Social Trends – Page 152 – Digital Finance Analytics (DFA) Blog

Do Younger Australians Understand Credit?

Australia’s credit reporting framework has recently undergone a fundamental shift away from a negative only reporting system to comprehensive credit reporting (CCR). Under the changes, lenders can report additional information about borrowers including repayment history such as whether a borrower has paid all credit obligations in a given month, and whether payment was on time, late or missed.

A newly released report examines the knowledge and attitudes of millennials (consumers born between 1980 and mid-2000) towards credit.

It also considers future implications of the shift to CCR in Australia, including the potential use of non-traditional data to assess creditworthiness. Millennials comprise almost a quarter of the population and are the fastest-growing segment of the consumer lending market in Australia. As millennials apply for credit cards, personal loans, car loans and home loans in coming years, lenders will have a range of new tools to assess credit risk and determine millennials’ access to credit.

This research was commissioned by the Customer Owned Banking Association (COBA) and aims to stimulate discussion about the implications of changes to credit reporting for millennials among Australian consumers, policy makers and industry.

This report is based on a three-stage study conducted over a 12 week period, which relied on a primarily qualitative approach. This included: a comprehensive review of domestic and international literature, 15 semistructured interviews across seven key informant groups, and two focus groups with 12 millennials. The findings presented are strictly informed by the literature and the qualitative data collected; they do not reflect the views of Good Shepherd Microfinance.

Despite being the fastest-growing segment for consumer loans, global and domestic research shows that young people are more likely to be ‘thin file’ or ‘credit invisible’ and are overrepresented among financially excluded people. Credit providers rely on previous credit history to make decisions, yet without any prior credit usage, providers have limited to no visibility of the creditworthiness of this group. Their lack of access to mainstream financial products may also make this group vulnerable to predatory lending products.

Our study finds that millennials have a lack of awareness of CCR, hence it will be imperative to raise their awareness to ensure the benefits of CCR are realised. Millennials do not know what data will be collected about them and they have little idea of how their behaviour will impact their creditworthiness now and in the future. Nearly two-thirds of millennials (64%) have never heard of, or do not understand, the term ‘credit report’, according to consumer research commissioned by COBA. Targeted education and transparency of credit assessment decisions will therefore be essential.

This report divides millennials into two distinct groups — the young millennials (18 to 24 years of age) and the older millennials (25 to 35 years of age). The difference between the young and the older millennials lies in their technological capabilities, their attitudes, and the degree to which they are willing to share their personal information digitally. Some millennials — especially young millennials — could more readily see the benefits associated with having a better credit rating as an incentive or reward for ‘good’ credit behaviour. Others had some reservations, seeing the potential for some groups (such as young millennials, those with low incomes, migrants, and early-school leavers) being disadvantaged as they were more likely to be creditinvisible. However, some studies argue that these groups may benefit from the introduction of CCR if payment behaviour from other sources is able to be included in credit-making decisions.

Overseas experience of credit reporting strongly supports the potential for non-traditional or alternative data to complement, rather than substitute, traditional credit data used to assess creditworthiness. Use of this data is particularly relevant for millennials as they generate broad alternative data sets about themselves through their digital behaviours including online payment and social media activity. Using alternative data to determine creditworthiness can open the door to better credit access for many millennials. As a first step, including utility and telecommunications data in credit reporting could facilitate new to credit consumers, such as millennials, to build a credit history without the necessity of borrowing.

More data captured and used by credit providers may mean greater opportunities for millennials and others who are ‘thin file’ or ‘no file’, but it also brings with it risks, particularly for young people who are generally unaware of how this data is captured and used. Potential risks include concerns that over-indebted consumers could be disproportionately impacted; data quality and integrity could lead to inaccurate or misinterpreted credit decisions; privacy and security of personal data; potential use of data for unauthorised purposes e.g. identity theft or fraud; cross-industry differences in data-capture methods and requirements; treatment of hardship or repayment history information; risk-based pricing; as well as a fear of increasing financial or social exclusion resulting from loan defaults. Millennials are a generation that is willing to take control of their personal information and CCR may provide them with an opportunity to do so. However, their lack of awareness and knowledge gaps in relation to credit puts a responsibility on all stakeholders to ensure that these are addressed through targeted education. Having more engaged and responsible consumers also benefits lenders, and can provide a positive flow-on impact on the economy as a whole.

