are leaders who are really listening to the needs of their staff,” concluded Ms Lydon.

The Indicators of a Thriving Workplace report found the most successful workplaces have a positive culture. This can be achieved through ensuring managers are committed to promoting mental health and wellbeing of staff, supporting staff effectively through change, building a culture that encourages open discussion about the issues that affect mental health and wellbeing and making sure managers lead by example through setting a good example for a healthy, happy and productive workplace.

SuperFriend partners with all profit to member superannuation funds and life insurers to support improved mental wellbeing practices for their staff and members, through the organisations they work with every day. Its’ work focuses on creating mentally healthy workplaces where every worker, every day can contribute and thrive at work. Since 2009, SuperFriend has been providing skills-based training, using best practice evidence to build the confidence and capability of staff working in financial services industry in their interactions with members.

Mortgage Stress Continues To Claw Higher

Digital Finance Analytics (DFA) has released the June 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] …

… so no surprise to see mortgage stress continuing to rise. Across Australia, more than 970,000 households are estimated to be now in mortgage stress (last month 966,000). This equates to 30.3% of owner occupied borrowing households. In addition, more than 22,000 of these are in severe stress. We estimate that more than 57,100 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though losses in WA are higher at 5.2 basis points. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.

scrollings=”no”

The latest S&P Ratings data shows a rise in 90 day plus delinquencies in the SPIN series for April, from the major banks. So despite the fact it only covers MBS mortgages the trend is consistent with our stress analysis!

The inevitable result of too lose lending standards and easy loans is creating an intractable problem for many households given the continued low income growth, high cost environment. This also means risks to lenders continue to rise.

Our surveys show that more households are keeping their wallets firmly in their pockets as they try to manage ever tighter cash flows. This is an economically significant issue and will be a drag anchor on future growth. The RBA’s bet on sustained household consumption looks pretty crook. Even now, household debt continues to climb to new record levels, mortgage lending is still growing at an unsustainable two to three times income. Falling home prices just adds extra picante to the problem.

We continue to see households having to cope with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment remains high. 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. Rate pressure will only increase as higher Bank Bill Swap Rates (BBSW) will force more lenders to lift their mortgage rates, as a number of smaller players already have done.

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.

Stress by The Numbers.

Regional analysis shows that NSW has 264,737 households in stress (264,344 last month), VIC 266,958 (271,744 last month), QLD 172,088 (164,795 last month) and WA has 129,741. The probability of default over the next 12 months rose, with around 10,953 in WA, around 10,526 in QLD, 14,207 in VIC and 15,200 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($927 million) from Owner Occupied Borrowers, which equates to 2.10 and 2.76 basis points respectively. Losses are likely to be highest in WA at 5.2 basis points, which equates to $761 million from Owner Occupied borrowers.

A fuller regional breakdown is set out below.

Here are the top 20 postcodes sorted by number of households in mortgage stress.

Some Important Context

The rise in 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”. The most significant area of law discussed by the Commission has been responsible lending. Yet most of the 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. Gill North, Professor of law at Deakin and a Principal of DFA suggests that” APRA (and not ASIC) should be the primary focus of regulatory criticism. APRA has failed to adequately prepare Australia for future financial system instability and its prudential supervision of home lending standards and practices over the last 5 years has been woeful”.

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 will be published by the Federal Law Review, a top ranked law journal later this month.

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 criticism. This paper concludes that “APRA failed to reasonably prevent or mitigate the accumulation of major systemic risks across the financial system and its regulatory approach was light touch at best.”

You can request our media release. Note this will NOT automatically send you our research updates, for that register here.

[contact-form to=’mnorth@digitalfinanceanalytics.com’ subject=’Request The June 2018 Stress Release’][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Email Me The June 2018 Media Release’ type=’radio’ required=’1′ options=’Yes Please’/][contact-field label=”Comment If You Like” type=”textarea”/][/contact-form]

Note that the detailed results from our surveys and analysis are made available to our paying clients.

[1] RBA E2 Household Finances – Selected Ratios March 2018

Fintech Spotlight – What’s On the Cards?

I caught up with the Co-Founder and CEO, David Boyd of Credit Card Compare, on their announcement of expansion into Singapore.

Kwok (A Co-Founder of Finty), David & Andrew Boyd.

Credit Card Compare does what it says on the tin, by providing a website for prospective credit card customers to select and compare the features and benefits of a wide range of Australian credit cards. In fact, the business, which started in a domestic setting a decade ago has thrived, and now has around 150,000 people seeking advice each month via the site.

When customers get a card approved from the bank, they receive a referral fee but do not handle the application or credit assessment processes, so Credit Card Compare is essentially a lead generating platform for lenders. The trick of course is to get current data passed back from the banks and David said that given the legacy systems in some organisations, this can be a challenge. They have some additional enhancements in the works, which we will see down the track. As yet they do not provide advice on which card is best, but simply make it possible for consumers to compare cards on a range of standard parameters and prioritise the features which they believe are most important.

