Benefit payments rise dramatically ahead of July 1 super changes

AMP says SMSF trustees looking to take advantage of the current rules around non-concessional caps have significantly increased benefit payments, according to the latest SuperConcepts SMSF Investment  Patterns Survey.

In the March 2017 quarter the average benefit payment increased significantly from $16,256 to $27,900.

Overall contribution levels also continued to rise in Q1, increasing from $8,548 to $9,138.  This continues the trend established in Q4 of last year which saw contributions increase by 181  per cent following the Government’s confirmation that the proposed Super changes will come into effect on July  1, 2017. The rise, however, is a reversal of the historical trend where Q1 has always been the lowest quarter each year.

SuperConcepts Executive  Manager Technical & Strategic Solutions Phil La  Greca said the findings clearly demonstrated that SMSF  trustees were looking to maximise current non-concessional contribution rules.

The current $180,000 after-tax contributions cap, and the three-year  $540,000 bring-forward rule remain until 30  June 2017.

Commenting  on the new trend to emerge around benefit payments,  which almost doubled  mainly through the  increase in lump sum withdrawals,  Mr  La Greca said:

“Trustees are implementing withdraw and re-contribution strategies to take advantage of the window of opportunity before July 1. Strategies include making non-concessional contributions  into an accumulation account, starting  a new 100 per cent  tax free pension and making contributions to a  spouse to try  and  equalise member balances and  maximise access to the $1.6 million pension transfer  balance cap for both persons.”

During prior quarters the split of lump sum withdrawals versus pension payments tended to be around 20 per cent versus 80 per cent. In the first quarter of 2017 the split shifted to 40 per cent versus 60 per cent.

Asset allocations largely remained unchanged as SMSF trustees and their advisers focus on dealing with the opportunities around the upcoming changes.

The quarterly SuperConcepts SMSF Investment Patterns  Survey covers approximately 2,750 funds, a sample of SMSFs administered by Multiport (part of the SuperConcepts group)  and the investments they held at 31 March 2016.  The assets of the funds surveyed represent approximately  $3.2 billion.

 

Government out of touch on housing policies ahead of budget: poll

From The Conversation.

Australians are concerned about housing affordability, so much so that 45.4% say they would be willing to see the value of their home stop growing to improve the situation, only 31.8% of those polled wouldn’t. An ANU poll shows 51.7% of Australians are also in favour of removing tax concessions like negative gearing.

The poll surveyed 2,513 people (representative of the population) and found 63.6% were willing to see an increase in supply of public housing. Only 32.3% are opposed to relaxing planning restrictions.

With these numbers in mind, it is perhaps surprising that state and federal governments have done so little of any substance in housing policy for decades, if anything they’ve contributed to the problem rather than improved the situation.

Potential policy changes that many believe will improve housing affordability, including removing or reducing tax incentives such as the capital gains tax discount or removing supply impediments, have all been considered too politically difficult by the current government.

The government has justified this by playing to the fear that the value of people’s home may decline or that more liberal planning arrangements may mean that new buildings may spoil the look and feel of local neighbourhoods.

The latest ANUpoll shows Australians are very concerned that future generations may be locked out of home ownership. Three quarters believe home ownership is part of the Australian way of life.

In terms of their own investments we found that nearly 68% of homeowners cite emotional security, stability and belonging as a reason for becoming a homeowner. In terms of security factors, 51% cite financial security, 42% refer to “renting is dead money” and 41% cite security of tenure and being able to “bang nails in the wall”.

Of those families who have an investment property (17% in this poll) the primary motivation for the investment was a “secure place to store money” (27.4%) closely followed by rental income (24.3%). Only 11.9% cited negative gearing as the primary motivator and 13.7% were motivated primarily by the capital gains discount.

Housing remains easily the most popular investment vehicle, with 30% saying their preferred investment for spare cash would be an investment property, followed by 18.5% preferring to upgrade their own home. Only 12.6% preferred shares as an investment.

In spite of recent talk of a housing bubble the general population is not particularly concerned with immediate price drops, with 85% expecting house prices to rise over the coming five years. Only 5.4% expect prices to fall and just 1.7% expect prices to decrease a lot.

If interest rates were to increase by 2 percentage points, 6.4% of mortgage holders expected to be in “a lot” of financial difficulty and 16.7% in “quite a bit”. Only 27.9% would be in no difficulty. While financial difficulty does not mean default, in mortgage markets it may not take a large share of loans to default to cause financial problems for an economy.