Australia is discriminating against investors

From The Conversation.

Many Australians dream of starting their own businesses. But they face restrictions on where they can access startup capital. In Australia you must be certified as a “sophisticated investor” to invest in risky, early stage ventures that cannot yet comply with costly disclosure requirements.

A “sophisticated investor” is someone with an income of at least A$250,000 per annum or assets worth A$2.5 million. But this qualification not only discriminates against some investors, it is a very limited view of what it means to be “sophisticated”. It also ignores recent changes in how companies interact with an important group of early investors – their customers. Even more, it robs startups of valuable capital.

The argument against “sophistication”

The argument for this restriction is that investing in private companies with unregulated disclosures is risky. They are not subject to the same requirements of a public company and are potentially more difficult for a layman to evaluate. “Unsophisticated investors” should just stick to publicly listed investments because they are less risky and more transparent.

But there’s nothing particular about having money that makes you a good investor and investors get shortchanged in public markets as well.

In particular, it is well documented that, on average, shares sold to the public through an IPO significantly underperform other investments in the long-run. Even when a high quality IPO does come to the market, unsophisticated investors will struggle to get a meaningful allocation, while wealthy, well-connected investors end up with most of what they ask for.

The academic literature refers to this as the “winner’s curse”, whereby unsophisticated investors only receive shares in an IPO when sophisticated investors think it’s a lemon.

Many startups have a unique relationship with customers

But companies also have greater intimacy with their customers than ever before. Micro-investing startup Acorns recently sought to raise A$6 million in a private share issue, at least partially from its estimated 160,000 Australian users. Acorns’ users are reported to have already pledged more than A$1 million to help the startup replenish its cash and pursue further growth opportunities.

Acorns may be slightly unusual in being able to raise this money, as it is itself an investing app. It helps its users build wealth by saving “spare change” and investing this money for them. So its client base is at least familiar with the tenets of investing.

But Acorns’ ability to tap its user base as a source of capital also challenges the notion that only “sophisticated” investors are suitably qualified to participate in early stage deals. Acorns’ users are typically young tech savvy millennials who are unlikely to pass the sophisticated investor test (which is probably why they are using the app). Yet, because of their interaction with the app, these users have unique insights in evaluating Acorns’ prospects.

It raises questions as to whether the distinction between “sophisticated” and “unsophisticated” investors remains relevant in the world of app based tech startups. These startups often have aggressive go-to-market business models that attempt to capture as many users as possible relatively early in their life. Would someone that is cash rich have a better understanding of this business than a customer or user of it?

In making an early stage investment decision a “sophisticated” investor could try to determine whether an app solves a significant problem in its user’s life and thus how deeply a user will engage with it. But predicting the behaviour of app users is inherently difficult. So who better to predict it than the users themselves?

Discriminating against certain investors costs everyone

Under the current rules, a lot of “unsophisticated” users are denied access to such investment opportunities because they are simply not wealthy enough. This robs investors of an opportunity and startups of a potential source of capital. Even more, we all could lose as companies that create incredible products struggle or die for lack of funds.

For startups, drawing on customer support, as Acorns has done, would provide a source of capital that does not carry the costs and conditions that are typically attached to angel and venture capital funding. For small investors it gives them direct access to some potentially very lucrative (but very high-risk) investments that otherwise would be impossible or very costly to access.

Democratising the way startups are financed could create an environment whereby entrepreneurs, small investors and the economy as a whole all benefit from financing new and interesting endeavours. But it all starts with re-conceptualising the current arbitrary notion of “sophistication”.

