Social Trends – Page 147 – Digital Finance Analytics (DFA) Blog

Australia Post salary scandal highlights our nation’s growing wage inequality

How much more than an average worker should a CEO earn? Research shows Australians believe CEOs should earn eight times more. It is perhaps unsurprising, then, that revelations about the salary of Australia Posts CEO Ahmed Fahour have caused a public furore this week.

Fahour’s pay is estimated at up to 119 times that of a postal worker, and 73.5 times that of the average earnings in the transport, postal and warehousing industry.

In 2015-16, he earned A$5.6 million – made up of A$4.4 million in salary and superannuation, and a A$1.2 million bonus. This has – at least for now – rightly put wage inequality on the national political agenda.

Questions of transparency

It’s not just that it’s a lot of money. Australia Post has, until this week, been able to keep Fahour’s salary top secret. It adamantly did not want us to know, even trying to gag the Senate committee it was required submit the information to in 2016.

Australia Post protested that revealing the size of the managerial swag-bag might mean people would “become targets for unwarranted media attention”. It also griped that making the bulging pay packets public could “lead to brand damage for Australia Post”.

This is corporate double-speak writ large. Brand damage for sure. But the reason is that the top-six Australia Post executives earn the same as half of the business’ total profits. Customers and citizens might rightly think this is just wrong – and, in the end, the customer is the one who is paying.

Executive pay comparisons

There is a rule of thumb in business ethics called the “New York Times Test”. It states that a business should not do anything that it would not want to see reported on the front page of the newspaper. Australia Post has not only failed this test, but it has deliberately tried to avoid being subject to it by its insistence on secrecy.

Australia Post is especially sensitive because it is a government-owned corporation. So, while it can still earn profits, there are no shareholders it is accountable to. Ultimately, Australia Post is answerable to the government.

Overindulgent executive salaries are usually rationalised with vague arguments that eschew responsibility. Managers and their PR minions harp on about the need to compete for global talent. Australia Post joined the chorus, very specifically defending the salaries of its chiefs because they were “in line with market practice”.

The poverty of this argument is palpable. Australia is leading the way internationally on this executive salary creep. And top postal executives in other countries earn a fraction of what is paid here. Britain’s postal boss does well, earning the equivalent of A$2.5 million. Fahour’s US counterpart takes home just A$543,616. In Canada, the salary is A$497,000.

The public has responded to news of Fahour’s salary with justified indignation. Even Prime Minister Malcolm Turnbull chimed in, saying he thinks Fahour’s salary is excessive.

As exorbitant as Fahour’s salary might be, it is just the tip of the iceberg when it comes to executive pay in Australia. It even looks relatively modest when compared to the sums taken home by CEOs in the corporate sector.

Peter and Steven Lowy at Westfield share A$25 million in realised pay. Seek’s Andrew Bassat yields just under A$20 million, and Nick Moore at Macquarie Group scrapes in over A$16 million.

These salary extravagances seem tame if you think that the top 1% of Australians have as much wealth as the bottom 70%. Gina Rinehart and Harry Triguboff alone own more that the bottom 20%.

Missing the broader point

The real point of all of this has been totally missed in the rush to side-step political accountability.

For Turnbull, it was just another “not my job” moment. The Australia Post board responded in a similarly dismissive way, with a promise to have “a discussion” the best it could muster.

At least the Senate had the nerve to call Australia Post chairman John Stanhope to publicly justify its executive wage bill at Senate Estimates later this month.

Meanwhile, the cost of living for average Australians and its relationship to wages and penalty rates remain key political issues. This is quite right, given the way that people are rewarded by corporations is a key determinant of income inequality.

No doubt the earnings of Australia Post’s top brass will fade from the headlines. What won’t fade so quickly is the way the gaps between the earning of those executives and rest of the Australian population keeps getting bigger.

This cannot be dismissed with facile arguments about the “politics of envy”. Instead, we need to take heed of research that clearly shows inequality is continuing to widen in Australia, and that this rising inequality is harmful to economic and social stability.

Author: Carl Rhodes, Professor of Organization Studies, University of Technology Sydne

Pension age rises will mean later super access

From The NewDaily.

