Social Trends – Page 130 – Digital Finance Analytics (DFA) Blog

Becoming more urban

Australia is increasingly linked to a fast-growing global population. The populations of Sydney and Melbourne are both expected to exceed 8.5 million by 2061. What will Australia’s cities look like then? Will they still be among the world’s lowest-density cities?

Such sprawling cities result in economic (productivity), social (spatial disadvantage) and environmental weaknesses (including a very big ecological footprint). Can our cities transform themselves to become more competitive, sustainable, liveable, resilient and inclusive?

Australian governments at all levels aspire to these goals, but they require multiple transitions. The prospects of success depend on the transformative capacity of four groups of stakeholders: state government, local government, the property development industry, and community residents.

Our newly published research has found such capacity is lacking, so transformation on the scale required remains a major challenge. Our research included a survey in Sydney and Melbourne of suburban residents’ attitudes to medium-density living and neighbourhood change – essentially “sounding out” community capacity for change. This article explores some of the findings.

So why do community attitudes in the suburbs matter? The key change involves the form and fabric of Australian cities: from a low-density suburban city to a more compact form characteristic of Europe. This requires regenerative redevelopment: redirecting population and property investment inwards to brownfields and greyfields redevelopment, rather than outwards to greenfields development, and increasing the supply of medium-density housing – the “missing middle”.

Unlike greenfields and brownfields, however, greyfields are occupied. More intensive urban infill represents a challenge to residents of established suburbs to share their higher-amenity, low-density space. And elected local councillors tend to align with their residents’ resistance to “overdevelopment” and changes in “neighbourhood character”.

Are attitudes changing?

In September 2016, the Centre for Urban Transitions surveyed 2,000 Sydney and Melbourne households in established middle-ring suburbs.

Asked “What type of dwelling would you want to live in?”, nearly 60% of residents in both cities favoured a detached house and yard. This is down from 90% in the early 1990s. So, in the space of one generation, attitudes have shifted significantly toward embracing higher-density living.

However, living arrangements extend beyond the dwelling. They include the neighbourhood and wider suburban context. Our survey explored three distinctive living environments:

a separate dwelling with a garden in a suburb with poor public transport

a medium-density dwelling with no garden but close to public transport

a high-rise apartment in the CBD or surrounding areas.

Responses revealed that when location was combined with housing type, this significantly increased preference for medium-density housing when located in established suburbs with good public transport and access to jobs and services. In both Sydney and Melbourne, 46% favoured this. That was the same proportion as preferred a separate dwelling and garden in a car-dependent suburb. Just 8% opted for apartments.

The question is whether these shifts in preference are reflected in residents’ attitudes to higher-density housing in their own neighbourhoods.

The survey found 71% of respondents were “aware of neighbourhood change in their locality”. This figure was identical for renters and property owners.

Fewer than 10% of residents in both cities think such change is a good thing, but almost 40% understand it has to happen. Just over 10% are neutral. Preference for less or no change sits around 45%.

This suggests capacity to accept change is growing, but it is grudging and not strongly endorsed.

The survey’s final stage probed the extent to which property owners contemplating a move were aware of, or open to, options of selling as a consortium of neighbours. While not common, examples are being reported with value uplifts resulting from lot consolidation ranging from 10% to 100%.

One-quarter of Sydney respondents were open to consolidating property for sale with neighbours. This number was even higher (39%) for investment properties.

What needs to be done?

Consolidated lot sales are not part of the business model of most real estate agencies, local government, or property developers.

It’s an area where the property development industry lacks capacity and is still failing to respond to the medium-density urban infill challenge. And state governments are reluctant to extend mid-rise medium-density zones in the big cities beyond designated activity centres and transport corridors.

Supply of well-designed medium-density housing needs to be greatly increased in the well-located, established, low-density, middle-ring suburbs. And it needs to happen at a precinct scale of redevelopment beyond that of knock-down-rebuild. This would enable more innovative, sustainable and aesthetically attractive development.

