New data suggests rising property prices are a threat to the retirement system, as many Australians use their superannuation balances to pay off their mortgages before they retire.
The latest investment update from NAB highlights that many Australians are concerned about ending their working lives in debt. It reported an increase in the number of respondents who feared a lack of retirement savings. It also found that paying down debt was the highest priority for the next 12 months.Likewise, the 2017 Household, Income and Labour Dynamics in Australia (HILDA) report – widely reported in recent days for its concerning home ownership numbers – also showed that both men and women were spending considerable chunks of their super to pay debts.
It found that men paying down debts spent on average $240,000 to do so in 2015, or 58 per cent of their super, while men helping family members spent $108,500, around 84 per cent of super. Women paying down debt spent $120,500, or 70 per cent of super and those helping family spent $67,000, or 48 per cent of super.
Some men and women also spent up big on things for themselves, as the following table shows. However, men spent far more than women here, indicating the gender imbalance in superannuation accounts.
Ian Yates, chief executive of the Council on the Ageing (COTA), said rising property prices could force more people to pay down more mortgage debt on retirement in the future.
“People are paying off debts of not inconsequential amounts on retirement. The numbers doing it and the amounts used surprised me,” he told The New Daily.
“It’s a concerning trend and if people plan to use their super to pay off a mortgage then they are not using it to provide retirement income.”
He said this could result in the government being faced with a dilemma.
“Given the family home is untaxed, the increased use of concessionally-taxed superannuation to pay off homes in retirement would not be what the government intended,” he said.
That could mean governments would be forced to review both superannuation and housing policy as “both superannuation and the age pension are predicated on high levels of home ownership”.
The HILDA report also showed that both men and women are retiring later with the average age of women retirees reaching 63.8 years in 2015 and men 66.1 years.
Mr Yates said the rise in retirement ages, while partly due to desire to work longer, also had a negative financial driver.
“A lot of people got frightened by the market crash accompanying the financial crisis and decided they need a bigger financial buffer before they retire.”
For 16 years the HILDA survey, run by the University of Melbourne, has polled the same 17,000 Australians.
The report’s author, Professor Roger Wilkins, pointed to the falling home ownership levels among younger people. In 2014, approximately 25 per cent of men and women aged 18 to 39 were home owners, down from nearly 36 per cent in 2002.
Younger people with housing debt saw average mortgages up from $169,000 to $336,500 between 2002 and 2014.
That reality plus rising prices meaning people have to save longer before buying “could result in the superannuation system being thwarted in its aim to provide retirement income by rises in outstanding mortgage debt”, Professor Wilkins told The New Daily.
Category: Social Trends
Egalitarian or Edwardian? The rising wealth inequality in Australia
Recent commentary on levels of inequality exposes the myth that Australia is an egalitarian society in which the privileges of birth have little currency.
Focusing on inequality in the distribution of incomes ignores an equally important dimension of inequality: wealth. Wealth is much more unequally distributed than income. Therefore, ignoring wealth inequality skews perceptions of social inequality.
Perceptions of the levels of income and wealth inequality are derived from our day-to-day experiences. This means that not mixing with people from the other end of the wealth distribution can colour our perceptions of inequality.
The lack of official data on the wealth holdings of Australians hampers research into trends in wealth inequality. Between 1915 and 2003-04, there is almost no official wealth data to examine.
In 2003-04, the wealthiest 20% of Australian households held 58.6% of total household wealth, and the poorest 20% of households held just 1.4% of total household wealth. In 2013-14, the wealthiest 20% of households held 61% of total household wealth, and the poorest 20% of households held just 1% of total household wealth.
These figures indicate that wealth inequality increased over the decade to 2013-14.
The table below details trends over time in various measures of wealth inequality. The P90 to P10 ratio compares the wealth of households at the 90th percentile with that of households at the tenth percentile. A larger ratio indicates greater levels of inequality.
In 2003-04, households at the 90th percentile held 45 times as much wealth as households at the tenth percentile. In 2013-14, households at the 90th percentile of the distribution held 52 times as much wealth as households at the tenth percentile. This indicates that wealth inequality increased in that decade.
Using the mean and median household wealth figures, it is possible to calculate the ratio of median to mean wealth.
The closer this ratio is to one, the lower the level of inequality. In 2003-04, the ratio was 0.63. In 2013-14, it was 0.57. This also indicates that wealth inequality increased.