The age at which you can receive the age pension is on the rise, up to 65.5 from July 1 and it could be as high as 70 within two decades.

There’s a big unanswered question related to that which the politicians don’t seem to want to touch; will that push up the superannuation preservation age?

The pension age will move to 67 by 2023 under a measure introduced by Labor back in 2009. The government has it slated to move to 70 by 2035 although PM Turnbull and Social Services minister Christian Porter side stepped the issue when Labor brought it up in parliament this week.

Labor, for the record, opposes the move and has done so since it was first introduced.

The measure was originally recommended to start in 2053 by the Abbott Government’s Audit Committee chaired by Tony Shepherd. But the Abbott budget in 2014 brought this back to 2035.

But even if the move to 70 were to come off the agenda in the medium term, there is still currently a mismatch between the age you can take super and the age you get the pension.

A few years ago you could take your super at 55. Now it’s 56 and it is moving towards 60, a point it will reach for those born from mid 1964 in 2021.

Supernatants are getting older. Source: ATO

The point of raising the preservation age was to keep it within five years of the pension age. Allowing the gap to widen would “encourage people to take their super, spend it and live off the pension,” said Ian Yates, CEO of lobby group Council on the Ageing.

Robert Curley, a director of Association of Independent Retirees, said his organisation would support a move. “The super preservation age should be maintained at five years below the pension age.”

Australia’s super pool outstrips Canada becoming world’s growth leader

But some take a much harder line than this. Brendan Coates, a researcher with the Grattan Institute, told The New Daily that he “supports an increase in both the pension age and the super preservation age to 70.”

“It would help reduce the budget deficit and increase GDP quite significantly.”

Mr Coates said research done by Grattan in 2012 had shown that those two measures would “cut the budget deficit by $12 billion in today’s dollars and increase GDP by at least 2 per cent”.

The economic benefit would come from “pushing people to work for longer”, Mr Coates said. The budget benefits would come from lower pension payments and higher taxes on super savings.

Of course not everyone takes what many would see as such a hard line approach. Mr Curley said “if you take the preservation age to 67 or 70 it negates the idea of super”.

“There needs to be a reasonable period for people to access and enjoy their superannuation.” Keeping too big a gap between preservation and pension age would also negate the idea of super by encouraging people to spend it early, he said.

Mr Coates said any increase in both benchmarks would have to be done gradually and adequate arrangements put in place to allow older people who could no longer work to be get the disability pension (which pays the same as the age pension).

“Otherwise there would be be a risk that people who couldn’t work any more would be forced onto Newstart [unemployment benefits],” Mr Coates said.

A spokesman for Labor’s superannuation shadow minister
Katy Gallagher said the opposition “did not have a view” on raising the preservation age. Financial Services Minister Kelly O’Dwyer did not respond to questions on the issue from The New Daily.

Mr Yates said resources would have to be put in place to help older people transition to new roles and jobs that matched their capabilities if working lives were to be extended to 70.

“If people are working longer we can’t expect them to have the same career path from 25 to 70.”

Extending working lives is a big issue through the OECD. As the following chart shows, Australia currently sits around the average of its peers.

OECD retirement ages in 2014. Source: OECD

Canadian Prime Minister Justin Trudeau was elected on a platform of reversing a retirement age rise from 65 to 67. But recently an economic advisory committee recommended a rise and measures to encourage people to work beyond 70.

So Just How Sensitive Are Property Investors To Rising Interest Rates Now?

Having looked at changes in investment loan supply, and the motivations of the rising number portfolio property investors, today we use updated data from our rolling household surveys to look at how property investors are positioned should mortgage rates rise. In fact, for many, rates have already been raised, thanks to lender repricing independent of any RBA cash rate move, some as much as 65 basis points. We think there is more to come, as loan supply gets tighter, international financial markets tighten and competitive dynamics allows for hikes to cover capital costs and to bolster margins.

To assess the sensitivity we model households ability to service mortgage debt, taking into account their other outgoings, and rental income. We are not here looking at default risk, but net cash flow. How high would rates rise before they were under pressure? Where they also have owner occupied loans, or other debts, we take this into account in our assessment.