The announcement of Credit Card Compare’s acquisition of Singapore based start-up, Finty.com highlights their desire to reach out and expand into selected Asian markets. Singapore has a unique credit card market, in that as well as card applicants being enticed with cash back, rewards and points, Finty enriches the rewards they receive, and as a result has a significant footprint in the market, despite relatively modest numbers of applications. In that market, customer rewards for taking a card are paid once approved, and most card holders possess a battery of separate cards for different purposes, for example, travel, expenses, and shopping. The average Singaporean would somewhere between six to eight cards, a much higher number than in Australia where most people only have one or two cards.

David sees significant growth potential across Asia, and also potentially some leverage from Finty.com back into the Australian business, seeing a win-win between the two businesses, with niche expertise from Singapore paired with executional capability in Australia.

Given the release of the ASIC report into Credit Cards, where they underscore the fact that many households have the wrong cards for their purchase and repayment behaviour, it seems to me that Credit Card Compare is well placed to bring greater sophistication into the local Australian market, whilst growing across the region. A nice trick to pull off if they can do it.

Another Day, Another Data Breach

Reports of data breaches are an increasingly common occurrence. In recent weeks, Ticketmaster, HealthEngine, PageUp and the Tasmanian Electoral Commission have all reported breaches.

It is easy to tune out to what is happening, particularly if it’s not your fault it happened in the first place.

But there are simple steps you can take to minimise the risk of the problem progressing from “identity compromise” to “identity crime”.

In 2012 former FBI Director Robert Mueller famously said:

I am convinced that there are only two types of companies: those that have been hacked and those that will be. And even they are converging into one category: companies that have been hacked and will be hacked again.

The types of personal information compromised might include names, addresses, dates of birth, credit card numbers, email addresses, usernames and passwords.

In some cases, very sensitive details relating to health and sexuality can be stolen.

What’s the worst that can happen?

In most cases, offenders are looking to gain money. But it’s important to differentiate between identity compromise and identity misuse.

Identity compromise is when your personal details are stolen, but no further action is taken. Identity misuse is more serious. That’s when your personal details are not only breached but are then used to perpetrate fraud, theft or other crimes.

Offenders might withdraw money from your accounts, open up new lines of credit or purchase new services in your name, or port your telecommunication services to another carrier. In worst case scenarios, victims of identity crime might be accused of a crime perpetrated by someone else.

The Australian government estimates that 5% of Australians (approximately 970,000 people) will lose money each year through identity crime, costing at least $2.2 billion annually. And it’s not always reported, so that’s likely a conservative estimate.

While millions of people are exposed to identity compromise, far fewer will actually experience identity misuse.

But identity crime can be a devastating and traumatic event. Victims spend an average of 18 hours repairing the damage and seeking to restore their identity.

It can be very difficult and cumbersome for a person to prove that any actions taken were not of their own doing.

How will I know I’ve been hacked?

Many victims of identity misuse do not realise until they start to receive bills for credit cards or services they don’t recognise, or are denied credit for a loan.

The organisations who hold your data often don’t realise they have been compromised for days, weeks or even months.

And when hacks do happen, organisations don’t always tell you upfront. The introduction of mandatory data breach notification laws in Australia is a positive step toward making potential victims aware of a data compromise, giving them the power to take action to protect themselves.

What can I do to keep safe?

Most data breaches will not reveal your entire identity but rather expose partial details. However, motivated offenders can use these details to obtain further information.

These offenders view your personal information as a commodity that can be bought, sold and traded in for financial reward, so it makes sense to protect it in the same way you would your money.

Here are some precautionary measures you can take to reduce the risks:

Always use strong and unique passwords. Many of us reuse passwords across multiple platforms, which means that when one is breached, offenders can access multiple accounts. Consider using a password manager.
Set up two-factor authentication where possible on all of your accounts.
Think about the information that you share and how it could be pieced together to form a holistic picture of you. For example, don’t use your mother’s maiden name as your personal security question if your entire family tree is available on a genealogy website.

And here’s what to do if you think you have been caught up in a data breach:

Change passwords on any account that’s been hacked, and on any other account using the same password.
Tell the relevant organisation what has happened. For example, if your credit card details have been compromised, you should contact your bank to cancel the card.
Report any financial losses to the Australian Cybercrime Online Reporting Network.
Check all your financial accounts and consider getting a copy of your credit report via Equifax, D&B or Experian. You can also put an alert on your name to prevent any future losses.
Be alert to any phishing emails. Offenders use creative methods to trick you into handing over personal information that helps them build a fuller profile of you.
If your email or social media accounts have been compromised, let your contacts know. They might also be targeted by an offender pretending to be you.
You can access personalised support at iDcare, the national support centre for identity crime in Australia and New Zealand.

The vast number of data breaches happening in the world makes it easy to tune them out. But it is important to acknowledge the reality of identity compromise. That’s not to say you need to swear off social media and never fill out an online form. Being aware of the risks and how to best to reduce them is an important step toward protecting yourself.

For further information about identity crime you can consult ACORN, Scamwatch, or the Office of the Australian Information Commissioner.

