Social Trends – Page 155 – Digital Finance Analytics (DFA) Blog

Digital Finance and Fintch – Benefits and Risks

Dr Jens Weidmann President of the Deutsche Bundesbank spoke on “Digital finance – Reaping the benefits without neglecting the risks“, drawing important links to financial literacy, financial stability and fintech.

More than 20 years have passed since Bill Gates famously said that “Banking is necessary, banks are not”.

While banks still exist – and I am sure they will continue to do so -, recent developments have shown that non-banks are just as capable of providing bank services. And that is not least due to the huge strides made in the field of information and communications technology (ICT), which has opened up a whole new world of possibilities for designing and distributing financial services.

And this has even transformed traditional banking business. Online banking, for example, has become the main point of access for many bank customers.

Digital finance, and the fintech industry in particular, have experienced very rapid growth in recent years on the back of both supply-side and demand-side forces.

On the supply side, technological progress plays an important role, but so, too, do efforts to drive down the costs of financial services. These forces are being propelled by the increasing availability of ICT infrastructure, the provision of unique access points to financial services, and the growing number of digital natives.

And on the demand side, “always on” customers are increasingly expecting to be able to bank with a minimum of fuss, whenever and wherever they like.

Digital finance opens up a host of opportunities, but we should not neglect the risks it entails. But how can we capitalise on these opportunities without losing sight of the potential risks? That is a key question of this conference – one that will be addressed by a panel discussion and also by Bank of England governor Mark Carney in his keynote speech this afternoon.

From an economic point of view, digital finance can deliver a wealth of benefits. First of all, digital financial services can bring about significant efficiency gains. Digitalisation can also stoke competition within the financial system and raise the contestability of financial markets. Some commentators even argue that digitalisation has the potential to revolutionise financial services and infrastructure.

The key buzzword here is “disruptive”. And many believe the most disruptive potential is to be found in blockchain or distributed ledger technology, which promises to allow payment transactions and securities settlement to bypass banks and central counterparties altogether.

Originally developed for the bitcoin virtual currency, this distributed ledger technology, it would appear, has turned out to be a multi-purpose tool. And even central banks – which aren’t typically known for being early adopters of new technologies – are currently doing experimental research on the potential use of blockchain.

The Bundesbank, for example, has recently launched a joint project with Deutsche Börse to develop a blockchain-based prototype of a securities settlement system.

But even apart from radically transforming the payments and securities settlement infrastructure, digitalisation enables newcomers to mount a challenge against incumbent market players.

Data-driven technologies can boost the transparency of the financial system and thus reduce information asymmetries. Big data analysis, for example, can improve the estimation of default risks even in the absence of a longstanding bank-customer relationship.

An increasing number of suppliers of financial services is particularly good news for households and enterprises lacking access to traditional sources of finance. In the end, this might drive up the number of projects that receive financing.

Online crowdfunding or peer-to-peer lending platforms might enable investment projects which would otherwise be too risky or too small for traditional banks, to go ahead.

In general, digital finance facilitates access to financial services. And this benefit is not confined to tech-savvy consumers in advanced economies. Indeed, digital technologies can be key drivers of financial inclusion in less developed countries, too.

In Kenya, for example, the share of people with a financial account rose from 42 % in 2011 to 75 % in 2014. Over the same period, the respective global figure rose from 51 % to 61 %.

In tandem with the mounting ubiquity of cell phones, mobile money accounts have gained popularity, particularly in Sub-Saharan Africa. In some countries, there are even more adults with a mobile money account than a conventional bank account.

Financial inclusion is thought to be conducive to promoting economic growth and lowering inequality. Financially included people are in a better position to start and develop businesses, to invest in their children’s education, to manage risks, and to absorb financial shocks.

On the other hand, there is a trade-off between financial inclusion and financial stability. Expanding access to financial services – especially to credit – at too fast a pace and with too little control exposes economies to stability risks, and households to the risk of over-indebtedness. The Indian microfinance crisis in 2010 showed us what can happen if too many households have access to credit despite being subprime borrowers.

And that is why financial literacy is so crucial. People with access to finance need a basic understanding of financial concepts like compound interest and risk diversification.

