Digital Finance Analytics (DFA) Blog – Page 493

The Property Imperative Weekly to 14 April 2018

Welcome to the Property Imperative Weekly to 14 April 2018. We review the latest property and finance news.

There is a massive amount to cover in this week’s review of property and finance news, so we will dive straight in.

CoreLogic says that final auction results for last week showed that 1,839 residential homes were taken to auction with a 62.8 per cent final auction clearance rate, down from 64.8 per cent over the previous week. Auction volumes rose across Melbourne with 723 auctions held and 68.2 per cent selling. There were a total of 795 Sydney auctions last week, but the higher volumes saw the final clearance rate weaken with 62.9 per cent of auctions successful, down on the 67.9 per cent the week prior. All of the remaining auction markets saw a rise in activity last week; clearance rates however returned varied results week-on-week, with Adelaide Brisbane and Perth showing an improvement across the higher volumes while Canberra and Tasmania both recorded lower clearance rates. Across the non-capital city regions, the highest clearance rate was recorded across the Hunter region, with 72.5 per cent of the 45 auctions successful.

This week, CoreLogic is currently tracking 1,690 capital city auctions and as usual, Melbourne and Sydney are the two busiest capital city auction markets, with 795 and 678 homes scheduled to go to auction. Auction activity is expected to be lower week-on week across each of the smaller auction markets

Two points to make. First is a slowing market, more homes will be sold privately, rather than via auctions, and this is clearly happening now, and second, we discussed in detail the vagaries of the auction clearance reporting in our separate blog, so check that out if you want to understand more about how reliable these figures are.

Home prices slipped a little this past week according to the CoreLogic index, but their analysis also confirmed what we are seeing, namely that more expensive properties are falling the most. In fact, values in the most expensive 25% of the property market are falling the fastest, whereas values for the most affordable 25% have actually risen in value.

Their analysis shows that over the March 2018 quarter, national data shows that dwelling values were down by 0.5%, however digging below the surface reveals the modest fall in values was confined to the most expensive quarter of the market. The most affordable properties increased in value by +0.7% compared to a +0.3% increase across the middle market and a -1.1% decline across the most expensive properties.

But looking at the details by location, in Sydney, over the past 12 months, the most expensive properties have recorded the largest value falls (-5.7%) followed by the middle market (-0.9%) and the most affordable market managed some moderate growth (+0.6%).

Compare that with Melbourne where values have increased over the past year across each segment of the market, with the most moderate increases recorded across the most expensive segment (+1.6%), then the middle 50% (+6.2%) while the most affordable suburbs have recorded double-digit growth (+11.3%)

Finally, in Perth values have fallen over the past year across each market sector with the largest declines across the most affordable properties (-4.4%) followed by the middle market (-3.2%) with the most expensive properties recording the most moderate value falls (-2.4%).

This shows the importance of granular information, and how misleading overall averages can be.

The RBA has released their Financial Stability Review today. It is worth reading the 70 odd pages as it gives a comprehensive picture of the current state of play, though through the Central Bank’s rose-tinted spectacles! They do talk about the risks of high household debt, and warn of the impact of rising interest rates ahead. They home in on the say $480 billion interest only mortgage loans due for reset over the over the next four years, which is around 30 per cent of outstanding loans. Resets to principal and interest will lift repayments by at least 30%. Some borrowers will be forced to sell.

This scenario mirrors the roll over of adjustable rate home loans in the United States which triggered the 2008 sub-prime mortgage crisis. Perhaps this is our own version! We have previously estimated more than $100 billion in these loans would now fail current tighter underwriting standards.

I published a more comprehensive review of the Financial Stability Review, and you can watch the video on this report. Importantly the RBA suggests that banks broke the rules in their lending on interest only loans before changes were made to regulation in 2014. The RBA says that there is the potential that these will result in banks having to set aside provisions and/or face penalties for past misconduct or perhaps (more notably) being constrained in the operation of parts of their businesses.

We also did a video on the RBA Chart pack which was released recently. Household consumption is still higher than disposable income, and the gap is being filled by the falling savings ratio. So, we are still spending, but raiding our savings to do so. Which of course is not sustainable. Now the other route to fund consumption is debt, so there should be no surprise to see that total household debt rose again (note this is adjusted thanks to changes in the ABS data relating to superannuation, we have previously breached the 200% mark). But on the same chart we see home prices are now falling – already the biggest fall since the GFC in 2007.

We see all the signs of issues ahead, with household debt still rising, household consumption relying on debt and savings, and overall growth still over reliant on the poor old household sector. We need a proper plan B, where investment is channelled into productive growth investments, not just more housing loans. Yet regulators and government appear to rely on this sector to make the numbers work – but it is, in my view, lipstick on a pig!