Infill targets for new housing in Australia’s largest cities range from 65% (Brisbane) to 85% (Adelaide), with Melbourne and Sydney in between. But these targets are not being achieved (not even Perth’s 47%). Greenfield development is still the main demographic absorber.

The Victorian government’s latest metro strategy introduced a new policy direction to “provide support and guidance for greyfield areas to deliver more housing choice and diversity”. That doesn’t alter many residents of these areas remaining resistant to change.

State and local governments need to introduce new statutory planning instruments and guidelines to enable greyfield precinct redevelopment. These are the focus of research in three Commonwealth Co-operative Research Centres (see here, here and here).

In an urban planning system that remains strongly top-down, local government serves as the main interface with local communities and property developers due to its role in planning approvals. Often this is reflected in local government’s gaming of the state government’s residential zoning schemes to ensure housing is “locked up” in minimal change zones. This effectively indicates that more intensive infill housing should happen “somewhere else” (the NIMBY syndrome).

David Chandler, a leading figure in Australia’s building and construction industry, sums up the challenges:

The capabilities needed to design and build small-scaled medium-density housing projects of three to ten dwellings up to three storeys atop below-grade parking have yet to be developed. If medium-density dwellings of the type described here are to make up a third of the housing landscape, a new marketing platform and delivery model will be required.

If governments are seriously minded to harvest the potential of greyfield sites and the urban middle, they will not only need to bring the community along in support of these more modest densification initiatives, they will need to be proactive in making sure the housing industry has the capabilities to deliver them.

Author: Peter Newton, Research Professor in Sustainable Urbanism, Swinburne University of Technology

New Small Amount Credit Contract and Consumer Lease Reforms

The Treasury has released exposure drafts for further reform for the Pay Day (SACC) and consumer lease sector (FINALLY)!

The exposure draft of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017 (the Bill) introduces a range of amendments to the Credit Act to enhance the consumer protection framework for SACCs and consumer leases. The amendments contained in the Bill are to be complemented by amendments to the Credit Regulations, which will be consulted on separately at a later date.

The new SACC and consumer leasing provisions will promote financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments. The Bill implements the Government’s response to the Review of the Small Amount Credit Contract Laws (the Review) that was conducted by an independent panel chaired by Ms Danielle Press. The Review was publicly released in March 2016. The Government’s response to the Review was released by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, on 28 November 2016.

The Draft Bill implements the Government’s response to the Review. This includes:

imposing a cap on the total payments that can be made under a consumer lease;

requiring small amount credit contracts (SACCs) to have equal repayments and equal payment intervals;

removing the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;

preventing lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;

introducing broad anti-avoidance protections to prevent SACC loan and consumer lease providers from circumventing the rules and protections contained in the Credit Act and the Code; and

strengthening penalties to increase incentives for SACC providers and lessors to comply with the law.

Deadline for submissions is 3rd November 2017.

Financial literacy is a public policy problem

From The Conversation.

It’s pretty common nowadays to see the likes of the Reserve Bank of Australia or the Australian Bureau of Statistics issue warnings about the size of Australian household debt. The reason is that the consequences of poor financial decisions often reach far wider than an individual or family.

The global financial crisis showed us how rapidly financial contagion can spread – one person’s debt is another person’s asset, so when the debt is written off so is the asset. However, there has been little improvement in financial literacy in the wake of the financial crisis, the lack of which was one of the underlying causes.

For instance, surveys just prior to the global financial crisis revealed that many Americans taking out home loans either did not read their loan documents or did not understand them. This meant that, in many cases, they did not understand that they were signing teaser loans where the interest rate starts out very low but increases after a few years.

This lack of financial literacy combined with predatory lending caused the subprime loan crisis, the precursor to the full blown financial crisis.

What is financial literacy?

Financial literacy refers to the ability to make sound financial decisions based on knowledge, skills and attitudes, taking into account personal circumstances.

Low financial literacy is particularly concerning in home loans. In an alarming parallel to the United States before the financial crisis, roughly one third of interest-only mortgagees do not understand that their repayments make no inroads into their debt, and that their interest rates will jump considerably after the interest-only period of the loan has expired.