The distribution of household wealth also varies between Australia’s state and territories, and by location within states and territories.
Households in the ACT recorded the highest mean household wealth (A$890,100). Households in Tasmania recorded the lowest mean household wealth ($595,600).
When these figures are disaggregated by location into capital city households and households located in the rest of the state, the largest wealth gap occurs in New South Wales. The mean wealth of households in Sydney was $971,700, whereas the mean wealth of households in the rest of NSW was $534,700.
The median-to-mean-wealth ratios show wealth was most unequally distributed in Brisbane and Perth.
Given a relatively large proportion of household wealth is held in the form of property assets, the recently released Household, Income and Labour Dynamics in Australia Survey report identifies property as the key driver of increasing wealth inequality.
The percentage of 18-to-39-year-olds with property declined by 10.5 percentage points between 2002 and 2014. And the level of debt of those with a mortgage doubled in real terms.
So, fewer young adults have mortgages now compared to a decade ago, and those who do have mortgages have higher levels of debt.
Two other sources of publicly available data on wealth are the lists of the super-wealthy published annually by the Business Review Weekly in Australia and Forbes in the US.
Figures published in the Business Review Weekly show that, after adjusting for inflation, in 1984 the wealthiest 20 Australians held $8.25 billion in assets. In 2017, the wealthiest 20 Australians held $104 billion.
Forbes’ lists of billionaires (in $US) show that the number of billionaires living in Australia increased from two to 26 between 1987 and 2014.
Having an increasing number of billionaires would not be an issue if all Australians’ wealth was increasing at a similar rate. However, if the gap between the wealth of the billionaires and that of the average residents increases dramatically, there is likely to be discontent.
Drawing on figures published in the Credit Suisse Wealth Report, it is possible to compare the wealth of the billionaires with that of average Australians.
In 2014, the wealth of the 26 Australian billionaires was equivalent to 214,914 adults with average wealth.
Recent turmoil in the UK and the US may be an indicator that the “peasants are revolting” and are not willing to return to the 19th century, when the very rich lorded over the masses.
Australia has yet to experience mass demonstrations and voter backlashes. But events overseas should be ringing alarm bells among our politicians in Canberra.
Author: Jennifer Chesters , Research Fellow, Youth Research Centre, University of Melbourne
Affordable housing shortfall leaves 1.3m households in need and rising
A new report by the Australian Housing and Urban Research Institute (AHURI) reveals, for the first time, the extent of housing need in Australia. An estimated 1.3 million households are in a state of housing need, whether unable to access market housing or in a position of rental stress. This figure is predicted to rise to 1.7 million by 2025.
To put it in perspective, 1.3 million is around 14% of Australian households. This national total includes 373,000 households in New South Wales, where the number is expected to increase by 80% to more than 670,000 by 2025 under the baseline economic assumptions of the modelling.
The first graph below shows the average annual level of housing need to 2025. The second, showing the percentages of households, permits a direct comparison by state. NSW and Queensland are in the worst position. The ACT is calculated to have the lowest proportional level of need.
What does this mean for households in need?
Housing need is defined as:
… the aggregate of households unable to access market-provided housing or requiring some form of housing assistance in the private rental market to avoid a position of rental stress.
This includes potential households that are unable to form because their income is too low to afford to rent in the private rental market. These households would traditionally rely on public housing and community housing to meet their needs. However, more and more are being forced into the private rental market, paying housing costs they are unable to afford without making significant sacrifices.
To 2025, on average 190,000 potential households in NSW will be unable to access market housing in a given year. The graph below is the most revealing as it illustrates the gap between affordable housing demand and supply.
The lack of social housing and subsidised rental housing prevents such households forming under affordable conditions. Many will manage to form but will have to spend well over 30% of their income on housing costs to do so, putting them in a position of financial stress.
The results also reveal the increasing pressure the affordable housing shortfall places on the housing assistance budget, notably Commonwealth Rent Assistance.
The absence of a significant new supply of affordable housing – there has been no large-scale program since the National Rental Affordability Scheme (NRAS) began in 2008 – has left state governments trying to find ways to plug the affordability gap.
Responses have been largely on the demand side, such as first home buyer concessions recently announced in NSW. But such incentives are no use for low-income households. To help them, intervention needs to be on the supply side.
How does Australia compare?
The AHURI research built on ideas emerging from research into housing need in the UK. It revealed interesting differences between the two countries.