Another important report came out from The Bank for International Settlements, the “Central Bankers Banker” has just released an interesting, and concerning report with the catchy title of “Financial spillovers, spillbacks, and the scope for international macroprudential policy coordination“. But in its 53 pages of “dry banker speak” there are some important facts which shows just how much of the global financial system is now interconnected. They start by making the point that over the past three decades, and despite a slowdown coinciding with the global financial crisis (GFC) of 2007–09, the degree of international financial integration has increased relentlessly. In fact the rapid pace of financial globalisation over the past decades has also been reflected in an over sixfold increase in the external assets and liabilities of nations as a share of GDP – despite a marked slowdown in the growth of cross-border positions in the immediate aftermath of the GFC. My own take is that we have been sleepwalking into a scenario where large capital flows and international financial players operating cross borders, negating the effectiveness of local macroeconomic measures, to their own ends. This new world is one where large global players end up with more power to influence outcomes than governments. No wonder that they often march in step, in terms of seeking outcomes which benefit the financial system machine. You can watch our separate video discussion on this report. Somewhere along the road, we have lost the plot, but unless radical changes are made, the Genie cannot be put back into the bottle. This should concern us all.

And there was further evidence of the global connections in a piece from From The St. Louis Fed On The Economy Blog which discussed the decoupling of home ownership from home price rises. They say recent evidence indicates that the cost of buying a home has increased relative to renting in several of the world’s largest economies, but the share of people owning homes has decreased. This pattern is occurring even in countries with diverging interest rate policies. And the causes need to be identified. We think the answer is simple: the financialisation of property and the availability of credit at low rates explains the phenomenon.

And finally on the global economy, Vice-President of the Deutsche Bundesbank Prof. Claudia Buch spoke on “Have the main advanced economies become more resilient to real and financial shocks? and makes three telling points. First, favourable economic prospects may lead to an underestimation of risks to financial stability. Second resilience should be assessed against the ability of the financial system to deal with unexpected events. Third there is the risk of a roll back of reforms. The warning is clear, we are not prepared for the unexpected, and as we have been showing, the risks are rising.

Locally more bad bank behaviour surfaced this week. ASIC says it accepted an enforceable undertaking from Commonwealth Financial Planning Limited and BW Financial Advice Limited, both wholly owned subsidiaries of the Commonwealth Bank of Australia (CBA). ASIC found that CFPL and BWFA failed to provide, or failed to locate evidence regarding the provision of, annual reviews to approximately 31,500 ‘Ongoing Service’ customers in the period from July 2007 to June 2015 (for CFPL) and from November 2010 to June 2015 (for BWFA). They will pay a community benefit payment of $3 million in total. Cheap at half the price!

In similar vein, ASIC says it has accepted an enforceable undertaking from Australia and New Zealand Banking Group Limited (ANZ) after an investigation found that ANZ had failed to provide documented annual reviews to more than 10,000 ‘Prime Access’ customers in the period from 2006 to 2013. Again, they will pay a community benefit payment of $3 million in total.

Both these cases were where the banks took fees for services they did not deliver – and this once again highlight the cultural issues within the banks, were profit overrides good customer outcomes. We suspect we will hear more about poor cultural norms this coming week as the Royal Commission hearing recommence with a focus on financial planning and wealth management.

Finally to home lending. The ABS released their February 2018 housing finance data. Where possible we track the trend data series, as it irons out some of the bumps along the way. The bottom line is investor as still active but at a slower rate. Some are suggesting there is evidence of stabilisation, but we do not see that in our surveys. Owner occupied loans, especially refinancing is growing quite fast – as lenders seek out lower risk refinance customers with attractive rates. First time buyers remain active, but comprise a small proportion of new loans as the effect of first owner grants pass, and lending standards tighten. You can watch our video on this.

But the final nail in the coffin was the announcement from Westpac of significantly tighten lending standards, with a forensic focus on household expenditure. They have updated their credit policies so borrower expenses will need to be captured at an “itemised and granular level” across 13 different categories and include expenses that will continue after settlement as well as debts with other institutions. They will also be insisting on documentary proof. Moreover, households will be required to certify their income and expenses is true. This cuts to the heart of the liar loans issue, as laid bare in the Royal Commission. That said, Despite the commission raising questions over whether the use of benchmarks is appropriate when assessing the suitability of a loan for a customer, the Westpac Group changes will still apply either the higher of the customer-declared expenses or the Household Expenditure Measure (HEM) for serviceability purposes. You can watch our separate video on this. Almost certainly other banks will follow and tighten their verification processes. This will put more downward pressure on lending multiples, and will lead to a drop in credit, with a follow on to put downward pressure on home prices.

We discussed this in an article which was published under my by-line in the Australian this week, where we argued that excess credit has caused the home price bubble, and as credit is reversed, home prices will fall.

Our central case is for a fall on average of 15-20% by the end of 2019, assuming no major international incidents. The outlook remains firmly on the downside in our view.

ABC The Business Does Mortgage Stress

Good segment from the ABC, in which UBS chief economist George Tharenou says house prices are going to fall because the royal commission will make banks lift their lending standards, making it much harder for people to get credit and be able to bid up prices. As we have already said, its all about credit!

