"Intelligent Insight"
We ran our regular live event last night. This is the high quality edited edition, including some behind the scenes footage.
We discussed our scenarios on property prices and other economic metrics over the next couple of years as well as a range of other important questions from the community.
The original recording of the pre-show, show and live chat is also available here. The formal show begins at 32:30.
We recently posted Out and About in Wollongong featuring the Jolly Swagman, in which we examined the state of the local economy. The show was supported by some excellent research from Mitchell Grande, a recent Graduate of Politics, Philosophy, Economics (Honours) at the University of Wollongong – concerned with Australian public policy, and especially energy policy. Today we provide additional context from his research.
His research involved three interviews across different professions, renamed for anonymity: Interviewee A, a former Development Assessment Officer in Wollongong for many years; Interviewee B, a non-governmental organisation Project Officer operating within Crown St Mall; and Interviewee C, an Economic Development Officer with the Council.
Behind these interviews is the background story of Wollongong after the turn of the century. Pioneered by rezoning of Wollongong’s inner-city industrial land, in favour of mixed-use residential developments or shop-top housing, there has been a profound shift in the local economic and labour market landscapes. Noticeably from our video, there is a lot of development reinforced by lots of Council strategies. In times like these, it’s worth getting on to the street to see behind the data and progress – and what we found was interesting: things are bad, but things are better.
Interviewee A spoke of the 2009 changes in the Local Environmental Plans (LEPs), which swung heavily toward shop-top development, including the removal of height restrictions to quite unreal limits. In their time, they approved four 10 to 30+ storey buildings in Wollongong Central Business District (CBD), and particularly around Wollongong Station – but few if any have come to fruition, due to the global financial crisis and also the poor planning-related features of ‘the Dead Zone.’ As we saw, this area had confusing commercial mixes like pawn shops and money stores, services and real estate agencies, as well as a mix of poor parking and daggy takeaways. Being the main in/out ramp of the station, foot traffic isn’t an issue – it’s just all heading somewhere else.
The 2009 LEP changes led to a major imbalance for local development, focusing on maximising residential construction and returns. Most of all, the LEP held a “very confusing and convoluted floor space ratio (FSR)” which favours commercial space but “which ‘Gong developers shy away from.” Interviewee A, here, spoke to the uniformity of FSR as a state-wide number given by the Department of Planning. This, not rates, is one major reason for vacancies. These kind of planning controls have steered local cities into densification, gentrification, and an expanding zone of unaffordability through urban sprawl, visualised by ghost shops.
After walking a few blocks toward the mall, noticeable changes in both vibrancy and vacancy were apparent. More services, notably health and wellbeing, as well as massage parlours and more cheap loans shops (for every one of those there was a couple more vacancies). A diverse street, for sure. But whether these are real drivers of economic growth, value creation, or just inelastic goods and services is implicit. Among all else, this type of job mix reinforces underemployment and poor wage conditions for the city.
The area between the Mall and the Dead Zone is hindered by the de-integration between these areas and the Hospital, having little draw in value and liveliness. As well, high running costs, high rents, low retail spending, and rising mortgage stress… these businesses would be betting heavily on new demand from the towers being built behind it. The story of de-integration between these areas is synonymous with the entire Wollongong local government area – albeit a much larger story – disjointed between education, health, metro, and recreation precincts.
For Interviewee B, the new retail segment of Crown St Mall has been chancy. It serves its purpose as a hub for, say, going to Chemist Warehouse or JB Hi-Fi, as well as having a food court and strip of restaurants – where most, if not all, are either chains, franchises, or commonplace brand names. This section has dramatically shifted the CBD’s centre of gravity, with rare if any vacancies appealing to consumers. Foot traffic is strictly to the centre (or the Mall), with people passing by proximate eateries, bus stops, and many vacancies – whether these feet notice and buy from these surrounds is another question. Interviewee B spoke to the ability of chains and big box retailers to withstand higher rents and ‘cyclical’ lower sales than, say, the local butcher who stuck it tough across from Coles.
