Category: Social Trends

Think The Unthinkable – The Property Crash We Have To Have?

In past years we have been highlighting the misaligned policy settings which have allowed home prices to balloon, household debt to soar, interest rates to slide and investors to gain more than a third of the market, higher than UK or USA. As banks have continued to lend and inflate their balance sheets and bolster their profitability, despite some tightening of standards; households are massively exposed.

The high debt means households have less disposable income and banks choosing to lend for housing rather than for productive business investment; both growth killing. The current capital rules have also encouraged more home lending and despite some recent tweaks, are still very generous.

Here is a tracker of home price growth, working back from today’s prices. The problem is not just the Sydney and Melbourne markets.  Its just that Sydney and Melbourne came later to the party.

Wage growth is still slowing whilst debt continues to lift. This is a real problem.

Had the settings been adjusted several years ago, this was then a manageable problem, but I am not sure it is now.

If the RBA cuts the cash rate it will stimulate housing further, whilst if it lifts rates, then mortgage rates will rise (beyond the recent and continuing out of cycle uplifts) and move the ~22% of households in mortgage stress higher.  Some will default.  The international rate cycle is on the way up, not down.

If more homes come on the market they will continue to be snapped up by cashed up investors (often levering the capital in their existing property) and overseas buys, which account for perhaps 10% of transactions.

If first time buyers are offered incentives, be they stamp duty relief, money from parents, cash payments/grants or cannibalising their super, the net effect will be simply to drive prices higher, it being a zero sum game. We know there are more than 1 million households who “Want to Buy”. Plus more arriving thanks to migration.

Investors still want property, thanks to the tax breaks and years of sustained growth, despite crushed rental yields. If lending standards are tightened, and a lower speed limit put on investor lending, we will see more investors going to the smaller lenders and the non-bank sector.  Also, some who already bought will be unable to refinance as they would now fall out of revised tighter requirements – about 9% of buyers fall into this category.

Switching away from stamp duty to a property tax may make more people trade, but that will just change the demand/supply curve, and perhaps drive prices even higher (as an artificial barrier is removed).

In fact, even joined up thinking which collectively attempts to cool the market whilst encouraging first owners into the market, is unlikely to succeed. Given the current political environment, this is even more unlikely.

Beneath all this is the financialisation of property, where it is seen as an investment class, not a source of shelter. This was called out recently in a UN paper, and is a global problem.

So, it looks to me as though we need a circuit breaker to kick-in, and that circuit breaker has to be a property correction, or even a crash.

A correction would scare off many investors, drop home prices to allow new entrants to purchase, and whilst many households would see paper profits falling, it was always funny money anyway.  Banks would take a hit, but then they have the capital buffers in place, and the RBA backstop.

In parallel, we still will need tighter rules of lending – especially for investment purposes, and the removal of the tax breaks which underpin the sector.  I think we need lending growth to track wage growth.

From here if we are careful, we can perhaps manage the settings such that such an explosion in prices wont happen again in the future.

But I wonder if we NEED a property crash. We certainly seem unable to manage under the current conditions.

 

 

Why Using Super For Housing Is Wrong

Interesting modelling from from Rice Warner Consultants, which shows that extracting money from superannuation to facilitate a property purchase will cost in later life and put a greater burden on state pensions down the track.

Universal superannuation was first provided to most Australian employees through industrial awards from 1986 and then via the SG from 1992. The original benefit “award super” was provided in lieu of a national increase in wages. Many members have wanted to get their hands on their deferred pay and there have been constant calls to allow young members to use their accrued super benefits as a housing deposit. Many of those with vested interests in the property industry have been touting the idea ever since.

The superannuation industry has tirelessly pointed out to various governments that the mandatory employer contribution is not sufficient to provide all Australians with a comfortable retirement. That is why, it is planned to increase contributions from the current level of 9.5% of salary to 12% by 2025. Given this, it is nonsensical to dilute retirement benefits further by allowing benefits to be used for other purposes.

The Financial System Inquiry (2014) recognised this and recommended the government adopt the objective of superannuation as providing income in retirement to substitute or supplement the Age Pension. Last November, the Financial Services Minister Kelly O’ Dwyer accepted the FSI recommendation without modification and it will become law as soon as a Senate committee has finished discussing the finer details of how this simple phrase should be worded.

Despite this clear objective, the Assistant Treasurer Michael Sukkar has ignored his own policy and this week suggested that he is reviewing whether young people could use their superannuation benefit as a deposit to buy a home. Perhaps he will regret this when he realises what such an asinine policy would cost future governments in increased Age Pension costs.

This policy would create higher activity and would push up the price of housing as more people compete for the same amount of housing stock. It would benefit real estate agents and mortgage brokers who would get higher commission without needing to do any extra work – one of the consequences of distorting capital markets. State governments would also benefit from the higher stamp duties on inflated house prices. Again, rewarding an inefficient tax.