The first chart is a summary of all borrowing investor households. The horizontal scale is the amount by rates may rise, and for each scenario we make an assessment of the proportion of households impacted, on a cumulative basis. So as rates rise, more households would feel pain.

The summary shows that nationally around a quarter of households would struggle with a rate hike of up to 0.5%, and as rate rose higher, this rises to 50% with a 3% rate rise, though 40% could cope with even a rise of 7%.

So a varied picture. But it gets really interesting if you segment the analysis. Those who follow DFA will know we are a great believer in segmentation to gain insight!

A state by state analysis shows that households in NSW are most exposed to a small rate rise, with 36% estimated to be under pressure from a 0.5% rise (explained by large mortgages and static rental yields), compared with 2% in TAS.

Origination channel makes a difference, with those who used a mortgage broker or advisor (third party) more exposed compared with those who when direct to a lender. The pattern is consistent across the rate rise bands. This could be explained by brokers knowing where to go to get the bigger loans, or the type of households going to brokers.

Households with interest only loans are 6% more exposed to a small rise, and this gap remains across our scenarios. No surprise, as interest only loans are more sensitive to rate movements. We have not here considered the tighter lending criteria now in play for interest only lending.

Our master segmentation reveals that it is Young Affluent and Young Growing Families who are most exposed, followed by Exclusive Professionals. Some of the more affluent are portfolio investors, so are more leveraged, despite larger incomes.

Finally, we can present the age band data, which shows that those aged 40-49 have the greatest exposure as rates rise, though young households are most sensitive to a small rise. Note this does not reveal the relative number of investor across the age groups, just their relative sensitivity.

This all suggests that lenders need to get granular to understand the risks in the portfolio. Households need to have a strategy to prepare for rate rises and should not be fixated on the capital appreciation, at the expense of cash flow management, especially in a rising rate environment.

‘Speeding’ housing investors are pushing families too far

From The NewDaily.

Market watchers are expecting a bombshell to be dropped on the property market next week, with Commonwealth Bank reportedly about to close its doors to refinancing housing investors wishing to migrate from other banks.

Fairfax Media suggested this could send “shockwaves” through the property market – though whether it will cause a price correction is far from certain.

At present, the consensus view is that CBA is simply taking a breather from lending to investors so as not to breach the mortgage growth speed limit imposed by the regulator.

The Australian Prudential Regulatory Authority introduced the speed limit in late 2014, requiring banks to limit growth in their investment mortgage books to 10 per cent per annum.

But even if CBA does slam on the brakes on Monday, it won’t be nearly enough.

A broker’s view

One independent mortgage broker told The New Daily that the speed limit is a fairly weak measure for controlling the housing credit bubble because so many smaller lenders exist to pick up the overflow of demand from the big banks.

Housing market risks may be staying the RBA’s hand

So an ANZ customer chasing a better deal at CBA may now find their broker raking up names they’ve never heard of.

AFG, for instance, offers what the broker calls a “white label” home loan built on funding from a number of other banks.

A confident investor should have no problem signing up with such a provider, although less savvy investors may baulk at moving away from the psychological safety of the big banks.

A second flaw

The net result of the speed limit is to slow lending to a degree, but it has likely helped smaller lenders take additional market share.

The latter is not a stated goal of the policy, and even the real goal – to reduce investor activity – really doesn’t go far enough.

To understand why, two factors need to be considered. The first is population growth and the second is inflation. Consumer price index inflation is currently running at 1.5 per cent per annum, and population growth is around 1.4 per cent.

Combining those two figures, the amount of money lent against the housing market would have to grow just under 3 per cent to stay ‘steady’ in relation to the rest of the economy.

In fact, although the value of mortgage debt in Australia has grown by an average of 8 per cent since the onset of the GFC, the last calendar year saw banks’ mortgage books grow by almost exactly the ‘steady’ amount – 2.9 per cent.

That’s partly due to lower volumes of homes changing hands, and partly due to a slow-down in house price growth.

Why 10 per cent is too much

What’s alarming about the 10 per cent speed limit, which CBA is apparently hitting and other banks are getting close to, is that it’s more than three times the ‘steady’ rate of growth.

