Category: Social Trends

Mortgage Stress Up In March 2018

Digital Finance Analytics (DFA) has released the March 2018 mortgage stress and default analysis update.

Across Australia, more than 956,000 households are estimated to be now in mortgage stress (last month 924,500). This equates to 30.0% of households. In addition, more than 21,000 of these are in severe stress, no change from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA are higher at 4.9 basis points.  Flat wages growth, rising living costs and higher real mortgage rates are all adding to the burden.

Martin North, Principal of Digital Finance Analytics said “we continue to see the number of households rising, and the quantum is now economically significant. Things will get more severe, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at two to three times income. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead as underwriting standards are tightened and home prices fall further”. The latest household debt to income ratio is now at a record 188.6.[1]

Overall, risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. The recent Royal Commission laid bare some of the industry practices which help to explain why stress is so high. This is a significant sleeping problem and the risks in the system remain higher than many recognise.

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 March 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.

The forces which are lifting mortgage stress levels remain largely the same. In cash flow terms, we 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.  We expect some upward pressure on real mortgage rates in coming months as international funding pressures mount, a potential for local rate rises and margin pressure on the banks thanks to a higher Bank Bill Swap Rate (BBSW).

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 261,159 households in stress (260,830 last month), VIC 258,303 (249,192 last month), QLD 176,154 (165,344 last month) and WA has 126,606 (130,068 last month). The probability of default over the next 12 months rose, with around 10,474 in WA, around 10,299 in QLD, 13,827 in VIC and 14,807 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($960 million) from Owner Occupied Borrowers, which equates to 2.09 and 2.76 basis points respectively. Losses are likely to be highest in WA at 4.9 basis points, which equates to $726 million from Owner Occupied borrowers.

[1] RBA E2 Household Finances – Selected Ratios December 2017 (Revised 3rd April 2018).

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Wealthy landlords and more sharehousing: how the rental sector is changing

From The Conversation.

More people are becoming heavily indebted by buying rental properties and shared accommodation is flourishing, as third party tech platforms help people find a place without a real estate agent.

A new report from the Australian Housing and Urban Research Institute explains how the private rental market is changing over time for both landlords and tenants.

Over the 10 years to 2016, the number of renters grew 38% – twice the rate of household growth. More renters now are couples, or couples with children, so it seems the sector is shaking its image of unstable housing or perhaps these people are left with few other options.

Households by type, 2006 and 2016

Author provided (No reuse)

The report analyses data from the 2016 Census, the 2013-14 Survey of Income and Housing and the 2014 Household, Income and Labour Dynamics in Australia (HILDA) Survey. It also draws on interviews conducted with 42 people involved in all aspects of the private rental sector: financing, provision, access and management.

Rental property ownership also grew. We found the number of households with an interest in a rental property grew and the number that own multiple properties grew slightly as well.

But the typical landlord is still the conventional “mum and dad” investor. Two-thirds of rental investor households have two incomes, and 39% have children.

However they are also mostly high-income and high-wealth households: 60% are in both the highest income and highest wealth bracket. Interestingly, about one in eight landlords is themselves a private renter.

Housing finance ($A), 2000 – 2016

Author provided (No reuse)

The biggest change in ownership is in finances: owners of rental properties are relying more heavily on debt.

Financing rental properties

The people we interviewed highlighted the Australian Prudential Regulation Authorities’ (APRA) guidance to lenders on loan serviceability calculations as having the greatest impact on overall investment levels and investor decisions.

Adding to the complexity is the proliferation of intermediaries, such as mortgage brokers and wealth advisers. These advisers are telling borrowers what lenders and loan products to use to maximise their borrowing power and negotiate lender and regulator requirements.

Houses are the most commonly rented in Australia, but everywhere rental markets are moving away from this and towards dwellings like apartments.

There’s now more diversity in rental properties too. For example the building of high-rise student accommodation, “new generation boarding houses” and granny flats.

These allow landlords to house more people in the one building, increasing revenue and making management more efficient.

The informal sector of shared accommodation appears to be flourishing, like improvising shared rooms and lodging-style accommodation in apartments and houses.

Finding a rental

People have moved from finding rentals in real estate agents’ high street offices and onto online platforms. New third-parties like apps and other digital platforms offer non-cash alternative bond products, schedule property inspections, collect rents, and organise repairs.

Even though these technological innovations avoid agents, they have in fact increased their share of private rental sector management. Agents themselves are use these platforms to change their businesses, and the structure of their industry.

Our research found that revenue from an agency’s property management business (its “rent roll”) has become increasingly important. Some players in the industry are consolidating their businesses around it, to make higher profits from tech-enabled efficiencies.

However, the real estate business still depends on building personal relationships, particularly in high-end markets.

