Social Trends – Page 136 – Digital Finance Analytics (DFA) Blog

What income inequality looks like across Australia

With affordable houses increasingly out of reach, wage growth slow and household debt high, Australians are certainly feeling poor. But how do they compare to their neighbours? New Census data confirms there’s a lot of variability in income.

The Census breaks the country up into 349 geographic regions (named in quote marks below), some of which cover more than one major town and some of which group related suburbs within cities. We examined 331 of these regions, excluding those containing fewer than 1,000 households.

The data show there are high levels of income inequality within these regions. A simple way to measure this is to look at the ratio of income between those who are well off (the top 20% within a region) and of those who are relatively disadvantaged (the bottom 20%) in the Census data. In Australia the weekly household income for the top 20% (A$1,579 per week) is 3.5 times the income of the bottom 20% (A$457).

The “Melbourne City” region has the most unequal incomes in Australia, where the top 20% have an income that is 8.3 times as high as those in the bottom 20%. “Adelaide City” (ratio of 5.5) and the “Sydney Inner City” (4.8) also have quite high levels of inequality.

Two of the poorest regions in the Northern Territory also have very high inequality. These are the vast region that encircles Darwin, called “Daly, Tiwi, West Arnhem” (ratio of 5.2) and the “East Arnhem” region (5.3).

However, there are regions with varying income levels, that also had relatively low inequality ratios. The region of “Molonglo”, in South Canberra (ratio of 2.2), “West Pilbara” in Western Australia (2.4) and “Kempsey, Nambucca” on New South Wales’ north coast (2.5) all have low levels of inequality.

For our analysis, we used equivalised household income. Equivalisation is a technique in which members of a household receive different weightings, based on the amount of additional resources they need.

The Australian Bureau of Statistics assumes that the first adult in a household has a weighting of 1, each additional adult a weighting of 0.5, and each child a weighting of 0.3. Total household income is then divided by the sum of the weightings for a representative income.

Incomes across Australia

For the whole of Australia, the equivalised median household income (the income in the middle of the distribution) is A$878 per week. The region with the lowest median income was “Daly, Tiwi, West Arnhem” in the Northern Territory, at A$510 per week.

However, several regional areas like “Maryborough, Pyrenees” (northwest of Ballarat in Victoria), “Kempsey, Nambucca” (NSW), “Maryborough” (between Bundaberg and the Sunshine Coast in Queensland), “Inverell, Tenterfield” (in NSW’s Northern Tablelands) and “South East Coast” in Tasmania all had median incomes of A$575 per week or less.

At the other end of the distribution, households in leafy suburbs of North Sydney – “Mosman” (NSW) had a median income of A$1,767 per week. Areas like “South Canberra” (ACT), “Manly” (in Sydney’s east) and the mining-dominated “West Pilbara” (WA) all had median incomes of A$1,674 or more per week.

We also looked at the extremes of the distribution. We define high income as those households with an income of A$1,500 or more per week. This equates to about 22% of the population. We defined low-income households as having an income of less than A$400 per week (about 14% of households).

Around 40% of households in the “Daly, Tiwi, West Arnhem” region were classified as being in poverty compared to around 6% in “North Sydney, Mosman” region. Conversely, around 60% of households in this region were classified as having high income, compared with only 6% of households in “Kempsey, Nambucca”.

How segregated are we within regions and cities?

While government policy is often delivered at the regional level, people live their lives at the local or neighbourhood level. However, the relatively disadvantaged and the upper-middle class are often segregated within these regions.

Richard Reeves of the Brookings Institute argues the segregation of the upper-middle class in Australia means this group “hoards” the benefits in the region they live in. Among the location advantages he lists are: access to the best schools, opportunities to network with the wealthy and powerful and the ability to disproportionately accrue capital gains on housing assets. To avoid this kind of “opportunity hoarding”, the rich and poor would need to be evenly spread within a region.

A simple way to look at this is through a “dissimilarity index”. In essence, this measures the evenness with which two groups are spread across a larger area. It ranges from zero to one, with higher values indicating a more uneven distribution and zero indicating complete mixing.

Looking at the distribution of the high income. Across Australia, the dissimilarity index has a value of 0.27. This means that around 27% of high-income households would have to move neighbourhoods to make the distribution completely even.

This varies quite substantially by region. “Far North” (encompassing Cape York in QLD) has a dissimilarity index of 0.42. “Auburn” (in western suburbs of Sydney, NSW) and “Playford” (on Adelaide’s northern fringe) also have quite large values.

Our richest regions tend to have the most even distribution of the wealthy, with “North Sydney, Mosman”, “Molonglo” and “Manly” having values of 0.06 or less.