Surveys, however, provide some worrying results. According to an International Survey of Adult Financial Literacy Competencies, which was commissioned by the G20 and published by the OECD, overall levels of financial literacy, as indicated by knowledge, attitudes and behaviour, are relatively low.

And another study, the S&P Global Financial Literacy Survey, which was supported by the World Bank, reveals that two out of three adults are not financially literate, albeit with major variations across countries. While more than half of adults are financially literate in most of the advanced economies, that goes for fewer than one-fifth of people in some developing or transformation countries.

There are, of course, other aspects of digital finance which have a bearing on financial stability.

Herding behaviour, for example, could be amplified by automated advisory services in portfolio management. Robo advisors might exacerbate financial volatility and pro-cyclicality if the assets under management reach a significant level, which is not yet the case.

Traditional banks in many countries are currently suffering from dwindling profitability due, most notably, to the low-interest-rate environment. Disintermediation, however, could intensify the problems of narrow profit margins. This might be the flipside of the mounting competition unleashed by the more widespread use of digitised financing.

And decentralisation might make it more difficult to tell who is exposed to whom, and to detect where financial risks ultimately lie.

Another point worth noting is that fintech business models have not yet run through an entire credit cycle. Experience with digital finance in economic downturns is very limited.

That being said, it is quite obvious that regulating fintechs and the entire digital financial industry smartly without hindering financial innovation is warranted. That’s why the objectives of the German G20 presidency include taking stock of the different regulatory approaches. Our aim is to develop a set of common criteria for the regulatory treatment of fintechs.

Fintechs should not base their business models on regulatory loopholes. Using lax regulation to attract business is a mistake that was already made before the latest financial crisis. Whatever we do, we need to avoid a regulatory race to the bottom. Rather, we should go for a level playing field.

To quote the words of the former ECB President Jean-Claude Trichet who said in 2010: “(…) “the crisis has exposed the risk of regulatory arbitrage, shedding a more negative light on the competition among different systems and rules.””

Getting a clearer picture of fintechs’ business activities is essential if we are to better understand whether and in what way they might pose a threat to financial stability. It is therefore an important endeavour of the Financial Stability Board to further investigate and promote data availability. Without reliable data, any assessment of risks is unfeasible.

Another threat – and certainly not just to financial stability – comes from cyber risks.

The more market infrastructures rely on digital technologies, the more vulnerable our interconnected global financial system becomes to criminal attacks, be it from computer hackers, cyber saboteurs or even terrorists.

Cyber criminals have repeatedly targeted financial institutions around the world, including central banks. There are plenty of financial institutions I could name whose defences have been successfully breached. The damage unleashed by successful attacks goes beyond the financial loss incurred. Cyber-attacks can potentially undermine peoples’ trust in the financial system.

So to avoid jeopardising the positive impact of digital finance, it will be crucial to address these risks and for banks to manage their IT and cyber risks with as much diligence as they do their traditional banking risks.

Cybersecurity risks will be a major item in a talk this afternoon with Thomas de Maizière, German Federal Minister of the Interior. And a research dialogue tomorrow will also address the topic of cyber security.

The Case For “Inclusive Growth”

From the IMF Blog.

Four years ago, at the World Economic Forum in Davos, IMF Managing Director Christine Lagarde warned of the dangers of rising inequality, a topic that has now risen to the very top of the global policy agenda.

While the IMF’s work on inequality has attracted the most attention, it is one of several new areas into which the institution has branched out in recent years. A unifying framework for all this work can be summarized in two words: Inclusive growth.

We want growth, but we also want to make sure:

that people have jobs—this is the basis for people to feel included in society and to have a sense of dignity;

that women and men have equal opportunities to participate in the economy—hence our focus on gender;

that the poor and the middle class share in the prosperity of a country—hence the work on inequality and shared prosperity;

that, as happens, for instance when countries discover natural resources, wealth is not captured by a few—this is why we worry about corruption and governance;

that there is financial inclusion—which makes a difference in investment, food security and health outcomes; and

that growth is shared just not among this generation but with future generations—hence our work on building resilience to climate change and natural disasters.

In short, a common thread through all our initiatives is that they seek to promote inclusion—an opportunity for everyone to make a better life for themselves.

These are not just fancy words; a click on any of the links above shows how the IMF is making work on inclusion a part of its daily operations.