As pointed out earlier negative gearing was the least cited reason for property investment which suggests removing the incentive would at least not make a dramatic difference to the level of housing investment in Australia.

The ANUpoll shows that the public are concerned about housing affordability and where policy is directed at improving affordability they are likely to be supportive. The policy options, be they demand side – reducing tax incentives, or supply side – building more dwellings and/or relaxing planning restrictions, are available, but greater political nerve may be required to undertake such options.

Author: Ben Phillips, Associate professor, Centre for Social Research and Methods (CSRM), Australian National University

The Latest Top 10 Post Codes In Risk Of Mortgage Default

Today using our latest mortgage stress and probability of default data, we explore the top ten highest risk post codes across the country. Specifically, we look at where we expect the largest number of mortgage defaults to occur over the next few months.

We explore the latest mortgage stress and default modelling, using data to the end of April 2017. We have already highlighted that overall mortgage stress is rising, with more than 767,000 households in stress compared with last month’s 669,000. This equates to 23.4% of households, up from 21.8% last month. 32,000 of these are in severe stress. We also estimate that nearly 52,000 households risk default in the next 12 months.

But now we look at individual post codes, and explore the top ten based on the number of households we expect to default. This is calculated using our 52,000 household sample with economic overlays for employment, inflation, interest rates and costs of living.

Note the labels in the chart above are only examples of locations within the postcodes.

As a general observation, many of the worst hit post codes are areas containing large numbers of newer property in the outer urban ring. Households here have large mortgages and limited income growth relative to house prices. But there are some important differences in terms of recent house price movements across the post codes.

We will count down the top 10, from 10th down to the highest risk postcode. So stay with us to the end!

The tenth highest risk post code in Australia is 6027 in Western Australia. This is the city of Joondalup and includes places like Ocean Reef and Edgewater. It is about 25 kilometres north of Perth. It’s a fast growing area with lots of young families, lots of new homes and large mortgages relative to income. The average house price is $510,000, down from $570,000 in 2014. We estimate there are more than 1,900 households in mortgage stress in the area, and 211 are likely to default in the next few months.

In ninth spot is Victorian post code 3064. This includes Craigieburn, Mickleham and Roxburgh Park. This area is about 25 kilometres north from Melbourne. The average house price is $438,000, up from $330,000 in 2014.  Again it is a fast growing area, with more than 60% of households holding a mortgage. The average age here is 30 years. We estimate there are 4,320 households in mortgage stress, and 212 are likely to default in the next few months.

Next at number eight is 4740 in Queensland. This includes Mackay and the surround areas, including Alexandra, Beaconsfield, Richmond and Slade Point. This area is more than 800 kilometres north of Brisbane, and is the gateway to the Bowen Basin coal mining reserves of Central Queensland. The average house price is $240,000 compared with $400,000 in 2014.  We estimate there are more than 3,600 households in mortgage stress in the region, and 244 are likely to default in the next few months.

We go back to Victoria for the seventh placed postcode which is 3029, Hoppers Crossing. This is a suburb of Melbourne about 23 kilometres’ south-west of the CBD and has grown to become a substantial residential area, with about half of properties there mortgaged. The average age is around 35. The average house price is $440,000 compared with $340,000 in 2014. We estimate there to be more than 3,400 households in mortgage stress, and we expect 266 households to default in the next few months.

In sixth place in Western Australia, is 6164, the city of Cockburn. It is about 8 kilometres south of Fremantle and about 24 kilometres south of Perth’s central business district. It includes areas like Jandakot, South Lake and Success. Around 40% of homes in the region are mortgaged and the average age is 31 years. Average house prices are around $730,000 about the same as in 2014. More than 2,530 households are in mortgage stress here, and the estimated number of defaults in the next few months is 308.

Next, counting down to number five, is another WA location, 6065, the city of Wanneroo which is around 25 kilometres north of Perth on the rail corridor. Again a fast growing suburb, the city has had the largest population expansion out of any other local government area in greater Perth. The average house price is $425,000 compared with $480,000 in 2014. Nearly half of households here have a mortgage, and more than 7,400 are in mortgage stress. We estimate that 339 households are likely to default in the next few months.

