Social Trends – Page 139 – Digital Finance Analytics (DFA) Blog

Treasury Releases Affordable Housing Measures

As part of the 2017-18 Budget, the Government announced it would be providing tax incentives to increase private and institutional investment in affordable housing. They have now released an exposure draft for comment.

The legislation proposes an additional 10% Capital Gains Tax (CGT) benefit for investors who provide affordable housing via a recognised community housing entity.

It also allows investment for affordable housing to be made via Managed Investment Trusts (MIT).

The purpose of public consultation is to seek stakeholder views on the exposure draft legislation and explanatory material. Deadline for submissions is 28th September.

Changes To CGT.

The Bill encourages investment in affordable housing for members of the community earning low to moderate incomes. This is achieved by allowing investors to have an additional affordable housing capital gains discount of up to 10 percent at the time a CGT event occurs to an ownership interest in a dwelling that is residential premises that has been used to provide affordable housing. By reducing the CGT that is payable upon disposal of affordable housing, it ensures that a greater proportion of the gain realised at disposal is retained by the investor.

The additional capital gains discount applies to investments by individuals directly in affordable housing or investments in affordable housing by individuals through trusts (other than public unit trusts and superannuation funds), including MITs to the extent the distribution or attribution is to the individual and includes such a capital gain.

An individual is eligible for an additional affordable housing capital gains discount (direct investment) on a capital gain if they:

make a discount capital gain from a CGT event happening in relation to a CGT asset that is their ownership interest in a dwelling; and

used the dwelling to provide affordable housing for at least three years (1095 days) which may be aggregate usage over different periods.

Only dwellings that are residential premises that are not commercial residential premises can be used to provide affordable housing. Therefore this measure does not apply to caravans, mobile homes and houseboats as they are not residential premises.

The tenancy of the dwelling or its availability for rent to be exclusively managed by an eligible community housing provider. Community housing providers provide rental housing to tenants who are members of the community earning low to moderate incomes. Community housing providers may own some of the dwellings, however they also manage dwellings on behalf of investors, institutions and state and territory governments. Many community housing providers specialise in providing accommodation to particular client groups which may include disability housing, aged tenants and youth housing. Community housing providers are regulated by the states and territories. For the purposes of this measure an eligible community housing provider is an entity that is registered as a community housing provider to provide community housing services under a law of the Commonwealth, state or territory or is registered by an Australian.

Affordable housing through managed investment trusts.

The proposals will amend taxation laws to encourage managed investment trusts (MITs) to invest in affordable housing. They:

allow MITs to invest in dwellings that are residential premises (but not commercial residential premises) that are used to provide affordable housing primarily for the purpose of deriving rent; and

apply the concessional 15 per cent withholding tax rate to fund payments: – to the extent they consist of affordable housing rental income and certain capital gains from dwelling used to provide affordable housing; and – that are paid or attributed to MIT members who are foreign residents of jurisdictions which Australia has listed as an exchange of information country.

A MIT is a type of unit trust which investors can use to collectively invest in assets that produce passive income, such as shares, property or fixed interest assets. There also currently is significant uncertainty about the eligibility rules for trusts being MITs if investments are made in dwellings that are residential premises. This is because there is a view that investment in residential property is not made for a primary purpose of earning rental income. It is instead for delivering capital gains from increased property values, and therefore not eligible for the MIT tax concessions.

This measure clarifies the eligibility rules for trusts to be MITs if they invest in dwellings that are residential premises. This will help to provide investors with investment certainty. This change will not, however, affect MITs investing in commercial residential premises. This means that trusts can invest in commercial residential premises and qualify as MITs provided this investment is primarily for the purpose of deriving rent consistent with the eligible investment business rules.

Income inequality ticks down as the rich see their incomes fall: ABS

From The Conversation.

Income inequality has dropped slightly in Australia, largely driven by a fall in incomes for the richest 20% of the population, according to the latest Australian Bureau of Statistics (ABS) Survey of Household Income and Wealth.

The richest 20% of the population have seen their real disposable incomes (adjusted for the number of people living in the household) fall by nearly 5%, or close to A$100 per week. Most other households have seen no real increase in their incomes over the two years since the previous survey was released.

Our recent public debate over whether inequality is rising or falling ran into the problem that the two most important sources of data were showing different trends. The ABS survey continues to show a higher level of income inequality than the HILDA survey, but the latest trends now look more similar.

Possibly the best characterisation of the latest ABS figures is that they show inequality remains higher than at any period before 2007-08, but in the short term it is unclear what to expect.