Self-sufficiency in retirement

We know that current levels of superannuation savings will not make people self-sufficient in retirement. If we look at people who have attained the retirement age, some 45% are currently on a full Age Pension and 31% are on a part pension. That means only 24% are not drawing a government benefit – and some of these are still working.

In 30 years, we estimate that the higher levels of superannuation benefits and a small increase in the pension eligibility age will push down the numbers on a full Age Pension to 33% with a corresponding rise in those on the part pension to 45%. However, the numbers who are self-sufficient will not change much at all. This shows that people will need to put more of their own money into super to become self-sufficient and they certainly cannot afford to take any out before retirement.

We have modelled the impact on a member aged 35 on average earnings taking $100,000 out of their super account to use as a housing deposit. Our young member now loses the power of compound interest and, assuming they only receive SG contributions and don’t top up their super later in life, they will draw an extra $92,000 (present value) in Age Pension payments in their retirement years.

So, the Federal Government allows someone to draw $100,000 and then pays them an extra welfare benefit of $92,000 later in life!

Some have suggested the super fund would simply lend the money to the member and it would be repaid. This would reduce the pain, though the member would still lose out on years of fund earnings – and investment returns make up a much larger component of a retirement benefit than contributions made throughout a career. The fund administrators would also need to keep records of this new activity which will increase fees for all members.

Clearly, there are far cheaper ways of getting people into home ownership, by looking at addressing the supply and demand for housing in our capital cities. Using super as a piecemeal solution is not the way to fix the housing problem.

Why higher interest rates should make you happy

From The Conversation.

The Federal Reserve just lifted short-term interest rates a quarter point and signaled that more hikes are to come over the course of the year.

The Federal Open Market Committee raised its benchmark lending rate to a range of 0.75 percent to 1 percent, as expected, and projected two more increases would be likely in 2017.

Numerous commentators have focused on who is hurt by rising rates, particularly those with lots of floating rate debt, such as a credit card balance, or anyone in need of a loan.

Not everyone, however, is negatively affected by rising rates.

There are some individuals and businesses cheering the Fed on as it pushes up rates, including savers, people traveling abroad and foreign exporters and businesses with large cash balances.

Let’s look at why each group may be celebrating the Fed’s action with a champagne toast.

Savers are happy

Interest is the economic inducement – or bribe – that compensates savers for waiting to spend their money in the future instead of squandering it today.

For eight years, the Fed has been giving us virtually no inducement to save because its target interest rate has hovered around zero ever since the 2008 financial crisis. People have been essentially punished for saving money because inflation meant at times you’d be better off stuffing cash in your mattress than in a savings account.

Rising rates means people who save money in certificates of deposits, money market funds and bank accounts will see higher returns. Many elderly people and retirees live off their Social Security checks plus interest and dividends from their savings. Retirees and people with large amounts of cash savings will now earn more money, which enables them to spend more and makes them big fans of the Fed’s current policy.

Even if you don’t have a single penny in savings but live or work in an area with a large number of retirees like southern Florida, Arizona or parts of California, the higher rates should translate into more economic activity and thus more jobs.

Travelers and importers are happy

Another group that should experience an immediate benefit includes importers and people traveling abroad because interest rate changes usually affect a country’s foreign exchange rate.

When rates rise in the U.S., the dollar tends to go up in value, which means it can buy more foreign currency. This makes traveling to other parts of the world cheaper.

In a nutshell, higher rates mean higher yields on U.S. bonds, mutual funds and certificates of deposit, making them more attractive to foreign investors. These investors need dollars to buy U.S. investments and are willing to give up their euros, yen, Swiss francs and other currencies to get ahold of them. By boosting the demand for dollars, the greenback appreciates, and suddenly that trip to Majorca is looking more affordable as fancy Spanish restaurants, flamenco shows, hotels and taxi rides become cheaper, in dollar terms.

This also makes people who export goods to the U.S. – essentially foreign companies – much happier as well at the expense of U.S. companies. Swiss chocolates, Korean phones, Chinese textiles, German beer and many other items will become cheaper for people in the U.S., meaning it should make Americans who prefer these items to their domestic counterparts happy too.

And since a boost in exports supports economic activity in countries selling these items, many foreign governments are also big fans of the Fed’s current policy.

Companies with cash are happy too

A third group that benefits are businesses with large cash reserves.

Nonfinancial companies in the Standard & Poor’s 500 index had about US$1.54 trillion in cash and cash equivalents as of Sept. 30 of last year.

Companies with large cash reserves do not let their money sit in a vault gathering dust. Instead, the money is often put into short-term investments that earn interest. When interest rates go up, they make extra earnings on their cash balances. This increase in profits, without a company doing any extra work, makes some CEOs fans of the Fed’s current policy.

In addition, there are a number of companies that bill customers up front and then make payments much later. Insurance companies are one example. People pay for their insurance policies first and then, if disaster strikes in the future, the insurance company pays out a claim. This means insurance companies hold large amounts of money for long periods of time that they’re hoping earns a good return.

So when rates rise, insurance companies become more profitable as they earn more money on every dollar of cash they have to set aside to cover an eventual claim. As a result, insurers like it when the Fed wants to tighten monetary policy and lift rates.