In fourth spot is Cranborne in Victoria, 3977. It is a suburb in the outer south east of Melbourne, 43 kilometres from the central business district. Its local government area is the City of Casey which is one of Victoria’s most populous regions, with a population of well over a quarter of a million. The average house price is $425,000 compared with $330,000 in 2014. In 3977, close to half of all homes are mortgaged, and we estimate 2,750 households are in mortgage stress, including 344 in severe stress. We estimate around 340 households will default in the next few months.

So down to the top three. The third most risky postcode according to our analysis is Victorian post code 3030 which is the region around Derrimut and Werribee. Werribee is a suburb of Geelong and is about 29 kilometres south west of Melbourne. The median house price is $405,000, well above its 2014 level of $310,000. Here 3,730 households are in mortgage stress, and 342 are likely to default in the next few months.

In second place is another Western Australian post code, 6155, Canning Vale and Willetton. It’s a large southern suburb of Perth, 20 kilometres from the CBD. The population has been growing quickly with significant new builds, and 60% of households have a mortgage. The average house price is around $560,000, down from $610,000 in 2014. The average age is 32 years. We estimate there are 4,150 households in mortgage stress and 342 households risk default in the next few months.

So finally, in top spot, at number one, is another Western Australian postcode 6210, Mandurah. This also includes suburbs such as Meadow Springs and Dudley Park. Mandurah is a southwest coast suburb, 65 kilometres from Perth. The average home price is around $300,000 and has fallen from $340,000 since 2014. Here there are 1,430 households in mortgage stress but we estimate 388 are at risk of default in the next few months.

As a final aside, in twenty second place, is the highest risk postcode in New South Wales, 2155, Kellyville, which is 36 kilometres north-west of the Sydney central business district in The Hills Shire. The average house price here is $1.1 million, compared with $860,000 in 2014. We estimate there are 1,240 households in mild stress and we estimate 151 households risk default in the next few months.

So that completes our analysis of the current most risky postcodes. We will update our modelling next month, so check back to see how the trends develop. But in summary households in Western Australia are most exposed in the current environment, especially with house prices there falling.

Productivity, Technology, and Demographics

From The IMF Blog

Hal Varian, chief economist at Google, says that if technology cannot boost productivity, then we are in real trouble.

In a podcast interview, Varian says thirty years from now, the global labor force will look very different, as working age populations in many countries, especially in advanced economies, start to shrink. While some workers today worry they will lose their jobs because of technology, economists are wondering if it will boost productivity enough to compensate for the shifting demographics—the so-called productivity paradox.

“I would say there are at least three forces at work,” says Varian. “One of these is the investment hangover from the recession—companies have been slow to reestablish their previous levels of investment. The second has been the diffusion of technology—the increasing gap between some of the more advanced companies and less advanced companies. And third, existing metrics are facing some strains in terms of adapting to the new economy.”

Varian believes demographics is important, particularly now that baby boomers, who made up most of the labor force from the 1970s through 1990s, are now retiring but will continue to be consumers.

“Today, the working labor force is growing at less than half of the rate of population growth, which is a concern in terms of how to make the amount produced equal to the amount that people want to consume,” he said.

Varian’s answer to the concern of older workers who are afraid robots will take over their jobs:

“There’s a saying in Silicon Valley that we overestimate what can happen in two years, and we underestimate what can happen in ten years—this has proven true time and again. What the 40- and 50-year-olds should be doing is continuing to learn. Lifetime learning is the norm now.”

 

The Free Market And Competition

Rod Sims, ACCC Chairman spoke at the Competition Law Conference 2017.

He argued that competition law and the work of the ACCC is essential to maintaining faith in Australia’s free market system. He also highlights that penalties actually imposed here in Australia are stunningly lower than those in other comparable jurisdictions.

It is an important time to be talking about competition. Competition law and policy are essential underpinnings of our free market economy. We are, however, in the midst of a crisis of faith in free markets which should, and I know does, worry us all. Today I want to make four points, as follows.

  • First, I will briefly outline the loss of faith in the free markets and why this should concern us all
  • Second, I will briefly discuss how some prominent economists have seen the role of competition policy and law in our market economy through time, and today
  • Third, I will explain why effective enforcement of the Competition and Consumer Act (CCA) is so important to people having faith in free markets, and
  • Fourth, I will suggest how we can improve the effectiveness of the CCA, particularly through higher penalties for competition law breaches.