As you can see in the following chart, there has been a slight fall in income inequality between 2013-14 and 2015-16, with the Gini coefficient for “Equivalised Disposable Household Income” falling from 0.333 to 0.323. The Gini coefficient is a measure between zero (where all households have the same income) and one (where only one household claims all the income).Equivalised Disposable Household Income is the total income of the household from all sources including social security payments, minus direct taxes, and then adjusted for the number of people living in the household. For example, a household of a couple with two children under the age of 15 is assumed to need 2.1 times the income of a household of a single adult to achieve the same standard of living.

So what explains these most recent trends? At this stage, it’s difficult to be definitive. It should also be borne in mind that it has only been two years since the last survey, the overall change is not large, and so we should be cautious in unpacking the trends.

But it is worth noting that this small reduction in income inequality has come at the same time as a small fall in both median and mean disposable incomes for Australian households.

The average taxes paid by households have also risen slightly in real terms (adjusted for inflation) since 2013-14, while the average social security benefits have stayed the same in real terms. This masks a significant drop in the real level of family payments (such as the family tax benefit) received by households, and increases in age pensions and “other payments” (overseas pensions and benefits, partner allowance, sickness allowance, special benefit, war widow pension (DVA), widow allowance, and wife pensions etc.).

However, where there does appear to be large changes are in the sources of income for households. If we compare incomes between the 2013-14 and 2015-16 surveys, we find that the only group that has enjoyed real increases in incomes are those whose main source of income is social security benefits. But these have risen by only A$6 per week, or about 1.3%, and they remain by far the lowest income households in Australia, with their average incomes remaining less than half of all other household groups.

Households who mainly rely on wages and salaries have seen their average real disposable incomes fall by about A$17 per week, or about 1.4%.

The biggest declines are among those who mainly rely on self-employment income from unincorporated businesses – usually a small business which has not incorporated as a registered company – and people whose main source of income is “other”.

“Other” includes many things, such as income received as a result of ownership of financial assets (interest, dividends), and of non-financial assets (rent, royalties), as well as from sources such as incorporated business income (i.e. companies), superannuation, child support, workers’ compensation and scholarships.

This group is fairly small – about 8% of households, but they are both the group with the highest and most unequal incomes and by far the highest level of net worth (assets minus liabilities). Their average incomes have fallen by around A$93 a week in real terms, or around 8%, but their median real incomes rose by around A$11 per week, suggesting that the loss in income was concentrated among higher income households in this group.

This group in 2013-14 had by far the highest level of income inequality with a Gini coefficient of 0.474. This has fallen to 0.423 in 2015-16. But because a lot of this income comes from the stockmarket, we can expect it to be more volatile.

The group who appear to have lost by far the most, however, are households whose main source of income is unincorporated business income. This is an even smaller group – around 4.6% of all households in 2015-16. Their real average incomes have fallen by more than A$160 per week, or around 16%. They also have a high level of inequality within their group, with a Gini coefficient of 0.353 in 2015-16, down from 0.389 two years previously.

But the overall change in income inequality is not large, and it does not significantly change Australia’s international ranking.

Writing in the Australian yesterday, Nick Cater of the Menzies Research Centre asserted that Australia is “one of the most equal and socially mobile nations on earth”. But even with the slight reduction in inequality, we are slightly above the OECD average, and there are around 20 OECD countries who are likely to have lower levels of income inequality than Australia.

Overall, the data shows a relatively small change in incomes for employee households and for households whose main source of income is social security payments. Together, these account for 87% of all households in Australia.

The reduction in overall income inequality in this period is therefore explained by the falls in income for the self-employed and for the “other” group – the group with the highest incomes and wealth.

Understanding what exactly has been happening for these groups and why will require further time and analysis. The volatility of the income sources for these groups is another reason to be cautious about projecting future trends.

Author: Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

First Time Buyers – The First Step is a Stretch – RBA

The RBA published a research discussion paper “The Property Ladder after the Financial Crisis: The First Step is a Stretch but Those Who Make It Are Doing OK”. Good on the RBA for looking at this important topic. But we do have some concerns about the relevance of their approach.

This paper investigates how things have changed since the GFC for those stepping onto the property ladder. Is ‘generation rent’ an important trend? Are people buying first homes taking on ‘too much’ debt? And what implications does this have for our understanding of the growing level of aggregate household debt?

They highlight the rise of those renting, and attribute this largely to rising home prices. As a piece of research, it is interesting, but as it stops in 2014, does not tell us that much about the current state of play! However, they conclude:

The results we find in this paper are very much bittersweet. On the one hand, we find that fewer people are making the transition from renters to home owners than prior to the crisis. Given research that links the rise in inequality to changes in home ownership patterns, this could have significant longer-term consequences for the distribution of wealth in Australia. On the other hand, those households that do make the transition are more financially secure than earlier cohorts. So the rise in aggregate and individual debt ratios do not appear to be associated with an increase in household financial vulnerability – at least as far as first home buyers are concerned.