It takes two

Many people’s first reaction when hearing that interest rates are rising is one of panic and dread.

The result is less cash sloshing around in the system, which makes mortgages, car loans and credit lines all more expensive. In other words, borrowers take it in the teeth.

However, like most things in life, there are two sides to every story. For every individual, business and government that is borrowing money, however, someone else is lending it. Another name for lenders is savers who want to invest the money they’re setting aside for future use and make a little (or big) return in the meantime.

Savers and many other groups are cheering the rise in rates, which helps move the U.S. back to a more “normal” interest rate policy – the recent period of near-zero rates has been unprecedented – and also signals the economy is on a surer footing. That should make all of us, even borrowers, a bit happier.

Author: Jay L. Zagorsky, Economist and Research Scientist, The Ohio State University

Wage Growth Continues To Slow

The latest edition of the RBA Bulletin included a section of wage growth and this chart. Inflation adjusted wage growth is close to zero. Not good for households with large mortgages.  Interestingly they did not separate public and private sector growth, out data suggests public sector employees are doing better than those in the private sector!

The RBA says the job-level micro WPI data provides further insights into the slowing of wage growth in Australia over recent years. Following the
decline in the terms of trade, there has been a reduction in the average size of wage increases.

This has been particularly pronounced in mining and mining-related wage industries. The increasing share of wage outcomes around 2–3 per cent also provides further support for the hypothesis that inflation outcomes and inflation expectations influence wage-setting.

The Bank’s expectation is that wage growth will gradually pick up over the next few years, as the adjustment following the end of the mining boom runs its course. The extent of the recovery will, in large part, depend on how wage growth will respond to improving labour market conditions, including the level of underutilisation.

They observe that wage growth across all pay-setting methods has declined. Wage growth in industries that have a higher prevalence of individual agreements has declined most significantly over recent years,
following strong growth in the previous few years. This may reflect the fact these industries have been influenced by the large terms of trade
movements, but may also indicate that wages set by individual contract can respond most quickly to changes in economic conditions.

Wage growth in industries with a higher share of enterprise bargaining agreements have the lowest wage volatility, as the typical length of an
agreement is around two and a half years. While changes in wage growth and labour market outcomes by pay-setting may reflect differences in wage flexibility or bargaining power, these can be difficult to distinguish from a wide range of other determinants of wages, including variation
in industry performance, the balance of demand and supply for different skills, and productivity.

The share of wage rises between 2–3 per cent has increased to now account for almost half of all wage changes. This may indicate some degree of anchoring to CPI outcomes and/or the Bank’s inflation target. Decisions by the Fair Work Commission, which sets awards and minimum wage outcomes, are heavily influenced by the CPI. A little over 20 per cent of employees have their pay determined directly by awards, and it is estimated pay outcomes for a further 10–15 per cent of employees
(covered by either enterprise agreements or individual contracts) are indirectly influenced by awards.

Not everyone wins from the bank of mum and dad

From The Conversation.

The “bank of mum and dad” is helping young Australians with more than just their housing aspirations. New analysis of data on children receiving an inheritance or cash payment from their parents has found they are more likely to be involved in business startups, financial risk-taking and entrepreneurial ventures, and receive other benefits to those without wealthy parents.

The bank of mum and dad is an expression coined to describe parents generously helping their children to get onto the home ownership ladder. We already know that parental transfers are helping Gen X and Gen Y children break into home ownership, in a market considered unaffordable by international standards.

While some are angered by the growing intergenerational wealth divide between the millennials and their baby boomer parents, estimates from the Household, Income and Labour Dynamics in Australia (HILDA) survey show many young people are benefiting from the wealth of their parents.

Between 2002 and 2012, 1.8 million Australians received an inheritance on one or more occasions. There was an average transfer of A$95,000 per beneficiary over the period. An even higher number (5.8 million) received cash transfers from surviving parents. These gifts averaged A$9,000 per recipient.

Housing assets remain the most important component of households’ wealth portfolios. The majority of households will therefore directly or indirectly draw down on housing wealth to finance monetary gifts to others while they are still alive. The family home is also typically the largest asset bequeathed when parents pass on.

Moreover, booming real house prices have boosted inheritances. At the same time, flexible mortgages have enabled parents to dip into their housing wealth to finance cash gifts to their children.

More than a leg up the housing ladder

A recent Australian Housing and Urban Research Institute report has shed new light on how financial gifts from parents help shape young people’s economic opportunities.

The study matches every person benefiting from an inheritance or parental cash transfer to a “control” person who is not a beneficiary, but has otherwise similar personal characteristics.

We found that the bank of mum and dad is helping young Australians with more than just their housing.

Intergenerational transfer beneficiaries are more likely to hold a bachelor’s degree than non-beneficiaries. Among those who receive cash payments from their parents, 29% hold a bachelor’s degree compared to 21% of the control group who do not receive such transfers. Bequest recipients have double the average bank deposit account balance of the matched controls. These larger financial holdings can be used to buffer income shocks, and as collateral to relax borrowing constraints.