Of specific interest was his comments on the low typical fines imposed on corporates, such that there may be little financial incentive to do the right thing.

The ACCC is very concerned that penalties imposed by Australian Courts in both competition and consumer cases historically have not been sufficiently high to deter contraventions, particularly in cases involving larger businesses.

On the consumer side, the ACCC strongly welcomes the current Australian Consumer Law Review. This review acknowledges that the maximum penalties for breaches of consumer law are inadequate. They are too low to provide a powerful deterrent effect, and this is particularly the case for breaches by large corporate players that are unlikely to be deterred by a maximum penalty of $1.1 million per contravention.

The ACL Review recommends that the ACL penalties be comparable to competition law penalties that also operate across the economy. There appears to be no policy reason for the maximum penalties under the ACL being lower than those available for breaches of competition laws.

As one example, we were pleased late last year when Nurofen maker, Reckitt Benckiser, had its penalty increased by the appeal court from $1.75 million to $6 million, after it was found that the original penalty could not be viewed as substantial or as achieving deterrence.

The Court held that the penalty imposed by the first instance judge of $1.75 million was “manifestly inadequate”, and that a penalty at that level “would reinforce a view that the price to be paid for the contraventions was an acceptable business strategy, and was no more than a cost of doing business.”

Perhaps had competition law penalties been available to the court we could have seen a penalty many times higher than the amount awarded to act as specific deterrents to large, multinational companies such as Reckitt Benckiser.

I suggest, although we have no way of knowing, that the vast majority of Australians would consider a $60 million penalty more appropriate as a specific deterrent for Reckitt Benckiser, which is a large multinational company.

Turning now to competition law, we have a very different story. The penalties available in Australia are broadly in line with international trends. However, penalties actually imposed here in Australia are stunningly lower than those in other comparable jurisdictions.

The key reason for this is that Australian competition law penalties were only brought into line with those overseas in 2009. From that date Australian courts now have been able to impose penalties of up to 10% of turnover where, as is usual, the benefits obtained from the illegal activity cannot be calculated.

For a company that, say, has an Australian turnover of $1 billion, the maximum penalty per contravention can now be $100 million, rather than $10 million as it was before this change was introduced in 2009.

While we are only now encountering cases where the relevant behavior occurred post 2009, the Parliament has clearly spoken. It now wants higher competition penalties as, I suspect, does the average Australian.

As with the Nurofen case in consumer law, the courts also seem to be focusing on the level of deterrence required. In his judgment on our proceedings against ANZ Bank and Macquarie Bank last December, Justice Wigney expressed reservations about the amount of the penalty that was by agreement jointly submitted to the court.

He said that the penalties were “at the very bottom of the range of agreed penalties” and that he would have ordered a much higher penalty had there been no agreed penalty. He also said:

“A very sizable penalty is plainly required to deter a financial institution of the size of ANZ from engaging in such conduct again. Equally, a very sizeable penalty is required to deter institutions in positions similar to ANZ who might be tempted to engage in similar contravening conduct”.

Clearly the size of the company does matter when having regard to the level of penalty required to achieve specific and general deterrence.

The ACCC has been for some time giving this issue careful thought. In particular we have had regard to the way in which other countries quantify their penalties in order to achieve deterrence.

In December 2016, for example, Australia participated in a Global Forum on competition hosted by the OECD. A key issue discussed was sanctions in competition cases. The research revealed that most other OECD jurisdictions, including the US, UK and the EU have very transparent methodologies for determining penalties.

In the United States, Europe and the UK the methodology used to determine penalties includes the calculation of a ‘base fine’. This is usually done by reference to a set percentage (between 10% and 30%) of the relevant turnover of the business being penalised. The turnover figure is often the turnover of the firm in the jurisdiction concerned but sometimes it is the relevant global turnover of the firm.

Commonly once the base fine is calculated, it is increased having regard to duration of the conduct and numbers of contraventions, and other aggravating factors. Mitigating factors are then applied which reduce the fine before a final figure is determined.

An important difference between our approach and that of other overseas jurisdictions is that our Courts do not start the exercise of determining penalties by calculating a base figure calculated by reference to turnover of the firm.

If the base penalty approach was applied in Australia, firms with smaller turnover might end up with similar fines to those currently imposed, but importantly firms with substantially larger turnovers would generally end up with much higher penalties.