UK government policy prior to 2010 emphasised the role of the planning system in helping to substantially increase affordable housing supply. This reflected evidence from England and Scotland that found a link between low levels of new housing supply and higher and rising house prices.
In this project, we found plenty of evidence of deteriorating housing affordability in Australia. But we did not find a particularly strong relationship between housing supply and price growth. This might reflect how other drivers of deteriorating housing affordability are more important in Australia – such as tax incentives for investors.
These findings suggest we need to look more closely at how new supply and investment demand interact, and in what circumstances boosting new supply is likely to improve affordability.
From our analysis of individuals’ labour market circumstances and incomes, it was also clear that the Australian workforce has not escaped the erosion of secure, full-time employment opportunities seen in other countries.
The combination of widespread insecure, part-time employment opportunities, high housing costs and low supply of rented social housing means the housing of many working Australians is extremely precarious.
How was the research done?
The research modelled housing need at the state and territory level to 2025 using an underlying set of economic assumptions and interrelated models on household formation, housing markets, labour markets and tenure choice.
The models were underpinned by data from the Housing, Income and Labour Dynamics in Australia (HILDA) Survey, the Australian Bureau of Statistics (ABS) and house price and rent data.
This research delivers, for the first time in Australia, a consistent and replicable methodology for assessing housing need. It can be used to inform resource allocation and simulate the impact of policy decisions on housing outcomes.
The intention is to further develop the model to assess housing need at the level of local government areas.
So, what are the policy implications?
The scale of the affordable housing shortfall requires major action from federal and state governments.
NRAS had its problems but at least delivered a supply of below-market housing. Australia cannot rely on the private sector to deliver housing for low-income households without some form of government subsidy as it is simply not profitable to do so.
The question is what government is going to be prepared, or even able, to spend big to close the affordable housing supply gap?
Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University; Professor of Housing Economics, University of Adelaide
Here’s why it’s so hard to say whether inequality is going up or down
Is inequality rising or falling? The answer, if recent public debate is anything to go by, may appear at first to depend on who you ask.
Part of the reason why we get such conflicting narratives about whether it’s rising or falling is that economic inequality can be measured in different ways, using different data sets.
And you might get a different answer depending on whether you’re talking about income inequality or wealth inequality. Income is the flow of economic resources over a certain time period, while wealth is the stock of resources built up over time.
We can draw some insights from the newly released Household Incomes and Labour Dynamics in Australia (HILDA) 2017 report, which reveals the latest results of a longitudinal study that has been running since 2001.
But it doesn’t show the whole story. Combining HILDA’s results with data from the Australian Bureau of Statistics’ income surveys gives a more comprehensive picture of trends in economic inequality in Australia.
HILDA data show lower income inequality than the ABS
Firstly, you need to know that when we are talking about income, most people are referring to the disposable income of the household, not individuals.
That’s all the income that members of a household receive from various sources, minus tax. You can then then adjust for the number of people in the household, accounting for the differing needs of adults and children to get what economists call “equivalised household disposable income”.
The HILDA survey, funded by the Department of Social Services and conducted by the Melbourne Institute, has followed some 17,000 individuals every year since 2001. (The most recent ABS income survey final sample consists of 14,162 households, comprising 27,339 persons aged 15 years old and over.)
One commonly used way to measure inequality is called the Gini coefficient, which varies between zero (where all households have exactly the same income) and one (where all the income is held by only one household). The Gini coefficient for equivalised household disposable income varies between about 0.244 in Iceland to 0.397 in the United States (with most other high income OECD countries falling between these two levels), but is as high as 0.46 in Mexico and 0.57 in South Africa.
The latest HILDA report puts Australia’s Gini coefficient at 0.296 and notes that it has “remained at approximately 0.3 over the entire 15 years of the HILDA Survey.”
The HILDA surveys show a lower level of income inequality than the ABS figures do. Some of the differences between these estimates will reflect the broader definition of income used by the ABS, and the significant changes in this definition over time.
In a sense, the HILDA longitudinal survey is like a video where the same people are interviewed every year, whereas the ABS surveys are like a snapshot of the Australian population taken every two years.
But there are also problems with longitudinal surveys because participants often drop out of the survey over time. Also the survey is based on people who were living in Australia in 2001, thus leaving out immigrants who have arrived since that time. While the survey has refreshed the sample in 2011 to address this problem, this attrition may reduce the representativeness of the sample. In addition, the sample size of the ABS surveys is about 50% greater than HILDA, which will reduce sampling errors.