Beneficiaries might therefore be willing to take more risks. They are also better positioned to borrow and finance business startups that might not otherwise get off the ground. These ideas are supported by the data.

A higher percentage of those enjoying access to the bank of mum and dad have set up their own business. 22% of heirs to a bequest are self-employed. In comparison, only 16% of the matched controls were self-employed. Similarly, 17% of those receiving cash payments from their parents are self-employed, compared to 11% of the matched controls.

The findings suggest that the bank of mum and dad could play a role in lifting economic growth through multiple channels. These include business startups, financial risk-taking and entrepreneurial ventures.

Bridging an intergenerational divide or widening an intra-generational gap?

It seems the bank of mum and dad is recycling large amounts of housing wealth to the next generation through intergenerational transfers; and it is an increasingly important pillar supporting educational, housing and business opportunities. However, this is a “leg up” that only benefits those fortunate enough to have parents that are able and willing to transfer wealth.

The business opportunities, educational gains and home ownership status that these transfers promote will create a growing divide among younger Australians. Those whose parents own a home are able to take advantage of a wider set of opportunities than others.

As the home ownership dream fades for growing numbers of Australians, this divide will become more conspicuous. Life time renting is a prospect that many Gen X and Gen Y parents are having to contemplate. Unless Australian governments reverse the decline in home ownership, their children will in turn be bypassed by the intergenerational circulation of housing wealth.

These concerns should provide added impetus as governments strive to improve housing affordability, and restore the home ownership society older Australians take for granted. If our governments fail in this regard we could very well witness further entrenchment of inequality in decades to come.

Authors: Rachel Ong, Deputy Director, Bankwest Curtin Economics Centre, Curtin University;  Gavin Wood, Professor of Housing, RMIT University;  Melek Cigdem-Bayram, Research Fellow, RMIT University

Retirees renting need more than $1 million to be comfortable

The Association of Superannuation Funds of Australia (ASFA) released its Retirement Standard updates for the December 2016 quarter showing a slight increase in the cost of living for retirees.

The Association also released new figures showing Sydney retirees relying on the private rental market for accommodation would need more than $1 million in super savings, as will all retiree couples living in Australian capital cities. Single retirees renting outside Sydney slip under the million dollar indicator.

ASFA CEO Dr Martin Fahy said whether single or in a couple, renting retirees in Sydney, that is those without a debt-free family home, were at a distinct financial disadvantage and would need about $1,045,000 and $1,166,000 at retirement respectively to reach the ASFA comfortable standard.

“This compares to $545,000 for a single and $640,000 for a couple who own their own home,” he said.

“For a single person renting privately in Sydney, around $320,000 is needed to support even a modest standard of living in retirement, with a couple needing around $450,000 to support a modest budget.”

Dr Fahy said one in 12 Australians aged more than 65 live in private rentals.

“Housing affordability and availability is a significant and increasing concern for many Australians and particularly impacts older Australians grappling with the private rental market,” he said.

ASFA estimates a single retiree renting privately in a one-bedroom unit in Sydney will need to spend $62,434 annually to be comfortable and a couple renting a two-bedroom unit will need to spend $79,801.

By comparison, ASFA comfortable retirement standard annual budgets for home owners in Sydney are around $43,300 for singles and $59,600 for couples.

“All estimates assume people are enjoying reasonable health, so any serious illness or disability makes the situation even more challenging, as does rental instability and associated costs,” Dr Fahy said.

“Compulsory superannuation contributions at 9.5 per cent fall well short of what is needed to support a comfortable standard of living in retirement for anyone renting privately.”

Currently around 75 per cent of households with the household head aged 65 and over own their home outright, 8 per cent are still paying off a mortgage and around 8 per cent are renting privately.

Housing affordability is a particularly serious challenge for residents of Sydney. Around 65 per cent of Sydney residents are home owners by the age of 60 compared to just under 80 per cent for the rest of the country.

Changes to ASFA Retirement Standard for December quarter

The ASFA Retirement Standard December quarter figures show budgets for retirees who own their own home have increased by 0.4 per cent for singles and 0.3 per cent for couples, at the comfortable level, compared to the previous quarter. Budgets for older retirees (those aged 85 and over) increased by less than 0.1 per cent.

At the modest level, budgets for retirees aged 65 increased by 0.5 per cent for singles and 0.4 per cent for couples. Budgets for older retirees (aged 85+) increased by less than 0.1 per cent.

The Consumer Price Index (CPI) rose 0.5 per cent in the December quarter 2016, according to the latest Australian Bureau of Statistics (ABS) figures. The small increase in the cost of retirement over recent quarters reflects moderate growth in the overall CPI.

In regard to the costs faced by all retirees, the most significant price rises in the December quarter were automotive fuel (+6.7%) and domestic holiday travel and accommodation (+5.5%). The most significant offsetting price falls this quarter were international holiday travel and accommodation (-2.6%), accessories (-5.1%) and waters, soft drinks and juices (-3.2%). The increase of the price of automotive fuel follows a 5.9 per cent increase the preceding quarter.