The new tech platforms of the private rental sector raise issues for tenants too, particularly in terms of the personal information they collect. For example, one of the online platform operators told us they looked forward to using applicants’ information to score or rank applicants. Another one of the new alternative bond providers uses automatic “trust scoring” of personal information to price its product.

These innovations may be convenient to use, and may give some tenants an advantage in accessing housing – but at the expense of others who are already disadvantaged.

Rental properties meeting demand?

If the private rental sector is going to meet the demand for settled housing, governments will have to intervene. This can’t be left to technological innovation, or higher income renters exercising their consumer power.

Federal or state governments could create public registers of landlords, or licensing requirements, to police landlords who are not “fit and proper” and exclude them from the sector.

There could also be stronger laws around tenancy conditions and protections for tenants against retaliatory action. The Poverty Inquiry in the 1970s set the basic model of our present laws and they haven’t changed much.

Tenants’ personal information also needs to be protected, to properly take account of the rise of the online application platforms; another is the informal sector, which is currently in a regulatory blindspot.

The popular emphasis on “mum and dad” investors diminishes expectations of landlords. Rental property investment should be regarded as a business that requires skill and effort. As for-profit providers of housing services, landlords should be held to standards that ensure the right to a dignified home life.

Author: Chris Martin, Research Fellow, City Housing, UNSW

Australia’s digital divide is not going away

From The Conversation.

Despite large investments in the National Broadband Network, the “digital divide” in Australia remains largely unchanged, according to a new report from the Australian Bureau of Statistics.

The Australian Household Use of Information Technology report says we are doing more online, and we are using an increasing number of connected devices. Our homes are more connected.

However, the number of people using the internet is not growing, and the basic parameters of digital inequality in Australia – age, geography, education and income – continue to define access to and uses of online resources.

Almost 2.6 million Australians, according to these ABS figures, do not use the internet. Nearly 1.3 million households are not connected. So what is going on? The ABS data points to the complexity of the social and economic issues involved, but it also helps us identify the key areas of concern.

Who’s missing out

Age is a critical factor. While more than nine in ten people aged between 15 to 54 are internet users, the number drops to eight in ten of those aged 55-64 years, and to under six in ten of those over 65 years.

Most people with jobs (95.1%) are online, compared to just 72.5% of those not employed. Migrants from non-English speaking countries are less connected (81.6%) than those Australian born (87.6%). Those already at a disadvantage – the very people who have the most to gain from all the extraordinary resources of the internet – are missing out.

This is not to say that it is only individuals that will benefit from greater digital inclusion. Raising the level of digital inclusion yields direct benefits for the community, government and business. There are, for instance, clear efficiency gains for government moving services online.

Raising the level of online health engagement for those over 65 years of age (the heaviest users of health care) would provide such a benefit. Currently, just over one in five people in this age category access online health services, substantially below the national average of two in five.

But nor should we focus only on the economic and efficiency gains of inclusion: the social benefits of connection and access to entertainment and information are considerable for most internet users, and especially so for those who are isolated and lonely, as older people may be.

Income and affordability matter

Australians with higher incomes are substantially more likely to have internet access at home than those with lower incomes – 96.9% of the highest quintile (bracket representing one fifth of the sample) income households have access, whereas only 67.4% of the lowest quintile have access.

And better-off Australians appear to be doing more online. Compared to the general population their uses of online banking and shopping, education and health services are higher. They are connected to the internet with multiple devices, with an average of 7.2 devices at home, compared to 4.4 in the lowest income quintile.

The gap between the major cities and the bush has not narrowed over time – 87.9% of those living in major cities have internet access at home, 82.7% in inner regional, 80.7% in outer regional and 77.1% in remote areas. It’s important to note that this survey did not include remote Indigenous communities, where the evidence suggests that internet access is usually very poor.

Among those who are connected, geographical differences in the means of access and modes of engagement with online services suggest a further gap among those who are already disadvantaged. People in remote areas use the internet much less for entertainment and formal education compared to their urban counterparts, which are services that require more bandwidth and better quality connections.

Unfortunately, the ABS did not ask why households do not have home internet access, as it did in 2014-15. That data revealed cost was a factor keeping 198,600 households offline. Unsurprisingly, 148,200 of these households were from the two lowest income quintiles. Cost was the major factor in keeping more than 30,000 of the 76,000 family households (with children under 15) offline.

Given the increasingly central role of the internet in educational activities, the fact that the number of family households without access has not fallen since 2014-15 is concerning.

Affordability will continue to be a problem as more data-intensive services are offered online and the demand for data increases, and as mobile services become increasingly important.

However, cost was not the only reason people gave for non-use. Around 200,000 of the two lowest income households lacked knowledge or confidence to use the internet. Digital ability, and our readiness to make use of the internet, are clearly areas for continuing attention. We know that interventions there can make a difference.