Following a pitstop at Wollongong’s big box centre, we finally ventured down Crown St Mall. A perfect Spring day in the ‘Gong, with a foragers market spanning a third of the way. For a midday Friday, it was plenty bustling. But the ground floor and upstairs vacancies were pervasive, with one for sale or for lease every few stores. In particular, the diversity of the store fronts was fairly constrained to health services, global brands, banks and financial services, as well as the tried and true café/bar.
Interviewee B works in the space between government and landlords, seeking to fill Crown St Mall vacancies with ‘makers and creators’ until the landlord finds a apposite tenant. These makers and creators run on a continually renewing 30-day license, while the shopfront is still advertised as for lease. Although not very well showcased in the video, these spaces are filled with new ideas and tenants who are battling through the local economic shift from traditional retail models. For these tenants, rents remain high as much as turnover remains low: a recent fix of already poor consumption hampered by online shopping and buy-now-pay-later services. In short, it is important to keep the Mall vibrant with non-traditional stores but “no way can [makers and creators] step into Crown St Mall on a full rental lease…” averaging $1,500 per week.
This form of short-term leasing is, in my opinion, successful insofar as it allows business who would otherwise shift into the ‘burbs a chance at establishing customers and proficiency in a pedestrian mall setting. It has successfully brought vibrancy to otherwise dingy spots of the Mall, like Globe Lane; an impressive growth story. The main question, in the long run, is the scheme’s sustainability and whether it can positively impact wages or the local economy through a surge in value added or productive activities. A very tall order.
Toward the end of the pedestrian Mall, where the market had ceased, we stopped again. The pattern of financial services and vacancies continued. Beyond the Mall toward the beach, although not featured in the video, is an interesting few blocks of many independent takeaway joints (bars, cafes, burgers), public administration buildings, and spats of development. Of note, lots of recently built shop-top housing is sparingly filled with ground floor tenants and is adjacent to more under construction mixed-use buildings.
As spoken to in the outset, the LEP rezoning of the inner-city toward the mixed-use development model has severely jolted the labour market, favouring both services and residential construction over value-added or manufacturing businesses. The inner-city land which surrounds the mall once retained over 12,000 manufacturing jobs back in 2007-2008. Since, the sector has fallen to 6,000 employees (2017-2018). Importantly, this is a treble effect of rezoning pressuring SMEs out of the inner-city, as much as it is higher rents and growing specialisation of overseas low-wage competitors grounding out businesses.
Interviewee B has seen this all too often, especially along Crown St Mall. SMEs are highly leveraged in personal debt and burdened by cost of living pressures, reluctant to fully close and instead stay fraught with affordability. Because of this, in their experience, tried ideas leave but rarely relocate. And if they were to, it would be out of the inner-city over to Fairy Meadow or Corrimal.
Interviewee C was well aware of the loss of manufacturing jobs, reiterating the Council’s commitment to public and private investment into office space, framing the opportunity to tap into the services labour market. Equally, investment is being directed to ‘[meet] the demand of inner-city living’ with shop-top housing increasing by 1,500 dwellings over 2016-2021. But glaringly, “the profitability and investment return of residential development has far outweighed the commercial management of development, leaving very little room for management.” It is intended that current and future investment will positively serve the anchor tenants, which, on the one hand, should be true as long as local population grows, and sustainable businesses land a lease. Easily done, right? But as we know, the ever-present question of demand and the ability to match is very uncertain.
Interviewee A believes the transition from manufacturing (etc.) will continue ever onward toward a service-based economy. Through such, they foresee more sociocultural flight, more commercial shortfalls in transition, and more finance being tied into housing, rents and accommodation. To stave off the current ‘feel’ of the ‘Gong, they suggest, “either someone at UOW needs to create the next Google” or locals must have all their needs localised and accommodated, meaning minimal commute times for work or health related specialists.