US’s China Tariffs May Create Risks for Some APAC Corps

The US government’s plan to impose 25% tariffs on imports from China across 1,333 product lines creates risks and complications for affected companies, and could be disruptive for regional and global supply chains, but the direct financial impact on Fitch-rated corporates in APAC is likely to be limited, says Fitch Ratings.

The announced tariffs cover around USD50 billion of Chinese exports, which we estimate would not have a significant effect on the Chinese or global economy. Subsequent and escalating tariff proposals by the Chinese and US governments have increased the risk of a full-blown trade war, and in that event the impact on APAC corporates would be more significant. However, we still believe a negotiated solution is most likely.

Televisions, printers, electronic components and motor vehicles are notable products covered by the US’s initial tariffs – in terms of the value of Chinese exports to the US. The importance of the US as an export market varies across these products. Almost one-third of China’s television exports and 28% of its motor vehicles exports are sent to the US. At the other end of the scale, only 8% of semiconductor shipments and 14% of electrical circuit apparatus go to the US, which should soften the impact on technology companies. Component manufacturers could be affected indirectly by a decline in exports of final products, although the list tended to avoid those products to limit the impact on US consumers.

Companies reliant on products included in the chart – particularly those toward the top – could be the most at risk, at least as far their exports are concerned. That said, the domestic market is more important than exports for many companies with operations in China, particularly Chinese firms. The domestic sales of Chinese automakers dwarf their exports, for example. The US is an important growth market for Hikvision – the only publicly Fitch-rated Chinese technology company likely to be affected by the tariffs directly – but around 70% of its external sales go to domestic customers.

Most Fitch-rated Chinese industrial companies do not export much to the US. Exports account for around half of Midea’s sales, but most go to emerging markets. The impact on Chinese clean-energy companies is likely to be minor. Wind-powered electric generating sets were included on the tariff list, but US imports from China were worth just USD36 million in 2017. Technology barriers have made it difficult for Chinese wind-turbine companies to enter the US market.

Foreign-owned Chinese exporters might be among the most affected by the tariffs. They accounted for 31% of exports last year, and joint ventures another 12%. These figures reflect China’s central role in regional and global supply chains, which could be disrupted by the tariffs.

Companies with the capacity to increase production outside of China might benefit from a shift in US demand, as the tariffs will boost their competitiveness relative to firms that rely on Chinese operations. This could be the case for Asian television manufacturers, such as Korea’s Samsung and LGE, which make most of their televisions in Mexico, Vietnam and Korea. However, a drop in component sales to China is likely to offset any potential upside for these firms. Among Japanese firms, Panasonic is no longer a significant manufacturer of televisions, while Sony focuses on the premium segment where it does not compete directly with Chinese companies.

Tariffs on imports of Chinese components could create complications for manufacturers in the US, highlighting the global nature of supply chains. The credit impact would vary – sectors with global footprints might be less affected, given the ability to shift sourcing and production.

Our Own Version Of Sub-Prime?

The RBA has released their Financial Stability Review today. It is worth reading the 70 odd pages as it give a comprehensive picture of the current state of play, though through the Central Bank’s rose-tinted spectacles!

They home in on the say $480 billion interest only mortgage loans due for reset over the over the next four years, which is around 30 per cent of outstanding loans. Resets to principal and interest will lift repayments by at least 30%. Some borrowers will be forced to sell.

This scenario mirrors the roll over of adjustable rate home loans in the United States which triggered the 2008 sub-prime mortgage crisis. Perhaps this is our own version!

We have previously estimated more than $100 billion in these loans would now fail current tighter underwriting standards.

One area of potential concern is for borrowers at the end of their current IO period. Much of the large stock of IO loans are due to convert to P&I loans between 2018 and 2021, with loans with expiring IO periods estimated to average around $120 billion per year or, in total, around 30 per cent of the current stock of outstanding mortgage credit. The step-up in mortgage
payments when the IO period ends can be in the range of 30 to 40 per cent, even after factoring in the typically lower interest rates charged on P&I loans.

However, a number of factors suggest that any resulting increase in financial stress should not be widespread. Most borrowers should be able to afford the step-up in mortgage repayments because many have accumulated substantial prepayments, and the serviceability assessments used to write IO loans incorporate a range of buffers, including those that factor in potential future interest rate increases and those that directly account for the step-up in payments at the end of the IO period.

Moreover, these buffers have increased in recent years. In addition to raising the interest rate buffer, APRA tightened its loan serviceability standards for IO loans in late 2014, requiring banks to conduct serviceability assessments for new loans based on the required repayments over the residual P&I period of the loan that follows the IO period.

Prior to this, some banks were conducting these assessments assuming P&I repayments were made over the entire life of the loan (including the IO period), which in the Australian Securities and Investments Commission’s (ASIC’s) view was not consistent with responsible lending requirements. As a result, eight lenders have agreed to provide remediation to borrowers that face financial stress as a direct result of past poor IO lending practices.