The final survey on household use of IT

This ABS survey is the last of its kind. We hope the Bureau will be able to undertake further surveys in this area. The end of this data series does not signal its lack of relevance, at a time when digital inclusion is more important than ever. On the contrary, it points to a pressing new challenge for governments, the community, and business.

As our service economy increasingly moves online — in education, health, work, and government services — we need to ensure that all Australians, particularly those already disadvantaged, have affordable access to the online world. A reliable evidence base to inform our work in this area is essential.

But the information we have should be enough to spark action in some critical areas. The affordability of broadband is clearly one of these. When we consider, for example, the situation of families with children — where cost is clearly an issue for a significant number of them — we need to recognise that existing policy settings and market mechanisms are not working.

The digital divide is likely to grow

The ABS findings correspond to other recent work in the area. Australian policy has long had the aim of making communications widely accessible across our huge country and dispersed, fairly small population.

But the Australian Digital Inclusion Index has highlighted the problem of affordability and unequal access across economic, social and spatial lines. Australia’s performance also compares poorly to other countries.

The Inclusive Internet Index, produced by The Economist’s Intelligence Unit, rates Australia at 25 out of 86 countries, behind Russia and Hungary.

So despite the egalitarian aspirations embodied in the policy language of the National Broadband Network, the evidence suggests that the Australian internet remains unusually unequal in terms of access and affordability.

Instead of a digital economy designed for everyone, we appear to have created a highly stratified internet, where the distribution of resources and opportunities online reflects Australia’s larger social and economic inequalities. The risk is that over time the digital divide will amplify these. Unfortunately there is little indication in the ABS data that any of the key indicators will change soon.

Authors: Julian Thomas, Director, Social Change Enabling Capability Platform, RMIT University; Chris K Wilson, Research Fellow, Technology, Communication and Policy Lab – Digital Ethnography Research Centre, RMIT University; Sora Park, Director, News & Media Research Centre, University of Canberra

Why it’s so hard to Delete Facebook: Constant psychological boosts keep you hooked

From The Conversation.

Here we go again: another Facebook controversy, yet again violating our sense of privacy by letting others harvest our personal information. This flareup is a big one to be sure, leading some people to consider leaving Facebook altogether, but the company and most of its over 2 billion users will reconcile. The vast majority will return to Facebook, just like they did the last time and the many times before that. As in all abusive relationships, users have a psychological dependence that keeps them hooked despite knowing that, at some level, it’s not good for them.

Decades of research has shown that our relationship with all media, whether movies, television or radio, is symbiotic: People like them because of the gratifications they get from consuming them – benefits like escapism, relaxation and companionship. The more people use them, the more gratifications they seek and obtain.

With online media, however, a consumer’s use provides data to media companies so they can serve up exactly what would gratify her most, as they mine her behavior patterns to tailor her online experiences and appeal to her individual psychological needs.

Aside from providing content for our consumption, Facebook, Twitter, Google – indeed all interactive media – provide us with new possibilities for interaction on the platform that can satisfy some of our innate human cravings.

Interactive tools in Facebook provide simplified ways to engage your curiosity, broadcast your thoughts, promote your image, maintain relationships and fulfill the yearning for external validation. Social media take advantage of common psychological traits and tendencies to keep you clicking – and revealing more of yourself. Here’s why it’s so hard, as a social network user, to pull the plug once and for all.

Buoying your ‘friend’ships

The more you click, the stronger your online relationships. Hitting the ‘Like’ button, commenting on photos of friends, sending birthday wishes and tagging others are just some of the ways in which Facebook allows you to engage in “social grooming.” All these tiny, fleeting contacts help users maintain relationships with large numbers of people with relative ease.

Molding the image you want to project

The more you reveal, the greater your chances of successful self-presentation. Studies have shown that strategic self-presentation is a key feature of Facebook use. Users shape their online identity by revealing which concert they went to and with whom, which causes they support, which rallies they attend and so on. In this way, you can curate your online self and manage others’ impressions of you, something that would be impossible to do in real life with such regularity and precision. Online, you get to project the ideal version of yourself all the time.

Snooping through an open window

The more you click, the more you can keep an eye on others. This kind of social searching and surveillance are among the most important gratifications obtained from Facebook. Most people take pleasure in looking up others on social media, often surreptitiously. The psychological need to monitor your environment is deep-rooted and drives you to keep up with news of the day – and fall victim to FOMO, the fear of missing out. Even privacy-minded senior citizens, loathe to reveal too much about themselves, are known to use Facebook to snoop on others.

Enhancing your social resources

The more you reveal, the greater your social net worth. Being more forthcoming can get you a job via LinkedIn. It can also help an old classmate find you and reconnect. Studies have shown that active use of Facebook can enhance your social capital, whether you’re a college student or a senior citizen wanting to bond with family members or rekindle ties with long-lost friends. Being active on social media is associated with increases in self-esteem and subjective well-being.