Author: Jason Zein, Associate Professor, UNSW Australia

Sydney needs higher affordable housing targets

From The Conversation.

The release this week by the Greater Sydney Commission of city-wide draft plans mandating some measure of affordable housing in new developments is a step in the right direction. However, the target of 5-10% on rezoned land is too low to make a serious impact on the city’s affordable housing shortage. It must be more ambitious.

Research highlights the central importance of affordable, stable housing to economic and social wellbeing. Yet, in Sydney, the lack of affordable housing has reached crisis point. Everyone from community housing providers to Commonwealth Treasury secretary John Fraser is pointing out that rising house prices are creating massive social and economic problems.

Housing researchers and academic housing economists across Australia agree that an essential part of the policy mix is to mandate a significant percentage of affordable homes in all new housing developments. This is known as “inclusionary zoning”.

Other global cities such as New York and London have recognised the important role of housing in their economies and have inclusionary zoning policies. Other states in Australia have also set affordable housing targets. These have not had harmful impacts on housing investment.

Fighting to keep windfall profits

Predictably, parts of the property industry are already resisting any level of inclusionary zoning. Some developers claim that affordable housing targets will increase housing costs for the majority. They argue that profits lost on affordable housing will have to be recouped elsewhere.

While we can expect this line of argument from those who profit from the status quo, it is fundamentally wrong for a simple reason. Housing developers will not bear the burden of these targets. Rather, it will be borne by land holders who currently make large windfall gains from selling land for development.

When land has been zoned to enable higher-density development, landholders reap these windfall profits without actually delivering any new housing or infrastructure.

For example, the site of a recently completed development in Sydney’s inner west was first purchased by a property company as industrial land for around A$8.5 million. Following a rezoning to higher-density residential, the site was sold again for A$48.5 million. In this case, the first buyer made a 471% windfall profit without building anything on the site.
The seller of the rezoned site of the Lewisham Estates development made a 471% windfall profit without building a thing. Inner West Council
If a fixed percentage of affordable housing becomes a condition of rezoning such sites, this will only affect the size of the landholder’s windfall gain. Developers will offer lower prices for the land, based on the mandated requirements for affordable housing.

Remember that the uplift in land value results from public policy changes that allow for housing development or higher-density housing. It is not unreasonable, then, that landowner windfalls should be limited to achieve the important public policy outcome of housing affordability.

This is why some property developers do not object to inclusionary zoning. Indeed, some have been part of the push for inclusionary zoning, through their membership of the Committee for Sydney. They recognise that so long as the “playing field” is level for all, mandatory targets for affordable housing can be achieved without making development unprofitable or housing more expensive.

Government is conflicted

The New South Wales government has been reluctant to set significant inclusionary zoning requirements for new developments in several important parts of the city. One possible reason is that the government itself stands to reap revenue from rezoning and/or redevelopment of government-owned land.

It is especially inappropriate that government-owned land should be exploited in this way. In big development schemes where government is the major landowner, such as Central-Eveleigh, the Bays Precinct and Olympic Park, public good should trump Treasury “profits” on land release. Government should not be in the business of extracting its own windfall at the cost of housing affordability.

Inclusionary zoning targets should therefore be much higher for housing developments on government-owned land, especially in major renewal precincts. Not only would developments on such sites still yield a “profit” for the taxpayer, they would deliver a social benefit to the wider community at no real cost and without impacting feasibility.

What targets should be set?

We join those in the housing sector who believe that at least 15% of housing in new private developments should be affordable. On publicly owned land, at least 30% of new housing developments should be affordable.

Of course, the details of land zoning matter. If targets are set, we must ensure the definition of “affordable” actually achieves the goal of reducing housing stress for people on low and moderate incomes while maintaining housing quality.

Substantial inclusionary zoning requirements will not make development more expensive. They will make it harder for land speculators to make large profits while making no contribution to the social and economic future of New South Wales. It is high time the foxes in the henhouse were called to account.