But it isn’t just that low financial literacy increases risk. It is also important for achieving a productive economy. Economic efficiency requires borrowers to not only have good information but to understand it. This allows them to weigh up the costs of borrowing with the benefits that they expect to receive.

If the information is distorted, either deliberately by lenders or through the misunderstanding of borrowers, they will miscalculate the benefits and capital in the economy will be misallocated. Economists call this market failure, a lot of which occurred in the housing market in the United States before the global financial crisis.

Financial literacy isn’t improving

Evidence suggests that financial literacy has not improved since the global financial crisis, and may have gotten worse.

A survey of adult financial literacy in Australia found that in 2014 the number of people who could actually recognise an investment was “too good to be true” – for example a financial asset promising to pay a return much higher than the going return on similar assets and for no greater risk – had actually declined, to 50% from 53% just three years earlier.

The survey also found that those who recognised that good investments (something with relatively low risk) may fluctuate in value fell to 67% from 74%.

But financial literacy education must also go hand in hand with general literacy and numeracy. The Productivity Commission found that 14% of the adult population had relatively low literacy skills in 2011-12. This is defined as being able to, at best, locate basic information from simple texts but being unable to evaluate truth claims or arguments.

The report also found 22% of the population had low numeracy skills, meaning that they can count, add and subtract and do other basic arithmetic. But they cannot understand statistical ideas, mathematical formula or analyse data.

In other words, a significant proportion of the Australian adult population are not equipped to understand the effect of an interest rate increase on their loan repayments, or understand a loan document that includes an interest rate increase after an initial period.

Fixing the problem of financial illiteracy cannot wait until people are in the throes of negotiating home loans and credit cards. And it should definitely take place before Australians resort to pay day loans.

This was the aim of the Australian Government’s National Financial Literacy Strategy, that ends this year. The strategy proposes a number of educational initiatives including embedding financial literacy in the school curriculum, a formal teacher training program, and development of educational resources and tools.

The strategy draws on similar steps that have been adopted by other countries and recommended by the Organisation for Economic Cooperation and Development (OECD).

The problem is that the curriculum is a crowded space. Financial literacy must compete with the latest fashions in school education as well as traditional curriculum content.

Fighting for curriculum space for financial literacy is a political exercise which governments must play hard. For example, by attaching serious funding to the achievement of financial literacy indicators at the school level, and training and certification for teachers. Increasing financial literacy isn’t just in the best interest of individuals, we all benefit from a more literate population.

Author: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

Pulling In Two Directions – The Property Imperative Weekly 21 Oct 2017

The latest economic and finance data appears to be pulling in two directions, so we discuss the trends.

Welcome to the Property Imperative Weekly to 21^st October 2017. Watch the video, or read the transcript!

In this week’s review of the latest finance and property news, we start with data from the Australian Institute of Health and Welfare in their newly released report Australian Welfare 2017. This is a distillation of data from various public sources, rather than offering new research.

In the housing chapter, they reinforce the well-known fact that home ownership is falling in Australia, while rates have been rising in a number of other comparable countries. Contributing to this trend overseas, at least in part, they say, are changes in the characteristics of households (including population ageing, household structure, and income and education) and policy influences, such as mortgage market innovations (including the relaxation of deposit constraints, increasing home ownership rates among lower income households, and tax reliefs on mortgage debt financing). In Australia, the steepest decline in home ownership rates across the 25 years to 2013–14 has been for people aged 25–34. This is typically the age at which first transitions into home ownership are made. But, fewer and fewer people in this age group are entering home ownership, with a 21 percentage point decline to just 39% in 2013–14 (compared with 60% in 1988–89). Home ownership rates for people aged 35–44 also fell, but not so much (12 percentage points).

Also, the proportion of home owners without a mortgage has continued to fall, while the proportion of renters has increased. Now more home owners have a mortgage, compared with those who own their property outright. Another fact is the startling gap between the rise in home prices, relative to disposable incomes, creating a barrier to home ownership for many. This gap has been fuelled by rapid house price growth (up 250% since the 1990’s), after the financial system was deregulated, with the total value of Australian housing estimated to be more than $6.5 trillion. Of course, the impact of higher house prices has been partially offset by lower mortgage interest rates, increased credit availability and changes in financial agency practices. These favourable lending conditions and low interest rates have encouraged buyers into the market, despite the growth in house prices themselves. This could all got wrong should mortgage rates rise.