Which brings us to Lang’s Corner, set to be a 10-or-so storey commercial office tower at the so-called end of the Mall. Interviewee C strongly affirmed the need for high-quality office space as a main driver of jobs growth. This goes with councils target of 1,050 jobs per annum until 2030, by retaining local skills and accommodating those shifting from Uni or primary industry, to become a ‘nationally significant city.’ Lang’s Corner is a part of “30,000 sqm of new commercial space, including 16,500 sqm of A-grade office space…” in the pipeline. Interviewee C then shared a number of reports which reaffirmed their position about the economic health and needs of Wollongong:
Interviewee A rejects the need for more office space, rather “there is a good mix… it [demand] is just not really there.” As well, “the vibrancy and feel of the place [in comparison to, say, the Shire CBDs along the trainline] also isn’t there…” “it has its own feel.” Interviewee A then went on to warn that current population and consumer issues, as well as demand and ability issues, will maintain the commercial sprawl and only increase vacancies and intimidate overindebted SMEs.
It appears that the real surge behind this demand/shortage of office space/scarce supply-induced rents is largely due to the residential development imbalance, in that Council has been ‘all in’ on housing speculation for some time, now requiring mammoth investments into commercial/office space. The frankly obtuse ratio of residential to commercial floor space has reduced local labour market diversity (i.e. losing manufacturing and primary industry, gaining services and food) in opting for shop-top developments. It is now vital, for the sustainability of the region, to catch up.
At the close of the video, we stood beneath two new mixed-use towers of 22 storeys and 19 storeys, with another under construction down the road set to be 21 storeys. The main questions which stuck with Joe and Martin were how the ‘Gong would absorb this supply, especially given population growth of 0.8% and the current macroeconomic conditions. Given the trend in local rents and consumer spending, will the ground floors be leased? Because, as we have seen play out across Australia’s junior CBDs, vacancies in newly constructed mixed-use buildings have been ubiquitous, with high turnover of retailers going bust or relocating out of mixed-use buildings, just to be replaced by ‘essential’ services. It is locally apparent that landlords refuse to lower rents for non-service tenants, in order to protect their loan-to-value ratios and avoid bank repayments.
It’s especially uncertain whether such an increase in residential supply will depress local prices, maintain the 2018 highs to maximise developers’ return, or be taken by domestic market, supposedly, upward. Council is fairly certain on developing more sooner, stylised by a great deal of high-rise development. At present, Wollongong has over 18 cranes: 8 were mixed-use residential (Parq on Flinders, Crownview Wollongong, Signature in Regent St, Avante in Rawson St, Skye Wollongong, Atchison St, and the Verge in Underwood St, Corrimal); 5 were residential (Loftus, Beatson and Church streets, The Village in Corrimal); 3 were commercial (Getaway, IMB Banks, Lang’s Corner); 2 at the University of Wollongong, and 1 day surgery at Urunga Parade. Local construction is at a high – only being beaten by Gold Coast with 29 cranes and Adelaide with 19 cranes on the infamous Crane Index.
Given the palpable feel of vacancies on the ground around these development cites, it seems that the area might soon be flooded with mixed-use and commercial space at a highly inopportune time in the market. It’s hard to tell whether the ground-level retail/commercial spaces of these under construction towers can actually be filled – let alone sustained – by their anchor tenants, or whether diverse business ideas (other than services or cafes) can be sustained. Again, this is a treble effect of local consumers preferring the brand name hard-top retailers, as well as online shopping and buy-now pay-later services, which eat away at the turnover needed to sustain the sticky high rents.
It seems we can only wait and see what will amount of the ‘Gong’s residential and commercial mix. Of course, the current lived reality in the local economy – slow income growth, high debt and mortgage stress, wobbly house prices, as well as a retail recession, high rents, and collapsed construction approvals – seems to imply one story, experience across Australia. While optimistic advocates of the ‘build it and they will come’ mantra seem to be telling us another.
Check out my recent podcast on the future of property market/challenges over at Spark Your Fire…
AUSTRAC, Australia’s anti money-laundering and terrorism financing regulator, has taken Westpac to court, alleging the major bank violated anti-money laundering and terrorism regulation on over 23 million occasions. Via Australian Broker.
According to AUSTRAC CEO Nicole Rose, the decision to commence civil penalty proceedings came on the back of a detailed investigation into Westpac’s non-compliance.
The regulator has alleged Westpac’s oversight of its program intended to identify, mitigate and manage money laundering and terrorism financing risks was deficient.