Enlarging your tribe

The more you click, the bigger and better the bandwagon. When you click to share a news story on social media or express approval of a product or service, you’re contributing to the creation of a bandwagon of support. Metrics conveying strong bandwagon support, just like five stars for a product on Amazon, are quite persuasive, in part because they represent a consensus among many opinions. In this way, you get to be a part of online communities that form around ideas, events, movements, stories and products – which can ultimately enhance your sense of belonging.

Expressing yourself and being validated

The more you reveal, the greater your agency. Whether it’s a tweet, a status update or a detailed blog post, you get to express yourself and help shape the discourse on social media. This self-expression by itself can be quite empowering. And metrics indicating bandwagon support for your posts – all those “likes” and smiley faces – can profoundly enhance your sense of self worth by appealing to your ingrained psychological need for external validation.

In all these ways, social media’s features provide us too many important gratifications to forego easily. If you think most users will give all this up in the off chance that illegally obtained data from their Facebook profiles and activities may be used to influence their votes, think again.

Algorithms that never let you go

While most people may be squeamish about algorithms mining their personal information, there’s an implicit understanding that sharing personal data is a necessary evil that helps enhance their experience. The algorithms that collect your information are also the algorithms that nudge you to be social, based on your interests, behaviors and networks of friends. Without Facebook egging you on, you probably wouldn’t be quite as social. Facebook is a major social lubricant of our time, often recommending friends to add to your circle and notifying you when a friend has said or done something potentially of interest.

A Facebook ‘nudge’ can push you to attend a local event. Facebook screenshot, CC BY-SA

 

Consider how many notifications Facebook sends about events alone. When presented with a nudge about an event, you may at least consider going, probably even visit the event page, maybe indicate that you’re “Interested” and even decide to attend the event. None of these decisions would be possible without first receiving the nudge.

What if Facebook never nudged you? What if algorithms never gave you recommendations or suggestions? Would you still perform those actions? According to nudge theory, you’d be far less likely to take action if you’re not encouraged to do so. If Facebook never nudged you to attend events, add friends, view others’ posts or wish friends Happy Birthday, it’s unlikely you would do it, thereby diminishing your social life and social circles.

Are you willing to say goodbye? Facebook screenshot, CC BY-ND

Facebook knows this very well. Just try deleting your Facebook account and you will be made to realize what a massive repository it is of your private and public memory. When one of us tried deactivating her account, she was told how huge the loss would be – profile disabled, all the memories evaporating, losing touch with over 500 friends. On the top of the page were profile photos of five friends, including the lead author of this article, with the line “S. Shyam will miss you.”

This is like asking if you would like to purposely and permanently cut off ties with all your friends. Now, who would want to do that?

Authors: S. Shyam Sundar, Distinguished Professor of Communication & Co-Director of the Media Effects Research Laboratory, Pennsylvania State University; Bingjie Liu, Ph.D. Student in Mass Communications, Pennsylvania State University; Carlina DiRusso, Ph.D. Student in Mass Communications, Pennsylvania State University; Michael Krieger, Ph.D. Student in Mass Communications, Pennsylvania State University

Census uncovers Australia’s most advantaged and disadvantaged areas

Ku-ring-gai on Sydney’s upper north shore is Australia’s most advantaged Local Government Area (LGA) according to new data released today from the ABS 2016 Census of Population and Housing.

Home to just over 118,000 residents on Census night, the leafy area is officially the most advantaged LGA in the country based on the ABS’ Socio-Economic Indexes for Areas (SEIFA), which ranks areas in Australia according to relative socio-economic advantage and disadvantage.

Another Sydney LGA, Mosman, which includes the affluent suburbs of Balmoral, Beauty Point and Clifton Gardens, has also been ranked amongst the most advantaged. In fact, SEIFA data shows the 10 most advantaged LGAs in Australia are all located around the Northern and Eastern areas of Sydney Harbour and in coastal Perth.

The most disadvantaged LGA is Cherbourg, approximately 250 kilometres north-west of Brisbane (QLD), followed by West Daly (NT). The 10 most disadvantaged LGAs in Australia can be found in Queensland and the Northern Territory.

SEIFA can help governments, communities and businesses determine areas needing additional funding and improved services, identify potential business opportunities, and research the relationship between health and education outcomes and the socio-economic conditions of an area.

The latest data has found that more than 30 per cent of people born in China, South Africa and Malaysia live in advantaged areas and less than 10 per cent reside in disadvantaged areas. Meanwhile, 40 per cent of Vietnamese-born live in disadvantaged areas and only a small proportion (11 per cent) live in advantaged areas.