The final piece of data shows that households are getting a mortgage later in life, and holding it longer, often well into retirement. In 2013, 71% of people born between 1957 and 1966 (mainly baby boomers), were financing a mortgage when aged 45–54. This trend is of particular concern as these households’ approach retirement without their home and asset base being paid off. For people looking to retire in the next 10 years, 45% of 55–64-year-olds in 2013 were still servicing a mortgage, compared with just 26% in 1982.

As the recent Citi report emphasises, and using our Core Market Data, the large level of debt outstanding by borrowers aged in their 50s and 60s means many investors will need to sell property to discharge their debts, especially those holding interest only loans. Given that the average age of wealthy seniors is 63 and the average IO debt is $236,400, Citi expressed concern that this cohort will not have enough time to repay the principal “without a significant hit to household cash flows”.

We still think the mortgage underwriting standards are too lose in Australia, as regulators try to balance slowing the market, but not killing the goose which is laying the golden economic egg. So we found the Canadian regulators intervention in their mortgage market this week significant. There the index of house prices to disposable income has increased 25%, from 2000, raising the prospect that real estate overvaluation is driving up overall household debt and overextending borrowers. So they tightened serviceability requirements and imposed loan to value limits on lenders.

Good news on housing affordability this week from the HIA, at least for some. Their Housing Affordability index for Australia improved by 0.5 per cent in the September 2017 quarter but still remains 4.4 per cent below the level recorded a year ago. It also showed that while some owner occupied borrowers had seen their mortgage rates drop, many property investors, has seen their rates rise. Sydney remains the least affordable market they say.

Our friends at Mozo wrote a blog post for us on the impact of the APRA changes to mortgage rates, which underscored the movements by type of loan.

More good news from the ABS. The monthly trend unemployment rate decreased by 0.2 per cent over the past year to 5.5 per cent in September, the lowest rate seen since March 2013. The participation rate remained steady at 65.2 per cent, within that male participation rate was 70.8 per cent, while the female participation rate reached a record high of 59.9 per cent. Over the past year, the states with the strongest annual growth in employment were Queensland (4.1 per cent), Tasmania (3.9 per cent), Victoria (3.1 per cent) and Western Australia (2.9 per cent). However, the underemployment trend rate still does not look that flash, especially in TAS, SA and WA, and we have a very high unemployment rate among younger workers as well as a rise in more casual, part-time work. All of this translates to lower wages.

The latest data from S&P showed a small decline in mortgage defaults in August. S&P said arrears decreased in all states and territories except the Australian Capital Territory (ACT) over the month, with noticeable improvements in Australia’s mining states and territories. The Northern Territory recorded the largest improvement, with arrears declining to 1.63% from 1.98% a month earlier. In Western Australia, arrears fell to 2.22% in August from a historic high of 2.38% in July. They still warned of potential risks in the system, especially from higher LVR IO loans written before 2015. And of course, this is looking a selection of securitised loans which may not be typical, and in any case, in most places home price rises mean struggling borrowers should have the capacity to sell and repay the bank. That would change if prices started to fall seriously.

Talking of risks, there were interesting comments from ASIC this week, suggesting that whilst brokers may be having appropriate conversations with their interest only mortgage customers, there was evidence of poor record keeping. This follows the regulator’s announcement they would commence a loan file review, to ensure that consumers are not paying for more expensive products that are unsuitable. Without good documentation brokers and lenders leave themselves open to the charge of making unsuitable loans, which can have significant consequences.

Another indicator of potential risks in the system is the rise in the number of households seeking short term loans from pay day lenders and other providers. Our surveys show that more than 1.4 million of the 9.5 million households in Australia are looking for finance (and it is rising fast as cash flows are stressed). Not all will successfully obtain a loan. We think more than $1 billion in loans are out there, and our research shows that such short term loans really do not solve household financial issues. However, when people are desperate, they will tend to grasp at any straw in the wind, regardless of cost or consequences. We also find these households are within certain household segments, who tend to be less affluent, and less well educated.