We attribute much of this change to the increase in housing prices and the associated hurdle that deposit requirements represent. While saving a deposit is a stretch, it is also a sign of financial discipline that is associated with fewer subsequent difficulties. Thus, while the first step on the property ladder is more of a stretch than before the crisis, those who do make the step are, on average, better placed to pay off their loans than prior to the crisis.

A few points to note.

First, the RBA paper uses HILDA data to 2014, so it cannot take account of more recent developments in the market – since then, incomes have been compressed, mortgage rates have been cut, and home prices have risen strongly in most states, so the paper may be of academic interest, but it may not represent the current state of play. Very recently, First Time Buyers appear to be more active.

More first time buyers are getting help from parent, and their loan to income ratios are extended, according to our own research.

Also, they had to impute those who are first time buyers from the data, as HILDA does not identify them specifically. Tricky!

The past three wealth modules of the survey (2006, 2010 and 2014) have included a variable, ‘rpage’, which asks the household reference person whether they have ever owned residential property and, if so, the age at which they first acquired, or started buying, this property.

Another variable, ‘hspown’, available in the 2001 and 2002 surveys only, asks households whether they still live in their first home. This variable allows us to identify FHBs directly for these years.

We combine the information from ‘hspown’ and ‘rpage’ into the one variable identifying indebted FHBs. For 2001 and 2002 we use the ‘hspown’ variable and the ‘rpage’ variable is used thereafter.

The percentage of owner-occupier households identified as FHBs in any given year is, on average, between 1 and 2 per cent over the course of the survey, which is broadly in line with aggregate measures. This corresponds to between 50 and 100 households each year.

So a very small sample.

Next, the RBA cited the aggregate household Debt-to-income Ratios cross-country estimates. Rising trends are apparent in many countries.

They then proceeded to explain the drawbacks of this data set.

Notwithstanding this statistic’s frequent use, it has a number of drawbacks. First, it compares a stock of debt with a flow of income rather than, say, a stock of debt against a stock of assets or a flow of repayments against a flow of income. This mixing of concepts means that it is not clear what a reasonable benchmark for the level of debt to income might be. There are also important distributional considerations that affect what meaning can be attached to the aggregate values. At heart these issues stem from the fact that, while it is tempting to interpret higher aggregate debt-to-income ratios through a representative consumer lens, it is misleading. Of particular note is that the aggregate ratio places more weight on high-income households, which can be misleading. Higher-income households can support higher debt-to-income ratios than lower-income households. This is primarily because a smaller fraction of a higher-income household’s expenditure needs to be devoted to necessities leaving more available to spend on other things. There are also other dimensions in which borrowers may differ, such as their risk of unemployment and their ability to obtain funds in an emergency, that would affect the inherent riskiness of any given debt level.

Fourth, they show that first time buyers have a higher mean debt-to-income ratio compared with other borrowers.

Turning first to the aggregated data, we can see in Figure 6 that the debt-to-income ratio of FHBs is substantially higher than that of all other indebted owner-occupiers. This reflects the fact that FHBs are at the beginning of their loan life cycle. That is, before they have had the opportunity to pay down their loan. Comparing the pre- and post-GFC periods, we see that the median FHB debt-to-income ratio was around 330 per cent in 2014, up approximately 40 per cent from the ratio of 230 per cent in 2001. FHBs are taking on more debt than in the past.

Actually, more recent data shows that Debt-to-Incomes are even more extended, with some FTB’s in Sydney at a ratio of 7x income (according to our more recent surveys).

Finally, they show that “despite higher debt levels, households who became indebted FHBs post-2007 appear to be paying down their mortgages and reducing their debt-to-income ratios at the same rate, or slightly faster, than households who took on a mortgage before 2007”.

In the year after taking out a loan, the reduction in the debt-to-income ratio for FHBs in the post-2007 period was around 8 per cent, compared to 5 per cent for the pre-2007 cohort. After three years, the debt-to-income ratio for FHBs in the pre- and post-2007 periods has decreased by 14 and 18 per cent, respectively. Given that these rates of amortisation are significantly higher than those associated with required repayments or interest rate changes over this period, it seems that these are voluntary choices rather than the consequence of changes to required repayment schedules. The median loan-to-valuation ratio of FHBs in the post-financial crisis period also decreases by more than for the previous cohort, although this is likely due to the rise in housing prices increasing the denominator of this ratio over time.