People of Aboriginal and/or Torres Strait Islander origin are more likely to live in the most disadvantaged areas with 48 per cent living in the bottom fifth most disadvantaged LGAs, compared to 18 per cent of non-Indigenous people. Overall, only 5.4 per cent of Aboriginal and/or Torres Strait Islander people live in areas of high relative advantage compared with 22 per cent of non-Indigenous people.

New for 2016 SEIFA are easy-to-use features and data visualisation tools, including interactive maps on the ABS website, making interpreting Census data even easier.

For local rankings, go to the 2016 SEIFA publication. The full suite of online Census data products is available on the ABS website.

10 MOST ADVANTAGED AREAS
Rank
Local Government Area
Usual Resident Population
1
Ku-ring-gai (NSW)
118,053
2
Mosman (NSW)
28,475
3
Woollahra (NSW)
54,240
4
Cottesloe (WA)
7,597
5
Peppermint Grove (WA)
1,636
6
Nedlands (WA)
21,121
7
North Sydney (NSW)
67,658
8
Lane Cove (NSW)
36,051
9
Cambridge (WA)
26,783
10
Hunters Hill (NSW)
13,999
10 MOST DISADVANTAGED AREAS
Rank
Local Government Area
Usual Resident Population
1
Cherbourg (Qld)
1,269
2
West Daly (NT)
3,166
3
Belyuen (NT)
164
4
Woorabinda (Qld)
962
5
Central Desert (NT)
3,677
6
Aurukun (Qld)
1,269
7
Yarrabah (Qld)
2,559
8
Doomadgee (Qld)
1,405
9
Napranum (Qld)
957
10
Palm Island (Qld)
2,446
 

You’re paying too much for electricity, but here’s what the states can do about it

From The Conversation.

State-owned power networks have spent up to A$20 billion more than was needed on the electricity grid, and households and businesses in New South Wales, Queensland and Tasmania are paying for it in sky-high power bills.

A new Grattan Institute report, Down to the Wire, shows that electricity customers in these states would be paying A$100-A$400 less each year if the overspend had not happened.

The problem is that state governments, worried about blackouts and growing demand for electricity, encouraged the networks to spend more in the mid-2000s. But the networks overdid it, and now consumers are paying for a grid that is underused, overvalued, or both.

Why we built too much

The grid includes high-voltage transmission lines that carry electricity over large distances, as well as low-voltage poles and wires that connect to homes and businesses. Networks are built to cope with those times of highest demand for electricity. Yet the growth in the value of network assets has far exceeded growth in customer numbers, total demand, or even peak demand.

Demand for electricity did grow rapidly in the early 2000s, but since then it has slowed substantially as more and more households have installed solar panels, and appliances have become more energy efficient. Networks may have overbuilt because they expected that demand would continue to grow.

Yet the overbuilding has occurred almost exclusively in the public networks. Why would government ownership lead to such high costs?

There are two main reasons. First, investment in electricity networks boosts state government revenues because public networks pay a fee to the state to neutralise their lower borrowing costs (as well as the dividend they pay to the state as the owner). Second, a government-owned business might come under political pressure to prioritise goals such as reliability or job creation over cost.

Of course governments worry about reliability – they cop the blame if anything goes wrong. In 2005, the NSW and Queensland governments required their network businesses to build excessive back-up infrastructure to protect against even the most unlikely events. Reliability did improve a bit in some networks, but at significant cost: on average, customers got an extra 45 minutes of electricity a year at a cost of A$270 each.

State governments should take responsibility

Successive state governments in NSW, Queensland and Tasmania are responsible for overinvesting in their networks and, in NSW and Queensland, for setting reliability standards too high.

State governments can’t turn back the clock but they can still fix the mistakes of the past. And they should, because if they don’t, consumers will be paying for decades to come.

Households and businesses that can afford to buy solar panels and batteries will reduce their reliance on the grid. Meanwhile, those left behind – including the most vulnerable Australians – will be stuck with the burden of paying for the grid.

In Down to the Wire we recommend that where network businesses are still in government hands, the government should write down the value of the assets. This would mean governments forgoing future revenue in favour of lower electricity bills. For recently privatised businesses in NSW, a write-down could create more issues than it solves, so in those cases the state government should refund consumers the difference through a rebate.

At a time when governments are concerned about energy affordability, NSW, Queensland and Tasmania have a real opportunity to do something about it. They should seize it.

How to prevent this happening again

There will always be pressure to spend more. At the moment, concerns about South Australia’s reliability could very well lead to further investment in network infrastructure.

Policymakers must also deal with the risk that, in future, parts of the network may no longer be needed. The grid may need to be reconfigured as new technologies emerge, some communities go off-grid, and new energy sources arise in new locations.

For now, consumers bear this risk: they are locked into paying for assets whether or not they are needed. In future, the risk should be shared between consumers and businesses; this would encourage businesses to avoid overbuilding in the first place and instead consider alternative solutions.