As an example, Professor Caron Beaton-Wells of the University of Melbourne has used the USA methodology to calculate that in the Visy case, instead of the penalty of $33m imposed then by the Court, the starting figure would have been $212 million, with potential to increase above that level. Under the EC’s 2006 Guidelines, Visy’s base figure would have been even higher.

In the ACCC’s view, penalties imposed under the CCA need to be many times higher than they are now to have a sufficient deterrent effect on larger firms. The current ACL Review has recommended such higher penalties for consumer law breaches; and we, the ACCC, must work with the courts to give effect to Parliament’s clear intention of a step change in penalties for competition law breaches by larger companies.

Why older Australians don’t downsize and the limits to what the government can do about it

From The Conversation.

Encouraging senior Australians to downsize their homes is one of the more popular ideas to make housing more affordable. The trouble is, incentives for downsizing would hit the budget, but make little difference to housing affordability.

It sounds good: new incentives would encourage seniors to move to housing that better suits their needs, while freeing up equity for their retirement and larger homes for younger families.

But the reality is different. Research shows most seniors are emotionally attached to their home and neighbourhood and don’t want to downsize.

When people do downsize, financial incentives are generally not the big things on their minds. And so most of the budget’s financial incentives will go to those who were going to downsize anyway.

Financial barriers to downsizing

There are three financial hurdles to downsizing. Downsizers risk losing some or all of their Age Pension, because the family home is exempt from the pension assets test, but any home equity unlocked by downsizing is not.

Downsizers also have to stump up the stamp duty on any new home they buy. For a senior purchasing the median-priced home in Sydney that’s now A$32,000. Finally earnings from the cash released are taxed, whereas capital gains on the home are not.

The Turnbull government has flagged the possibility of financial incentives in next week’s federal budget for superannuants and pensioners to downsize their home.

One proposal would exempt downsizers from the A$1.6 million cap on super balances eligible for tax-free earnings in retirement, or from the A$100,000 annual cap on post-tax contributions. But this would benefit only the very wealthiest retirees – just 60,000 retirees have super fund balances exceeding A$1.6 million.

More seniors would benefit from a proposal to exempt them from stamp duty when purchasing a smaller home. And many would benefit from a Property Council proposal to quarantine some portion of the proceeds from the pension assets test for up to a decade.

The trouble with all these proposals is that they would hit the budget – because everyone who downsized would get the benefits – but they would not encourage many more seniors to downsize.

Staying – or downsizing – is seldom about the money

Research shows that for two-thirds of older Australians, the desire to “age in place” is the most important reason for not selling the family home. Often they stay put because they can’t find suitable housing in the same local area.

In established suburbs where many seniors live, there are relatively few smaller dwellings because planning laws restrict subdivision. And even if the new house is next door, there’s an emotional cost to leaving a long-standing home, and to packing and moving.

And so, few older Australians downsize their home. According to the Productivity Commission, about 20% aged 60 or over have sold their home and purchased a less expensive one since turning 50. Another 15% have “strong intentions” to do so in the future.

When older Australians do downsize, their decision is dominated by non-financial considerations, such as a preference for a different style of house and living, a concern that it is getting too hard to maintain the house and garden, or the loss of a partner.

These emotional factors typically dwarf financial considerations. According to surveys, no more than 15% of downsizers are motivated by financial gain. Stamp duty costs were a barrier for only about 5% of those thinking of downsizing. Only 1% of seniors listed the impact on their pension as their main reason for not downsizing.

There are better and cheaper ways to encourage seniors to downsize

If governments do want to use financial incentives to encourage downsizing, budget sticks would be cheaper and fairer than budget carrots. Even if they have little effect on downsizing rates, at least they would contribute to much-needed budget repair and economic growth.

The federal government should include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage a few more seniors to downsize. More importantly, it would make pension arrangements fairer, and contribute up to A$7 billion a year to the budget.

Asset-rich, income-poor retirees could continue to receive a full pension by borrowing against the value of the home until the house is sold. The federal government would then recover the cost from the proceeds of the sale. If well designed, this scheme would have almost no effect on retirees – instead it would primarily reduce inheritances.

State governments should abolish stamp duties on property, and replace them with a general property tax, as the ACT Government is doing. This would encourage downsizing, although only at the margins.

But the real policy justification is that it would help working age households to take a better job that’s only accessible by moving house, and so improve economic growth. It’s a big prize: a national shift from stamp duties to broad-based property taxes could add up to A$9 billion a year to the economy.