ABS data show inequality has risen
The Australian Bureau of Statistics (ABS) has conducted income surveys since the late 1960s, although it is only surveys since 1982 that are comprehensive and available for public analysis. These ABS surveys are also used in most of the international data sources that compare income inequality across countries – the OECD Income Distribution database and the Luxembourg Income Survey.
The ABS data show a clear increase in both wealth and income inequality over the mid- to long run.
The chart below shows two long series of estimates from the ABS surveys – those published in 2006 by researchers David Johnson and Roger Wilkins (who now oversees the HILDA survey) from 1981-82 to 1996-97, and official figures prepared by the ABS, from 1994-95 to 2013-14.
Despite the differences in income measures and equivalence scales, the long run trend from the ABS figures is clear.
There are periods in which inequality fell, but overall inequality rose over the whole period – including in the most recent period to 2013-14. The Gini coefficient in 2013-14 is a little lower than its peak just before the Global Financial Crisis, but the difference is not large.
True, there have been changes in the ABS’ survey methodology over the years but these changes should not have an effect after 2007-08, as income definitions haven’t changed in a major way since then.
Wealth is much more unequally distributed than income
The ABS also publish information on the distribution of net worth – that’s household assets minus liabilities. Wealth is much more unequally distributed than income.
According to the ABS, the Gini coefficient for net worth in 2013-14 was 0.605 (compared to a Gini coefficient for income of 0.333). This is a clear increase from a Gini of 0.573 in 2003-04.
Put another way, ABS data show a high income household in the richest 20% of the income distribution has an income around 5.4 times as high as the average household in the bottom 20% of the income distribution, as this chart demonstrates:
In contrast, ABS data show that on average households in the richest 20% of the distribution of net worth have wealth of around $2.5 million or more than 70 times higher than the net worth held on average by households in the bottom 20% of the wealth distribution, as this chart demonstrates:
Somewhat surprisingly, however, the Credit Suisse Global Wealth Report puts wealth inequality in Australia at below the world average (and the mean and median levels of net worth at among the highest in the world).
This largely reflects the still high level of home ownership in Australia and the high levels of wealth in home ownership, which accounts for nearly half of total net worth on average.
Reconciling conflicting trends
While these two major sources of data show conflicting trends on income inequality, the ABS sample size is much greater. Ultimately, however, the reasons for the differences between the findings of the ABS and the HILDA survey are not obvious.
One way forward would be for the ABS and the Melbourne Institute to jointly analyse the differences between their findings to identify why their estimates of inequality diverge.
Author: Professor, Crawford School of Public Policy, Australian National University
Interstate Property Investors Messing The Adelaide Market
A segment from ABC 7:30 discussing the rise of interstate property investors into the Adelaide market, and the impact of this on local owner occupied purchasers.
Our second-class citizens – kids who can’t leave home
This year’s Household, Income and Labour Dynamics in Australia (HILDA) survey results confirm, with damning certainty, how Australia is spiralling back into inequality based around property ownership.
The Household, Income and Labour Dynamics in Australia survey, one of the most comprehensive studies of social and economic trends, shows the proportion of 18 to 39-year-olds owning their own home slumping from 36 per cent in 2002 to just 25 per cent today.
Within that figure, couples with dependent children went from an ownership rate of 55.5 per cent 15 years ago, to just 38.6 per cent.
That’s important, because it is parents passing wealth down to their children that are once again starting to define who gets into property and who doesn’t – we’re going back to a 1950s-style class division.
All in the numbers
To see how, consider the way assets grow in value over time, and the relationship between inflation-adjusted (‘real’) growth, and nominal growth.
Imagine a couple buying a home in Brisbane in 2002 at the age of 25. When they hit 40 this year, two things will have happened.
Firstly, for any given interest rate, the real value of their monthly mortgage payments will be lower thanks to the eroding effect of inflation.
Assuming their income had only just kept pace with inflation, their repayments after 15 years would be, for any given interest rate, only 70 per cent as large a chunk of their pay packets.
Secondly, the home would be worth about 1.9 times as much in inflation-adjusted terms, or 2.7 times as much in nominal dollars, based on ABS data.
Those left behind
By contrast, a 25-year-old couple who decided not to buy in 2002, but who at the age of 40 decided to do so today, faces two financial nasties – they’ll need a much larger deposit; and they’ll have to hand over a much larger chunk of their income each month if they want to pay off the home by retirement.