AUSTRAC has found the failures led to “serious and systemic non-compliance” with the AML/CTF Act.
“These AML/CTF laws are in place to protect Australia’s financial system, businesses and the community from criminal exploitation. Serious and systemic non-compliance leaves our financial system open to being exploited by criminals,” said Rose.
“The failure to pass on information about IFTIs to AUSTRAC undermines the integrity of Australia’s financial system and hinders AUSTRAC’s ability to track down the origins of financial transactions, when required to support police investigations.”
Westpac allegedly failed to:
AUSTRAC aims to build resilience in the financial system and ensure the financial services sector understands, and is able to meet, compliance and reporting obligations.
“We have been, and will continue to work with Westpac during these proceedings to strengthen their AML/CTF processes and frameworks,” Rose said.
“Westpac disclosed issues with its IFTI reporting, has cooperated with AUSTRAC’s investigation and has commenced the process of uplifting its AML/CTF controls.”
Westpac is a member of the Fintel Alliance, a private-public partnership established by AUSTRAC to tackle serious financial crime, including money laundering and terrorism financing.
The use and regard to expenditure benchmarks is “an area that is ripe for further guidance from ASIC”, and will be a focus of the updated RG 209 guidance next month, the financial services regulator has suggested. Via The Adviser.
Speaking at the parliamentary joint committee on corporations and financial services hearing on its oversight of the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel on Tuesday (19 November), chairman James Shipton and commissioner Sean Hughes revealed some of the specific issues that will be addressed in its upcoming revised guidance on responsible lending.
The chair told the parliamentary joint committee that there was a need for “more contemporaneous” guidance around responsible lending, particularly given the increasing number of online lenders, the upcoming open banking scheme and increased data, the evolution of business practices, updates to technology, and automatisation of systems.
Commissioner Hughes elaborated that the “greater use of technology and technological tools to verify borrow information in real time” and have it “fully verified using technology solutions within 58 minutes” was an advancement that was not available when the National Consumer Credit Protection Act (NCCP) was written 10 years ago.
Another area that required updating was around expense benchmarks used to verify borrower expenses – such as the Household Expenditure Measure (HEM) – particularly given the fact that some categories of expenses are not included in HEM, such as certain medical costs, superannuation contributions and mortgage repayments.
Commissioner Hughes said: “We are not requiring lenders to scrutinise how many cups of coffee you are having, whether you are going to an expensive gym and all those things. That is not what our guidance requires.
“What our guidance is suggesting (and I emphasize suggesting) is that lenders could have regard to unusual patterns and expenditure, which take a borrower outside normal patterns for that person.”
He continued: “There are some categories of expense that require a lender to go above and beyond the standardised benchmark. So, this is something we’ve recognised through the consultation process that we have undertaken. It’s been something that all the submissions have commented on, and we think it’s an area that is ripe for further guidance from ASIC.”
Mr Hughes later told the committee that another area ASIC will be “zeroing in on” will be the level of enquiries needed for refinances, among other activities.
He said: “[W]hat we do want to preserve, as part of our guidance in the next version, is the concept of scalability. And this is something that other submitters [to the consultation] have commented on as well.
“So for instance, if I use the example of a borrower who is seeking to refinance an existing loan that retains the same overall credit headroom – perhaps swapping out another security, taking advantage of lower interest rates – we would say that, if all other things haven’t changed and the borrower’s capacity to repay the loan remains the same and their income seem stable, that would not require a lender to do the forensic detailed examination of how many cups of coffee, or gym memberships, etc., they have that might be required in other instances.”
Other areas that the new guidance will reportedly clarify include detailing situations where the responsible lending guidance does not apply (such as small-business lending) as well as when the guidance does apply outside of mortgages (such as for credit cards and unsecured personal loans).
However, Mr Shipton emphasised that ASIC’s new guidance will be “principles-based” rather than dogmatic, and “provide discretion by financial institutions and lenders, to be able to exercise their good professional discretion in determining these areas”, given that there is “always going to nuance” and “unique situations” in providing finance.