In short, the downsizing debate is a prime example of how governments prefer politically easy options with cosmetic appeal, but little real effect, on housing affordability. If they’re serious about making it easier for young Australians to buy a home, they will have to make tougher policy choices.

Authors: Brendan Coates, Fellow, Grattan Institute; John Daley, Chief Executive Officer, Grattan Institute

Affordable housing is not just about the purchase price

From The Conversation.

Solving the affordable housing crisis is a high priority for state governments around Australia.

This is understandable given the hyper-inflated property markets in many Australian capital cities. Rising concerns that interest rates will increase over coming years also fuel the unaffordability fires.

Proposed solutions to this crisis often focus on opening up new greenfield areas of land in the outer suburbs to develop lower-cost housing. Hence the solution to the affordable housing process is often thought to lie in creating housing with a low purchase price. This approach incentivises developers and housing suppliers to keep the price of new housing stock as low as possible.

This leads to houses that are more costly to own and maintain. Construction savings on features such as insulation, passive solar design, and heating and cooling systems mean such houses have high energy demands. That, in turn, means ongoing living costs such as the cost of air conditioning remain high for the life of the house.

Such houses are also constructed to the minimum standards dictated by the building codes. Poorer design and lower-quality materials can lead to large deferred maintenance costs and lower resilience to natural hazards.

In addition, housing in the outer suburbs has poorer prospects for capital growth, effectively trapping poorer households on the fringes of our cities. The residents of these suburbs also generally face higher transport costs to get to work and services.

Exposed to future risks

We are, in effect, encouraging new home owners to take on larger future risks and costs just so they can buy a house. This keeps government happy by increasing the number of new home owners – a proxy for affordable housing.

But this approach ignores the issue that home owners increasingly cannot afford to continue to own a home, not just buy one.

Increasingly, the first cost-saving action for struggling home owners is to be uninsured or underinsured. About 14% per cent of people have no home or contents insurance whatsoever.

Of those who are insured, many know they are not adequately covered. Back in 2012 it was identified that around one-quarter of home owners and renters had no insurance cover for house contents. Other estimates suggest that nearly one-third of households in Australia remain uninsured. Other studies more recently concluded that 41% of tenants do not have contents insurance.

Events like the recent Cyclone Debbie remind us just how exposed many families are to natural hazards, including physical damage to assets and the associated emotional hardship.

In many cases, families have been financially wiped out as a result of their lack of insurance coverage. These families then go back onto the long waiting list for affordable social housing.

Therefore, by defining affordable housing in terms of only purchase price of housing and number of new home owners, we are dramatically understating the problem of housing affordability.

By facilitating families to invest in houses that require high energy demands to be liveable, and which are located in areas increasingly exposed to natural hazards while households are uninsured or underinsured, we are simply mismanaging the affordable housing challenge.

Reframing affordability

A key action that can be taken is to frame housing affordability in terms of whole-of-ownership-life costs. This means we move away from defining affordable housing in terms of the initial capital cost and instead consider the total cost of owning a house over the term of ownership.

This approach explicitly encapsulates the risks of under-insurance and higher interest rates.

This is the approach used when funding infrastructure and major utilities assets. When planning major infrastructure, cost-benefit analyses must now consider the whole-of-life costs. This is to account for enthusiastic infrastructure advocates deferring costs through to increased maintenance obligations so the capital costs remains low, and hence the project becomes more attractive.

It’s the same for housing development. Therefore, the same approach needs to be adopted for home ownership.

Housing affordability is worsening, warns ratings agency

From Mortgage Professional Australia.

Moody’s report shows regulatory crackdowns and low-interest rates will not protect affordability, putting pressure on Government to take action in the Budget

Housing affordability is deteriorating in Australia despite the impact of regulatory crackdowns and low interest rates, a report by international ratings agency Moody investors Service has found.

Affordability worsened in the year to March 2017, with interest repayments requiring for 27.9% of household income on average, compared with 27.6% in March 2016. Affordability declined steeply in Sydney, Melbourne and Adelaide, according to the report, although it improved in Brisbane and Perth, which is currently the most affordable city in Australia, with the proportion of income going to repayments at 19.9%.