Inclusion is important, but so of course is growth. “A larger slice of the pie for everyone calls for a bigger pie” (Lipton, 2016). So when we push for inclusive growth, we are not advocating as role models either the former Soviet Union or present day North Korea—those are examples of ‘inclusive misery,’ not inclusive growth. Understanding the sources of productivity and long-run growth—and the structural policies needed to deliver growth—thus remains an important part of the IMF’s agenda.

Globalization and inclusion

The IMF was set up to foster international cooperation. Hence, to us, inclusion refers not just to the sharing of prosperity within a country, but to the sharing of prosperity among all the countries of the world. International trade, capital flows, and migration are the channels through which this can come about. This is why we stand firmly in favor of globalization, while recognizing that there is discontent with some of its effects and that much more could be done to share the prosperity it generates.

Higher growth should help address some of the discontent, as argued by Harvard economist Benjamin Friedman in his book, The Moral Consequences of Economic Growth. Friedman shows that, over the long sweep of history, strong growth by “the broad bulk” of a society’s citizens is associated with greater tolerance in attitudes towards immigrants, better provision for the disadvantaged in society, and strengthening of democratic institutions.

However, designing policies so they deliver inclusive growth in the first place will be a more durable response than leaving matters to the trickle-down effects of growth.

Policies for inclusive growth

♦ Trampolines and safety nets: “More inclusive economic growth demands policies that address the needs of those who lose out … Otherwise our political problems will only deepen” (Lipton, 2016). Trampoline policies such as job counseling and retraining allow workers to bounce back from job loss: they help people adjust faster when economic shocks occur, reduce long unemployment spells and hence keep the skills of workers from depreciating. While such programs which already exist in many advanced economies, they deserve further study so that all can benefit from best practice. Safety net programs have a role to play too. Governments can offer wage insurance for workers displaced into lower-paying jobs and offer employers wage subsidies for hiring displaced workers. Programs such as the U.S. earned income tax credit should be extended to further narrow income gaps while encouraging people to work (Obstfeld, 2016).

♦ Broader sharing of the benefits of the financial sector and financial globalization: We need “a financial system that is both more ethical and oriented more to the needs of the real economy—a financial system that serves society and not the other way round” (Lagarde, 2015). Policies that broaden access to finance for the poor and middle class are needed to help them garner the benefits of foreign flows of capital. Increased capital mobility across borders has often fueled international tax competition and deprived governments of revenues (a “race to the bottom leaves everyone at the bottom,” (Lagarde, 2014). The lower revenue makes it harder for governments to finance trampoline policies and safety nets without inordinately high taxes on labor or regressive consumption taxes. Hence, we need international coordination against tax avoidance to prevent the bulk of globalization gains from accruing disproportionately to capital (Obstfeld, 2016).

♦ ‘Pre-distribution’ and redistribution: Over the long haul, polices that improve access to good education and health care for all classes of society are needed to provide better equality of opportunity. However, this is neither very easy nor an overnight fix. Hence, in the short run, ‘pre-distribution’ policies need to be complemented by redistribution: “more progressive tax and transfer policies must play a role in spreading globalization’s economic benefits more broadly” (Obstfeld, 2016).

If you’re serious about affordable Sydney housing, Premier, here’s a must-do list

From The Conversation.

So “fixing housing affordability” in Sydney is one of three top priorities for the new premier of New South Wales, Gladys Berejiklian. It’s good that the state’s new leader recognises this as an intensifying problem that can’t be ignored.

Berejiklian will appreciate the electoral importance of this issue. It’s an especially sensitive topic in western Sydney, which no longer provides Sydney with the large reserve of less-expensive property that it once did. Unless they can draw on family wealth, even middle-income first-home-buyers are now locked out of huge swathes of Sydney – including areas far from the inner city.

But given she came to the top job from the Treasury portfolio, Berejiklian would also be expected to have a clear understanding that the lack of well-located affordable housing is an economic productivity concern as well as a social problem.

One aspect of this, as shown by our recent research, is that central Sydney’s booming hospitality sector is facing growing pressure to find and retain suitable employees. This is because of workers’ limited ability to find affordable housing within a reasonable distance. To work in the inner city they must weigh up other compromises – such as living in shared housing, or paying a very high proportion of income in rent.