So, while there are some general conclusions, we are not sure the work really adds much to the current debate on housing affordability, housing debt, and the current stresses which households, especially first time buyers are experiencing.

How market forces and weakened institutions are keeping our wages low

From The Conversation.

Within the political class there is a low level moral panic about low wages growth. The irony is that those lamenting this situation are simply witnessing the ultimate outcome of policies they have long advocated.

While Australia still has systems like Industrial Tribunals and Awards – given how they interact with market forces today, these institutions now work to entrench wage inequality rather than reduce it.

Wage rates and movements are determined by a combination of market and institutional forces. Technology, human capital, levels of labour supply and the profitability of companies in laggard and leading set the lower and upper bounds for sustainable wage levels.

As economist and philosopher Adam Smith noted, the income workers require to survive sets what’s called a “market floor” for wages – the lowest acceptable limit. Rates of profit in the best performing firms set the upper limit, as Australia’s executive class has shown very clearly for over three decades now. What rates actually prevail within these very broad limits are determined by institutional forces – in Australia, the award system of minimum wages and unions collective bargaining rights.

Historically Australia has had the great benefit of having institutional arrangements that balanced these forces well. The key elements of this were a network of industrial tribunals that regularly assessed the overall economic and social situation and determined what rates and movements in pay were sustainable.

These rates were not set unilaterally, but in coordination with what employers and organised workers indicated was possible, in industry level collective agreements.

The defacto rule was that wage movements should equate to movements in productivity plus the cost of living. The standards set in the leading profitable sectors then spread to the entire workforce through the maintenance of award relativities (ie standard comparative rates of pay set by reference to benchmark occupations like metal fitter, carpenter and truck driver). During this time awards rates approximated pretty closely to going rates of pay.

These underlying principles were not unique to Australia. In the era following the second world war it meant that in most countries workers shared in productivity growth and wages tracked pretty closely with it.

Since the mid 1970s and especially since the 1980s all this has changed.

Australia has not seen anything like full employment since the early 1970s. While unemployment has been cyclical, it has usually been 5% or more since that time. More importantly, underemployment has been on the rise.

This has not been cyclical. It has racketed up after each recession.

And that is just in terms of hours worked. If we took into account workers with skills not being used, levels of labour underutilisation are much higher. Estimates of underutilisation of this nature vary as being between 15 and 25%.

High levels of indebtedness also weaken workers bargaining power. Today few can hold out for long bargaining periods – either individually or collectively. This gives employers a huge advantage in setting wages.

The legacy of labour market ‘reform’

In the 1970s and 1980s Australia’s wage setting institutions worked well to protect wage rates against the full force of these downward pressures. Since the early 1990s, however, those institutions have been transformed.

The key issue here has not just been the weakening of unions and their bargaining power. Just as significant has been the uncoupling of wage rates set by wage leaders, from the wages of the weak. Workers in benchmark setting sectors like construction used to establish wage norms. These were recognised by industrial tribunals as a community standard which they then passed on to workers in weaker sectors like retail through generalised award wage base rises. In this way the wages of the strong supported movement in the wages of the weak.

This was a key “reform” of the Keating government, introduced with the active support of the ACTU. It was explicitly designed to let wages of the strong grow faster than the wages of the weak to maintain macroeconomic balance as the wages system decentralised.

The Howard governments’ labour law changes – first the Workplace Relations Act (1996) and then Workchoices (2006) – merely extended the logic of this reform trajectory. The current Fair Work Act merely codifies this trajectory as the law of the land today.

Today Austraila’s minimum wages remain among the highest in the world. The difference is they operate in relative isolation from the rest of the workforce.

Until the 1990s they were part of an interconnected system that ensured wages gains of the strong were widely shared. Today they provide the ultimate safety for those with the weakest levels of bargaining power – currently about 15% of the workforce directly and a further 15% indirectly.

We should also not forget the new found role of Treasury departments. Immediately after its election, the O’Farrell government in NSW legislated to cap wage rises in the NSW public sector to no more than 2.5% per annum.

Pubic sector teachers and nurses, especially in NSW, were emerging at the new wage leaders. This meant that their wages were now capped and this Treasury edict – and not collective bargaining and arbitration – set community wage norms.

Today our wages system has a different logic. The recent cut in penalty rates is a case of the wages of the weak putting pressure on the wages of the strong. While the Fair Work Commission quarantined the rest of the workforce from this cut by limiting its recent decision to low paid service workers – the precedent is there. Future movement in wage standards for anti-social hours will be down and not up.