With the focus on reliability right now, governments are at risk of repeating mistakes of the past. The truth is that Australia already has a very reliable grid.

On average across the National Electricity Market, consumers experience less than two-and-a-half hours in unplanned outages per year. Reducing that by a few minutes of supply each year is very expensive. Politicians typically value reliability more than consumers, but ultimately it is consumers who foot the bill.

State governments now have an opportunity to reset the clock – to pay off the mistakes of the past and let consumers guide choices about our future grid.

Author: Kate Griffiths, Senior Associate, Grattan Institute

Household Financial Confidence Drifts Lower Again

The latest edition of the Digital Finance Analytics Household Finance Confidence Index shows a further drift lower, remaining below the 100 neutral benchmark. It fell to 94.6 in February, down from 95.1 the previous month. This is in stark contrast to improved levels of business confidence as some have reported. Our latest video blog covered the results.

The slide was more significant among those households with investment properties, thanks to higher mortgage rates, concerns about interest only loan resets and lower home prices. In additional net rentals are lower. Owner occupied households also fell just a small amount, mainly because of rising living costs against flat incomes. Those renting, or otherwise excluded from property are the least confident. This continues the long term trend, indicating that property ownership still bolsters confidence to some extent.

The slide was pretty consistent across the states, other than a small lift in WA.  Compared with a year ago, confidence levels in NSW and VIC are significantly lower.

We also see a similar story across all the age bands, suggesting the decline in confidence is similarly widely spread.

To understand the reasons for the falls we can look to the index scorecard. Overall, there was a rise of 1.2% in households feeling less secure about their jobs, compared with this time last year, and a small reduction in those feeling more secure.

Those with savings were less comfortable, thanks to continued falls in deposit rates, and recent discussions about deposit bail-in following passage of the recent APRA Act.  More significantly, more are dipping into their savings, to maintain lifestyle, and so balances are reducing. Many realise this is not a sustainable position.

Just under half of households remain uncomfortable with the amount of debt they hold, around half saw no change over the past year. Concerns related to rising interest charges which are working through, and also ability to maintain mortgage repayments. Some households have resorted to obtain additional credit, either on a card, or separate loan, to maintain their finances. Again many realise this is not a sustainable position.

Costs of living concerns rose, with 76.7%, up 3.84% on last month, households saying that costs of electricity, fuel, rates, child care and school fees all impacting. Only 2.5% of households said their costs had fallen.

Finally, we saw a fall of 3.7% of households who said their net worth had improved, down to 54.6%, mainly explained by changes in the value of property on one hand, and of share prices on the other. 16% said their net worth had fallen. 28.9% said there had been no change.

Based on our research, we see little on the horizon to suggest that household financial confidence will improve. We expect wages growth to remain contained, and home prices to slide, while costs of living pressures continue to grow. There will also be more pressure on mortgage interest rates as funding costs rise, and lower rates on deposits as banks trim these rates to protect their net margins.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

Why don’t we read the fine print? Because banks know the pressure points to push

From The Conversation.

The Financial Services Royal Commission has exposed the pressure selling tactics used by the banks. They draw on simple psychological rules to target vulnerabilities among some of their most loyal customers.

One example is the high-pressure selling of add-on insurance for customers when they sign up to a credit card. The Commonwealth Bank of Australia (CBA) acknowledged that upwards of A$13 million of refunds are likely to be paid to consumers who had been pressured into buying these add-on products.

Another witness at the commission, Irene Savidis, relayed what happened when she tried to cancel this insurance:

they just kind of kept pushing it on me saying, you know, “It’s good for you, it will help you.” I just felt pressured or kind of like, you know, no matter what I said, it was the opposite. So I couldn’t – I felt like I couldn’t cancel it.

These techniques are well established in psychological research as ways to manipulate behaviour. In this single example, we can see how the representative of the CBA used trust, repetition (the more something is repeated, the more we are likely to believe that it is true), authority (the salesperson is perceived to be an expert), and scarcity (act now, or you will miss out). All of these factors are part of the marketers’ bag of tricks.

As much as trust can be useful under certain circumstances, at times it can be dangerous. When we are faced with choices or decisions where we don’t feel confident, we have a tendency to give over our decision making to somebody who we believe has those skills and authority and trust them to do the right thing by us.

How we make decisions under situations of stress

As we can see in the examples from the commission, many of these financial decisions are being made by consumers under already significant financial and psychological stress. We also know that under these conditions none of us make the best decisions.

In psychology, we know that people don’t always think through their decision making in a rational and linear way when placed under situations of stress. This becomes more pronounced when – counter intuitively – people are provided with lots of information related to a topic that they don’t have the ability to fully understand, either because it is complex and confusing, or even simply because it is in an area that they don’t have any experience in.

It’s in these situations that they rely on peripheral information to make their choices – things like colours, previous experience with similar situations, even the aesthetic layout of the information, or the way the person giving them the information is dressed.