The RBA minutes, release this week, did not tell us much more, but contained this morsel. “Members noted that housing loans as a share of banks’ domestic credit had increased markedly over the preceding two decades. APRA intended to publish a discussion paper later in 2017 addressing the concentration of banks’ exposures to housing. Members also noted that APRA had intensified its focus on Australian banks strengthening their risk culture”. We can barely contain our excitement at the prospect! A discussion paper later in the year!

CoreLogic’s latest auction clearance results showed there is still demand for property, with a preliminary clearance rate of 70.6 per cent, and increase from last week when the final clearance rate slipped to 64.4 per cent, the lowest clearance rate since January 2016.

Finally, we released our latest flagship report – The Property Imperative, Volume 9. This is available free on request from our web site and is a distillation of our research into the finance and property market, using data from our household surveys and other public data. Whilst we provide these weekly updates via our blog, twice a year we publish a full report. Volume 9 offers, in one place, a unique summary of the finance and property markets, from a household perspective, over more than 70 pages.

What really struck us as we wrote the report was the amount of change in the property and finance sector, with significant regulatory tightening, changes in mortgage pricing and a rotation in mortgage lending. But the underlying facts of high prices, mortgage stress and rising risks in the system appear unchanged. The number of reports highlighting the risks have risen substantially.

Standing back, sure the data is pulling to two directions, with employment higher, auction clearance rates firm and affordability for some manageable. But the bigger picture contains a number of risks, stemming from the divergence of incomes and home prices, the lose lending standards over the past few years, and the risks from the more recent tightening of the rules, at a time when interest rates are more likely to rise than fall. Without a significant rise in incomes in real terms – and we cannot see where this will come from – the risks to growth and financial stability are still not fully understood.

And that’s the Property Imperative to 21^st October 2017. Follow this link to request the Volume 9 Property Imperative Report.

More On The Reduction In Home Ownership In Five Charts

The newly released Australian Institute of Health and Welfare report “Australia’s Welfare 2017“, is a distillation of data from various public sources, rather than offering new research.

However, the section on housing, reinforces the trends we have been highlighting in our recent posts.

Home ownership is still the most common tenure type in Australia, as it is in many other OECD countries. However, home ownership rates have tended to increase in many OECD countries over recent decades, unlike the Australian experience. Contributing to this trend overseas, at least in part, are changes in the characteristics of households (including population ageing, household structure, and income and education) and policy influences, such as mortgage market innovations (including the relaxation of deposit constraints, increasing home ownership rates among lower income households, and tax reliefs on mortgage debt financing).

Over the past 20 years, there has also been a major shift in home ownership trends across Australia. Nationally, the proportion of home owners without a mortgage has continued to fall, while the proportion of renters has increased.

The gap between household income and dwelling prices in Australia has widened over the past 3 decades, creating a barrier to home ownership for many. This gap has been fuelled by rapid house price growth, after the financial system was deregulated, with the total value of Australian housing estimated to be $6.5 trillion.

House prices in Australia have increased substantially in recent decades. The OECD noted in its biennial survey that they have reached unprecedented highs in Australia, increasing by 250% in real terms since the 1990s. The impact of higher house prices has been partially offset by lower mortgage interest rates, increased credit availability and changes in financial agency practices. These favourable lending conditions and low interest rates have encouraged buyers into the market, despite the growth in house prices themselves.

Research shows that Australia is experiencing generational change when it comes to home ownership, with younger households being principally affected by factors such as economic constraints, lifestyle choices and work–home preferences.

The steepest decline in home ownership rates across the 25 years to 2013–14 has been for people aged 25–34. This is typically the age at which first transitions into home ownership are made. But, fewer and fewer people in this age group are entering home ownership, with a 21 percentage point decline to just 39% in 2013–14 (compared with 60% in 1988–89). Home ownership rates for people aged 35–44 also fell, but not so much (12 percentage points). People aged over 65 (the age of retirement) were the only age group to increase their rate of home ownership and, even then, the increase was marginal.