The main contributors to the rise in the food and non-alcoholic beverages group in the quarter were restaurant meals (+1.1%), other food products (+5.4%) and vegetables (+2.5%).

Over the last 1- months, the food and non-alcoholic beverages group rose 1.8%. The main contributors to the rise were vegetables (+12.5%), fruit (+6.9%) and restaurant meals (+2.4%).

The main contributor to the rise in the recreation and culture group in the December quarter was domestic holiday travel and accommodation (+5.5%). The rise in domestic holiday travel and accommodation is due to the October school holidays and the lead up to the peak summer holiday period.

Aging and Wealth Inequality

Interesting piece from the St. Louis Federal Reserve looking at the connection between age and wealth and its implications for aging and wealth inequality.

An individual’s wealth varies with age. Most people are born with little to no financial wealth and, as they age, they save part of their income to accumulate wealth or sometimes borrow to finance education, which creates debt. Once people reach retirement, they stop accumulating wealth and start spending down their savings. Thus, the richest people can often be found among those who are about to retire.

Age is not the only determinant of wealth. People’s wealth varies with how much they are given by their parents, their income, and their decisions on how much to consume or save and how to invest their wealth.

In this essay, however, we focus on the connection between age and wealth and its implications for aging and wealth inequality. The issue is salient because the U.S. population is aging and inequality is a frequent concern. Today, less than 15 percent of the overall population is 65 years of age or older, and that share is projected to rise above 30 percent by 2030. Is this going to exacerbate or mitigate wealth inequality in the United States?

The figure shows wealth per capita (black line) by age group in 2010. As indicated earlier, the richest people tend to be 65 to 74 years of age. The figure also shows the fraction of wealth (dashed line) held by households, ranked by the age of the head of household. A key message is that age is a significant source of inequality: The largest and youngest groups hold the least wealth—those under 35 years of age (blue line) represent over 25 percent of the population but hold only about 5 percent of total wealth. If the dashed and blue lines overlapped, each group’s share of the population and share of wealth would be the same and age would not contribute to wealth inequality. In this case, the black line would be flat: Each individual would hold the same amount of wealth, regardless of age.

One can examine the effect of the age distribution using a standard measure of wealth inequality: the Gini index (sometimes called the Gini coefficient), which varies from 0 to 1. A value of 0 indicates no inequality—everyone holds the same wealth. A positive Gini index indicates some inequality. If one individual held all the wealth—maximal inequality—the Gini index would equal 1. In the United States, for example, the richest 1 percent of the population holds 42 percent of total wealth.1 As the figure shows, the age group with the highest share of wealth—those 55 to 64 years of age—holds almost 31 percent of the wealth but represents only about 16 percent of the population. The Gini coefficient implied by the figure is 0.385.2 Because this Gini coefficient measures only the dispersion of wealth by age group, it omits additional sources of wealth inequality and therefore understates the true Gini coefficient for the United States.

A simple example helps illustrate that wealth inequality by age contributes to overall wealth inequality: Consider an economy, as shown in the table, with 100 people. Each young person holds $1 of wealth, while each old person holds $10 of wealth (top panel). The population shares of young and old are 80 percent and 20 percent, respectively. Note that this panel represents, in a stylized way, the features of the U.S. economy displayed in the figure: There are many more young people than old people, but the old hold more wealth than the young. The total wealth of this economy is $280, where the young collectively hold $80 and the old collectively hold $200. The young’s share of total wealth is (80/280) = 29 percent, which is noticeably less than their 80 percent share of the population. The Gini coefficient associated with this distribution of wealth is 0.51.

Suppose now that the economy ages and there are 50 old people and 50 young people (bottom panel). Because older people have more money, total wealth in the economy rises from $280 to $550. If each young person still holds $1 of wealth, their share of total wealth becomes (50/550) = 9 percent instead of 29 percent—a decline of 20 percentage points. But their share in the population decreased by 30 percentage points, from 80 percent to 50 percent, so the Gini coefficient declines from 0.51 to 0.41.

So the aging of the population, per se, is a factor that can reduce wealth inequality. This example, however, must be interpreted with caution. It does not imply that the forecasted aging of the U.S. population will be accompanied by a reduction in wealth inequality. As mentioned in the introduction, the calculation presented here abstracts from other forms of inequality not related to age. It is conceivable that these other forms of inequality may increase as the population becomes older and offset the effects described here.

Property Investment and the Financialisation of Housing

An important report from the Special Rapporteur to the UN Human Rights Council highlights the “financialization of housing” and its impact on human rights. If you want to understand the rise in property investment in Australia, and the problem of housing affordability, read this! Sydney and Melbourne are “Hedge Cities”.  You cannot fix housing affordability without addressing the investment class.