When we feel we have less resources, we perform worse on tasks requiring high-level cognitive control, like important decision making. Logical reasoning, the kind that should occur when signing up to a loan, extending our credit, or committing to any major financial agreement, is relatively inefficient in these situations.

Responding to pressure selling techniques

So, how do we respond to the types of techniques that we have seen and any others that might be exposed by the commission over the next 12 months?

We need to accept that our decision making is flawed and not judge ourselves, or others, harshly, when they seem to make irrational decisions, or behave in a way that is counter-intuitive. We need to accept that people are complicated, and will make a decision that conforms to their emotional state of mind, at that point in time.

That said, there are some things people can do to avoid some of these manipulative tactics. One thing is to do your best to slow down when it comes to decision-making. If you do want to buy something, that’s fine, but do it outside the heat of the sales process.

Speak to someone you trust about your plans. Recognise that your emotional brain may already have convinced your rational brain that you are making a good decision, so you need to check in with someone who isn’t emotionally engaged in the decision.

And if the person offering something like add-on insurance creates a sense of scarcity, then identify the feeling, and assume you can walk away. A classic technique of traditional sales is to say something along the lines of, “I can only offer you this now”, but the best response is always to take your time. If they are offering you this today, they are more than likely to offer it to you tomorrow.

One thing that has emerged from the royal commission is the somewhat obvious fact that banks are businesses. Indeed, people should not be fooled into thinking that banks are anything other than profit-driven organisations. Banks know exactly what they are doing when it comes to the use of manipulative techniques to get customers to buy their products.

The hope is that this royal commission will be able uncover and act upon some of the practices verging on illegal, while highlighting some of the more unpleasant and unethical practices that have been occurring.

Author: Paul Harrison, Director, Centre for Employee and Consumer Wellbeing; Senior Lecturer, Deakin Business School, Deakin University; Chiara Piancatelli, PhD Candidate

Consumers need critical thinking to fend off banks’ bad behaviour

From The Conversation.

The irresponsible (if not predatory) lending and the selling of “junk” financial products highlighted by the Financial Services Royal Commission should raise concerns for regulators, educators and parents interested in financial literacy.

Research shows a strong correlation between financial literacy and literacy and numeracy skills. Literacy and numeracy are critical for, among other things, making sense of product disclosure statements and understanding the impact of loan terms and interest rates on the total amount to be repaid.

But teaching financial literacy requires going beyond these skills, by cultivating a healthy scepticism of financial institutions and the capabilities and confidence to make informed financial decisions.

There is a strong relationship between a low socioeconomic background and low financial literacy in both adolescents and adults.

It’s not just disadvantaged and vulnerable groups that struggle with financial decision-making. People who are highly educated in finance also make poor decisions – for instance, by focusing too much on growing their assets and ignoring risks.

But studies show that when regulation is effective and the financial system can be trusted, even consumers with limited financial knowledge and information-processing capabilities have the potential to deal with complex financial decisions.

For example, when considering mortgage protection insurance, applicants stand to benefit from knowing the actual risk of events like serious illness or injury that can affect their ability to meet monthly loan repayments.

Building financial capability

One way to develop better financial literacy is through simulating real-world risks, rewards and decisions in safe and supportive environments. For instance, families can play games like Monopoly and The Game of Life.

Secondary school students also have access to more sophisticated online simulations, such as the ESSI Money Game and the ASX Sharemarket Game.

Hypothetical scenarios like these provide opportunities for role play, where students can practise drawing on evidence and using it to think and reason about situations.

A recent survey of teachers of Year 7-10 commerce students revealed that more could also be done to teach students how to compare and choose between banks and financial products and services, what to do in the case of a financial scam, and how to escalate an unresolved complaint.

But we also need to take a look at the role banks play in financial education. Programs like the Commonwealth Bank’s Dollarmites Club and Westpac’s Solve to Save teach children about money on the banks’ terms.

A key call to action in these programs is often to open a bank account and activate a savings plan. In the Solve to Save program, parents pay a $10 weekly subscription, which is “automatically refunded” to their child’s nominated Westpac account every week they complete three mathematics exercises.

Late last year, in response to criticism by the consumer advocacy group Choice, the Commonwealth Bank stopped kickback payments to schools related to its longstanding Dollarmites scheme.

While the banks may be proud of their investment in these education programs, they serve to position the banks as experts in money matters while cultivating trust and brand loyalty.

What does it really mean to be smart with money?

Misguided trust has exposed vulnerable individuals to the moral hazard of the banks – and underscores the importance of improved financial regulation and education moving forward.

Given that borrowing decisions are complex, multidimensional and often emotional, it’s important to consider any lender’s motives, or “What’s in it for them?” Banks are profit-driven. This means an important question to ask oneself is: “Where can I get information and support that is independent, comprehensive and easy to understand?”