That means the mortgage market continues to be rebalanced away from owner-occupiers and towards investors.

It is investors driving extraordinary price growth in Sydney – up more than 60 per cent since 2012 – and Melbourne, and it is first home buyers and young families being priced out of the market.

This has to change. One suggestion, from economist Leith van Onselen, is to halve the speed limit to 5 per cent. That would still see investment loans growing faster than the population and inflation, but it would at least be a start.

Let’s get the language right

It would also be useful if media commentators could start focusing on the younger, more vulnerable portion of the housing market rather than celebrating the windfall capital gains made by the older and wealthier portions.

To illustrate what I mean, I’ve prepared two charts from the same set of ABS numbers for Sydney – one with a happy upward slant, the other with a depressing downward slide.

The first, which many readers will be familiar with, shows the huge capital gains investors have made in the past few years –expressed as the house price to income ratio.

The second looks at this period of financial exuberance from the first home buyer’s perspective where the question is not “how many incomes is my asset worth?” but rather “how much of the asset is my income worth?”

From that perspective, the appropriate headline is not ‘House prices boom in Sydney’ or ‘Investor returns at record levels’ – it is ‘Purchasing power of wages plummets’ or ‘Housing affordability tumbles’.

Do Investment Property Investors Also Use SMSF’s?

We recently featured our analysis of Portfolio Property Investors, using data from our household surveys. We were subsequently asked whether we could cross correlate property investors and SMSF using our survey data. So today we discuss the relationship between property investors and SMSF. We were particularly interest in those who hold investment property OUTSIDE a SMSF.

To do this we ran a primary filter across our data to identity households who where property investors, and then looked at what proportion of these property investors also ran a SMSF. We thought this would be interesting, because both investment mechanisms are tax efficient investment options. Do households use both? If so, which ones?

We found on average, around 13% of property investors also have a self managed super fund (SMSF). Households in the ACT were most likely to be running both systems (17%), followed by NSW (14%) and VIC (12.8%).

Older households working full time were more likely to have both an SMSF and Investment Property, but we also noted a small number of younger households were also using both tax shelters.

We found a significant correlation between income bands and use of SMSF among investment property holders (this does not tell you about the relative number of households across the income bands, just their relative mix). Up to 30% of higher income banded households have both a SMSF and Investment Property.

Finally, we look across our master household segments. These segments are the most powerful way to understand how different household groups are behaving. The most affluent groups tend to hold both investment property and SMSF – for example, 30% of the Exclusive Professional segment has both. Less affluent households were much less likely to run a a SMSF.

This shows that more affluent households are more able and willing to use both investment tax shelter structures. It also shows that any review of the use of negative gearing, investment properties and the like, needs to be looked at in the context of overall tax planning. Given the new limits on superannuation withdrawals, we expect to see a further rotation towards investment property, which as we already explained has a remarkable array of tax breaks and incentives. We expect the number of Portfolio Property Investors to continue to rise whilst the current generous settings exist.

Is Local Unemployment Related to Local Housing Prices?

From The St. Louis FED.

The U.S. national labor market has recovered from the effects of the 2007-2009 recession; however despite the national labor market recovery, significant regional variation remains. Recent economic research highlights links between regional labor and housing markets. In their article, “ The Recent Evolution of Local U.S. Labor Markets, ” Authors Maximiliano Dvorkin and Hannah Shell examined the recession and recovery by reviewing the correlation between county-level unemployment rates and changes in housing prices.

National unemployment reached a pre-recession low in December 2007; by October 2009 the unemployment rate in most counties increased between 4 and 20 percentage points. The authors found that areas with higher unemployment rates before the recession experienced larger increases in unemployment during the recession, and those areas with lower unemployment rates before the recession experienced smaller upticks in unemployment during the recession.

The authors theorized that one reason for the disparity in unemployment rate increases could be related to the housing supply. Specifically, the unemployment rates in Arizona, New Mexico, Nevada and Utah remained above their pre-recession levels; these are also areas where housing prices dropped significantly.

When they examined the percent change in county house prices with the change in the county unemployment rate, the results showed a strong negative correlation, meaning that counties with larger decreases in housing prices experienced larger increases in the unemployment rate, perhaps because larger house price declines during downturns are leading to larger declines in local consumption spending that further depress the local economy.