Relying on backpacker labour supply isn’t an ideal business strategy. And, as inner Sydney housing affordability deteriorates further, there’s every possibility other CBD industries will see their lower-income labour market thinning out.

The broader issue is the growing stress caused by the continuing focus of employment creation in inner-city areas. This applies especially to the so-called “global arc” stretching from the airport in the south to Macquarie Park in the north.

The mismatch between where affordable housing and jobs are available is a key cause of traffic congestion. Dan Himbrechts/AAP

In the last few years annual job growth here has been running at more than 2%, but only 0.5% in western Sydney. At the same time, housing market pressures mean more and more people needed to fill these new jobs are having to live in outer western Sydney. The resulting traffic congestion is damaging Sydney’s economy.

Nationally, the cost of congestion in 2015 was A$16.5 billion – up by 30% on 2010. Anyone who commutes by car in Sydney will know it is a major part of this problem. Ultimately, some companies may choose to relocate to places where these problems are less severe.

Housing supply is only part of the solution

On the other hand, it must be hoped that Berejiklian will leave behind at Treasury the flawed analysis that fixing Sydney’s housing problems is simply a matter of increasing housing supply.

No-one disputes that, with continued population growth, maximising new house-building must be part of the policy mix. But the idea that this can provide any kind of silver bullet for housing unaffordability is shot dead by the experience of the past few years. Record construction rates have co-existed with unprecedented and ongoing property price hikes.

As premier, Berejiklian should therefore lend support to her ministerial colleague, Rob Stokes, who called it right by arguing recently that Sydney’s housing problems partly result from a market pumped up by excessive tax concessions for landlord investors.

These powers are held at the federal level, not with the states. So Berejiklian can do little more than lobby for such reform.

Adopt the best policies from others

And yet the premier does have important powers of her own that can make a difference.

Recognising that even a moderation of property prices isn’t going to provide relief for tens of thousands of hard-pressed renters, the NSW government must take a leaf out of the book of cities like London and New York by using its planning muscle to ensure the inclusion of affordable rental housing in all major new housing developments.

Under the former premier, Mike Baird, a promising initiative in this arena was the recent proposal by the Greater Sydney Commission to introduce a scheme of this kind. Private housing developments on sites “upzoned” under the planning system should include 5-10% affordable rental housing.

If she is serious about this issue, Berejiklian should back the commission’s move. She can prove her commitment to finding solutions by setting a much higher affordable rental housing target for development on government-owned land. This would ensure that a significant affordable component is locked in for flagship projects such as the Central to Eveleigh and Bays Precinct urban renewal schemes. This is a one-off opportunity that must not be squandered.

The new premier should also recommit to the innovative Social and Affordable Housing Fund (SAHF) created under her predecessor, following his 2015 commitment to a “billion-dollar fund” for affordable housing.

An announcement on the promised second phase of the SAHF has been long-awaited. Perhaps Berejiklian can pledge to underwrite this by dipping into the huge stamp-duty bonanza the government has reaped in recent years.

Above all, NSW needs an overarching housing strategy that encompasses much more than just the social end of the spectrum. Recognising the urgency of the problem, Berejiklian should pledge that her officials will get to work on this right away.

Author: Hal Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW Australia

Rental Stress Now Hits 42.5% of Low Income Households

The latest report from the Productivity Commission “Report on Government Services 2017, Volume G: Housing and homelessness” shows rental stress is on the rise. Nationally, the proportion of low income renter households in rental stress increased from 35.4 per cent in 2007-08 to 42.5 per cent in 2013-14.

This is an indirect, but significant impact of the ever rising un-affordable housing burden.

In addition, the report included data on Commonwealth Rent Assistance (CRA) showing a rise in payment to reduce rental stress, of $4.4 billion in 2015-16. A further hidden impact of high housing costs.

CRA helps eligible people meet the cost of rental housing in the private market, aiming to reduce the incidence of rental stress. It is an Australian Government non-taxable income supplement, paid to recipients of income support payment, ABSTUDY, Family Tax Benefit Part A, or a Veteran’s service pension or income support supplement.

Australian Government expenditure on CRA was $4.4 billion in 2015-16, increasing in real terms from $3.6 billion in 2011-12. The average government CRA expenditure per eligible income unit was $3251 in 2015-16.