If this example were set in the 1980s and 1990s, you might say “it’s their own stupid fault”.
And you’d probably be right – the barriers to entering the housing market were much lower then.
Today, however, the HILDA numbers describe a housing market in which many young Australians have no choice about getting into the market.
Since the turn of the millennium, house prices across Australia have roughly doubled in inflation-adjusted terms, and a deposit for a home can’t just be ‘scraped together’ by maxing-out a few credit cards and smashing the piggy bank.
So young Australians have three options: stay at home for years more and save madly for a deposit; move out and rent, saving even more madly for a deposit; or receive a windfall gift or loan from the ‘bank of Mum and Dad’.
The HILDA data shows more young Aussies opting for the first option. In 2001, 43 per cent of men and 27 per cent of women aged 22 to 25 lived with their parents, but those numbers have now ballooned to 60 per cent for men and 48 per cent for women.
The old progression of moving out and renting, scraping together a deposit, and then moving into property ownership is almost impossible for many – unless the ‘bank of Mum and Dad’ is able to help.
A compounding problem
When Mum and Dad are unable to help with a deposit, the effects on wealth equality begin to compound.
Today’s 25-year-olds who do not have family money behind them will take much longer to get into the market, meaning they’ll have smaller capital gains behind them when their own children come asking for help.
Buying a home has never been a universal right, but as detailed last week, it’s something that at its peak was available to 71.4 per cent of Australian households.
As that number slides lower – or tumbles lower for younger groups – it’s time to face facts.
The new class divide in Australia is between those who have generous property-owning parents, and those who do not.
Home ownership falling, debts rising – it’s looking grim for the under 40s
Home ownership among young people is declining, as mortgage debt almost doubles for the same age group, results from the Household Income and Labour Dynamics in Australia (HILDA) survey show. It also shows young people are living with their parents longer.
The Melbourne Institute of Applied Economic and Social Research undertakes the survey every year. It’s Australia’s only nationally representative household longitudinal study, and has followed the same individuals and households since 2001.
The survey shows the rate of home ownership among 18 to 39 year olds declined from 36% in 2002 to 25% in 2014. In the same age group, the decline in home ownership has been largest for families with dependent children, falling from 56% to 39%.
Even for those in this group who manage to buy a home, mortgage debt has risen dramatically. In 2002, 89% of home owners in this age range had mortgage debt. By 2014 this had risen to 94%.
More significantly, the average home debt rose considerably. Expressed in December 2015 prices, average home debt grew from about A$169,000 in 2002 to about A$337,000 in 2014. Low interest rates since the global financial crisis have meant mortgage repayments for these home owners have remained manageable, but this group is very vulnerable to rate rises.
Detailed wealth data in the survey, collected every four years since 2002, show this increase in debt and decrease in ownership are part of a trend in the wider population. HILDA shows 65% of households were in owner-occupied dwellings in 2015, down from 69% in 2001.
In fact, the decline in home ownership has been greater than the decline in owner-occupied households. This is largely because adult children are living with their parents for longer.
For example, the HILDA data show that the proportion of women aged 22 to 25 living with their parents rose from 28% in 2001 to 48% in 2015. For men this proportion rose from 42% to 60%.
Among those who manage to access the housing market, the data shows that the growth in home debt is not simply because they are borrowing more to purchase their home. A surprisingly high proportion of young home owners (between 30% and 40%) actually increase their debt from one year to the next, despite most of them remaining in the same home. Even over a four-year period – for example, from 2010 to 2014 – at least 40% of young home owners with a mortgage increase their nominal home debt.
The proportion of people with home debt that exceeds the value of their home – that is, negative equity – has also risen. In 2002, 2.4% of people had negative equity in their home; in 2014, 3.9% had negative equity. This is a relatively small proportion, but this could change as even small decreases in house prices will result in substantial increases in the prevalence of negative equity.
How this changes with location, income and profession
In 2014, less than 20% of Sydneysiders aged 18 to 39 were home owners, compared with 36% or more in the ACT, urban Northern Territory and non-urban regions of Australia. To a significant extent this reflects differences across regions in house prices.
Sydney and Melbourne have particularly high house prices, while non-urban areas generally have comparatively low house prices. Regional differences in the incomes of 18 to 39 year olds also play a role.
Those with the highest home-ownership rates are professionals and, to a lesser extent, managers. They experienced relatively little decline in home ownership.