Over the course of the twentieth century Australia devised a remarkable set of institutions to manage the complex problem of wages and labour standards. It’s time we built on what little remains of that legacy to remedy low wage growth.

Building on these institutions doesn’t mean restoring what was. New policies need to engage with new realities. Even former enthusiastic supporters for reducing labour standards and wages such as the IMF now recognise growth needs to be inclusive if it is to sustainable.

It’s much easier to destroy institutions that deliver fair pay than build them. Australia found ways of achieving fair pay over the course of the twentieth century – it can to so again.

Author: John Buchanan, Head of the Discipline of Business Analytics, University of Sydney Business School, University of Sydney

Half Of Pre-Retirees Risk Significant Shortfalls

Almost half of Australians between the ages of 50 and 70 are at risk of falling short of a comfortable retirement, according to new research released by MLC.

The research explored the thoughts and habits of the “forgotten” low super balance Boomers, and revealed nearly half (43 per cent) of those surveyed admitted to having a superannuation balance of less than $100,000.

Additionally, 33 per cent of this age group reported having $50,000 or less in their super account, falling extremely short of what is recommended a single retiree needs for a comfortable retirement (over $545,000).

Lara Bourguignon, General Manager of Customer Experience, Superannuation at MLC, believes that all Australians should enjoy retirement – regardless of their financial situation.

“Australia has a high level of poverty among retirees, and we believe that super is one of the greatest tools we have to change this.”

“While these results are concerning, we want to remind people in this age group that it’s not too late for them to take action and better understand their holistic wealth position as they prepare for retirement.”

Ms Bourguignon said there are a number of steps Australians can take to maximise their super balance in their final years of work, and to structure their portfolios to make the most of what they do have when they’re in retirement.

“For example, we know some of the people in this age group have other assets such as property in their name beyond super, which is an important factor for them to consider when planning for retirement.”

“If they don’t have other assets, engaging with their super fund may prove to be a cost effective way for them to access advice in lieu of seeing a financial adviser,” Ms Bourguignon said.

Of those with a retirement saving of under $100,000, the research also revealed 42 per cent only became concerned about the balance of their retirement savings in their 50s, while over 30 per cent admitted they never checked their super balance.

“Sticking your head in the sand will often lead to unnecessary stress”.

How governments have widened the gap between generations in home ownership

From The Conversation.

Various government policies have fuelled the demand for housing over time, expanding the wealth of older home owners and pushing it further and further beyond the reach of young would-be home buyers. A new study highlights this divide between millennials and their boomer parents.

The study is part of a Committee of Economic Development of Australia (CEDA) report called Housing Australia. It compares trends in property ownership across age groups over a period of three decades.

Between 1982 and 2013, the share of home owners among 25-34 year olds shrunk the most, by more than 20%. On the other hand, the share of home owners among those aged 65+ years has risen slightly.

The rate of renting has spiralled among young people. By 2013, renting had outstripped home ownership among 25-34 year olds.

Same policies, different impacts on generations

There is undoubtedly a growing intergenerational divide in access to the housing market. The timing of policy reforms has been a major driver of this widening housing wealth gap.

Negative gearing has long advantaged property investors, potentially crowding out aspiring first home buyers. While negative gearing was briefly quarantined in 1985, this was repealed after just two years.

The appeal of negative gearing grew as financial deregulation spread rapidly during the 70s and 80s. This deregulation widened access to mortgage finance, but also pushed real property prices to ever higher levels.

In 1999, the Ralph review paved the way for the reform of capital gains tax on investment properties. Instead of taxing real capital gains at investors’ marginal income tax rates, only 50% of capital gains were taxed from 1999 onwards, albeit at nominal values.

The move, designed to promote investment activity, actually aggravated housing market volatility. The confluence of negative gearing benefits and the capital gains tax discount encouraged investors to go into more debt to finance buying property, taxed at discounted rates. The First Home Owners Grant, introduced in 2000, was another lever that increased demand. In the face of land supply constraints, these sorts of subsidies were likely to result in rising house prices.

Other policy reforms, while not directly housing related, have also affected young people’s opportunities to accumulate wealth.

The Higher Education Contribution Scheme (HECS) was introduced in 1989, at a time when many Gen X’s were entering tertiary education. This ended access to the free education that their boomer parents enjoyed.

HECS parameters were tightened over time. And in 1997, HECS contribution rates rose for new students and repayment thresholds were reduced.

Of course, the 1992 introduction of the superannuation guarantee would have boosted Gen X’s retirement savings relative to boomers. However, these savings are not accessible till the compulsory preservation age, so can’t be used now to buy a house.