He continued: “There will never be able to be a set of rules or guidance written which will be able to precisely convey and allow for every precise circumstance. That’s why principles-based guidance is important. That’s what we’re going to, that’s what we’re going to be aiming to do.”
Economist John Adams and analyst Martin North discuss the very latest price stats – they appear to be still rising… fast… but….
The New Zealand Reserve Bank has increased its supervisory monitoring of the Bank of New Zealand (BNZ) and applied precautionary adjustments to its capital requirements following the identification of weaknesses in BNZ’s capital calculation processes.
BNZ identified a number of errors while undertaking a programme of remediation, which began in early 2018 and is expected to continue into 2020. These included three capital calculation errors, which resulted in misreported risk weighted assets over a number of years.
It is now required to increase the risk weight floor of its operational risk capital model from $350 million to $600 million capital. The $250m increase is a supervisory capital overlay.
The Reserve Bank requires banks to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. BNZ has not been in breach of minimum capital requirements at any point.
“However given the likelihood that further compliance issues will be discovered during the review and remediation, the Reserve Bank regards a precautionary capital adjustment as prudent,” Deputy Governor Geoff Bascand says.
In 2017, the Reserve Bank conducted a review of bank director attestation processes and noted that many banks were attesting to compliance on the basis of negative assurance, ie they did not have evidence to suggest that they were not in compliance.
Breaches are now being identified as banks review their governance, control and assurance processes and move from a negative assurance to a positive evidence-based assurance framework. Over the past year, a number of banks have disclosed breaches of their conditions of registration, Mr Bascand says. Many of these have related to errors in the calculation of their regulatory capital or liquidity which, in some cases, have gone undetected for a number of years.
“We are reassured by BNZ’s response to the issues along with the independent oversight from PWC,” Mr Bascand says. “BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses. “The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank’s expectation that the current review will identify all outstanding compliance issues and potential breaches.”
Takeovers of smaller rivals by digital platforms, including their data sets, may pose a threat to consumers’ choice and privacy, said ACCC Chair Rod Sims.
Mr Sims was speaking at the Consumer Policy Research Conference (CPRC) Conference on the ACCC’s perspectives on consumer welfare in the data economy.
“Few consumers are fully informed of, nor can they effectively control, how their data is going to be used and shared. There are further concerns when the service they sign up to is taken over by another business,” said Mr Sims.
Mr Sims raised these issues in relation to Google’s recently announced proposed acquisition of Fitbit.
“The change in data collection policies, when a company like Fitbit transfers its data to Google, creates a very uncertain world for consumers who shared very personal information about their health to Fitbit under a certain set of privacy terms,” said Mr Sims.
At the time of Google’s acquisition of DoubleClick, DoubleClick reportedly denied that the data it collects through its system for serving ads would be combined with Google’s search data. Eight years later, Google updated its privacy policy and removed a commitment not to combine Doubleclick data with personally identifiable data held by Google.
When Facebook acquired WhatsApp, Facebook claimed it was unable to establish reliable matching between Facebook users and WhatsApp users’ accounts. Two years later, WhatsApp updated its terms of service and privacy policy, indicating it could link WhatsApp users’ phone numbers with Facebook users’ identities.
“Given the history of digital platforms making statements as to what they intend to do with data and what they actually do down the track, it is a stretch to believe any commitment Google makes in relation Fitbit users’ data will still be in place five years from now.”
“Clearly, personal health data is an increasingly valuable commodity so it is important when consumers sign up to a particular health platform their original privacy choices are respected and their personal data is protected even if that company is sold.”
Research from the ACCC inquiry showed around 80 per cent of users considered digital platforms tracking their online behaviour to create profiles, and also the sharing their personal information with an unknown third party, is a misuse of their information.
Facebook’s recent announcement of its planned offering of a cryptocurrency Libra is also a potential cause for concern, said Mr Sims.
“Here we have an organisation, whose lifeblood is to monetise data, getting into the financial services industry,” said Mr Sims.
“A lack of clear information about how their data will be handled reduces consumers’ ability to make informed choices based on that data.”
“During our DPI we found a lack of consumer protection and effective deterrence of poor data practises have undermined consumer’s ability to choose products.”