Household Finance Confidence Slips After Christmas Binge

We have released the latest edition of the Digital Finance Analytics Household Finance Confidence Index, to end January 2017 today, which is a barometer of households attitudes towards their finances, derived from our rolling household surveys.

The aggregate index fell slightly from 103.2 in December to 102.68 during January, but is still sitting above a neutral measure of 100, and the trend remains positive. However there are a number of significant variations within the index as we look across states and household segments. These variations are important

First, the state scores are wider now than they have ever been, with households in NSW the most positive, at 110, whilst households in WA slip further to 81. Households in VIC and SA also slipped a little, whilst households in QLD were a little more positive.

The performance of the property market is the key determinate of the outcomes of household finance confidence, with those holding investment property slightly more positive than owner occupied property owners, whilst those who are renting, or living with family or friends are significantly less positive. Whilst some mortgage holders have received or expect to see a lift in their mortgage rate, this is offset by strong capital growth in recent months. The NSW property holders, especially in greater Sydney are by far the most positive. Renters in regional WA, where employment prospects are weaker, are the least positive.

Looking in detail at the drivers of the index, we see a rise by 1% of households who are felling less secure about their employment prospects – especially those in part-time jobs – and more are saying they are under employed.

In terms of the debt burden, there was a 4% rise in those less comfortable about the debt they hold, thanks to rising mortgages, the Christmas spending binge and higher mortgage rates.

More household are saying their real incomes have fallen, up 3%, whilst those who say their costs of living have risen was up 8%.

To offset these negative indicators however, some households reported better returns from term deposits and shares, as well as a significant boost to capital values on their property. Those who said their net worth had risen stood at 64%, up 5% from last month. The property sector is firmly linked to household confidence, and vice-versa.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 26,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

If scandals don’t make us switch banks, financial technology might

From The Conversation.

An efficient market relies on rational customers being willing to change suppliers when there’s good reason to do so. But what happens when customers stay put regardless? This issue is particularly acute in the banking industry.

Even when bank customers have a very good reason to switch, behavioural economics research shows they’re often reluctant to make the move. For example, big scandals that affect banks have a weak impact on consumer behaviour. However, there is a greater propensity to act among customers who are directly impacted.

Behavioural economics also shows bank customers are often slow to switch to take advantage of better offers from competitors. In 2016, the UK’s Competition and Markets Authority lamented that only “3% of personal and 4% of business customers switch to a different bank in any year” in the country. In 2013, Canstar suggested the figure is slightly higher in Australia at 5%.

Despite the slightly higher propensity to switch banks among Australian consumers, there’s much we can learn from the UK’s use of behavioural economics to nudge customers to act in their own best interests. In particular, financial technology companies can provide information platforms to make it easier for customers to switch.

Why bank customers don’t change

Behavioural economists have shown that consumer decisions are not rational. In particular, there is a “sunk cost bias” that affects consumer decisions. That is, consumers tend to place more value on any previous effort or expenditure they’ve made rather than judging economic value when they make decisions.

If you have left a 20% deposit on an item in a store, you will probably buy it, even if you found the same item for sale at 75% of the price elsewhere. So, customers will tend to stick with the bank they’ve got, despite scandals.

Competition authorities, led by the UK’s Competition and Markets Authority, are increasingly trying the “nudge” options offered by behavioural economics as a way to help persuade an irrational consumer to do what is in their best interests. A nudge is simply a mechanism to encourage people. It might be a reminder as to the consequences of not taking the action or benefits of going ahead.

Regulators have examined ways in which nudges can be given without unintended consequences. For example, should the nudge be a carrot or a stick? And which works best? The UK’s Competition and Markets Authority’s chief economic advisor, Mike Walker, advises regulators to “test, learn and adapt”.

A critical part of any nudge is presenting information in a way that can be used easily by consumers. Intermediaries, comparison tools and other financial technology services can provide this information.

How financial technology businesses could help

One of the barriers at the moment to getting customers to switch in Australia is a lack of information on all bank products and financial technology businesses to manage this information.