For workers in other occupations, home ownership has declined substantially. In 2014 home ownership was especially rare among community and personal services workers, sales workers and labourers.
This decline represents profound social change among this age group, where renting is increasingly becoming the dominant form of housing. In 2002, 61% of people aged 35 to 39 were home owners – a clear majority of their age group. By 2014, this proportion had fallen to 48%.
The changing housing situation of young adults is part of a broader change in the distribution of wealth in Australia. The HILDA Survey shows that differences in average wealth by age have grown since 2002. For example, in 2002, median net wealth of those aged 65 and over was 2.8 times that of people aged 25 to 34. In 2014, this ratio had increased to 4.5.
The decline in home ownership among young adults and this broader trend in wealth have implications for their long-term economic wellbeing and indeed for the retirement income system. Even if house price growth moderates and many of those currently aged under 40 ultimately enter the housing market, it’s likely that a rising proportion will not have paid off the mortgage by the time they retire. It may be that many will resort to drawing on superannuation balances to repay home loans, in turn increasing demands on the Age Pension.
Professorial Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, University of Melbourne
Income divide between rich and poor Australians widening
Income inequality is worsening in Australia, according to comprehensive new research that finds renters, pensioners and students are feeling the pinch while high earners get pay rises.
ME bank’s twice-yearly survey of 1500 households, conducted in June and published on Monday, revealed bigger gaps in income, housing and financial worries across the nation.
In the last financial year, the overwhelming majority of Australian households (68 per cent) saw their incomes stagnate or fall. Only 32 per cent got pay rises – the lowest in three years.
Income inequality was apparent.
Almost half (45 per cent) of households earning less than $40,000 said their incomes went backwards, while almost half (46 per cent) of households on at least $100,000 saw pay rises. These high earners were least likely (17 per cent) to report income cuts.
Meanwhile, the incomes of 46 per cent of the middle class (households earning $75,000 to $100,000 a year) were stagnant in 2016-17, according to the survey.
If the results reflect the nation’s finances, then just over half of all Australians (51 per cent) are living pay cheque to pay cheque, spending all their income or more each month, with nothing leftover.
ME’s consulting economist Jeff Oughton, who co-authored the report, said the findings were relevant to the current debate over inequality because “this is how people feel”.
“The bill shock, the income cuts and the housing stress were quite loud signals,” he told The New Daily.
“There have been different winners and losers here, post the global financial crisis, and different winners and losers from low interest rates.”
The good news was that, overall, those who filled out the 17-page survey were feeling slightly less worried about their finances, perhaps because the global economy appears to be recovering.
ME’s financial comfort index − measured by combining reflections on debt, income, retirement, savings and long-term investments − is now at 5.51 out of 10, up from 5.39 in 2012.
However, vulnerable groups were doing it tough.
Renters were far less financially comfortable (4.52 out of 10) than those paying off a mortgage (5.47) and outright home owners (6.44).
Students were the most worried. Their financial confidence plummeted from just over five to 4.32 over the last year, the lowest since the survey began in 2011. This may have been a response to the government’s increase to university debt repayments.
Single parents improved but still ranked poorly (4.95 out of 10).
Self-funded retirees were the most comfortable (7.12 out of 10) while age pensioners were among the least (5.03).
Households earning over $200,000 recorded a staggering double-digit rise in financial comfort – up 10 per cent to 7.85 out of 10 – while those on $40,000 or less were stuck at 4.43.
Overall, Australians were more confident about their debt levels (6.31 out of 10), income (5.72), retirement (5.18), savings (5.07) and long-term investments (4.99).
The only key measure of financial comfort that worsened was when households were asked to imagine their finances in 2017-18: confidence on that measure fell three per cent to 5.31 out of 10, reflecting a general pessimism in the economy.
According to the report, a key reason many Australians fear the future is that, despite low inflation, the price of fuel, power, groceries and other necessities appear high and rising.
A growing number also expect their ability to manage debt to deteriorate if mortgage interest rates rise significantly.
One in five households said they spent more than half their disposable income on housing payments – with the majority renters.
A third (31 per cent) expected to be worse off financially if the Reserve Bank raised the official cash rate by 100 basis points, from 1.5 to 2.5 per cent, including half (47 per cent) of those with a mortgage.
However, 29 per cent said they would be better off – a reflection of those who own their homes and investors seeking better returns.