“Vague, long and complex data policies contribute to this substantial disconnect between how consumers think their data should be treated and how it is actually treated,” said Mr Sims.
“Transparency and inadequate disclosure issues involving digital platforms and consumer data were a major focus of our Inquiry, and remain one of the ACCC’s top priorities.”
According to an article in the New Daily today by Samantha Maiden, “Families would be able to claim child care costs of up to $60,000 a year as a tax deduction under a proposal to be launched by Liberal MP David Sharma on Tuesday”.
However, the biggest benefits go to families with a combined income of $280,000 a year or more who could slash their combined taxable income to $220,000.
Under the proposal, a family that could afford to pay a nanny $60,000 a year could split the cost 50:50 between two working parents as a tax deduction.
Each parent would then be able to reduce their taxable income by $30,000.
The Productivity Commission has previously recommended against making child care costs tax deductible, on the basis that it is not an effective means of support for lower- and middle-income families.
The article also features modelling by Dr Ben Phillips.
He found the policy would leave more than 205,000 households better off, representing one in five of households with children.
The average couple with children would be $618 per annum better off.
“Although households in the top quintile of the income distribution benefit the most on average with an average benefit of $1080 per annum, those in the second quintile (the bottom 20 per cent to 40 per cent of the income distribution) are on average $626 per annum better off. This represents a 1.9 per cent increase in disposal income,” the report states.
Underestimating the appetite of premium quality borrowers has led to a revenue downgrade for fintech business lender Prospa and a 28 per cent reduction in its share price. Via InvestorDaily.
Prospa shares crashed 27 per cent to a record low of $2.80 on Monday morning following the release of the group’s trading and guidance update.
Prospa has revised its revenue forecasts down by 8 per cent to $143.8 million from the $156.4 million as advertised in the company’s prospectus. Prospa floated on the ASX in June with an IPO price of $3.78 and rallied almost 20 per cent in day of trading, lifting the company’s market cap to $720 million.
However, following this week’s trading update, the company is now valued at $450 million. Sales and marketing expenses are forecasted to be $80.1 million for the calendar year, up 5.5 per cent from the $75.9 million forecast in the prospectus.
EBITDA is forecast to take a 62 per cent hit from $10.6 million to $4 million.
Prospa stated that the downward revision to its revenue predictions is largely due to its “premiumisation strategy exceeding our forecast”. Premiumisation is traditionally a strategy employed by companies to make consumers pay more for a product by promoting its exclusivity. But for a small business lender like Prospa, premium customers are actually less profitable.
“While we continue to grow our lending to all credit grades, we are seeing increased appetite for our solutions from premium credit quality customers who pay lower interest rates over longer terms,” the company said.
Prospa said its strategy to optimise its cost of funding has facilitated lower rates for customers and broadened its customer base and appeal – allowing the company to tap more of the $20 billion addressable market.
“The introduction of a new rate card in early April was more successful than anticipated, with approximately 43 per cent of Prospa’s portfolio now represented by premium customers,” the company said.
“The evolution in book composition towards premium grades has led to a short-term impact on revenue, despite the positive impact premiumisation has had on market penetration, operating leverage, funding diversity and portfolio resilience.”
Lending rates to premium customers are lower than the average book rate and the loan duration is longer. In the four months to 31 October 2019, the average simple interest rate on Prospa’s book has adjusted to 18.5 per cent compared to the prospectus forecast at 18.9 per cent and average loan term has increased to 14.6 months (Prospectus at 14 months).
Early indications are that the static loss rates in the growing premium section of our loan book are well below 4 per cent, which is the bottom of the risk appetite range.
Greg Moshal, co-founder and joint CEO of Prospa, admitted that the lender is experiencing some short-term impacts on its forecasts, but said he remains confident Prospa has the right growth strategies to deliver long-term shareholder value and solve the funding challenges of small business owners across Australia and New Zealand.
“Originations are growing,” he said. “Portfolio premiumisation means a higher quality loan book and lower rates and longer average terms for our customers. Early loss indicators continue to improve and we expect to continue to invest in new products, sales and marketing.”