“East Arnhem” has a very high level of concentration of low income individuals by neighbourhood, with a dissimilarity index of 0.70. The next two highest regions (“Katherine” and “Alice Springs”) are also in the Northern Territory, with index values of 0.53 and 0.55 respectively.

We can also compare the measures we used, to find out how they relate to each other. The following figure shows that the richest regions tend to be those with the highest level of income inequality.

However, as inequality goes up, there tends to be a greater concentration of low income households by neighbourhood (there’s also less of a concentration of high income households).

Have and have nots

It’s true that the level of income mobility is higher in Australia than it is in the US. However, Australia also has prominent examples of economic policies that disproportionately benefit the upper-middle class, such as the capital gains tax discount and superannuation tax incentives.

Australia also has a geographically concentrated income distribution, with the rich living in neighbourhoods with other rich people. The poor are also more likely to live in close proximity to people who share their disadvantage.

If Richard Reeves is right, and the spatial segregation of high and low income households reinforces inequality across the generations, then policies that encourage the mixing of different social classes in the same neighbourhood and region should be a way forward.

Authors ; Nicholas Biddle, Associate Professor, ANU College of Arts and Social Sciences, Australian National University; Francis Markham, Research Fellow, College of Arts and Social Sciences, Australian National University

Banks do what RBA won’t: hike interest rates

From The New Daily.

The Reserve Bank may hold rates for as long as a year, but mortgage borrowers could be punished anyway by rising house prices and gouging by the banks.

Australia’s central bank held the official cash rate at 1.5 per cent for the tenth time on Tuesday. It hasn’t moved since a 25 basis point cut in August 2016.

But this hasn’t stopped the banks. They have refused to pass on the full benefit of the RBA’s record-low rates in order to offset costs and prop up profits.

Analysis by The New Daily of official data published on Tuesday showed that the gap between the RBA rate and the standard rate banks quote to mortgage borrowers is around the widest in 20 years.

RMIT economist Dr Ashton De Silva, an expert on the housing market, said it was “conceivable” that banks could widen this gap even further in coming months in response to rumblings in the global economy.

He pointed to the impact of Brexit and the Federal Reserve pushing up rates in the US as factors that could force Australian banks to pay more to borrow overseas and pass on the costs to owner-occupiers.

This spread between the official rate – which the RBA insists is still the “main driver” of bank funding costs – and the Standard Variable Rate banks quote to prospective customers is sitting perilously close to four percentage points, the biggest margin since 1994.

The SVR is higher than what most customers actually pay, but the gap is similar for discounted rates.

The good news for borrowers is that the RBA probably won’t hike rates for a few months more, according to the market.

The futures market is tipping rates won’t rise until next year, and even then, not by much. The ‘yield curve’ in that market shows rates are expected to reach about 1.75 per cent by November 2018.

But that’s not much relief if the banks push up rates in the interim in response to rising borrowing costs.

Martin North at Digital Finance Analytics said lenders were likely to continue penalising investors and interest-only borrowers, while leaving owner-occupier rates roughly where they are.

“Last year there was a massive race to the bottom in terms of discounts to try to gain volume and share. Many banks dented their margins in the process,” Mr North told The New Daily.

“They’ve now got the perfect cover, thanks to APRA’s regulatory intervention, and so I’d expected to see mortgage rates continuing to grind higher, particularly for investors and anyone on interest-only.”

The RBA’s cash rate may be the “main driver” of bank funding costs, but it’s not the only driver. Australian banks also borrow heavily in overseas money markets such as London and New York, where central banks are eyeing rate hikes, and from term deposits in Australia.

Owner-occupier mortgage rates are still lower than they were in 2011, when the RBA began cutting. Since then, the official cash rate has fallen by almost 70 per cent, from 4.75 to 1.5 per cent.

The problem for borrowers is that rising house prices (fuelled in part by low rates) are negating the benefits.

Rate cuts are supposed to give households more disposable income by reducing their mortgage repayments.

But interest is only half a mortgage. The rest is ‘principal’, which is being pushed up by higher property values, especially in Sydney and Melbourne.

This means the total amount of money we’re repaying to banks is high and staying high, despite what the RBA has been doing.

The Bank for International Settlements has estimated that the average Australian household spent 15.3 per cent of income on interest and principal repayments (a measure known as the ‘debt service ratio’) over the last three months of 2016, its latest estimate.

This is back to levels last seen in 2013, which means the benefits of low rates must be getting swamped by house price rises.

Australia’s debt service ratio is now third behind the Netherlands (17.4pc) and Denmark (15.9pc), putting us above a comparable economy like Canada (12.3pc) and well above bigger economies such as the USA (8.2pc) and United Kingdom (9.7pc).