Although the UK implemented services that make it easier to switch between retail bank accounts, the UK’s Competition and Markets Authority found that this didn’t improve competition in the sector. To resolve this problem, it has ensured that customers have information on other banks and their account options as part of new account-switching regulation.

The way that this works is that customers can compare their existing offering with alternatives using an app that talks to an open electronic interface to the bank. The UK’s Competition and Markets Authority has mandated that the retail banks provide this interface, known as an applications programming interface, to both consumers and to financial technology businesses.

The effect is a space for new businesses to provide comparison tools. These new financial technology businesses will not impose a significant cost on the banks. Each of the UK banks has spent around £1 million each to create these open electronic interfaces, according to the UK Open Data Institute.

The open electronic interfaces will be associated with the European Union Second Payment Services Directive, which will be implemented before Brexit takes effect. This directive will help automate parts of the switching process.

The Australian banks and the Reserve Bank under the auspices of the Australian Payments Clearing Association are trialling a New Payments Platform to try to make it easier for customers to switch. But it’s not likely to have the same degree of flexibility and consistency as the approaches adopted in the UK, as it focuses on financial institution needs, rather than consumer ones.

Regulators in Australia should use behavioural economic analysis to learn more about how consumers use any new information on bank switching or services on this offered by financial technology businesses.

We’re still waiting on evidence on how these new financial technology companies will change consumer behaviour in the UK. But it is likely that in the very least it will increase the intensity of rivalry between the retail banks, this can only be a good outcome for consumers in the UK.

This could also inform a similar implementation in Australia, particularly after a parliamentary committee’s first report on the four major banks is released.

Author: Rob Nicholls, Lecturer in Business Law, UNSW

One in two Australian households expected to be retire ready

Fifty-three per cent of Australian households are expected to have enough for a comfortable retirement from their combined superannuation savings, personal assets and the Age Pension, according to the latest CommBank Retire Ready Index released today.

When the Age Pension is removed, the number of households that can afford a comfortable retirement reduces to 17 per cent, and to just six per cent when the calculations are based on superannuation only.

Linda Elkins, Executive General Manager Advice, Commonwealth Bank said: “The good news is that many Australians who may not currently be on track for a comfortable retirement are very close. A little bit of planning could see them reach the comfortable level.”

CommBank commissioned Rice Warner to prepare the report, which shows that many Australians are close to achieving the comfortable retirement standard defined by the Association of Superannuation Funds of Australia (ASFA). The report shows that while 53 per cent of Australian households are on track, a further 18 per cent are projected have 80 to 99 per cent of what they will need.

The overall results are mixed across cohorts and age groups, and highlight the growing importance of superannuation in helping Australians achieve a comfortable retirement.

Millennials will need to save harder for retirement than other cohorts due to their longer life expectancies. Superannuation will play an important role and will comprise, on average, 78 per cent of retirement assets for 25 year-olds working today.

“The CommBank Retire Ready Index shows how important superannuation will be for the long term financial well-being of young Australians. Many people do not become engaged with superannuation until later in their working lives, but taking a keener interest in superannuation now, consolidating accounts into one super fund and contributing a little more each week can help younger Australians stay on track for a comfortable retirement,” Ms Elkins said.

In the 60-64 year-old age group, couples are expected to be better off than singles but will have reduced retire readiness as they have not received the long term benefits of compulsory Superannuation Guarantee contributions. On the other hand, younger age groups are expected to have less in assets at retirement outside of superannuation when compared with their older counterparts.

“The report also shows that more men than women are retire ready. Women have longer life expectancies, and therefore need more assets to maintain a comfortable level of retirement. Women also generally have lower retirement savings due to career breaks during their child bearing years and lower average income levels throughout their working lives.”

Ms Elkins also said: “People who are approaching retirement could give their savings a boost by taking advantage of the current superannuation contribution caps before they are reduced on 1 July.”

“It is important that people of all ages understand how much they will need to save now to secure their financial futures.”

“To help Australians see how on track they are for a comfortable retirement, CommBank has developed a retirement calculator. This is a good first step to see how retire ready you are and is a useful resource to help you get on track to reach your goals for a comfortable retirement,” she said.