To Borrow, or not to Borrow?

From The Federal Bank of St. Louis Blog.

Have you ever wondered whether it makes sense to borrow for college? Or how much debt is worth taking on to get that dream home?

Well, we at the Center for Household Financial Stability did. Accordingly, we organized, along with the Private Debt Project, a research symposium back in June to see if there exist tipping points at which taking on more debt could be too financially risky. After all, if debt doesn’t lead to more income and wealth, what’s the point? Asking these questions is one of the driving forces at the Center because we don’t think enough attention is being paid to the debt side of family balance sheets.

For the symposium, we commissioned several new papers from Fed and non-Fed economists. The papers—along with my summary and reflection—were released last week.

The research findings were both interesting and often counterintuitive. Let me mention just a few.

My colleagues Bill Emmons and Lowell Ricketts looked at loan delinquencies. Reflecting our Center’s ongoing work on the demographics of wealth, they found that younger, less-educated and nonwhite families were more likely to tip into delinquency. No huge surprise there. But then the co-authors posed what I think is a groundbreaking framing question, including for many Fed economists: Are these struggling families at this greater risk because they make riskier financial choices or because of structural, systemic forces that are largely shaping their financial behavior? In other words, is our tipping points question whether more financial education is primarily needed or whether a change in public policy is primarily needed?

Neil Bhutta and Benjamin Keys also discerned some alarming tipping points by looking at the nearly $1 trillion in home equity extractions between the boom years of 2002-2005. Extractors, they found, were more likely to default on their mortgages, even after controlling for credit scores and other risk factors. Even more surprising, extractors were more than twice as likely to become severely delinquent on their mortgage debts and almost 40 percent more likely to become delinquent on other kinds of debt.

We didn’t just look at the numbers but also the psychology of tipping points. Christopher Foote, Lara Loewenstein and Paul Willen found that, leading up to the financial crisis, excessive mortgage borrowing was fueled not by a financial indicator (the amount of income needed for a mortgage) but by a psychological one (the expected increase in future housing prices).

The symposium also opened up new ways to think about tipping points: At what point, for example, is an aspiration given up because of too much debt? And do different generations—say Gen Xers and millennials—think differently about how much debt is good or bad?

Several trends suggest families will be struggling with high debt levels for years to come, and it behooves all of us to think more about when debt goes from being productive to destructive. The financial health of families and our economy may depend on it.

I hope you’ll have a chance to read all of the papers, each one novel and forward-looking.

Additional Resources

Symposium: Tipping Points: Mapping and Understanding the Impact of Debt on Household Financial Well Being and Economic Growth

On the Economy: Mortgage Debt’s Share of Total Debt Keeps Declining

On the Economy: How Consumer Debt Has Evolved in the Nation and the Eighth District

Changing dynamics in household behaviour help explain low inflation

The NZ Reserve Bank is taking account of changing household saving and spending behaviours in its inflation forecasts, Deputy Governor Geoff Bascand said in a speech to the Australia National University in Canberra.

Mr Bascand said that Australasian patterns of saving and spending are proving different from other advanced economies.

Internationally, demand dynamics have changed since the global financial crisis (GFC), challenging inflation modelling and, in some cases, inflation-targeting frameworks.

Some economists suggest that we are now in an era of “secular stagnation”, with persistent low demand due to higher saving and a reduced tendency to invest, driving down the long-term real neutral interest rate. Others point to an overhang from earlier excessive debt accumulation and suggest that demand is being depressed by a lengthy period of deleveraging (reduced borrowing).

Across advanced economies, investment has been weak and national saving rates on average haven’t altered significantly since the GFC.

But a different picture emerges in Australasia, which has witnessed an uplift in saving, especially by households, and steady output growth supported by robust investment.

“In Australasia the current outlook looks a lot like that which prevailed before the 2000s. In other advanced economies, weak investment growth, coupled with a disappointing expansion in the supply side of the economy, points to a world more consistent with lower long-term growth expectations.