Bloom and boom: how babies and migrants have contributed to Australia’s population growth

From The Conversation.

Population change has long been a topic of public debate in Australia, periodically escalating into controversy.

It is inextricably linked to debates about immigration levels, labour force needs, capital city congestion and housing costs, refugee intakes, economic growth in country areas and northern Australia, the “big versus smaller” Australia debate, and environmental pressures.

Views about the rate of population growth in Australia are numerous and mixed. At one end of the spectrum are those who are vehemently opposed to further population increases; at the other end are supporters of substantially higher population growth and a “very big” Australia.

Logically, population debates usually quote Australia’s demographic statistics. But there is value in comparing our population growth in the international context.

Average growth rates compared globally

Although growth rates have fluctuated considerably from year to year, statistics just released by the Australian Bureau of Statistics (ABS) show that Australia’s population grew by 3.75 million between 2006 and 2016. This indicates an average annual growth rate of 1.7%.

As the chart below shows, this was quite high compared to other countries and global regions. Over the decade, other English-speaking countries such as New Zealand, Canada and the US all experienced growth rates lower than Australia’s. The world’s more developed countries in aggregate grew by an annual average of 0.3%.

The world’s population as a whole increased by an average of 1.2% per year.

According to the UN Population Division, Australia ranked 90th out of 233 countries in terms of population growth rate over the decade. The countries or territories with higher growth rates were mostly less developed countries, particularly in Africa, and the oil-rich Gulf states. The only developed countries with faster rates of growth were Singapore, Luxembourg and Israel.

Why Australia’s population growth rate is higher

There are two main reasons for Australia’s high growth.

Net overseas migration (immigration minus emigration) is one major factor. It has been generating a little over half (56%) of population growth in recent years.

Demand for immigration – to settle permanently, work in Australia, or study here for a few years – is high, and there are many opportunities for people to move to Australia. In the 2015-16 financial year about 190,000 visas were granted to migrants and 19,000 for humanitarian and refugee entry. Temporary migrants included 311,000 student visas, 215,000 working holidaymaker visas and 86,000 temporary work (skilled) 457 visas.

Over the last five years, ABS figures show that immigration has averaged about 480,000 per year and emigration about 280,000. This puts annual net overseas migration at around 200,000.

This is high in international terms. UN Population Division data for the 2010-15 period reveals Australia had the 17th-highest rate of net overseas migration of any country.

But it is not just overseas migration driving Australia’s population growth. High natural increase (the number of births minus the number of deaths) also makes a substantial contribution. Natural increase has been responsible for a little under half (44%) of population growth in recent years (about 157,000 per year).

Australia has a relatively healthy fertility rate, which lately has averaged almost 1.9 babies per woman. We also enjoy one of the highest life expectancies in the world.

This combination of an extended history of net overseas migration gains, a long baby boom and a healthy fertility rate has resulted in Australia being less advanced in the population ageing transition than many other developed countries.

In particular, relatively large numbers of people are in the peak childbearing ages. This means that even if migration fell immediately to zero the population would still increase. Demographers call this age structure effect “population momentum”.

Whether Australia’s population is growing too fast

While Australia’s population growth rate is high in a global context, this does not necessarily mean its population is growing too fast. It all depends on your point of view.

It is important to stress that the overall population growth rate is just one aspect of Australia’s demography. A more comprehensive debate about the nation’s demographic trajectory should consider a broad range of issues, such as:

population age structure (the numbers of people in different age groups);

the health and wellbeing of a rapidly growing population at the highest ages;

population distribution across the country;

economic growth and development;

the contributions of temporary workers and overseas students;

appropriate infrastructure for the needs of the population; and

environmental management and per-capita carbon emissions.

Progress on issues such as healthy ageing, economic development,and environmental management depend on appropriate strategies to deal with these challenges. Total population numbers will often be relevant to the discussion, but they are only part of the equation.

Author: Tom Wilson , Principal Research Fellow, Charles Darwin University

Australian household debt breaks new records

From The New Daily.

The Reserve Bank board will be facing record-high debt levels when it decides on Tuesday whether or not to follow other central banks by lifting the official cash rate.

Ten years after the global financial crisis – which many trace to the collapse of two Bear Sterns hedge funds in July 2007 – Australians are more indebted than ever, largely because of mortgages.

The latest official data, published by the Reserve Bank on Friday, showed that Australian households owed debt in the March quarter equal to 190 per cent of their yearly disposable income – a new all-time high.

In a speech in May, Reserve Bank governor Dr Philip Lowe blamed this trend on a combination of low interest rates, slow wages growth and house price rises fuelled by overseas investor demand and strong population increases.