The financialization of housing has its origins in neo-liberalism, the deregulation of housing markets, and structural adjustment programmes imposed by financial institutions and agreed to by States. It is also tied to the internationalization of trade and investment agreements which, as discussed below, make States’ housing policies accountable to investors rather than to human rights. The financialization of housing is also the result of significant changes in the way credit was provided for housing and more specifically, of the advent of “mortgage-backed securities”.

The amount of money involved in the purchase of housing and real estate is almost impossible to digest. Cushman and Wakefield, an American global real estate services firm engaging in $90 billion worth of real estate sales per year, publishes an annual report entitled “The Great Wall of Money” which includes a calculation of the amount of capital raised each year for trans-border real estate investments. The total in 2015 was a record $443 billion, with residential properties representing the largest single share. The report notes that “cross border flows will continue to transform real estate investment across the globe”

Housing prices in so-called “hedge cities” like Hong Kong, London, Munich, Stockholm, Sydney and Vancouver have all increased by over 50 per cent since 2011, creating vast amounts of increased assets for the wealthy while making housing unaffordable for most households not already invested in the market. Land prices in the 35 largest cities in China have increased almost five-fold in the past decade and prices for urban land in the top 100 cities in China have increased on average by 50 per cent in the past year.

The report examines structural changes that have occurred in recent years whereby massive amounts of global capital have been invested in housing as a commodity, as security for financial instruments that are traded on global markets, and as a means of accumulating wealth. The report assesses the effect of those historic changes on the enjoyment of the right to adequate housing and outlines an appropriate human rights framework for States to address them. The report reviews the role of domestic and international law in that sphere, and considers the application of principles of business and human rights.

The report concludes with a review of States’ policy responses to the financialization of housing and some recommendations for more coherent and effective strategies to ensure that the actions of global financial institutions and actors are consistent with ensuring access to housing for all by 2030. The Special Rapporteur suggests that, as a way forward, States must redefine their relationship with private investors and international financial institutions, and reform the governance of financial markets so that, rather than treating housing as a commodity valued primarily as an asset for the accumulation of wealth they reclaim housing as a social good, and thus ensure the human right to a place to live in security and dignity.

  1. The expanding role and unprecedented dominance of financial markets and corporations in the housing sector is now generally referred to as the “financialization of housing”. The term has a number of meanings. In the present report, the “financialization of housing” refers to structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets. It refers to the way capital investment in housing increasingly disconnects housing from its social function of providing a place to live in security and dignity and hence undermines the realization of housing as a human right. It refers to the way housing and financial markets are oblivious to people and communities, and the role housing plays in their well-being.
  2. Housing and real estate markets have been transformed by corporate finance, including banks, insurance and pension funds, hedge funds, private equity firms and other kinds of financial intermediaries with massive amounts of capital and excess liquidity. The global financial system has grown exponentially and now far outstrips the so-called real “productive” economy in terms of sheer volumes of wealth, with housing accounting for much of that growth.
  3. Housing and commercial real estate have become the “commodity of choice” for corporate finance and the pace at which financial corporations and funds are taking over housing and real estate in many cities is staggering. The value of global real estate is about US$ 217 trillion, nearly 60 per cent of the value of all global assets, with residential real estate comprising 75 per cent of the total.  In the course of one year, from mid-2013 to mid-2014, corporate buying of larger properties in the top 100 recipient global cities rose from US$ 600 billion to US$ 1 trillion.3 Housing is at the centre of an historic structural transformation in global investment and the economies of the industrialized world with profound consequences for those in need of adequate housing.
  4. In “hedge cities”, prime destinations for global capital seeking safe havens for investments, housing prices have increased to levels that most residents cannot afford, creating huge increases in wealth for property owners in prime locations while excluding moderate- and low-income households from access to homeownership or rentals due to unaffordability. Those households are pushed to peri-urban areas with scant employment and services.
  5. Elsewhere, financialization is linked to expanded credit and debt taken on by individual households made vulnerable to predatory lending practices and the volatility of markets, the result of which is unprecedented housing precarity. Financialized housing markets have caused displacement and evictions at an unparalleled scale: in the United States of America over the course of 5 years, over 13 million foreclosures resulted in more than 9 million households being evicted. In Spain, more than half a million foreclosures between 2008 and 2013 resulted in over 300,000 evictions. There were almost 1 million foreclosures between 2009 and 2012 in Hungary.
  6. In many countries in the global South, where the majority of households are unlikely to have access to formal credit, the impact of financialization is experienced differently, but with a common theme — the subversion of housing and land as social goods in favour of their value as commodities for the accumulation of wealth, resulting in widespread evictions and displacement. Informal settlements are frequently replaced by luxury residential and high-end commercial real estate.
  7. While much has been written about the financialization of housing, it has not often been considered from the standpoint of human rights. Decision-making and assessment of policies relating to housing and finance are devoid of reference to housing as a human right. Issues related to business and human rights have received some attention in recent years. However, the housing and real estate sector — the largest business sector with many of the most serious impacts on human rights — appears to have been mostly ignored.
  8. A report on the topic is timely as States embark on the implementation of the Sustainable Development Goals. If the commitment in target 11.1 to ensure access for all to adequate, safe and affordable housing and basic services is to be achieved by 2030, it is essential to consider the role of international finance and financial actors in housing systems. That will help to identify and address more effectively patterns of systemic exclusion, to ensure more meaningful human rights accountability for issues of displacement, evictions, demolitions and homelessness, and the engagement of all relevant actors in the realization of the right to adequate housing.
  9.  Constructing human rights accountability within a complex financial system to which Governments are themselves accountable, involving trillions of dollars in assets, may seem a daunting task. However, the global community cannot afford to be cowered by the complexity of financialization.8 The present report aims to cut through some of the complexity and opaqueness of finance in housing to expose the central relevance and necessity of the human rights paradigm at multiple levels, from the international to the local.
  10. The report builds on important work undertaken by the previous Special Rapporteur on the right to housing. In her 2012 report on the impact of finance policies on the right to housing of those living in poverty (A/67/286), she warned of emerging trends towards the financialization of housing encouraged by States’ abandonment of social housing programmes and increased reliance on private market solutions. She documented attempts by States to rely on the private market and homeownership, which increases inequality and fails to address the housing needs of low-income and marginalized groups. More fundamentally, she called for a paradigm shift through which housing would once again be recognized as a fundamental human right rather than as a commodity. The present report takes up that challenge.