“To what extent heightened household saving preferences in Australasia represent a permanent shift or a prolonged deleveraging adjustment is uncertain. Some indicators provide tentative support to the view that it represents a prolonged cyclical correction.”

Mr Bascand says the rate of growth of consumption, including the relationship between consumption and wealth, is crucial to the Reserve Bank’s assessment of business cycle dynamics and inflation prospects. Projections of demand arising from historical estimates of consumption from wealth have been over-optimistic. Weaker spending than expected out of higher housing wealth is part of the reason why inflation has been lower than forecast.

He says taking into account the increase in household saving we have seen, the links between interest rates, output and inflation appear stable.

“Currently, we are projecting per-capita consumption growth to improve and provide an impetus to output growth. The acceleration is modest compared to the previous cycle as household saving is expected to remain positive over the forecast horizon.”

Greater Sydney Commission releases draft district plans

From The Real Estate Conversation.

The Greater Sydney Commission, which is headed up by Lucy Turnbull, has released its draft district plans outlining targets and priorities across Sydney’s six districts for the next 20 years.

The Greater Sydney Commission has released its draft district plan with a 20-year vision for each of Sydney’s six districts.

The plan sets out how the priorities outlined in the ‘A Plan for Growing Sydney’ report can be achieved in practical terms, and includes a 5-10 per cent affordable rental housing target for low and very low income households in all new residential developments across Sydney.

The plan also outlines a vision for a ‘green grid’, a network of parks, bushland, waterways, green street canopies, and walking and cycling paths across the city.

The Commission’s plan is to transform Sydney’s six districts into three cities: the Eastern City, the Central City and the Western City, with each city liveable and productive in its own right.

The Commission has also launched a Greater Sydney Digital Dashboard, an online tool that will allow better monitoring of the growth and changing face of Sydney with a view to making better planning decisions.

Visitors are able to enter their suburb name into the website, and view their relevant district plan and related documents.

With Sydney forecast to have a population of 6 million by 2036, better urban planning is essential.

“Greater Sydney is a mosaic of great places, and we’ve collaborated with the community, peak interest groups, businesses, and all levels of government to build concrete plans to make those places greater,” said Greater Sydney Commission’s Chief Commissioner, Lucy Turnbull.

Greater Sydney Commission CEO Sarah Hill said, “By early 2018, for the first time in many decades, our aim is that final land use, transport and infrastructure plans will be aligned to provide a strong platform for Greater Sydney.”

The plans will be on display until the end of March 2017. The Commission will be leading a public discussion about the plans until then, and encourages submissions.

To view the documents click here.

To visit the Greater Sydney website visit here.

To make a submission click here.

Why special tax breaks for seniors should go

From The Conversation.

The federal government could save about A$1 billion a year by winding back three tax breaks for older Australians that are unduly generous and have no sensible policy rationale, according to our new Grattan Institute report.

Many seniors pay less than younger workers on the same income as a result of the Seniors and Pensioners Tax Offset (SAPTO) and a higher Medicare levy income threshold. They also get a higher rebate on their private health insurance than younger workers on the same income.

The tax-free thresholds for seniors and for younger people have diverged over the last 20 years. Seniors do not pay tax until they earn A$32,279 a year, whereas younger households have an effective tax-free threshold of A$20,542.

These outcomes are hard to justify. A retired couple pay about A$4000 a year in tax on earnings of A$70,000 a year from their assets (assuming assets outside of super worth A$1.4 million). Any extra income they draw from a super account is tax free.

By contrast a working couple with both people earning the minimum wage would have the same income of $70,000 a year but pay tax of about A$7000. Unlike the retired couple, they probably don’t own their own home and have little chance of accumulating $1.4 million in assets, or much super savings, or owning their home before they retire.