Nationally in June 2016, there were 1 345 983 income units receiving CRA . Of these, 79.4 per cent paid enough rent to be eligible to receive the maximum rate of CRA (an increase from 75.0 per cent in 2012).

The median CRA payment at June 2016 was $130 per fortnight, with median rent being $437 per fortnight.

CRA and rental stress

Rental stress is defined as more than 30 per cent of household income being spent on rent, and is a separate sector-wide indicator. CRA is indexed to the Consumer Price Index (CPI) but rental costs have increased at a faster rate than the CPI since 2008 (ABS 2016), so the real value of CRA payments has decreased for individuals in that time.

Nationally in June 2016, 68.2 per cent of CRA income units would have paid more than 30 per cent of their gross income on rent if CRA were not provided — with CRA this proportion was 41.2 per cent.

The table below presents a range of CRA data, including Australian Government expenditure and information on CRA income units — including Aboriginal and Torres Strait Islander recipients, those with special needs — and those in rural and remote areas.

Malcolm Turnbull seizes housing affordability as key to his comeback

From The New Daily.

Malcolm Turnbull has seized on housing affordability as one issue that could help drag his government out of the electoral doldrums, according to sources close to the Prime Minister.

Treasurer Scott Morrison is currently in London with a mission to take a lead from Britain in finding ways to open up the housing market to more potential home buyers and help solve the crisis in Australian cities.

Add to that Mr Turnbull’s decision last week to appoint Victorian MP Michael Sukkar as Assistant Minister to the Treasurer with the task of tackling housing affordability, and it becomes clear the government is taking the issue seriously.

Mr Sukkar insists the housing crisis is an “extraordinarily high” priority for the Prime Minister.

That view was reinforced by another government source, who said the Prime Minister wants to be seen to be acting on the issue.

“Malcolm is genuine in wanting to see something done on housing affordability, but it has also become too much of a hot political topic for us not to be seen to be acting in this space,” the source said.

“We need something to help turn the polls around, and if we can make progress with housing, it could be a win-win situation.

“The problem is being able to achieve something substantial. Kevin Rudd promised the earth on housing when he was in opposition and then found out how hard it was to deliver once he got into government.

“We are under no illusion about how difficult this issue is, but we think something can be achieved.”

Mr Morrison is embarking on a string of briefings in the UK detailing how the Conservative government there opened up access to bank data and changed how that data is created and shared.

The so-called open banking standard will help more startups offer cheaper housing financing products.

Last year, an Australian parliamentary committee recommended banks here be made to, by July 2018, open up access to their customers’ data and thereby make it easier for them to switch financial institutions.

The Treasurer will meet with the Open Data Institute, the Bank of England and the Financial Conduct Authority while in Britain.

He will also meet with his UK counterpart, Chancellor of the Exchequer Philip Hammond.

But while the government seems keen to follow some of the examples the Brits are setting over housing affordability, abolishing negative gearing doesn’t appear to be one of them.

Mr Sukkar has already dismissed changing Australia’s negative gearing regime, while Labor is continuing its pledge to make significant changes to the system.

Shadow assistant treasurer Andrew Leigh said there was more to learn from the UK conservatives about housing affordability than just innovative financing methods.

“You’ve got to distinguish between a policy which builds a small number of homes at the bottom end of the market and one which could make a difference right across the wide swath of the market,” Dr Leigh said.

“So sure, we should look at innovative financing solutions but let’s not pretend that that’s going to make it easier for middle Australia to buy a house.

“Here you need to look at something else the Conservatives have been doing over in the UK.

“In the 2015 budget the British Conservatives decided to make changes to negative gearing. The British Conservatives, against a scare campaign in which some of the tabloids said it was going to drive down house prices, saw through significant changes to negative gearing of the kind that Labor has been proposing in Australia.

“I’m worried that the Treasurer will come back touting a plan which will really only help a few rather than one that will help many.”

Housing Affordability Still Under Pressure – Demographia

The 13th Annual Housing Affordability Survey – 2017 has been released by Demographia and it underscores the problem we have with affordable housing. All five of Australia’s major centres are rate “un-affordable on their scale.

The overall major housing market Median Multiple is 6.6. In 2004 (the first Survey), Sydney’s Median Multiple was 7.6, and has risen 60 percent since then.