However, to date, only a small number of borrowers have been identified as being eligible for such remediation action. Some borrowers have voluntarily switched to P&I repayments early to avoid the new higher interest rates on IO loans, and these borrowers appear well placed to handle the higher repayments.

Some IO borrowers may be able to delay or reduce the step-up in repayments. Depending on personal circumstances some may be eligible to extend the IO period on their existing loan or refinance into a new IO loan or a new P&I loan with a longer residual loan term. The share of borrowers who cannot afford higher P&I repayments and are not eligible to alleviate their situation by refinancing is thought to be small.

In addition, borrowers who are in this situation as a result of past poor lending practices may be eligible for remediation from lenders. Most would be expected to have positive equity given substantial housing price growth in many parts of the country over recent years and hence would at least have the option to sell the property if they experienced financial stress from the increase in repayments. The most vulnerable borrowers would likely be owner-occupiers that still have a high LVR and who might find it more difficult to refinance or resolve their situation by selling the property.

Looking more broadly at household finances, they say that the ratio of total household debt to income has increased by almost 30 percentage points over the past five years to almost 190 per cent, after having been broadly unchanged for close to a decade.

Australia’s household debt-to-income ratio is high relative to many other advanced economies, including some that have also continued to see strong growth in household lending in the post-crisis period, such as Canada, New Zealand and Sweden.

Household debt in these economies is notably higher than in those that were more affected by the financial crisis and experienced deleveraging, including Spain, the United Kingdom and the United States. While Australia’s high level of household indebtedness increases the risk that some households might experience financial stress in the event of a negative shock, most indicators of aggregate household financial stress currently remain fairly low (notwithstanding some areas of concern, particularly in mining regions). In addition, total household mortgage debt repayments as a share of income have been broadly steady for several years.

Note of course this is because interest rates have been cut to ultra-low levels, and should rates rise, payments would rise significantly.

The RBA says that default rates on mortgages (More than $1.7 trillion) is low, but concedes higher in the mining heavy states.

Then they defend the situation by saying that household wealth is rising (though thanks mainly to inflated property values, currently beginning to correct), and continue to cite out of date HILDA survey data from 3 years ago to demonstrate that the share of households experiencing financial stress has been the lowest since at least the early 2000s. But this is so old as to be laughable, remembering the interest rates and living costs have risen, and incomes are flat in real terms.

And they argue again that households are prepaying on their mortgages. We agree some are, but not those in the stressed category. Averaging data is a wonderful thing!

Finally, a word on the profitability outlook of the banks.

Despite the recent lift, analysts are cautious about the outlook for profit growth. The recent benefits to profit growth from a widening of the NIM and falling bad debt charges are expected to fade, especially if short-term wholesale spreads remain elevated. The financial impact of the multiple inquiries into the financial services sector remains a key uncertainty, including the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Productivity Commission’s Inquiry into Competition in Australia‘s Financial System, and the Australian Competition and Consumer Commission’s Residential Mortgage Products Price Inquiry. There is the potential that these will result in banks having to set aside provisions and/or face penalties for past misconduct or perhaps (more notably) being constrained in the operation of parts of their businesses.

This uncertainty around banks’ future earnings has weighed on their share prices, which have underperformed global peers (although Australian banks still have higher price-to-book ratios). The decline in share prices has also seen banks’ forward earnings yields (a proxy for their cost of equity capital) further diverge from that of the rest of the Australian market since mid 2017 (Graph 3.8). Banks’ current forward earnings yields remain a little above their pre-crisis average, despite a large decline in risk-free rates since then.

Risks In A Financially Connected World

The Bank for International Settlements, the “Central Bankers Banker” has just released an interesting, and concerning report with the catchy title of “Financial spillovers, spillbacks, and the scope for international macroprudential policy coordination“.

But in its 53 pages of “dry banker speak” there are some important facts which shows just how much of the global financial system is now interconnected.

They start by making the point that over the past three decades, and despite a slowdown coinciding with the global financial crisis (GFC) of 2007–09, the degree of international financial integration has increased relentlessly.

In fact the rapid pace of financial globalisation over the past decades has also been reflected in an over sixfold increase in the external assets and liabilities of nations as a share of GDP – despite a marked slowdown in the growth of cross-border positions in the immediate aftermath of the GFC.

This chart shows the evolution of advanced economies’ financial exposures to a group of large middle-income countries, split into portfolio exposures and bank exposures. It shows that both types of exposures have increased substantially since the late 1990s.

Here is another chart which again the linkages, looking at cross-border liabilities by counterparty. The chart shows the classification of cross-border debt liabilities by type of counterparty. It shows that cross-border liabilities where both creditor and debtor are banks are the largest of the four possible categories, and increased rapidly in the run-up to the GFC. It also shows a rapid increase in credit flows relative to foreign direct investments (FDI) and portfolio equity flows.