These age-based tax breaks help to explain why the proportion of seniors paying tax has almost halved in the last 20 years. Those over 65 pay less tax per household in real terms than seniors did 20 years ago, despite their rising incomes and workforce participation rates.

Age-based tax breaks are badly designed to any justifiable purposes such as increasing workforce participation or preserving adequate retirement incomes for poorer Australians. Tapers that withdraw the offsets for those with higher incomes lead to the tax breaks effectively increase marginal tax rates for many people. And of seniors who lodge a tax return, none of the benefits go to the bottom 40%.

Some may argue that the tax breaks are a fair reward for a lifetime of paying tax. But large tax breaks for seniors are in fact a relatively new invention not provided to previous generations.

And the current generation of seniors also receive much more than their predecessors from government spending, particularly on health. Senior households on average receive A$32,000 a year from government more than they contribute in income and sales taxes. In 2004 they only took out about A$22,000 a year. For now, federal budget deficits are funding the difference.

Very little justification was provided for these tax breaks when they were introduced. But they correlate with electoral dynamics shifting decisively in favour of older voters. From 1995 to 2015, the proportion of eligible voters aged 55 and over grew from 27% to 34%. Because younger Australians enrol less, those aged 55 and over are now 38% of enrolled voters.

These tax breaks might have been affordable when they were introduced 15 years ago, and budgets moved into surplus. But the federal government has been running large budget deficits for 8 years in a row. It must make tough saving and spending decisions to avoid handing an unsustainable bill to future generations.
Our report proposes winding back SAPTO and the higher Medicare levy threshold. Self-funded retirees should not qualify for SAPTO. Seniors with enough private income that they do not qualify for a full Age Pension should pay some income tax.

The proposed changes are fair. Seniors would pay either the same or less tax than younger Australians. They would have little effect on the 40% of seniors who receive a full Age Pension. They would mostly affect seniors who are wealthy enough to receive no pension or just a part pension.

These changes would save the federal budget about A$700 million a year. Reducing the private health insurance rebate so that seniors get the same rebate as younger Australians would save another A$250 million.

To put that A$1 billion of budget repair in context, the government’s recent omnibus bill improved the bottom line by A$2 billion a year, and the super package by less than A$1 billion. With deficits running at about A$40 billion a year, there is a long way to go, and reforming age-based tax breaks would help.

Author: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; William Young, Associate, Grattan Institute

Businesses remove unfair contract terms before new law

The Australian Competition and Consumer Commission’s new report into potentially unfair contract terms details its review of 46 contracts across seven industries, which resulted in a range of businesses making changes to their small business standard form contracts.

The ACCC will begin enforcing the new law this week [Nov 12], when consumer protections against unfair contract terms are extended to include up to 2 million Australian small businesses.

The report, Unfair terms in small business contracts, provides an industry-by-industry breakdown of the common terms of concern identified by the ACCC following its engagement with businesses in seven industries, including advertising, telecommunications, retail leasing, independent contracting, franchising, waste management, and agriculture.

“Businesses should be aware that from Saturday the ACCC is moving from its education phase to an enforcement approach where we will be targeting unfair contract terms,” ACCC Deputy Chair Dr Michael Schaper said.

“Positive engagement with the ACCC over the last year has seen businesses such as Australia Post, News Limited, Optus and Scentre Group (Westfield) amend or remove contract terms that may have been problematic when the new law commences.”

“Small businesses sign an average of eight standard form contracts a year and from November 12 these contracts will be covered by a law preventing unfair terms in contracts that are offered on a ‘take-it or leave-it’ basis.”

The ACCC has identified three types of problematic terms as being widespread and likely to cause concern.

“Terms that give one party an unconstrained right to unilaterally vary key aspects of a contract, that unfairly seek to shift liability from the contract provider to the small business or that provide unnecessarily broad termination rights will almost always raise concerns about unfairness. Businesses that rely on these types of terms should be aware that they are leaving themselves open to action by the ACCC or another party,” Dr Schaper said.