Only Hong Kong, Sydney, Vancouver, Auckland and San Jose are less affordable than Melbourne. Adelaide has a severely unaffordable 6.6 Median Multiple and is the 16th least affordable of the 92 major markets. Brisbane has a Median Multiple is 6.2 and is ranked 18th least affordable, while Perth, with a Median Multiple of 6.1 is the 20th least affordable major housing market.

Outside of the major markets, 28 in Australia are rated severely unaffordable. The least affordable of these are Wingcaribbee, NSW (9.8), Tweed Head, NSW (9.7), Gold Coast, QLD (9.0) and Sunshine Coast, QLD (9.0).

Sydney in second place, after Hong Kong, with Melbourne also in the top 10.

Demographia’s ‘median multiple’ approach establishes a benchmark for housing affordability by linking median house prices to median household incomes. The ‘median multiple’ is not a perfect measure because it does not account for house sizes or build quality. But it is the only index that allows a quick comparison of different housing markets, and it is the best approximation of housing affordability measures we have to date.

The Median Multiple is widely used for evaluating urban markets, and has been recommended by the World Bank and the United Nations and is used by the Joint Center for Housing Studies, Harvard University. The Median Multiple and other price-to-income multiples (housing affordability multiples) are used to compare housing affordability between markets by the Organization for Economic Cooperation and Development, the International Monetary Fund, The Economist, and other organizations.

Historically, liberally regulated markets have exhibited median house prices that are three times or less that of median household incomes, for a Median Multiple of 3.0 or less.

The Survey covers 406 metropolitan housing markets (metropolitan areas) in nine countries (Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States) for the third quarter of 2016. A total of 92 major metropolitan markets (housing markets) — with more than 1,000,000 population — are included, including five megacities (Tokyo-Yokohama, New York, Osaka-Kobe-Kyoto, Los Angeles, and London).

There are 26 severely unaffordable major housing markets in 2016. Again, Hong Kong is the least affordable, with a Median Multiple of 18.1, down from 19.0 last year. Sydney is again second, at 12.2 (the same Median Multiple as last year). Vancouver is third least affordable, at 11.8, where house prices rose the equivalent of a full year’s household income in only a year. Auckland is fourth least affordable, at 10.0 and San Jose has a Median Multiple of 9.6. The least affordable 10 also includes Melbourne (9.5), Honolulu (9.4), Los Angeles (9.3), where house prices rose the equivalent of 14 months in household income in only 12 months. San Francisco has a Median Multiple of 9.2 and Bournemouth & Dorsett is 8.9.

One in five homeowners will struggle with rate rise of less than 0.5%

From News.com.au

ONE in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

Our love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as we scramble over each other to snap up property while interest rates are at historic lows, we have gotten ourselves into a bit of a pickle. We might not actually be able to afford funding our affair.

An analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. And the results are distressing.

It showed that around 20 per cent — that’s one in five homeowners — would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less. An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

The major banks have already started increasing their home loan rates this year, despite the market broadly expecting the Reserve Bank to keep the cash rate steady at 1.5 per cent this year.

Just this week NAB upped a number of its owner-occupied and investment fixed rate loans.

“There are a range of factors that influence the funding that NAB — and all Australian banks — source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said of the announcement.

“The cost of providing our fixed rate home loans has increased over recent months.”

So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk.

NOT TERRIBLY SURPRISING

Martin North, Principal of Digital Finance Analytics, said the results are concerning, albeit not surprising.

“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market,” Mr North told news.com.au.

But the widespread assumption that interest rates will remain at historic lows is a disaster waiting to happen, especially in an environment where wage growth is stagnant.

“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth,” Mr North said.

“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the latest Wage Price Index released by the Australian Bureau of Statistics (ABS).

And as a result Australia’s debt-to-income ratio is astronomical. The ratio of household debt to disposable income has almost tripled since 1988, from 64 per cent to 185 per cent, according to the latest AMP. NATSEM Income and Wealth report.

What this means is that many Australian households are highly indebted, thanks in large part to the property market, without the income growth to pay it down.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” Mr North said.