Generation X, those born between 1961 and 1981 (41 per cent), and single parents (36 per cent) were those most concerned about rising rates. And owner-occupiers (53 per cent ‘worse off’, 22 per cent ‘better off’) were far more concerned than property investors (35 per cent ‘worse off’, 29 per cent ‘better off’).
Households who expected to benefit from rising rates included outright home owners (38 per cent), those earning $100,000+ (36 per cent) and retirees (32 per cent).
Pleasingly, only three per cent of households said they were behind on their mortgage payments. But this was much higher among single parents (15 per cent) and Australians earning under $40,000 a year (9 per cent).
There was also a spike in those who expected to fail to meet minimum debt repayments in the next 6 to 12 months, up from 5 per cent to 9 per cent.
Further reflecting the divide, all groups of workers – full-timers, self-employed, part-timers and casuals – reported more financial confidence.
But the comfort levels of the unemployed plummeted from 4.5 to 3.12 out of 10, the lowest ever.
The divide was also seen across geographical regions. Metro areas rated their financial comfort 5.66 out of 10, while regional areas were 5.05.
The only state to worsen was South Australia, where financial comfort fell from 5.70 to 5.20 out of 10 over the last year.
Rental Stress, The Hidden Problem
There is much discussion of mortgage stress, some of which we highlight by our ongoing research into the growing numbers of households under financial pressure. The results for July will be out soon.
But rental stress is less discussed, but in our mind is equally significant, so today we explore some of the data in our Core Market Model to July 17. In fact there are more households in rental stress than in mortgage stress according to our analysis. We know their financial confidence on average is lower.
First, we need to define rental stress. Whilst some will use a “30% of income to pay the rent” as a benchmark, we do not think it is an adequate measure – not least because we see large numbers of households renting where more than 30% of income is paid away on rent, yet they are not in financial difficulty. Others pay less away, but are in stress. 30% is too arbitrary!
So we look at net cash flow. If households, once they pay their rent, tax and other outgoings have close to nothing left, or a small deficit, at the end of the month, they fall into our mild stressed category. Those with a severe cash deficit at the end of the month, are in serve stress.
We start by looking at the causes of rental stress. Using data from our surveys, we find that costs of living, under employment and flat incomes are the main causes of rental stress.
Those renting tend to hold less financial assets, so are more exposed, especially where they are also responsible for bills (electricity, council rates etc). Those in difficulty will be more likely to hold multiple credit cards, and also access short term loans to get by. Those in the stressed categories will be less likely to spend at the shops, and so are a brake on economic activity. One strategy some use is to move to cheaper rented accommodation, with poorer facilities to reduce outgoings. The migratory nature of renters, especially those in stress are not well understood. The current tenancy regulations in Australia are pretty weak. Much of this movement is not reported, nor recorded.
So, lets look at some of the numbers, remembering one third of households are renting, in round numbers that is 3 million households.
Looking by state, more than half of renters in NSW are in rental stress (on our definition), and the highest proportion of any state here are in severe rental stress. The proportion of households in stress fades away as we look across the other states and territories. But the three most populous states have the highest rental stress levels.
Looking across our segments, we see that older households are more under stress, and a significant proportion in severe stress. Whilst wealthy seniors may hold some savings, stressed seniors do not. Many are reliant on Government support.
Looking across the geographic zones (a series of concentric rings around our main urban hubs) we see significant levels of stress in the urban centres, as well as on the urban fringe. The former is being created by high rents – especially in the newly constructed high-rise blocks being thrown up across the eastern states, often occupied by young affluent households; whilst in the urban fringe, it is more about depressed incomes. We see stress rolling out into the regions, but is less apparent in the more rural and remote areas.
Finally, here is list of the regions across the country. Greater Sydney and the Central Coast have the highest representation of stressed renters as a proportion of all households renting.
All this highlights the issues we have due to the combination of flat incomes, and rising costs. It is also the obverse of the picture we revealed yesterday, where we showed rental growth is very low (causing more investors to have a net cash-flow problem).
Once again we see the outworking of poor public policy over a generation. With an internationally high proportion of property investors and a high proportion of people who are likely to never own their own property, rental stress provides another important perspective of the issues we face.
We have very granular data, down to post code, but that will get too detailed for this post.
Giving you more say in your super? Not likely with these changes
The government is introducing a raft of changes to the regulation of superannuation in a bid to give consumers more power over their retirement funds. But, in fact, consumers are unlikely to use these new powers and the changes might not improve super fund performance.