All these policies have clearly had varying generational impacts, adversely affecting home purchase opportunities for younger generations while delivering significant wealth expansion to older home owners.

An intergenerational housing policy lens

A new housing landscape has emerged in recent years. It is marked by precarious home ownership and long-term renting for young people.

It’s also dominated by a growing wealth chasm – not just between the young and old – but also between young people who have access to wealth transfers from affluent parents and those who do not.

The majority of housing related policies do not consider issues of equity across generations. There are currently very few examples of potential housing reforms that can benefit multiple generations.

However, there is one policy that could – the abolition of stamp duties. It would remove a significant barrier to downsizing by seniors.

The equity released from downsizing would boost retirement incomes for seniors, while freeing up more housing space for young growing families. Negative impacts on revenue flowing to government could be mitigated by a simultaneous implementation of a broad based land tax. This would in turn push down house prices.

As life expectancies increase, the need for governments to take into account policy impact on different generations is critical. On the other hand, policies that take a short-term view will only worsen intergenerational tensions and entrench property ownership as a marker of distinction between the “haves” and “have nots” in Australia.

Author: Rachel Ong, Deputy Director, Bankwest Curtin Economics Centre, Curtin University

The Future: Save More, Work Longer

According to the IMF Blog, Young adults in advanced economies must take steps to increase their retirement income security. Younger generations will have to work longer and save more for retirement.

But with flat income, high debt, and potentially rising interest rates, saving we think may be an impossible task, which will redefine the concept of retirement altogether.

Public pensions have played a crucial role in ensuring retirement income security over the past few decades. But for the millennial generation coming of working age now, the prospect is that public pensions won’t provide as large a safety net as they did to earlier generations. As a result, millennials should take steps to supplement their retirement income.

Pensions and other types of public transfers have long been an important source of income for the elderly, accounting for more than 60 percent of their income in countries that are members of the Organisation for Economic Co-operation and Development (OECD). Pensions also reduce poverty. Without them, poverty rates among those over 65 also would be much higher in advanced economies.

Pressure on pensions

But pensions are also costly to provide. Government spending on pensions has been increasing in advanced economies from an average of 4 percent of GDP in 1970 to close to 9 percent in 2015—largely reflecting population aging.

Population aging puts pressure on pension systems by increasing the ratio of elderly beneficiaries to younger workers, who typically contribute to funding these benefits. The pressure on retirement systems is exacerbated by increasing longevity—life expectancy at age 65 is projected to increase by about one year a decade.

To deal with the costs of aging, many countries have initiated significant pension reforms, aiming largely at containing the growth in the number of pensioners—typically by increasing retirement ages or tightening eligibility rules—and reducing the size of pensions, usually by adjusting benefit formulas. Since the 1980s, public pension expenditure per elderly person as a percent of income per capita—the so-called economic replacement rate—has been about 35 percent. But that replacement rate is projected to decline to less than 20 percent by 2060.

This means that younger generations will have to work longer and save more for retirement to achieve replacement rates similar to those of today’s retirees.

Working longer

To close the gap in the economic replacement rate relative to today’s retirees, one option for younger individuals is to lengthen their productive work lives. For those born between 1990 and 2009, who will start to retire in 2055, increasing retirement ages by five years—from today’s average of 63 to 68 in 2060—would close half of the gap relative to today’s retirees. A longer work life can be justified by increased longevity. But prolonging work lives also has many benefits. It enhances long-term economic growth and helps governments’ ability to sustain tax and spending policies. Working longer can also help people maintain their physical, mental, and cognitive health. However, efforts to promote longer work lives should be accompanied by adequate provisions to protect the poor, whose life expectancy tends to be shorter than average.

Saving more

Simulations suggest that if those born between 1990 and 2009 put aside about 6 percent of their earnings each year, they would close half of the gap in economic replacement rate relative to today’s retirees. In practice, relying on people’s private savings for retirement requires a hard-to-achieve mix of fortune and savvy. First, individuals need continuous and stable earnings over their careers to be able to save sufficient amounts. Second, workers would have to be able to decide how much to put aside each year and how to invest their savings. Third, the risks from uncertain or low returns are borne by individuals. Finally, workers would have to decide how fast to consume their savings during retirement. These are all complex decisions, and people can make mistakes at each step along the way.

Time to cope

For younger generations, acting early is crucial to ensure retirement income security, especially because longevity gains are projected to continue. As millennials start to enter the workforce, retirement might be the last thing on their mind. But with many governments retrenching their role in providing retirement income, younger workers need to work longer and step up their retirement savings.