They explain that cross-border bank-to-bank funding (liabilities) can be decomposed into two distinctive forms: (a) arm’s length (interbank) funding that takes place between unrelated banks; and (b) related (intragroup) funding that takes place in an internal capital market between global parent banks and their foreign affiliates. They note that cross-border bank-to-bank liabilities have also played a major role in the expansion of domestic lending, at their peak in 2007 these flows accounted for more than 25% of total private credit of the recipient economy.

This also opens the door to potential arbitrage, for example “rebooking” of loans, whereby loans are originated by subsidiaries but then booked on the balance sheet of the parent institution. Indeed, the presence of foreign branches of financial institutions that are not subject to host country regulation may undermine domestic macroprudential policies.

This degree of global linkage raises significant issues, despite the argument trotted about by economists that there are benefits from the improved efficiency of resource allocation.

First, the increased global interconnectedness has led to new risks, associated with the amplification of shocks during turbulent times and the transmission of excess financial volatility through international capital flows. They suggest there is robust evidence that private capital flows have been a major conduit of global financial shocks across countries and have helped fuel domestic credit booms that have often ended in financial crises, especially in developing economies.

Second, international capital flows have created macroeconomic policy challenges for advanced economies as well. For example, the rest of the world’s appetite for US safe assets was an important factor behind the credit and asset price booms in the United States that fuelled the subsequent financial crisis and created turmoil around the world. It is also well documented that since the GFC, the various forms of accommodative monetary policy pursued in the United States and the euro area have exerted significant spillover effects on other countries by influencing interest rates and credit conditions around the world – irrespective, at first sight, of the nature of the exchange rate regime.

Finally, there is evidence to suggest that in recent years financial market volatility in some large middle-income countries has been transmitted back, and to a greater extent, to asset prices in advanced economies and other countries. For instance, the suspension of trading after the Chinese stock market drop on 6 January 2016 affected major asset markets all over the world. Thus, international spillovers have become a two-way street – with the potential to create financial instability in both directions.

This means that macroeconomic settings in the USA – and especially the progressive rise in their benchmark rate, and reversal of QE, will have flow-on effects which will resonate around the global financial system. In a way, no country is an island.

The paper does also make the point that there may be some benefits – for example, if the global economy is experiencing a recession for instance, the coordinated adoption of an expansionary fiscal policy stance by a group of large countries may, through trade and financial spillovers, benefit all countries. The magnitude of this gain may actually increase with the degree to which countries are interconnected, the degree of business cycle synchronisation, and the very magnitude of spillovers.

But, if maintaining financial stability is a key policy objective, the propagation of financial risks through volatile short-term capital flows also becomes a source of concern.

After detailed analysis the paper reaches the following conclusions.

First, with the advance in global financial integration over the last three decades, the transmission of shocks has become a two-way street – from advanced economies to the rest of the world, but also and increasingly from a group of large middle-income countries, which we refer to as SMICs, to the rest of the world, including major advanced economies. These increased spillbacks have strengthened incentives for advanced economies to internalise the impact of their policies on these countries, and the rest of the world in general. Although stronger spillovers and spillbacks are not in and of themselves an argument for greater policy coordination between these economies, the fact that they may exacerbate financial risks – especially when countries are in different phases of their economic and financial cycles – and threaten global financial stability is.

Second, the disconnect between the global scope of financial markets and the national scope of financial regulation has become increasingly apparent, through leakages and cross-border arbitrage – especially through global banks. In fact, what we have learned from the financial trilemma is that it has become increasingly difficult to maintain domestic financial stability without enhancing cross-border macroprudential policy coordination, at least in its structural dimension. Avoiding the leakages stemming from international regulatory arbitrage and open capital markets requires cooperation, but addressing cyclical risks requires coordination.

Third, divergent policies and policy preferences contribute additional dimensions to global financial risks. In the absence of a centralised macroprudential authority, coordination needs to rely on an international macroprudential regime that promotes global welfare. Yet, divergence in national interests can make coordination unfeasible. Fourth, significant gaps remain in the evidence on regulatory spillovers and arbitrage, and the role of the macroprudential regime in the cross-border transmission of shocks. In addition, research on the potential gains associated with multilateral coordination of macroprudential policies remains limited. This may be due in part to the natural or instinctive focus of national authorities on their own country’s objectives, or to greater priority on policy coordination within countries – an important ongoing debate in the context of monetary and macroprudential policies. This “inward” focus may itself be due to the lack of perception of the benefits of multilateralism with respect to achieving national objectives – which therefore makes further research on these benefits all the more important.

This assessment suggests that, in a financially integrated world, international coordination of macroprudential policies may not only be valuable, but also essential, for macroprudential instruments to be effective at the national level. A first step towards coordination has been taken with Basel III’s principle of jurisdictional reciprocity for countercyclical capital buffers, but this principle needs to be extended to a larger array of macroprudential instruments. Further empirical and analytical work (including by the BIS, FSB and IMF) on the benefits of international
macroprudential policy coordination could play a significant role in promoting more awareness of the potential gains associated with global financial stability. This work agenda should involve a research component focused on measuring the gains from coordination and improving data on cross-border financial flows intermediated by various entities (banks, investment funds and large institutional investors), as well as improving capacity for systemic risk monitoring.