Census data from 2016 became available just prior to the release of this publication and confirm this trend of diminishing home ownership rates among younger Australians. From 2006 to 2016 Census data reveal the greatest declines in home ownership have been in the 25–34 and 35–44 year age groups (from 51% down to 45% and from 68% to 62%, respectively).

In 2013, 71% of people born between 1957 and 1966 (mainly baby boomers), were financing a mortgage when aged 45–54. This trend is of particular concern as these households approach retirement without their home and asset base being paid off. For people looking to retire in the next 10 years, 45% of 55–64-year-olds in 2013 were still servicing a mortgage, compared with just 26% in 1982.

Debt agreements and how to avoid unnecessary debt traps

From The Conversation.

Debt agreements are the fastest growing form of personal insolvency in Australia. They were designed to offer debtors a low-cost way to make arrangements with their creditors, while avoiding bankruptcy and some of its more serious consequences.

When introduced, law reformers intended that debt agreements should be administered by volunteers rather than by commercial administrators who charge fees. However, in practice, debtors often pay substantial fees to debt agreement administrators.

In fact, many debtors pay more than 100% of their original debt, because of the high cost of administration fees. But there are cheaper options available for managing debt.

Debt agreements

Debt agreements are binding contracts made between debtors and their creditors in accordance with personal insolvency law. They are aimed at providing debtors in financial stress with the option of compromising with creditors. Not all debtors can enter into a debt agreement – there are income and debt limits.

In many cases, debtors pay their creditors an agreed reduced amount by instalments over a period of time. A debt agreement administrator assists in the negotiation process and distributes the payments to creditors.

Debt agreements have fewer adverse consequences than bankruptcy. One key advantage is that debtors may be allowed to keep their home.

Nonetheless, the adverse consequences of debt agreements include having a record on the National Personal Insolvency Index, and difficulties obtaining credit. Debtors’ ability to maintain a licence in various professions may be affected and the debt agreement must be disclosed in certain situations.

A growing problem in Australia

In 2016 there were 12,150 new debt agreements, comprising 41.5% of all personal insolvencies in Australia. While the number of debt agreements has increased steadily each year, bankruptcies have decreased since 2010.

Our research examines three sources of data to gauge the impact of debt agreements. These sources include statistics from the Australian Financial Security Authority (AFSA), an online survey of 400 debtors, and interviews with industry stakeholders.

Most debtors pay more under debt agreements than the amount they originally owed. This is due to the fees charged by AFSA and, in particular, for-profit debt agreement administrators.

In 2016, close to 23% of debtors’ payments went towards debt agreement administrators’ fees. The total amount of fees paid by debtors is higher when Australian Financial Security Agency fees and set-up fees paid to debt agreement administrators are included.

Many debt agreements are unsuitable

Debt agreements are useful for some people, such as those who have a home to protect from seizure in bankruptcy. However, consumer advocates find many instances of debt agreements unsuited to the needs of debtors. High administration fees are detrimental particularly for low income debtors.

Some debtors enter into debt agreements which they clearly cannot afford, aggravating their financial stress. If they are unable to make the payments required under a debt agreement and it is terminated, the fees cannot be recovered but the debts to creditors remain, leaving debtors in a worse position.

Debtors who rely primarily on Centrelink benefits are among the clearest examples of people unsuited to debt agreements. Centrelink benefits are meant to provide a basic standard of living, and diverting a portion of income towards debt agreements is likely to cause significant hardship.

People whose incomes comprise a disability or aged pension may in many cases be better off declaring bankruptcy, or seeking other forms of debt relief.

Better options available

There are several fee-free options for managing debt which do not involve the adverse consequences of debt agreements.

Financial hardship schemes commonly allow payment by instalments, or short term extensions of time, for debts owed to utilities or credit providers. Free independent dispute resolution offered by the Financial Ombudsman Service and the Credit and Investments Ombudsman is available to people who have disputes with financial service providers.