Governments can make it easier for individuals to remain in the workforce at older ages by reviewing taxes and benefits that might favor early retirement. Nudges to encourage workers to save can also help, for example by automatically enrolling them in private retirement saving plans. For example, starting in 2018, the United Kingdom will require employers to automatically enroll workers in a pension program. Boosting financial literacy and making the workplace more friendly to older workers can also be part of the solution.

The good news for younger workers is that retirement is some four decades away, allowing time to plan for longer careers and to put money aside for later. But they must start now.

Meet The Eleventh Largest and Totally Unregulated Bank In Australia

More households are only able to purchase residential property with help from parents – the Bank of Mum and Dad. This has become a critical factor in helping first time buyers in particular break into the very expensive property market, especially as lenders tighten their underwriting standards.

But here is an astonishing fact – the Bank of Mum and Dad, on our latest estimate, is the eleventh largest lender in Australia, ahead of AMP Bank, HSBC and most of the community banks and mutuals. We estimate at least $16 billion is outstanding with the Bank of Mum and Dad, and it is growing fast.

The average advance to a prospective purchaser is now $88,096, and this continues to rise.

More than half of first time buyers need help from the Bank of Mum and Dad, either a cash gift or loan, or other help such as paying stamp duty, helping with mortgage repayments or child care costs. This is because of the equity held by those owning property, which is accessible when needed. But it does reinforce the inter-generational issues, and the risks in the market.

We wonder how many lenders check specifically to see if the saved deposit a prospective first time buyer has is a gift or private loan.

The mix of loans is interesting in that we see a relative rise in the number of owner occupied transactions where the Bank of Mum and Dad is active. In 2015, more investor loans were funded than owner occupied loans, that has reversed now.

Across the states, the relative proportion in VIC is growing, although NSW still has the largest number of loans. But the Bank of Mum and Dad is active is all states and territories.

Three points worth considering.

First, new buyers are ever more reliant on assistance from parents, but this creates inter-generation pressure with older home owners perhaps giving away value which should be part of their retirement nest egg, and younger buyers holding additional debt obligations below the water line. All caused by our silly property market, as Four Corners discussed. Those who do not have “wealthy” parents have little chance of entering the market, another factor in the inequality debate.

Second, this is of course totally (rightly) unregulated, but suggests that overall housing debt is even higher than might be thought from the official statistics. Often the arrangements are not formalised, and this can lead to issues down the track. Bank underwriting standards need to take account of this phenomenon.

Third our analysis suggests that households who receive such assistance are more likely to get into financial difficulty later, because they have not had the discipline of saving and so over-reach property wise.

Just one more element to consider when trying to understand the complex property finance sector.

Why investor-driven urban density is inevitably linked to disadvantage

From The Conversation.

The densification of Australian cities has been heralded as a boon for housing choice and diversity. The up-beat promotion of “the swing to urban living” by one of Australia’s leading developer lobby groups epitomises the rhetoric around this seismic shift in housing.

Glossy advertisements for luxury living in our city centres and suburbs adorn the property pages of our newspapers.

Brochures boast of breathtaking city views from uppers storeys and gush about amenity, lifestyle and “liveability” – often touting the benefits of adjacent public infrastructure investments (but please don’t mention “value sharing”).

Depictions of attractive younger people, occasionally clutching a smiling infant, are prominent as the image of all things new, urban and desirable.

Long gone are the days when the manifestations of property marketeers’ imaginations were restricted to images of low-density master-planned estates on the urban fringe. We hardly ever hear about these nowadays.

There’s truth in the claims that housing choice and diversity have indeed widened in the last few decades as a result. The statistics clearly show a much greater spread of dwelling options in our cities.

The rise and rise of the apartment block

Apartments now account for 28% of housing in Sydney and 15% in Melbourne. As the maps below show, most recent growth in apartment stock is clearly in and around the inner city. Yet even the more distant suburbs have had an increase in higher-density residential development.
Changes in the number of flats and apartments, 2011 to 2016, in Sydney (above) and Melbourne (below). Data: ABS Census 2011, 2016, Author provided
Data: ABS Census 2011, 2016, Author provided
For many, inner-city apartment living is clearly a preferred choice for the stage in their life when an upcoming, “vibrant” neighbourhood is attractive. High-density urban renewal has been a boon for hipsters and students alike.

But the issue of choice needs to be unpacked carefully. For many others, the “swing to urban living” is more of a necessity.

True, the surge in apartment building has put many properties onto the market to rent or buy that are clearly cheaper than houses in the same suburb. From that point of view, they have added to the affordability of these neighbourhoods.