At its last interest rate meeting in June, the RBA board cited persistently weak wages growth as a key factor in it keeping the cash rate on hold at a record-low 1.5 per cent – where it was widely forecast to stay on Tuesday.

Household debt will no doubt weigh heavily on the minds of the RBA board.

Last month, the Swiss-based Bank for International Settlements captured headlines across the nation by warning that Australia’s surge in household indebtedness was likely to constrain future economic growth and increase our susceptibility to another crisis.

Global ratings agencies Moody’s and Standard & Poor’s have also downgraded the creditworthiness of Australian banks over fears about unsustainable debt and inflated house prices.

Australia’s debt-to-income ratio concerns many experts because it is globally unusual – and because high household debt frequently coincides with financial crises.

Not even the US, just before it plunged much of the world into economic chaos, had a debt-income ratio as high as Australia’s current 190 per cent. Estimates put US household debt closer to 140 per cent in 2007.

Further data from the Reserve Bank confirmed that Australia’s debt mountain is largely a consequence of soaring property prices.

In the March quarter, Australian housing debt reached 135 per cent of annual disposable income, according to the RBA, breaking another record.

Homeowners hold a large share of the debt.

According to the Reserve Bank, the ratio of owner-occupier housing debt to yearly income hit 101.8 per cent in the March quarter – yet another all-time high.

The reason the Bank for International Settlements predicted that Australia’s economic growth would be curbed by debt was that inevitable interest rates rises would reduce disposable income of indebted households.

Household consumption is crucial to Australia’s economic growth – it accounted for 57 per cent of GDP in the March quarter. Rate rises could put that GDP figure at risk by reducing spending, the BIS said.

This is a key reason why most economists are predicting the Reserve Bank won’t hike the cash rate on Tuesday.

The RBA Shadow Board – an independent panel of economists – has put a 59 per cent probability on a rate hold being the right decision on Tuesday, compared to a 39 per cent probability for a rate hike, and only 2 per cent probability for a rate cut.

“The spotlight is turning again to the high indebtedness of Australian households,” the Shadow Board noted.

However, there is some good news on debt. A wealth divide in the Australian housing market could lessen the risk of a US-style mortgage crash.

According to the RBA governor, housing debt is heavily skewed towards the wealthy.

“This is different from what occurred in the United States in the run-up to the subprime crisis, when many lower-income households borrowed a lot of money,” Dr Lowe said in May.

The bad news is that these mortgages are increasingly invading our retirement.

“Borrowers of all ages have taken out larger mortgages relative to their incomes and they are taking longer to pay them off,” Dr Lowe said.

“Older households are also more likely than before to have an investment property with a mortgage and it has become more common to have a mortgage at the time of retirement.”

Why Australia is becoming a workers’ paradise lost

From The New Daily.

Australia was once regarded as a workers’ paradise where pay, conditions and skill levels were the envy of the world. But something is amiss.

Where once the fortunes of working people and the economy travelled hand in hand, workers have become uncoupled from national prosperity.

Australia’s record-breaking 26 years of uninterrupted growth comes as little consolation for working men and women doing it tough. While we’ve technically avoided recession for almost three decades, many workers are living in recessionary climes every bit as punishing as the infamous recession we had to have in 1991.

The headline indicators of economic growth mask a crisis of confidence in the suburbs as debt-laden households nervously ponder their financial stamina. Employment was once the reward of a prosperous economy but many Australians are in a virtual state of permanent job insecurity.

The unemployment rate hit a four-year low of 5.5 per cent in May but workers on the ground know things are more fragile than such bumper figures suggest.

They know many employers are struggling, maintaining their viability with relentless cutbacks. Those who get to keep their jobs know they can expect little movement on their pay. Wages growth is at its lowest since the 1991 recession.

Add to that the penalty rate cuts for hospitality, fast food, retail and pharmacy workers, who have lost the benefit of the minimum wage increase – and are likely to suffer a wage cut in 2018 and 2019.

The proportion of national economic output paid to workers is at an all-time low, based on trend estimates. Total labour compensation fell to 51.5 per cent of national GDP in the March 2017 quarter, the lowest since 1964.

Workers also know that employers are relying more on casual and part-time labour and the use of contractors and labour-hire workers. This not only keeps a lid on wages growth but also means the underemployment rate – employed workers wanting more hours – is at a record high of 8.8 per cent.

While households are walking on eggshells the Turnbull government gloats that it is delivering “jobs and growth”. But Reserve Bank governor Philip Lowe is concerned about wages.

Dr Lowe recently called on workers to reclaim their stake in the Australian economy by seeking wage increases. In an unusually forthright speech, he described the static wages growth as a “crisis”. He recognised that workers concerned about job security were unwilling to press for better wages.