THE YOUNG AND RICH MOST AT RISK

This finding will come as a surprise: young affluent homeowners are the most at risk — it is not just a problem with struggling families on the urban fringe. When it comes to this segment of the market, around 70 per cent would be in difficulty with a 0.5 per cent or less rise. If rates were to hike 3 per cent, bringing them to around the long term average of 7 per cent, nine in ten young affluent homeowners would feel the pressure.

“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it.

“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar.”

And while the younger wealthy segment of the market being most at risk might not be of that much importance compared to other segments, Mr North said what is concerning is the intense focus on this market.

“Any household group that is under pressure is a problem for the broader economy because if these people are under pressure they are not going to be spending money on retail and the broader economy,” Mr North told news.com.au.

“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”

TOUGHER HOME LOAN RESTRICTIONS NEEDED

Now an argument is mounting that Australian banks need to toughen up their approach to home lending.

“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough,” Mr North said.

This includes accepting financial help from relatives for a deposit, a growing trend among first home buyers.

“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving.”

News.com.au contacted several banks for comment on whether they think a rethink of their underwriting standards is needed. Only one lender, Commonwealth Bank, agreed to comment, but remained vague on the topic.

“In line with our responsible lending commitments, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. Buffers and minimum floor rates are used when assessing loan serviceability so it is affordable for customers,” a CBA spokesman said in an emailed statement.

But Mr North said something needs to be done before we find ourselves in a property and economic downturn.

“I’m assuming that with the capital growth we have seen in the property market, it will allow people who get into significant difficulty to be able to get out, however, it’s the feedback concern that I’ve got.

“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty.

“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,” he told news.com.au.

The Definitive Guide To Our Latest Mortgage Stress Research

We have had an avalanche of requests for further information about our monthly mortgage stress research which is published as a series of blog posts plus coverage in the media, including Four Corners. Here is the timeline of recent posts, which together provides a comprehensive view of the work.

Mortgage Stress Eases A Little In May

Mortgage Stress Pushes Higher In January 2020

Mortgage Stress Steady In August 2019

July 2019 Mortgage Stress Still Up, Despite Rate Cuts

Mortgage Stress Higher Post the Election

Mortgage Stress Builds Again as Debt Grows

Mortgage Stress Accelerates Again as Debt Grows

Mortgage Stress At Record High (Again)

Mortgage Stress Is Breaking More Households

Mortgage Stress Gets More Extreme In November 2018

Mortgage Stress Climbs Again in October

Mortgage Stress Busts The 1 Million Households

Mortgage Stress Continues To Build In August 2018

Household Financial Pressure Tightens Some More

Mortgage Stress Continues To Claw Higher

April Mortgage Stress Trends Higher … Again…

Mortgage Stress Feb 2018, Refinancing Helps, But Still Higher

Mortgage Stress Still With Us In 2018

Top 10 Mortgage Stress Countdown At December 2017

Households Under The Mortgage Stress Gun In December

Mortgage Stress Continues On a High Plateau In November

October Mortgage Stress Higher Again – See The Top 10 Post Codes

Top 10 Mortgage Stress Count Down – September 2017

More than 30,000 of the nation’s ‘richest’ households in financial distress

Mortgage Stress Still On The Up

ABC Four Corners Does Mortgage Stress

Mortgage Stress Gets Worse in July

Mortgage Stress Grinds Higher In June

Australians Curb Spending as Household Debt Balloons

Mortgage Stress Accelerates Further In May

What The Mortgage Stress Data Tells Us

Mortgage Stress And Default Probability Rise Again In April

Record numbers under mortgage stress

Mortgage Stress Analysis Using the DFA Market Model

Seven News Melbourne Does Mortgage Stress

Nine News Does Mortgage Stress

So Where Will The Property Market Go In 2017?

Mortgage Stress And Probability Of Default Is Rising

Mortgage Stress Covers 18.5% Of Book Value

A Segmented View Of Mortgage Stress and Default

Top 20 Postcodes For Mortgage Stress Across Australia

New DFA Video Blog – Household Mortgage Stress and Defaults

The Full 100 Mortgage Stress Listing

Check out our media coverage.

We need to find new ways to measure the Australian labour force

From The Conversation.

Over the last few years, we’ve seen a massive shift in the way we work. Thousands of Australians have abandoned the traditional 40-hour work week to work fewer hours or take on ad-hoc work, such as driving for Uber or doing odd jobs on Airtasker.