My own take is that we have been sleepwalking into a scenario where large capital flows and international financial players operating cross borders, negating the effectiveness of local macroeconomic measures, to their own ends. This new world is one where large global players end up with more power to influence outcomes than governments. No wonder that they often march in step, in terms of seeking outcomes which benefit the financial system machine.

Somewhere along the road, we have lost the plot, but unless radical changes are made, the Genie cannot be put back into the bottle. This should concern us all.

ASIC accepts enforceable undertaking from CBA subsidiaries for Fees For No Service conduct

ASIC says it has has accepted an enforceable undertaking (EU) from Commonwealth Financial Planning Limited (CFPL) and BW Financial Advice Limited (BWFA), both wholly owned subsidiaries of the Commonwealth Bank of Australia (CBA).

ASIC found that CFPL and BWFA failed to provide, or failed to locate evidence regarding the provision of, annual reviews to approximately 31,500 ‘Ongoing Service’ customers in the period from July 2007 to June 2015 (for CFPL) and from November 2010 to June 2015 (for BWFA).

The EU requires, among other things:

CFPL and BWFA to pay a community benefit payment of $3 million in total;

CFPL to provide an attestation from senior management setting out the material changes that have been made to CFPL’s compliance systems and processes in response to the misconduct; and

CFPL to provide further attestations from senior management, supported by an expert report, that:

CFPL’s compliance systems and processes are now reasonably adequate to track CFPL’s contractual obligations to its Ongoing Service clients; and

CFPL has taken reasonable steps to identify and remediate its Ongoing Service customers to whom CFPL did not provide annual reviews in the period from July 2015 to January 2018.

As BWFA ceased trading in October 2016, CFPL is the focus of the compliance improvements required under the EU.

ASIC Deputy Chair Peter Kell said, ‘Our report into Fees For No Service in October 2016 identified the major financial institutions’ systemic failures in this area, and called for fair compensation to be paid to customers who did not receive the advice reviews that they were promised and paid for.

‘This enforceable undertaking follows on from the earlier enforceable undertaking accepted by ASIC in relation to ANZ’s fees for no service conduct. These failures show that all too often the financial institutions prioritised revenue and fee generation over the delivery of advice and services paid for by their customers.’

In addition to the EU, CFPL and BWFA have also agreed to compensate approximately 31,500 affected customers in the period from July 2007 to June 2015 (for CFPL) and from November 2010 to June 2015 (for BWFA). The compensation program is nearing completion and as at 28 February 2018, CFPL and BWFA have paid or offered to pay approximately $88 million (plus interest) to these customers (with the total compensation estimated at $88.6 million (plus interest)).

Background

The EU follows an ASIC investigation into CFPL and BWFA in relation to their fees for no service conduct concerning various Ongoing Service packages which were offered to CFPL and BWFA financial planning customers for an annual fee. A key component of those packages from about 2004 (for CFPL) and from 2010 (for BWFA) was the provision of an annual review of the customer’s financial plan.

As a result of the investigation, ASIC was concerned that:

CFPL and BWFA either did not provide, or have not identified evidence regarding the provision of, annual reviews to approximately 31,500 Ongoing Service customers who had paid for those reviews;

CFPL and BWFA did not have adequate systems and processes in place for tracking their Ongoing Service customers and ensuring that annual reviews were provided to them;

senior management were aware from at least mid-2012 that a relatively small number of CFPL Ongoing Service customers who were not assigned to an active adviser may not have received an annual review, and that there was a potential risk of a broader ‘fees for no service’ issue in relation to other Ongoing Service customers, but CFPL did not notify ASIC of the issue until July 2014; and

CFPL and BWFA failed to comply with section 912A(1)(a) of the Corporations Act which provides that a financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly, and a condition of their respective Australian financial services licence.

Both CFPL and BWFA have acknowledged in the EU that ASIC’s concerns were reasonably held.

View the enforceable undertaking here.

The EU has been accepted by ASIC as part of ASIC’s Wealth Management Project to address systemic failures by financial institutions and advisers, over a number of years, to provide ongoing advice services to customers who paid fees to receive those services (commonly referred to by ASIC as Fees for No Service conduct). A report on ASIC’s work in this area was released in October 2016 (Report 499), and updated in May 2017 (17-145MR) and December 2017 (17-438MR).

Tales From The RBA Chart Pack – April 2018

Today we run through some of the latest charts contained in the RBA’s Monthly Chart Pack, released in early April 2018.

Our first chart is of the headline inflation in advanced economies, where we see that inflation is still sitting below the typical target band of 2-3% in the USA, Euro Area and Japan.

However, in two of the most populous countries China and India, inflation is higher with India close to 5% from a high of 17% in 2010.