“People value security and one way you can get a bit more security is not to demand a wage rise,” he said.

With annual wages growth of just 1.9 per cent, Dr Lowe said it “would be a good thing” for workers to “ask for larger wage rises”.

The absence of a clear recovery after the global financial crisis has left many workers in wages limbo. Workers prepared to show wages restraint in 2007-08 have not had the “bounce back” in wages that normally comes with a clear-cut recovery.

The post-GFC period also coincides with enormous advances in digital technology which has transformed business models and whole industries.

A report by the Committee for Economic Development of Australia estimates that 40 per cent of Australian jobs that exist today are likely to disappear in the next 10 to 15 years due to technological advancements.

And yet from the Turnbull government, or the opposition for that matter, there has been no sign of an honest “conversation” about the enormous changes and challenges that face workers. No blueprint for Australia’s transition to a digital economy, no investment in the training and reskilling that will be so vital to Australia’s future, no apparent understanding of what the workplaces of the future will look like.

The government is entitled to celebrate the record run of growth. But it would do well to understand the consequences of simply looking the other way as workers languish in prolonged recession-like conditions and households teeter on the brink of financial despair.

A workforce under sustained distress will ultimately impact on living standards, consumer confidence, financial viability and national productivity. The workers’ paradise, after all, was a paradise shared by all Australians.

Australia doesn’t have a population policy – why?

From The Conversation.

Australia lacks an overarching population policy or strategy. Over the years, multiple inquiries have recommended such a policy. Population policies the world over typically focus on births and migration.

As part of post-war reconstruction, Australia adopted a 2% population growth target. Mass immigration was a defining feature, and couples were called on to populate or perish. Immigration was successful, but women were big losers in the push for births.

The 1975 National Population Inquiry proved a significant moment in Australian demography. The inquiry found that Australia should not seek to influence population, but should anticipate and respond.

Population policy was revisited in the 1990s with the National Population Council. Its 1994 report found no optimal population size for Australia, but again called for a responsive population policy of preparedness.

Interest in sustainable population policy was renewed in 2010 following Kevin Rudd’s infamous endorsement of a “big Australia”. We even had a minister for population, Tony Burke, for about six months until the portfolio was expanded. Population was subsequently dropped from any ministerial title.

After an exhaustive inquiry, A Sustainable Population Strategy for Australia was released in 2011. This stopped short of recommending a population policy but removed any option of population limits. Change felt possible in shifting the narrative to a proactive endeavour concerning population matters, particularly evident in the National Urban Policy.

Despite such inquiries and recommendations to adopt a population policy, governments have so far resisted. Unsuccessful attempts at population policy can be understood in terms of difficulties in gaining political support and concerns about coercion.

But national population policy need not be coercive – unlike, for example, in India or China. Instead, it can be a series of targets and connected policy domains with oversight.

Presently, the policy landscape is disjointed. Parenting leave, family and childcare payments, and immigration are each somewhat responsive to population changes, but not prepared. Family payments have been shown not to increase birth rates.

Births, deaths, migration – and taxes

The intergenerational reports have been our only glimpse of responsiveness and preparedness. But these have increasingly been criticised for their political tone. Who could forget the Challenge of Change campaign?

Dr Karl Kruszelnicki fronted the Challenge of Change campaign.

What we know is that Australia’s population continues to age, so among the nation’s pressing issues is fewer taxpayers. The total age-related dependency ratio, of people aged over and under working age relative to the working-aged population, was 52 per 100 people in 2016.

While the child-dependency rate (0-14 year olds) is higher than the aged-dependency rate (people 65 and over), the rate of people aged less than 15 has steadily declined as the population aged 65 and over has driven increases in the so-called dependency burden.

The relative increase in people older than working age is increasing pressure on the economy and government budgets. While government spending on young people is substantial, the highest per person spending is among people aged 65 and over.

A robust workforce contributing income tax and services is essential to ensure current lifestyles are afforded to the young while also sustaining the public spending necessary for people over 65 years who have over their lives contributed to the nation.

With birth rates low and deaths increasing, natural increase is no longer driving Australia’s population. Immigration is increasingly relied on to offset the ageing of the workforce. Over half (54%) of Australia’s population growth is from net overseas migration.

Preparing for an older population

In a 2013 United Nations survey, the Australian government reported concerns about population ageing, a desire to increase the “too low” birth rate, but satisfaction with the level of net overseas migration. Interestingly, a preference for migration away from cities was also cited.

From current policy and discourse, you would not know these views were held. Most Australians also report a preference for the level of immigration to remain the same or be increased, contrary to sentiments we often hear.