But the way we measure the labour market has not kept up. We still rely on the Australian Bureau of Statistics’ labour force survey, a survey from the 1960s conducted according to international conventions that is no longer appropriate for today’s labour market.

Today’s economy – one of independent contractors, ad-hoc work, irregular and flexible hours – needs a new form of measurement.

How the government measures the workforce

Every month the Australian Bureau of Statistics (ABS) surveys about 0.32% of the civilian population aged over 15 years about their employment status.

In short, you’re counted as employed if you completed at least one hour of paid work in the week before the survey.

But this doesn’t sound quite right. Clearly, one hour of paid work per week doesn’t fit most people’s idea of employment.

In fact, over one million workers are counted as “underemployed”, meaning they would work more hours if they could. This raises the question of whether these people should really be considered “employed”. The answer depends on what policy question you are trying to address.

Is our unemployment rate right?

Let’s get right into how our unemployment rate is calculated.

If respondents haven’t done any paid work in the last week, they are asked two further questions – first, have they actively sought work in the last four weeks, and second, are they currently available to start work? They are only considered unemployed if they answer yes to both of these questions. Otherwise, they’re not counted as part of the labour force.

This means full-time homemakers, carers, the ill and non-working retirees aren’t considered unemployed.

The labour force is the sum of the employed and the unemployed. The unemployment rate is the percentage of the labour force who are unemployed.

Lastly, the participation rate is the percentage of the population aged 15 and older who are in the labour force. According to the latest ABS trend estimates, the participation rate stood at 64.5% in November, no change from October.

The participation rate has been consistently trending upwards over time for women and falling for men. This does not mean women are increasingly doing more work but that over time they have switched from unpaid to paid work. One of the main reasons for falling participation among men is that unskilled manual jobs for older men have been declining over several decades and many men have been reclassified as unemployed, disabled or retired.

More issues with the survey

The Labour Force Survey only provides a measure of employment and not the number of jobs. For example, a person might work 20 hours per week at a supermarket and 10 hours per week as an Uber driver. Employment is always classified according to the “main job”, so the ABS deems them as one person employed part-time (working fewer than 35 hours) in the retail industry.

If that person worked five more hours as an Uber driver the next week, they would be classified as full-time (35 hours) but the supermarket job would still determine the industry in which they are employed.

The crucial problem here is that there are two jobs being done, but the ABS employment estimate only counts one. So be wary of commentators and politicians making statements like “the economy gained/lost 10,000 jobs last month”! What jobs are they measuring?

The labour force survey also fails to make distinctions between different types of workers. About two million Australians work as independent contractors like construction workers or other business operators such as hairdressers working from home. However, in the figures they are not distinguished from regular employees.

Whereas it might be relatively easy for an employee to know if they did any paid work in the week before the survey, it might not be so obvious for a non-employee. For instance, an author might work 50 hours on their book one week and three hours the next. Most of their work is basic research rather than writing. They receive a royalty payment twice a year. How would they answer the question of whether they did any paid work in the last week?

For non-employees the question of whether they are prepared to start work and have been actively looking for work can also be complex. Someone doing consultancy work might not actively look for work because clients seek them out instead.

We need something new

The ABS has tried tackling some of these issues by conducting some different surveys, including the Characteristics of Employment Survey which presents information on all employed persons according to their status of employment. However, the framework classifies jobholders by their main job. That is, only the job in which they usually worked the most hours. This doesn’t capture many of the issues of concern in, say, the “sharing” or “gig” economy

The ABS has also attempted to compare the number of filled jobs to the amount of employed people, using estimates in the labour force survey. This can reveal interesting information about the labour market. For instance, in February 2013 there were 11,628,300 employed people in Australia, but an estimated 12,287,200 filled jobs. That is, there were 658,900 more filled jobs than there were employed people.

But even then, the estimates still use the conventional definition of a job.

The ABS is still working on an Australian Labour Market Account, based on International Labor Organisation (ILO) methodology, which may address some of the issues discussed here. But this will still be based on traditional definitions of jobs, employment, and unemployment.

Our conventional employment measures are no longer equipped to inform us about important aspects of our labour force and a reliance on them could lead to inappropriate policy. We need labour force numbers than can capture the nuances of a modern economy.