Inflation in Australia is still sitting below the 2% lower bounds of the RBA 2-3% target range, on both the trimmed mean, their preferred measure and weighted mean basis.

Now to GDP. World GDP Growth is sitting at around 4%, based on purchasing power weighted figures, of around 85% of world GDP. We could have a separate discussion about whether GDP is a good or adequate measure of growth, but in short, it might work for a manufacturing based economy, but really does not do the job in more advanced and globalised economies, in my view.

Anyway, in comparison, Australian GDP looks pretty poor, and fell towards 2% in the last quarter.

But looking at the contributions to GDP growth, household consumption made the strongest contribution, with non-mining investment and public demand also helping, but dwelling investment, and mining investment fell below zero. Imports also had a negative impact, as you would expect. So the RBA is still over-reliant on the household sector performing, which is a problem.

This next chart is very relevant. Household consumption is still higher than disposable income, and the gap is being filled by the falling savings ratio. So, we are still spending, but raiding our savings to do so. Which of course is not sustainable.

Now the other route to fund consumption is debt, so there should be no surprise to see that total household debt rose again (note this is adjusted thanks to changes in the ABS data relating to superannuation, we have previously breached the 200% mark). But on the same chart we see home prices are now falling – already the biggest fall since the GFC in 2007.

It is worth noting that the ratio of total debt to GDP is also very high, and back up to the pre-GFC levels.

Debt is a critical factor in the equation, and we have too much of it in the system, as our banking system expanded to fill the never ending demand. As a result, although the debts household hold – liabilities – is sky high, total net wealth has stopped growing, and the value of dwellings has slipped a little. This will be an important chart to watch in the months ahead. Note that financial assets – including shares, and other types of savings, remains at a high. But of course those with high debts tend to be the ones with little or no savings, so this chart does not parse out the segmental differences. I think I may make a separate video on this issue down the track.

This chart shows the trajectory of average home price growth across the country. Clearly rates of growth are tumbling, and so we expect the indicator to turn negative soon. Some smaller markets like Adelaide and Hobart are helping to support the figures. Of course the bigger markets like Sydney are already negative.The next chart shows the slight rise in unemployment and the fact that underemployment is still sitting above 8%. So while the Government talks up the creation of more than 400,000 jobs recently, the truth is there are many who want more work – and of course many of these jobs created are part-time and or low paid, or even gig-economy jobs. The underemployment number belies the apparent low unemployment figures, which other less official sources suggest is nearer to 9%. It’s a matter of definition, and certainly the ABS data flatters the true state of play, in my book.To round out our quick tour we look at housing lending rates.

Whilst there has been no recent change in the cash rate – for the past 20 months or so, and bank headline indicator rates for new owner occupied loans have come down, reflecting strong competition for low risk new business, the real rates paid by borrowers continue to rise. And as we know even small rises will put more into mortgage stress – 965,000 households are in this condition, based on our latest research, which equates to 30% of the market. You can watch our separate video on this important topic.

And expect more rate rises, irrespective of what the RBA may do. Here is the US Corporate Bond Yields, which are rising now, in response to the FEDs reversal of QE, and lift in their benchmark rates. And more to come. The latest from the FED today suggested at least three more rate hikes in the next year, which is faster than many were expecting. And inflation is expected to run hot in the US. Ahead.

Spreads between the Australian 10-year Bond Yield and the Cash Rate are rising, all of which is putting more funding pressure on the Banks.

And we can see that Financial companies have been the largest issuer of bonds, with significant rises in recent times. About half of all the bonds from the finance sector are issued abroad, so changes in global interest rates will translate to higher funding costs here, so expect more mortgage repricing upwards. These bond issues of course enabled the banks to lend ever more and so create more deposits, to inflate the economy and their books. You can watch our recent video on this, as well as read the article published in the Australian, under my by-line. You can see the current finance system in action.

So standing back, we see all the signs of issues ahead, with household debt still rising, household consumption relying on debt and savings, and overall growth still over reliant on the poor old household sector. We need a proper plan B, where investment is channelled into productive growth investments, not just more housing loans. Yet regulators and government appear to rely on this sector to make the numbers work – but it is, in my view, lipstick on a pig!

A Global Perspective On Home Ownership

From The St. Louis Fed On The Economy Blog

An excellent FED post which discusses the decoupling of home ownership from home price rises. We think the answer is simple: the financialisation of property and the availability of credit at low rates explains the phenomenon.

In the aftermath of WWII, several developed economies (such as the U.K. and the U.S.) had large housing booms fueled by significant increases in the homeownership rate. The length and the magnitude of the ownership boom varied by country, but many of these countries went from a nation of renters to a nation of owners by around the late 1970s to mid-1980s.

Historically, the cost of buying a house, relative to renting, has been positively correlated with the percent of households that own their home. From 1996 to 2006, both the price of houses and the homeownership rate increased in the U.S. This increasing trend ended abruptly with the global financial crisis that drove house prices and homeownership rates to historically low levels.