If you are experiencing any distress as a result of identity crime, please contact Lifeline.

Author: Cassandra Cross Senior Lecturer in Criminology, Queensland University of Technology

Royal commission shows bank lenders don’t ‘get’ farming, and rural economies pay the price

From The Conversation.

The Financial Services Royal Commission has exposed the fraught relationship between farmers and financiers. We have heard about loan terms being changed without notice or consultation, loans revalued to suit the agendas of financiers, and heartless and harsh treatment of farmers once the loans are revoked.

A number of factors have contributed to this, including instability in the market value of farms, policy changes that make farms more reliant on financial instruments, and shifts in the global positioning of farm land relative to other forms of property.

The commission has heard that local lending brokers were not qualified to value farm properties, and that farm valuations have become fluid and unpredictable.

Sometimes farms and farmland were deliberately overvalued. Higher values enable farmers to borrow more money for farm improvements, and the local lending branch manager to earn higher commissions.

Not only do the central administrators in banks lack the information and expertise to question these assessments, their business models have encouraged overvaluation and overborrowing as a means to grow their businesses.

Across the Murray Darling Basin banks have taken the separation of water from land – a precursor to the marketisation of water – as a cue to devalue land.

This has provided a reason to void existing loan agreements and to offer refinancing under more arduous conditions. Farmers have no option to refuse, and so borrow with the expectation that a couple of good years will put them back on track.

And if the good years don’t materialise, farms fall into financial stress.

This confronts a third issue, which is that in the bad years farms are harder to sell so their market value plummets. This compounds the problem.

Farmers are more reliant on banks

Policy changes have made farms more reliant on banks.

Since Australia adopted open-market policies in the 1980s and agricultural markets have become global, farmers have been exposed to global price changes.

The removal of single-desk marketing boards like the Australian Wheat Board, which protected farms from price fluctuations, increases the impact of price changes. Farmers are now expected to purchase financial products to reduce the risk of this volatility.

Drought assistance has also been reoriented to rely on market-based instruments, such as loans from banks rather than grants from governments. In the wake of the deregulation of the financial system, and the post-financial crisis consolidation of the farm lending sector, many farm-specific loan products have disappeared. So banks tend to treat farms as businesses like any other.

The open-market policies also create an imperative to expand landholdings (“get big or get out”) and to invest in the latest equipment and technologies. Since this requires borrowing, it thrusts farmers onto a credit treadmill.

Of course, low interest rates have also stimulated borrowing for farm expansion.

Increasing corporate control of farm inputs (seeds, fertiliser etc.) and outputs is squeezing farmers’ capacity to earn enough to service their loans.

To make matters worse, the declining terms of trade impel farmers to increase productivity just to stand still.

The farmers before the royal commission have mostly managed to stay on the treadmill, but only until the banks’ rule changes cranked up the speed to throw them off.

It’s clear that despite their crucial role, many banks still don’t really “get” the vagaries of farming. They don’t understand how different farm lending is – or should be – to commercial and housing lending. Neither do they seem to appreciate the broader social and economic dimensions of the role they have in managing farm risks.

Dramatic revisions to land valuations, as discussed in numerous cases described in the commission, can undermine an entire farming region’s equity.

The accelerated thinning out of the farming population impacts on local economies and sporting teams, among others. In the lead-up to and during the whole process of deregulation, farmers were continually reassured – in reports by the Productivity Commission, for example – that the credit market would evolve to meet their needs.

The evidence that the commission has heard in many respects represents a case of market – and regulatory – failure.

Since the global financial crisis, farm land has become an attractive investment for wealthy families and institutional investors, and for governments worried about food security.

As this pushes up land values, banks can be more aggressive towards failing farms. Foreclosures free up land for deep-pocketed investors.

It would be a mistake, then, to conclude that the stories coming out of the commission are an isolated issue relating to the one bank’s heavy-handed mopping up after the failure of a specialised rural lender – as was the case with ANZ and Landmark.

On the contrary, there are many stories of different banks imposing financial risk frameworks on farmers that are ill-equipped to accommodate the vagaries of farming production and pricing.

When farmers jest about being owned by the banks, they aren’t joking.

We should ask why the government took so long to acknowledge the problems of rural finance and the effects on farming communities.

After the commission concludes, it is likely that banks and regulators will tighten the risk parameters on farm lending and make it harder for smaller family farmers to access finance.

Vulnerable farms will not be able to borrow as much money as in the past. This might be prudent from a financial risk perspective.

However, if city bankers don’t understand farming and don’t make allowances for the volatile and uncertain economies of farming, there’s still no guarantee that tighter rules will translate into better decisions and more positive outcomes.

Rather, tighter rules are likely to have uneven consequences, further disadvantaging smaller family farms relative to deep-pocketed agribusinesses. So, in effect, restricting credit is likely to accelerate the transfer of farmland from family farms to more corporate entities including transnational corporations.

Author: Sally Weller Reader, Australian Catholic University; Neil Argent Professor of Rural Geography, University of New England