The headline change introduces annual general meetings (AGMs) for superannuation funds. Previously these weren’t commonplace, as they are with companies. The government proposes these meetings will help fund members hold superannuation fund trustees and executives to account.
But many of us barely glance at our own superannuation account balances when the six-monthly statement appears in our inbox, so it’s reasonable to predict that, of the 15 million or so superannuation fund members in Australia, only a tiny fraction are likely to go to an annual meeting.
And why would we? One reason shareholders attend listed company AGMs is so they can vote on appointments of directors and remuneration of managers. However, superannuation funds are trusts, not public companies, and members won’t have the same rights even if they attend.
These AGMs will instead offer members the chance to quiz the executives, auditor and actuary, but no votes on material decisions. So this is nothing new: superannuation fund members have virtually no influence over trustee appointments, executive remuneration or other decisions.
Even the industry fund trustees, who are representatives of member organisations in super funds (such as trade unions), are not usually elected by fund members but are appointed by their sponsoring organisations.
If members are consigned to tea and biscuits with the fund chairman, where is the consumer “power” in Financial Services Minister Kelly O’Dwyer’s reforms? It rests mainly with the regulator, the Australian Prudential Regulation Authority (APRA).
The key changes intend to give APRA more responsibility for protecting the interests of superannuation fund members. This is particularly in relation to MySuper – the standardised default superannuation product.
Because superannuation is mandatory for most employees, the system captures many people who don’t have the will or the skill to make active choices about what fund manages their retirement savings. This includes decisions on where their savings will be invested, and what level of life insurance cover they take. Passive members don’t “shop around” for efficient providers, to their own cost.
Following the paternalistic reasoning of the Cooper Review, successive governments have shepherded passive superannuation fund members into MySuper options. MySuper products must have a single diversified investment strategy, are allowed to charge only a limited range of fees and must offer a standard default cover for life and total and permanent disability.
MySuper funds also have to report their investment goals and performance on a dashboard that is supposed to help people make comparisons between similar products. Employers must choose a default fund for their employees from the list of MySuper products.
Even so, MySuper product fees and investment performance vary widely. APRA quarterly superannuation statistics (2017) report that, in 2015, after MySuper was “up and running”, annual fees and costs on a A$50,000 account balance in fixed-strategy MySuper products ranged from $265 per year to $1085 per year (with a median of A$520 per year).
The investment performance of MySuper products also varies considerably. In the same year, the mean annual investment return (gross of expenses) for single-strategy MySuper products was 8.45%, the bottom 10% receive less than a 5.5% return and the top 10% receive more than a 10.9%.
While some variation in returns is due to intentional differences in the design of default investment products, some is related to differences in manager skill or efficiency.
These latest reforms, if passed into law, will mean APRA can refuse or cancel a MySuper authority, at a much lower threshold than applies currently. If APRA has reason to think that a superannuation entity that offers a MySuper product may not meets its obligations, that is grounds to refuse or cancel an authority. Since the default superannuation sector is large, such a decision would be extremely costly to the fund in question.
Under this legislation, trustees of MySuper funds will be obliged to write their own annual report card. Each year, trustees will have to assess the “options, benefits and facilities” offered to their members and the investment strategy (target risk and return). Trustees will also be required to report on the insurance strategy for members, including whether (unnecessary) insurance fees are depleting balances; and to evaluate whether the fund is large enough to do all these at a reasonable cost.
In each case, trustees are required to show that they are promoting members’ financial interests. They will have to compare the performance of their MySuper product to that of other MySuper products.
Even though the trustees score their own card, APRA will also examine these, under the threat that the MySuper authority could be cancelled. It’s not clear how much discipline these rules can impose on trustees, but there are some obstacles to implementation and some possible unintended consequences.
Most superannuation funds know very little about their members. Usually these funds only collect a member’s age, gender, some indication of income, and sometimes their postcode. To show that a financial service, investment or insurance product promotes (or fails to promote) the financial interest of a member will be very difficult on this little information.
For example, two 25-year-old men in the same profession will have very different needs for life insurance if one is single and the other has a non-income-earning partner and a child. But they will look the same to the MySuper trustees.
Also, having an annual peer comparison of investment performance by MySuper trustees will focus on short-term results rather than the long-horizon outcomes needed for a secure retirement.
So the governments’ claim that these changes will “give consumers more power” and strengthen regulation of this large sector are stretching the truth.
Author: Professor of Finance, University of Sydney