In the current climate, teaching capabilities for a healthy scepticism and personal agency is the way forward.

We also need to change the public perception of what it means to be financially literate. The conventional focus on individual responsibility and wealth accumulation is flawed.

Arguably, this focus has contributed to the need for a Financial Services Royal Commission. Whether you are a bank, a mortgage broker or a consumer, the impact of your decisions on others must be carefully considered.

While education can contribute to preparing all Australians for informed financial participation, the task is challenging.

Authors: Carly Sawatzki, Assistant Professor, University of Canberra; Levon Ellen Blue, Lecturer, Queensland University of Technology

Homeless numbers will keep rising until governments change course on housing

From The Conversation.

Ten years ago the Australian government launched a National Partnership Agreement on Homelessness (NPAH). It injected A$800 million into homelessness services and A$300 million to build 600 new homes for people experiencing homelessness. It was later announced that another A$400 million would be available under the National Affordable Housing Agreement (NAHA) to build new housing and supported accommodation for the homeless. Total recurrent expenditure (at 2016-17 prices) on homelessness services has increased by 28.8%, from A$634.2 million in 2012-13 to A$817.4 million in 2016-17.

But despite this, the number of people experiencing homelessness and the rate of homelessness have both increased. Our research points to problems in the public housing system as one of the more important causes of these increases.

According to census figures released on Wednesday by the Australian Bureau of Statistics (ABS), the number of homeless people in Australia has risen by 14% to 116,427. The rate of homelessness has increased from 47.6 people per 10,000 of the population in 2011, to 49.8 per 10,000 now. (The ABS defines homelessness here.)

There is some good news: the numbers of Indigenous homeless and homeless children and youth (aged 12-18) have declined by 26%, 11% and 7% respectively since 2011. But on the downside, increases are particularly pronounced in New South Wales (where the homelessness rate rose by 27% and among people aged over 65 (by just over 30%) and overseas-born migrants (by 40%).

Why are we still going backwards?

Changes in Australian housing and welfare systems and wider social and economic developments appear to have more than offset any benefits from the NPAH and NAHA. Our research sheds some light on the role played by Australia’s housing system. Using the internationally recognised and unique Journeys Home longitudinal survey, we find that public housing is the most important factor in preventing homelessness among vulnerable people.

Public housing is particularly effective because it is affordable. It has also traditionally offered a long-term refuge for precariously housed people. This is because public housing leases provide the benefits of security of tenure commonly associated with home ownership.

It is perhaps no accident that NSW was one of the first states to introduce fixed-term tenancies in public housing. This eroded one of the major attributes of tenure, in a state that has seen relatively large increases in homelessness numbers.

The empirical evidence also suggests that community housing fails to provide the same protection for people at risk of homelessness. While community housing is affordable, the security of tenure is weaker, which may explain these findings.

Despite such evidence, the stock of public housing continued to decline between the 2011 and 2016 censuses. State government-initiated transfers of stock to the community housing sector accelerated this trend. In 2013 Australia had a public housing stock of 325,226 dwellings. This declined by 3.2% to 314,864 usable dwellings in 2017.

Where are the additional homeless coming from?

One of the more alarming changes is a sharp increase in the number of homeless people over 65. This partly reflects Australia’s ageing population. However, the increase is such that the elderly’s share of the total homelessness count has also risen.

Furthermore, our research suggests that this trend could become protracted. This is because the homeless elderly have much less chance of escaping into formal housing than younger people experiencing homelessness. We have little understanding of the reasons for this, but gaps in service provision to the aged could be partly responsible.

The other group who feature prominently among the homeless are overseas migrants. They now make up 46% of the homeless, despite representing just 28% of the Australian population. The number of homeless overseas-born migrants has soared by 40% since the 2011 Census, from 38,085 to 53,606 people.

It turns out that homeless overseas-born migrants are concentrated among those living in severely overcrowded dwellings – a little over half of those living in these conditions were born overseas. We know little about these homeless people. Discrimination could be a factor, though some characterise this group as students living in group households who should not be considered homeless. But this is speculation and further study is certainly required.

In view of the latest census results, it is clear to us that governments need to reassess their approach to what is turning into an intractable social problem.

We do not deny that situational factors, such as drug abuse, domestic violence and so forth, are important here. But equally, there is strong evidence that structural problems in our housing market are a significant cause of growth in the numbers of homeless people.

Until these problems are resolved, service provision and support will remain a band-aid masking deeper social and housing system issues.

Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University; Guy Johnson, Professor, Urban Housing and Homelessness, RMIT University; Juliet Watson, Lecturer, Urban Housing and Homelessness, RMIT University; Rosanna Scutella, Senior Research Fellow, Centre for Applied Social Research, RMIT University