People often enter into debt agreements without seeking independent advice or accessing other options for managing debt. In 2016, 92% of debt agreement debtors relied on debt administrators as their primary source of information. Marketing often emphasises the advantages of debt agreements over bankruptcy.

Debtors often lack adequate knowledge of cheaper, better options for managing debt and of the adverse consequences of debt agreements. When the debt agreement system was established, it was not expected that private, profit-making debt administrators would assume a prominent role.

Law reformers noted in the 1996 Bankruptcy Legislation Amendment Bill that ‘if fees were charged, debt agreements would in many cases not be viable either for the debtor, or for his or her creditors’. They further noted that this would defeat the purpose for which debt agreements were introduced.

Recommendations

Reforms to the debt agreement system are currently being considered, but in order to be effective, these reforms should provide better safeguards for debtors. These should include stricter eligibility requirements for debtors entering into debt agreements such as a minimum income or ownership of assets which are protected from seizure in bankruptcy.

We need a more rigorous, legally binding assessment of debtors’ suitability on the part of debt agreement administrators; the provision of clearer information to debtors; and limits on administrators’ fees. Debtors should have access to free dispute resolution services when problems with debt agreement administrators arise.

Such reforms would reduce the risk of debtors being left worse off, financially, as a result of debt agreements that are unsuited to their circumstances.

Authors: Vivien Chen, Lecturer, Monash Business School, Monash University; Ian Ramsay, Professor, Melbourne Law School, University of Melbourne; Lucinda O’Brien, Research Fellow, University of Melbourne

Senior property investors can’t ‘sit on their hands’

From Nestegg.

The Citi report argued that the growing number of multi-property investors and falling yields were a worrying sign for senior investors who may have little time left in their working life to repay their debts. The report was compiled using Citi figures and data from Digital Finance Analytics (DFA).

“Tighter application of responsible lending laws mean that investors must now have a clear debt repayment plan, although for many prevailing interest-only (IO) borrowers this does not exist,” said the Citi analysts lead by Craig Williams and Brendan Sproules.

“The large level of debt outstanding by borrowers aged in their 50s and 60s means many investors will need to sell property to discharge their debts.”

They warned that as 28 per cent of wealthy senior investors were not asked about a capital repayment plan upon loan application and 32 per cent of them do not have a capital repayment plan, “as these cohorts begin to hit retirement age, their investment properties will need to be sold to repay the debt”.

According to Citi, mortgage debt is “one of the most important economic and social issues of our time”, due to the risk that highly indebted households pose to the economy.

Citi and DFA’s figures reported that ~35 per cent of mortgages are held by investors, ~40 per cent of mortgages are interest-only and the percentage of investors holding IO loans has grown to ~70 per cent.

Considering this, Citi said most wealthy seniors (53 per cent) preferred the repayment structure because it helped them get a bigger loan. For most stressed seniors (72 per cent), IO loans appealed because of the ability to make smaller repayments.

Multi-property investors growing

Additionally, the proportion of wealth seniors who own multiple investment properties has grown in the years since 2011.

In 2011, 22 per cent of wealthy senior investors own two or three properties, 72 per cent owned one, and just 1 per cent owned six or seven.

Conversely, in 2017, 18 per cent of this group owned six or seven properties, 7 per cent owned two or three, and 73 per cent owned one investment property.

Across all cohorts, the percentage of multi-property investors has grown and this has been “coinciding with the considerable rise in IO mortgages”.

At the same time, however, the gross rental yield in Sydney has fallen from 4.3 per cent in May 2013 to 2.80 per cent in May 2017 and the average standard variable rate for IO loans at the major banks has grown from 6.17 per cent to 6.26 per cent.

Marking these cash flow and investment fundamentals as “deteriorated”, Citi said: “Looking forward, investors are losing the ability to ride out the cycle.

“The most important question for the future direction of house prices is – What will these multi-investment property borrowers do when faced with increasing cash flow losses and flat or declining property prices?”

Given that the average age of wealthy seniors is 63 and the average IO debt is $236,400, according to their figures, Citi expressed concern that this cohort will not have enough time to repay the principal “without a significant hit to household cash flows”.