Every Consumer of Financial Products Should Read This!

In a speech “The role of financial regulation in protecting consumers“, the Governor of the Central Bank of Ireland highlights the abundant empirical and theoretical research to show that consumers do not always act in their own best interest in making financial decisions and that biases can be exacerbated by the design of financial products.

This is a very important issue, especially given the current debates about the role of banking, and the cultural behaviour of bankers. In a word, without appropriate regulation and protection, consumers are at a significant disadvantage. More needs to be done to empower consumers in their dealings with financial services firms.  International financial literacy studies indicate that a majority of the world population do not have sufficient knowledge to understand even basic financial products and fail to make effective decisions to manage their finances and the risk associated with them.

A vast empirical literature shows that consumers tend to make poor financial choices, taking on too much debt, misunderstanding investment risk and choosing financial products that do not match their needs. Over recent decades, the formal economic theory to rationalise these patterns has been developed, with insights from economics and psychology blended in the vibrant fields of behavioural economics and behavioural finance.

The fast pace of financial innovation has created a complex world for consumers, where the range of available financial products is broad, and the consequences of financial choices are significant. Coupled with this, the typical household tends to have a limited personal track record in making financial decisions, since the purchase of financial products happens only infrequently. This is problematic, since the demands for financial sophistication and knowledge are sizeable if a consumer is to navigate safely through the options put forward by providers of financial services. Financial decisions often require consumers to assess risk and uncertainty, for example, and to consider trade-offs between the near term and the long term. A growing body of academic literature shows that, among the general population, the level of financial knowledge, skills and ability to consider such complexities is low.

There is also a growing body of evidence from the field of behavioural economics that consumers are subject to behavioural biases when making decisions. In other words, decisions are affected by emotions and psychological experiences, by rules of thumb and accepted norms. For example, consumers can exhibit present-biased behaviour, which leads them to over-value payoffs today relative to payoffs in the future, a bias which can be associated with self-control problems.  In addition, households can be overly attached to the status quo and suffer inertia bias, taking default options in financial contracts, failing to switch product or provider even when there are clear benefits to switching.  Retail investors also tend to follow naïve investment strategies rather than identifying superior options.  Consumers can also exhibit loss aversion bias, meaning that they care more about potential losses than making equivalent gains.

The design of financial products and services can serve to ease or exacerbate these biases.  In this context, behavioural economics shows that framing matters – put simply, firms can present the same information in different ways and this can lead to different choices by consumers.  A key insight from the recent experience with financial crisis and from the growing literature on behavioural economics, is that consumers do not always act in their own best interest. In addition, market forces do not always act to reduce consumer mistakes. Firms face their own incentives when designing and framing products, and these incentives may not align with the best interests of the consumer. For example, analysis by the Office of Fair Trading in the UK shows that firms can frame prices in a way that plays on consumer biases. Empirical research also suggests that firms can choose to market the salient features of products that appeal to consumer biases, while shrouding the less favourable aspects that could alter a consumer’s choice to purchase that product. The interactions between misaligned incentives and behavioural biases can adversely affect consumer welfare, and there are many examples of analytical work that highlight such costs.

 

Does Western Australia have the highest unemployment in the country?

From The Conversation Fact Check.

In the lead-up to the March 11 state election, Western Australian Labor leader Mark McGowan said the state has the highest unemployment rate in Australia. Is that correct?

Checking the source

When asked for sources to support his statement, a spokeswoman for McGowan said by email:

The first source is the Australian Bureau of Statistics stats for January (most recent) – below is the table on their summary page showing WA as the highest on a seasonally adjusted basis. In addition we had The West [Australian] citing the same stats here.

Let’s take a closer look at what those numbers really mean.

Who is counted in the unemployment rate?