“Businesses should consider whether a contract term creates an imbalance of obligations between the parties, whether it is necessary to protect a legitimate business need, and whether it causes detriment to the other party. Businesses should ensure that potentially problematic terms are only as broad as reasonably necessary to protect their legitimate interests, as terms that grant rights beyond this are likely to be unfair.”

The report provides guidance to these industries about these specific concerns, but also serves as general guidance to businesses operating in other industries about the kinds of terms that may be considered unfair from November 12.

Previous research has shown almost two thirds of small businesses claim to have experienced unfairness in contract terms and conditions they have signed, with almost half report experiencing some harm as a result.

See also: Unfair terms in small business contracts

Background

The law will apply to a standard form contract entered into or renewed on or after 12 November 2016. If a contract is varied on or after 12 November 2016, the law will apply to the varied terms.

Contracts covered include those between businesses where one of the businesses employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.

Standard form contracts provide little or no opportunity for the responding party to negotiate the terms – they are offered on a ‘take it or leave it’ basis.

The law sets out examples of contract terms that may be unfair, including:

terms that enable one party (but not another) to avoid or limit their obligations under the contract

terms that enable one party (but not another) to terminate the contract

terms that penalise one party (but not another) for breaching or terminating the contract

terms that enable one party (but not another) to vary the terms of the contract.

Only a court or tribunal (not the ACCC) can decide that a term is unfair. However, if a court or tribunal finds that a term is ‘unfair’, the term will be void – this means it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Collaborative Australian home ownership

CBA has highlighted some of the disruptive business models which may impact on the housing market in the future.

Buying a home in Australia may be set for a major makeover in the next 15 years as economic, cultural and demographic trends lead to the emergence of new ways of funding home ownership.

CommBank’s Future Home Insights Series has identified a number of trends that are predicted to significantly influence the Australian housing market from now until 2030 and beyond, including population growth, urban living trends and the rise of multi-unit dwelling construction. The series also found that Australia’s society will encompass a broader collection of social groups, which will influence how Australian property is built and sold.

Dan Huggins, Executive General Manager Home Buying, Commonwealth Bank, said: “We know these trends will significantly impact how Australians live, buy and sell property. At the same time, these trends could change how lenders meet the needs of Australian home buyers in the future.”

CommBank has identified eight existing and emerging pathways to home ownership, including:

Collaborative buying

Co-living arrangements could become more sophisticated with the emergence of collaborative buying/living models. ‘Co-housers’ typically own or rent a smaller-sized dwelling that’s part of a bigger development and contains some communal areas. If residents can share spare rooms, living areas, storage sheds and laundries, then each house can be smaller – and therefore more affordable. Co-housing also reduces the overall physical and environmental footprint per household through more efficient land use.

Group loans

A growing number of people are splitting the costs of buying a home by partnering with a sibling or friend so they can share mortgage repayments with someone they trust. Analysis by CommBank shows that the number of applications with two or more applicants is trending up, from 64 per cent in 2014 to 67 per cent in 2016, while the number of single applicants for mortgages is slowly trending down. This approach coincides with the rise in multi-generational living and provides buying power that comes with two generations contributing to a property.

Communities in common

By 2030, new dwellings will average 119 square metres in size, which is around half the size of the average house in Australia today. To compensate for smaller private living spaces, many developers and architects are designing communities that encourage people to share generous common spaces with like-minded people in their building. Communities in Common also occur when individuals formally band together because they share certain values and lifestyles.

Joint-ventures and syndicates

Pooling funds to gain greater buying power is becoming more common in Australia.

Increasingly, all kinds of people, from siblings to cousins and friends, are coming together to enter the property market as a group. Group development models – where people buy and develop blocks of land collectively – also deliver economies of scale. It can be far cheaper to build several properties at once than one dwelling at a time.

Guarantor Loans

Australians may be familiar with guarantor loans as a way for parents to form joint property ventures with their children. These loans help young people get into the housing market sooner by allowing parents or family members to use their own property as additional security.