Australia has time to prepare for, and make opportunities of, the challenges of an ageing population. Some countries are facing tough decisions now and it is interesting to watch the politics play out. What Japan, China and Germany show is that we need to take action now.

Insightful guides are in place already. South Australia has had a population strategy since 2004. Tasmania recently adopted one.

These state strategies focus on growth to curb economic downturn. What is important in these two cases is that both emphasise policy portfolio linkages, as well as evidence and reporting against targets without coercive measures.

What is a sensible approach to population policy?

A renewed, earnest and transparent population conversation is needed. With ever more reliance on immigration, we must go beyond the unhelpful pro-immigration versus pro-nationalism debate to consider our population prospects.

The key question is: how can Australia make opportunities of its demographic challenges?

Australia has the potential to be a global leader in innovative markets and research and development. An ageing population provides an interesting market opening; we just need to be smart about it. Without careful consideration, Australia will be merely a bystander in the increasingly competitive global market.

Policy connectedness should exist between portfolios. These include: health; housing; education, skills and training; employment; infrastructure; regional development; water and energy; environment; and migrant settlement.

We can invest more effectively in young people — our future workforce and economic lifeblood — if we consider a life-course approach to population dynamics. Family friendly, gender-equal workplaces will go a long way to ease the pressures of having children. Integral to this is affordable and accessible child care.

And establishing a ministerial portfolio overseeing population strategy would be a good start.

Author: Liz Allen , Demographer, ANU Centre for Social Research and Methods, Australian National University

The working poor: one-in-five households being left behind

From The New Daily.

It was heartening on Thursday to see job ads continue to tick up, rising 1.7 per cent in the three months to the end of May, or 9.2 per cent in the past year.

But before we get too excited, this week’s census data raises real concerns that the kinds of jobs being created aren’t paying enough for workers to live on.

The alarming fact is that one-fifth of households in 2016 recorded a gross income, including all government benefits, of less than $650 a week.

To put that in context, that’s less than the full couple rate for the aged pension ($670 a week) and less than a full-time worker on the minimum wage ($673).

Think about that for a minute. If 800,000 households say they have income of less than $650, and if that figure by definition excludes retiree couples living on the full pension, or on a higher combination of pension and super, we’ve got a huge problem.

The census, for some reason, compares the number of households on $650 or less with households falling under the same threshold five years ago.

That’s a bit strange, because the consumer price index has risen a cumulative 9.85 per cent in that time. So you’d need $714 today to buy the same goods and services as in 2011.

For middle Australia, that’s proving less of a problem – real wages are not rising as quickly as GDP growth, which means companies are taking a larger share of growth as profits, but at least they’re ahead of inflation.

So while the economy expanded 6.2 per cent in real terms over five years, the median personal income was up 4.6 per cent , and median household incomes are up 6.1 per cent. Not great, but a lot better than for the sub-$650 group.

The Australian Council of Social Services estimates that 800,000 households are in housing stress – spending more than 30 per cent of their income on housing – and while that’s not an exact fit with the sub-$650 group, the overlap would be very large.

Who are we forgetting?

When Bob Menzies spoke of a ‘forgotten people’ in his famous 1942 speech, he meant a middle class who were not wealthy, but neither backed by the then-huge union movement.

Well, times change. The census reveals an alarmingly large cohort of people forgotten for other reasons.

They are left behind by a skyrocketing housing market, stuck in the rut of under-employment, attacked as a drain on the budget or for not paying more tax, seeing their penalty rates cut, or forced to jump through undignified job-seeker hoops.

So yes, it’s natural for the political and media classes to welcome an uptick in job ads. But we have to ask if that’s going to do anything to lift the fortunes of the gradually swelling ranks of working poor.

This year’s census summary was released under the headline “Census reveals: we’re a fast changing nation”.

When one in five households live on less that the age pension and less than a single minimum wage, “a fast polarising nation” might be more apt.

Eight rate hikes in two years? Our economy should be so lucky!

From The New Daily.

A widely-misreported warning of eight rate hikes in two years would in fact be good news for the economy, according to the man who made the prediction.

Dr John Edwards, former economic advisor to Paul Keating, former RBA board member and former chief economist at HSBC, struck fear into the hearts of mortgage holders this week by supposedly forecasting that the official cash rate would rise from 1.5 to 3.5 per cent by the end of 2019.

He actually wrote that the RBA would be forced to lift rates to 3.5 per cent only if the Australian economy substantially improved.

“This implies that within three years Australia’s economic world has returned to more-or-less normal, with wages growth of 3.5 per cent, inflation of 2.5 per cent, and output growth of 3 per cent,” Dr Edwards said.

He admitted such a rosy outcome might never eventuate.

“The pace of tightening will anyway be governed by the strength of the economy,” he wrote.