The Australian Bureau of Statistics (ABS) considers a person to be unemployed if they were aged 15 years and over and were not employed during the labour force survey reference week, and:

  • had actively looked for full-time or part-time work at any time in the four weeks up to the end of the reference week and were available for work in the reference week; or
  • were waiting to start a new job within four weeks from the end of the reference week and could have started in the reference week if the job had been available then.

The unemployment rate is the number of unemployed persons expressed as a percentage of the labour force. This is a reasonable indicator of the overall health of the labour market and economy.

The ABS collects labour force statistics on a monthly basis, but adjustments are made to these estimates to take into account seasonality and previous trends.

Is Western Australia’s unemployment rate the highest in the country?

The most recent Australian Bureau of Statistics labour force monthly figures show that, when using the seasonally adjusted metrics, the unemployment rate is the highest for Western Australia at 6.5%. This is closely followed by South Australia at 6.4%. These figures support the claim that unemployment is the highest for Western Australia.

However, when using trend estimates, the unemployment rate is marginally higher in South Australia: 6.7% compared to 6.6%.

Trend figures are typically more reliable than seasonally adjusted figures. And – as with all labour market statistics produced by the ABS – there is a degree of statistical error in such estimates because the figures are based on survey data.

Overall, there’s very little difference between first and second place in the unemployment ranks, with only 0.1 (rounded) of a percentage point difference between the two states using either metric.

The unemployment rate for Western Australia is higher than Tasmania’s unemployment rate, as McGowan said.

The Conversation/ABS – Labour force, January 2017, CC BY-ND

Recent unemployment trends

Unemployment rates typically follow economic cycles. When the economy is doing well, unemployment is low. When the economy is flagging, unemployment will begin to rise.

Unemployment rates and other labour market indicators such as labour force participation and employment rates will also be affected by the population composition of an area and any changes in this composition.

Changes in the unemployment rate across Australia’s states and territories over the last 15-plus years demonstrate that these largely follow the economic cycle (Figure 2). Over the course of the mining boom, unemployment rates decreased, falling to a low of 2.7% in Western Australia and 4.2% nationally.

In the wake of the global financial crisis, unemployment rates begin to rise again after a short reprieve in 2009 and 2010. Since this point, unemployment rates for all states and territories have been on an upward trajectory.

Comparing 2012 with the most recent figures, the unemployment rate in Western Australia has risen most sharply across all states and territories – from the lowest rate alongside ACT in 2012 to the current highest rate alongside South Australia.

Over the same period, the unemployment rate in NSW has fallen, while in Tasmania and Victoria the rate initially climbed before returning to around the same level.

Figure 2: Unemployment rate, Jan 2000 – Jan 2017, trend estimates. ABS Labour Force Statistics, Jan 2017, Cat No.6202.0

It is less clear to what degree the state government in Western Australia has helped “create” the current labour market conditions being experienced in that state. (McGowan’s full quote was: “It is true the Liberals and Nationals have wrecked the state’s finances, and have created the highest unemployment in the country in Western Australia, higher than Tasmania, higher than South Australia…”, but checking the claim about the state’s finances is a separate and bigger question beyond the scope of this FactCheck, which has focused only on employment.)

As I explained in this previous FactCheck, a government’s influence over the labour market is constrained by what is happening in the wider global economy. Taking credit for jobs growth, or laying blame when the unemployment rate goes up, is valid only to a certain degree.

Verdict

McGowan’s statement that “the highest unemployment in the country [is] in Western Australia, higher than Tasmania, higher than South Australia” is correct when based on the most recent seasonally adjusted figures from the Australian Bureau of Statistics.

Trend estimates are typically a better data source to use and show that South Australia is marginally higher than Western Australia. However, there is very little difference.

It is less clear to what degree the current state government helped “create” this situation. Western Australia’s unemployment rate has been increasing since the global financial crisis. A similar pattern is seen across most Australian states and territories.

Since 2012, WA’s unemployment rate has risen at a faster pace than other states and territories, from the lowest in 2012 alongside ACT to the highest now alongside South Australia.

Changes in the population composition of the state along with the economic cycle are likely to be driving these trends. – Rebecca Cassells

Review

This is a sound FactCheck. It notes that the Australian Bureau of Statistics provides more than one measure of the unemployment rate. While Western Australia has the highest state unemployment rate in January 2017 on a seasonally adjusted basis, South Australia has a higher trend estimate. It is less clear, however, that the trend estimate is considered more reliable than the seasonally adjusted estimate, particularly for the most recent month of reported figures.

I agree with the caveat that it is less clear that the current state government helped “create” this situation. The potential for state governments to influence the overall state of the economy in the short term is very much constrained.

I would stress even more that the unemployment measures provided each month by the ABS are only estimates, based on surveyed samples of individuals, not the whole population. State unemployment rates in particular are quite volatile month to month, with changes up and down of 0.3-0.4 percentage points quite common. Differences in unemployment rates between states of 0.1 percentage points in any specific month are not particularly informative. – Michael Coelli