Further, this group could be additionally affected by the needs of the adult children they might have. Citi pointed to research showing that the ‘Bank of Mum and Dad’ can now be considered Australia’s fifth largest home loan lender.

The RBA backs them up

The Citi analysts are not alone in their concerns. The Reserve Bank of Australia recently flagged the “potential risk” in the growing number of property investors over the age of 60 with mortgage debt. The “significant increase” in the share of geared investors was considered particularly alarming.

The RBA conceded, however: “While this seemingly could increase risks, there are some mitigating factors.

“Although this age group is more indebted, the average retirement age has increased over time, so older investors are more likely to be working, increasing their capacity to withstand shortfalls in rental income or higher interest rates.”

Housing Affordability Eases for Some

The HIA says that despite the poor levels of housing affordability there are signs of improvement for home-buyers. Investors are not so lucky.

“The HIA Housing Affordability index for Australia improved by 0.5 per cent in the September 2017 quarter but still remains 4.4 per cent below the level recorded a year ago.

“Housing Affordability has been deteriorating in Australia for decades, particularly in capital cities, as demand for new housing greatly exceeded the supply.

“Recent interventions by the government, through APRA, to curb growth in investor activity may have improved affordability for owner-occupiers.

“As a consequence of this intervention it appears that the market has responded with higher mortgage rates for investors and eased rates for owner-occupiers.

“This has had the unintended consequence of improving housing affordability for owner-occupiers.

“Irrespective of intent, this is positive news for owner-occupier buyers in the affordability equation.

The HIA Affordability Index has been produced for more than 17 years using a range of recent data including wages, house prices and borrowing costs to provide an indication of the affordability of housing.

A higher index result signifies a more favourable affordability outcome.

“The Report’s regional analysis demonstrates the substantial differences in affordability conditions around the country,” added Mr Reardon.

“Sydney retains the mantle as the nation’s least affordable housing market despite the affordability index showing a modest improvement in affordability during the quarter. It still takes twice the average Sydney income to service a mortgage on a median priced home in Sydney while avoiding mortgage stress.

Brisbane, Adelaide, Perth and Darwin all recorded modest improvements in affordability in the September quarter. Melbourne, Hobart and Canberra each recorded a modest deterioration in affordability during the quarter.

ASIC committed to improving the financial capabilities of Australians

ASIC has released the National Financial Literacy Strategy for consultation.

The National Financial Literacy Strategy is a framework to guide policies, program and activities that aim to strengthen Australians’ financial literacy and capability.

The five priorities in the National Strategy are:

Educate the next generation, particularly through the formal education system;

Increase the use of free, impartial information, tools and resources;

Provide quality targeted guidance and support;

Strengthen co-ordination and effective partnerships;

Improve research, measurement and evaluation.

A key feature of the National Strategy is collaboration across different sectors, including government agencies, community organisations, the education sector and financial services firms. ASIC is leading a public consultation process to shape the National Strategy from 2018 and is seeking feedback on a number of issues including:

updating the language of the National Strategy from ‘financial literacy’ to ‘financial capability’ to reflect a growing focus on behaviours that support better financial outcomes;

expanding the priority audiences identified under the National Strategy, for example to include people with disability (and their families or carers) who are navigating choices and options under the National Disability Insurance Scheme, or people in newly arrived communities who are attempting to understand and access financial services;

broadening stakeholder reach and engagement with the National Strategy, including through the use of new technologies and;

improving research, measurement and evaluation.

‘Building financial capabilities requires a long-term commitment to lay the foundations for behavioural change over time. We all confront significant financial decisions at key points in our lives, such as leaving school, having children, or reaching retirement. To help people develop healthy financial habits and make better decisions about money we’re seeking feedback on the National Strategy’, said ASIC Deputy Chair Peter Kell.

‘I encourage people to share their views with us through this process. Your input will help us shape a National Strategy that supports positive outcomes for individuals and communities now and into the future’, Mr Kell said.

ASIC invites feedback on the consultation paper from all interested stakeholders. Submissions are due by Friday 17 November 2017.