“If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

The piece prompted warnings that households would be forced to pay hundreds more a year in mortgage repayments, but Dr Edwards himself feared no such disastrous outcome: “The increases will cause less distress than will be widely observed.”

He said this was because housing interest payments were at 7 per cent of household disposable income, compared to 9.5 per cent in 2011 and 11 per cent just before the US-triggered global financial crisis.

These figures ignore the enormous impact of principal repayments. But the latest census data confirmed his point, showing that most parts of Australia were paying less overall on their mortgages than five years ago.

Dr Stephen Koukoulas, former economic adviser to Julia Gillard, said the economy would have to be “on fire” to necessitate eight rate rises, which would be “fantastic” news for workers.

He said GDP growth would have to be closer to 5 per cent, inflation 4 per cent and unemployment 3 per cent for the RBA to push the cash rate up by 200 basis points.

“If it comes to pass, it’ll be because the economy is in an inflation-inspired boom,” Dr Koukoulas told The New Daily.

Such a boom would help regular Australians because inflation is largely driven by household consumption, and “you need wages growth to underpin household consumption”.

A key factor is that the RBA sets the cash rate to target core inflation of 2 to 3 per cent over the medium term.

Because inflation has been below target for so many years, the central bank might allow it to sit at 3.2 or 3.3 per cent for a similar period of time, Dr Koukoulas said.

“There is a serious discussion among central banks that because of the hangover of the GFC, with low inflation still being recorded, let’s tolerate a year or two of above target inflation and let the unemployment rate get back down a little bit.”

Core inflation would only sit persistently above 3 per cent over the next two years if workers were “swimming in cash”, offsetting higher mortgage payments, which Dr Koukoulas said was an “improbable” but “fantastic” scenario.

Tom Kennedy, economist at JP Morgan, saw no such wage boom on the horizon.

In a research note on Thursday, he said next month’s minimum hourly wage increase of 3.3 per cent would be wholly offset by the much-publicised reduction in Sunday penalty rates.

Structural changes, such as underemployment and the increasing share of lower-paid services jobs, meant that the unemployment rate (currently 5.5 per cent) “most likely understates the slack” in the labour market, Mr Kennedy wrote.

Workers would have to get substantially more jobs and hours to enjoy wage rises, he said.

Australians are working longer so they can pay off their mortgage debt

From The Conversation.

Rising mortgage debt is affecting everything from employment to spending, as Australians approach retirement, our study finds. Higher levels of housing debt among pre-retirees are linked to them working for longer.

We found for a home owner aged 45-64 years, the chances of being employed are around 40% higher for every additional A$100,000 in mortgage debt owed against the family home.

There’s also a link between house price changes and household spending. For every A$100,000 increase in the value of a person’s house, annual household spending of home owners increased by around A$1,500. These home owners are willing to increase their spending because they’re able to borrow more against their home to finance it.

Long-run trends in mortgage debt

Australians are paying down their mortgages later in life. The percentage of home owners aged 25 years or over who are carrying a mortgage debt climbed from 42% to 56% between 1990 and 2013.

Mortgage debt burdens among pre-retirees have soared. For home owners aged 45-54 years, the incidence of mortgage debt has nearly doubled from 36% to 71%. Among those aged 55-64 years, this incidence has more than tripled from 14% to 44%.

These trends reflect at least two things. Higher housing cost burdens have resulted in a decline in home ownership rates among young people. Those able to access home ownership are doing so later in life and by taking on higher levels of debt relative to their incomes.

Flexible mortgage products also now allow home owners to unlock wealth stored in the family home whenever required, and not just their retirement years.

Higher mortgage debts, longer working lives

Australians are working longer because they are paying down their mortgages later in life.

Our modelling, based on the 2001-2010 Household, Income and Labour Dynamics in Australia (HILDA) survey data, shows that pre-retirees aged 55-64 years are 18% more likely to continue working for every A$100,000 increase in their mortgage debt.

On the one hand, unexpected increases in housing prices could have caused buyers considering home ownership to borrow more in order to buy a house, and encouraged homeowners to spend more by withdrawing the equity from their homes. These mortgagors then have to extend their working lives to meet higher mortgage repayments.

On the other hand, longer life expectancy may have encouraged many Australians to plan longer working lives. Carrying higher levels of mortgage debt later in life could be a financial tactic to finance their spending over a longer lifespan.

Borrowing more, spending more?

Our analysis found some differences between subgroups of home owners and between periods preceding and following the global financial crisis.

Before the global financial crisis highly indebted home buyers were more prepared to use their mortgages in order to bridge the gap between spending plans and income. After the crisis, home buyers with large mortgages were less willing to use their mortgages in this way.