Moody’s expect that housing affordability will continue to deteriorate, blaming “rising housing prices, which outstripped the positive effects of lower interest rates and moderate income growth”. Whilst APRA’s restrictions on interest-only mortgage lending could dampen demand for apartments they could also reduce affordability, Moody’s claims: “the new regulatory measures have prompted some lenders to raise interest rates on interest-only and housing investment loans, which will make such loans less affordable.”

Proportion of joint-income required to meet interest repayments, March 2016:

  • Sydney 37.5%
  • Melbourne 30.3%
  • Brisbane 23.9%
  • Adelaide 23%
  • Perth 19.9%
  • Australia: 27.9%

Coming just weeks ahead of the 2017-18 Federal Budget, Moody’s report indicates the Government cannot rely on regulators and the RBA if it wants to improve affordability. In March Treasurer Scott Morrison said repayment affordability would play a major part in the Budget and was a bigger issue then the difficulty of first home buyers, whilst ruling out any changes to negative gearing.

In a series of sensitivity tests, Moody’s demonstrated the risks faced by Australian homeowners. Looking at the effect of house prices continuing to rise, income decreasing and interest rates increasing, Moody’s found Sydney homeowners were particularly vulnerable. A 10% rise in property values – far from unknown in the harbour city – meant an extra 3.8% of income needed to meet mortgage repayments.

Moody’s report did find that affordability was unchanged for apartments. Apartment owners spent an average of 24.5% of their income on repayments, compared to 29.3% for house owners. This is a national average: affordability of apartments did decline in Sydney and Melbourne.

Inflation number misses the housing crisis

From The New Daily.

Almost nothing is to be seen of Australia’s housing crisis in the latest inflation figures.

Wednesday’s Consumer Price Index (CPI) from the Australian Bureau of Statistics showed just a 0.5 per cent increase in inflation this quarter, up 2.1 per cent over the past 12 months.

Over the same period, house prices grew 1.4 per cent, and by 75 per cent over the past five years.

The biggest increases in the CPI were in fuel, healthcare, power and, yes, housing.

However, as pointed out recently by Commonwealth Bank senior economist Gareth Aird, this ‘housing’ figure, which accounts for 22 per cent of the CPI calculation, does not truly reflect the struggle of many Australians to get onto the property ladder.

“The CPI is a poor barometer of changes in the cost of living for people who don’t own a dwelling and aspire to purchase one,” Mr Aird wrote.

That’s because the CPI measure of ‘housing’ only counts rents, utilities and the cost of building a new dwelling. It doesn’t include the cost of the land the dwelling sits on. And it doesn’t include the interest costs of repaying a mortgage.

If the full cost of housing was factored in, Mr Aird estimated it would add roughly 55 percentage points to headline inflation.

As mentioned above, the CPI ‘housing’ measure also doesn’t include interest charges. It used to, but they were removed in 1998 after lobbying from the Reserve Bank, which argued that rising mortgage interest rates would push up inflation, thereby requiring official cash rate rises, which would then push mortgage rates even higher, in a vicious loop.

The RBA said then that “excluding interest charges would in no way distort the outcome over the long run”.

Australia Institute senior research fellow David Richardson said if the CPI were to include land prices, the inflation rate would be pulled too hard by almost out of control house prices.

“Imagine if things went up 15 per cent a year in price,” Mr Richardson told The New Daily.

“Lots of contracts in Australia are indexed against the CPI. If they’re sort of fiddled then you’re talking billions and billions in consequences.”

Marcel van Kints, program manager with the Prices Branch of the ABS Macroeconomic Statistics Division, told The New Daily: “The ABS CPI aligns with international standards, an international respected measure of inflation.”

The ABS also published a FAQ with Wednesday’s release in which they pointed to their reasoning behind the exclusion of land from the CPI.

They said that housing is included in the Selected Living Cost Indexes, which are “particularly suited to assessing whether or not the disposable incomes of households have kept pace with price changes”.

Inflation outpaces wages

All of this is seeing many Australians left behind as both housing and the prices of popular consumer goods rise while wages stagnate.

Over the past 12 months, the CPI rose 2.1 per cent while wages grew by only 1.9 per cent, according to the latest ABS data.

The Australia Institute’s David Richardson said this is leaving many Australians worse off.

“I suspect that as professionals and skilled white collar workers, we’re all in the same boat,” he said.

“What we’re seeing now is a symptom of structural change that’s been creeping up on us for a long time.”