However, affordable to whom is an open question. At A$850,000 and upwards for a standard two-bedder in Waterloo, South Sydney, and $500,000 or more in Melbourne’s Docklands for a similar property, these are not exactly a cheap option for anyone on a low income.

But other than in the prestige areas where higher-income downsizers and pied-à-terre owners can be enticed to buy in some comfort, much of what is being built is straightforward “investor grade product” – flats built to attract the burgeoning investment market.

It can be argued that the investor has always been a major target of apartment developers, even in the 1960s and 1970s when strata units became common, particularly in Sydney. But it is even more so today.

Despite the clamour to control overseas investors perceived to be flooding the market, the bulk of investors are home grown. We don’t need to rehearse the debates on the factors that have fuelled this splurge, but clearly the development industry has been savvy to the possibilities of this market.

In the last decade, backed by state planning authorities and politicians desperate to claim they have “solved” housing affordability by letting apartment building rip, developers have got involved on an unprecedented scale. The figures bear this out: in 2016, for the first time, Australia built more apartments than houses. The majority end up for rent.

Problematic products with too few protections

In the rush, we, the housing consumer, have been offered a motley range of new housing with a series of escalating problems. Leaving aside amateur management by owners’ bodies in charge of multi-million-dollar assets, problems of short-term holiday lettings and neighbour disputes, there are more serious concerns over build quality, defective materials and fire compliance.

The apartment market has been left wide open for poor-quality outcomes by building industry deregulation. This includes:

moves toward complying development approval for high-rise;

self-certification of building components;

complex design and non-traditional building methods;

relaxation of defect rectification requirements;

long chains of sub-contractors;

poor oversight by local planners and authorities; and

cheap or non-compliant fittings and finishes.

Plus there’s the rush to get buildings up and sold off. Not to mention fly-by-night “phoenix” developers who vanish as soon as the last flat is occupied, never to be found when the defects bills come in.

The lack of consumer protection in this market is astounding. The average toaster comes with more consumer protection – at least you can get your money back if the product fails.

‘Vertical slums’ in the making

These chickens will surely come home to roost in the lower end of the market, which will never attract the wealthy empty-nesters or cashed-up young professionals with the resources to ensure quality outcomes.

In Melbourne, space and design standards, including windowless bedrooms, have come under critical scrutiny, as has site cramming. Tall apartment blocks stand cheek-by-jowl in overdeveloped inner-city precincts.

At least New South Wales has State Environmental Planning Policy 65, which regulates space and amenity standards, and the BASIX environmental standard to prevent the more egregious practices.

But people are most likely to confront the problems of density in the many thousands of new units adorning precincts around suburban rail stations and town centres. These have been built under the uncertain logic of “transport-orientated development”, often replacing light industrial or secondary commercial development.

These developments attract a mixed community of lower-income renters. Many are recently arrived immigrants and marginal home buyers – often first-timers. Many have young children, as these units are the only option for young families to buy or rent in otherwise unaffordable markets. Overall, though, renters predominate.

What will be the trajectory of these blocks, once the gloss wears off and those who can move on do so? You only have to look at the previous generation of suburban walk-up blocks in these areas to find the answer.

Far from bastions of gentrification, the large multi-unit buildings in less prestigious locations will drift inexorably into the lower reaches of the private rental market.

Town centres like Liverpool, Fairfield, Auburn, Bankstown and Blacktown in Sydney point the way. The cracks in the density juggernaut are already showing in many of the more recently built blocks in these areas – literally, in many cases.

This inexorable logic of the market will create suburban concentrations of lower-income households on a scale hitherto experienced only in the legacy inner-city high-rise public housing estates.

With the latter being systematically cleared away, the formation of vertical slums of the future owned by the massed ranks of unaccountable, profit-driven investor landlords is a racing certainty. The consequences are all too easy to imagine.

The call for greater regulation of apartment, planning, design and construction is being heard in some quarters. The 2015 NSW Independent Review of the Building Professionals Act highlights these concerns.

But don’t hold your breath for rapid reform. No-one wants to kill the goose that’s laying so many golden eggs for the development industry and government alike – especially in inflated stamp-duty receipts.

The market has a habit of self-regulating on supply. Evidence of a marked downturn in apartment building is a clear sign of that. But don’t expect the market to self-regulate on quality, at least with the current highly fragmented, confusing (not least to builders and bureaucrats), under-resourced and largely unpoliced regulatory system.

The legacy of this entirely avoidable crisis is completely predictable, but will be for future generations to pick up

Author: Bill Randolph, Director, City Futures – Faculty Leadership, City Futures Research Centre, Urban Analytics and City Data, Infrastructure in the Built Environment, UNSW