In contrast, the spending plans of indebted households who both own their home and a second investment property seem more sensitive to house price movements since the global financial crisis. Property investors with mortgage debt increased their average yearly spending after the crisis from A$1,700 to over A$2,800 for every A$100,000 increase in their housing wealth.

On the other hand, for home owners with no investment properties, average yearly spending tightened from A$1,700 to A$1,500 for every A$100,000 increase in their housing wealth. This suggests investors with debt are not so risk-averse as other homeowners.

Housing, productivity and the economy

Mortgage debts have important economy-wide effects through interactions with labour markets and consumer spending.

Ageing is often associated with lower rates of labour force participation and declining physical and mental health, which can result in reduced productivity growth. If people are extending their working lives to repay higher mortgage debt, this could mitigate some of the productivity consequences of population ageing, albeit at the expense of greater exposure to debt in later life.

When real house values are rising, home owners and property investors are able to borrow more against their home to finance their spending. In the short run this can help offset the effect of stagnant wages (on their spending) and thereby sustain growth momentum in the economy.

But if wages fail to pick up, these higher levels of debt can be a drag on growth. High levels of indebtedness also increase exposure to house price and interest rate risk, and pose a threat to macroeconomic stability.

Our research makes a compelling case for considering housing differently, as essential economic infrastructure. Housing needs to be re- positioned from the periphery to a central place within national economic policy debates. This could be crucial to an understanding of how our housing system can promote rather than curb economic growth in Australia.

Authors: Rachel Ong, Deputy Director, Bankwest Curtin Economics Centre, Curtin University; Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University; Kadir Atalay, Senior Lecturer in Economics, University of Sydney; Melek Cigdem-Bayram, Research Fellow, RMIT University

The census confirms Australia’s great housing swindle

From The New Daily.

The new census data released on Tuesday should infuriate young Australians because it shows definitively how the housing market is being rigged against them.

It dispels for good the myth that a shortage of dwellings is what’s causing house prices to rocket beyond their reach.

The key myth-busting statistic is the average number of people per dwelling, which has not budged an inch in the five years since the last census. It’s staying at 2.6 which is where it was back in 2000 well before the house price boom began.

Breaking down that number, the census shows the number of occupied dwellings increased by 6.8 per cent over five years, which is less than population growth over the same period: 8.8 per cent.

However, the number of unoccupied dwellings grew at 11.3 per cent over five years. That equates to 105,000 more empty dwellings since 2011.

Those numbers explain the apparent paradox of ‘people per dwelling’ remaining static, while renters and home buyers experience a tightening market.

And it is getting tighter, as shown by the rental data. Median rents increased by 17.5 per cent over the period, outstripping average income growth of 13.7 per cent over the same period.

That pushed more people into ‘rental stress’, defined as requiring them to spend more than 30 per cent of their disposable income on rent. In 2011 the proportion was 10.4 per cent, but that has now risen to 11.5 per cent.

Home rage

So the dwellings are there, but either not on the market or increasingly unaffordable if they are.

What’s maddening about those two problems is that they are caused by politicians, not ‘the market’ as the pollies always try to pretend.

There are two categories of market participants that have led to this situation.

One is overseas property investors, dominated by buyers from mainland China. They are permitted to buy only new dwellings – a rule that is supposed to stimulate housing supply and put downward pressure on prices.

In reality, there are two major exemptions. They can buy homes for their adult children to live in during periods of study in Australia, and, more recently, to house children as young as six who enrol in Australian primary schools.

But the investors who are leaving properties vacant aren’t interested in accessing education. They buy off-the-plan apartments as a store of wealth, much like giant gold bars.

If China suffers an economic or geopolitical collapse, which many commentators think likely, some of their fortune will be sitting in high-rise towers in Sydney, Melbourne or Brisbane.

The second class of market participants operating in a decidedly non-free-market way are local investors seeking to minimise tax through negative gearing and profit from the 50 per cent discount that applies to any capital gains they make.

Those investors are subsidised by other taxpayers to outbid would-be owner-occupiers.

Over time, the toxic combination of negative gearing and the capital gains tax discount have returned tens of billions of dollars to generally older, wealthier Australians, thereby increasing the tax bills of younger Australians.

Oh yes, and pushing property prices way out of reach.

That is turning younger Australians into a generation of renters. Tuesday’s census figures confirm this ongoing trend, with the percentage of Australians renting rising from 29.6 to 31 per cent since 2011.

Put together, these numbers are absurd, inequitable, and a drag on the economy because of the ever-increasing proportion of wages being handed by young Australia to the bank-share-owning and cash-deposit-holding older Australians.

If young Australians weren’t furious before the census data came out, they should be now.