Crowd housing

Online crowd housing platforms are connecting homebuyers who share common interests with property developers and architects, giving groups of people more say in the kinds of homes they’d like to see built. For buyers, it means they’re able to express their needs to property developers in real-time; and for developers, it means reducing settlement risk by creating more attractive apartments that specifically meet the needs of buyers.

Staircasing

Moving up the property ladder by buying more shares in an individual property, and hopefully one day attaining full ownership, is known as ‘staircasing’. Instead of buying a house outright, home owners are buying a share in a property and gradually increasing this stake as their savings grow. Whilst this is new to Australia, overseas’ examples include a British government scheme, which allows home owners to pay as much as they can afford – usually between 25 per cent and 75 per cent of the total value of a property – increasing their ownership stake when funds allow.

Guesthousing

Australia is seeing a rise in the variety and frequency of online portals such as Airbnb that connect homeowners looking to monetise their spare bedroom or couch. This works well as it provides additional income for the homeowner to put towards the mortgage and other bills, and it offers the tenant a place to stay whether it be on a short-term or a longer-term arrangement.

Where You Buy Matters

We did some specific research for a slot on ABC Radio in South Eastern Regional NSW, covering the regions around Cooma, Bega, Jindabyne, and Batemans Bay. Using data from our surveys we were able to pull out some insights into the property markets in these locations. Given the fixation elsewhere on capital city prices, it is worth remembering that the property market actually consists of a series of micro-markets, with very different characteristics and outcomes. Our research shows this nicely.

So, looking at the four markets, lets start with average home price trends.

At Cooma, the Capital of the Snowy Mountains, prices are on average around $240,000, though they have slipped a bit in the past year, with a fall of around 10%.

Bega, in the rural heartland of the Sapphire Coast, has an average price of around $300,000 with a small fall in the last year of around 3%.

Jindabyne which overlooks Lake Jindabyne near the Snowy Mountains has an average price of $430,000, and has seen a strong rise this year after a small fall last.

Finally, Batemans Bay, in an area surrounded by understated natural beauty, attracting everyone from watercolour artists and rock fishermen, keen surfers and fishing enthusiasts to families on holiday, has an average price of $330,000 up about 3% this year. Units here rose around 1.3% to around $230,000.

The types of families vary across the region. For example, Jindabyne has many younger families, including those with growing kids, whereas Batemans Bay has an older population including many edging towards, or in retirement. Households in Bega and Cooma tend to be in the middle, with an average age of 51.

So now we look at the mortgage metrics for these areas. The loan to value ratio is highest in Cooma at 84%, reflecting some price falls, and larger mortgages. But the loan to income and debt servicing ratios are quite healthy, so there is little mortgage stress at current interest rates. It rates were to rise, that could change. Many of the properties here have been held for several years, so some capital value has been locked in, but capital growth remains limited.

Compare this with Batemans Bay. Here the LVR is significantly lower, at around 51%, but the DSR and LTI are higher. This reflects the more limited incomes many older households now have, despite the fact they still have an outstanding mortgage. There is more sensitivity to rising rates. There have been more recent property transfers, and loan refinances. We also see growth in the number of apartments in the region.

Households in Jindabyne have a higher debt service ratio, reflecting the larger mortgages required to purchase here compared with incomes. Again there is sensitivity to rising rates. The loan to income ratio is 4.7 on average.

We also found that demand along the coast is being supported by those from the cities buying a second property for holiday, or investment purposes, including the scenario where they grab equity from an existing Sydney property to fund the purchase. This illustrates the spillover effects of high Sydney prices.

So overall, property momentum in these regions does not mirror the growth rates in Greater Sydney, though there are some spillover effects. Property on the coast is in greater demand, including from investors, and many prospective local buyers are being priced out of the market. Some mortgage holders have quite a high debt burden, in terms of meeting repayments, and would be sensitive to rising rates.