It is reasonable to expect prices and homeownership to move in the same direction. A decrease in the number of people who want to buy homes to live in could lead to a decrease in both prices and homeownership. Similarly, an increase in the number of people buying homes to live in could lead to an increase in both prices and homeownership.

However, recent evidence indicates that the cost of buying a home has increased relative to renting in several of the world’s largest economies, but the share of people owning homes has decreased. This pattern is occurring even in countries with diverging interest rate policies. It is important to delve into this fact and try to find potential explanations. (For trends in homeownership rates and price-to-rent ratios for several developed economies, see the figures at the end of this post.)

Increasing Cost of Housing

The price-to-rent ratio measures the cost of buying a home relative to the cost of renting. Factors like credit conditions or demand for homes as an investment asset affect the price of houses but not the price of rentals. These and other factors cause the price-to-rent ratio to move.

Over the period 1996-2006, the cost of buying a home grew more quickly than the cost of renting in many large economies. For example, the price-to-rent ratio in the U.S. increased by more than 30 percent between 2000 and 2006. Even larger increases occurred in the U.K. and France, where the price-to-rent ratio rose by nearly 80 percent over the same period.

The price-to-rent ratio declined in the wake of the housing crisis in the U.S., the eurozone, Spain and the U.K., but in the past few years, it has started to increase again. The price of houses is again increasing more quickly than the price of rentals.

Decreasing Homeownership

However, the homeownership rate has not increased along with the price-to-rent ratio. The homeownership rate (the percent of households that are owner-occupied) has fallen in several large economies:

In the U.S., the homeownership rate fell from around 69 percent before the recession to less than 64 percent in 2016.

In the U.K., the rate fell from nearly 69 percent to around 63 percent.

The homeownership rates in Germany and Italy have also fallen.

Diverging Policies

The pattern of increasing house prices and decreasing homeownership has occurred even in countries with diverging monetary policies:

By 2016, the Federal Reserve had ended quantitative easing and had begun raising rates in the U.S.

In contrast, the Bank of England and the European Central Bank continued quantitative easing throughout 2016 and reduced rates.

Nonetheless, the homeownership rate continued to fall in the U.S., the U.K. and many parts of Europe, while the price-to-rent ratio continued to increase.

Housing Supply

Several factors could be driving the decoupling of the price-to-rent ratio and the homeownership rate. From the housing supply side, there is a trend toward decreased construction of starter and midsize housing units.

Developers have increased the construction of large single-family homes at the expense of the other segments in the market. From 2010 to 2016, the fraction of new homes with four or more bedrooms increased from 38 percent to 51 percent.

This limited supply, particularly for starter homes, could result in increased prices for those homes and fewer new homeowners. One possible factor is regulatory change. The National Association of Home Builders claims that, on average, regulations account for 24.3 percent of the final price of a new single-family home. Recent increases in regulatory costs could have encouraged builders to focus on larger homes with higher margins. Supply may be just reacting to developments in demand that we discuss next.

Housing Demand

From the demand side, there are three leading explanations, which are likely complementary and self-reinforcing:

Changes in preferences toward homeownership

Changes in access to mortgage credit

Changes in the investment nature of real estate

Preferences for homeownership may have changed because households who lost their homes in foreclosure post-2006 may be reluctant to buy again. Also, younger generations may be less likely to own cars or houses and prefer to rent them.

Demand for ownership has also decreased because credit conditions are tighter in the post-Dodd Frank period.

Real Estate Investment

The previous demand arguments can explain why the price-to-rent ratio dropped post-2006. As rents grew relative to home prices, together with the low returns of safe assets, rental properties became a more attractive investment. This attracted real estate investors who bid up prices while depressing the homeownership rate.

Moreover, builders increased their supply of apartments and other multifamily developments. From 2006 to 2016, single-family construction projects declined from 81 percent to 67 percent of all housing starts.

There are several types of real estate investors:

“Mom and dad” investors looking for investment income

Foreign investors who have increased real estate prices in many of the major cities of the world

Institutional landlords like Invitation Homes or American Homes 4 Rent

In fact, since 2016 the real estate industry group has been elevated to the sector level, effective in the S&P U.S. Indices.

In addition, the widespread use of internet rental portals such as Airbnb and VRBO has increased the opportunity to offer short-term leases, increasing the revenue stream from rental housing.

There are several potential explanations, but more research is needed to determine the cause of the decoupling of house prices from homeownership rates and what it means for the economy.

Authors: Carlos Garriga, Vice President and Economist; Pedro Gete, IE Business School; and Daniel Eubanks, Senior Research Associate

Advanced Economies and Financial Shocks

Vice-President of the Deutsche Bundesbank Prof. Claudia Buch spoke on “Have the main advanced economies become more resilient to real and financial shocks? and makes three telling points. First, favorable economic prospects may lead to an underestimation of risks to financial stability. Second resilience should be assessed against the ability of the financial system to deal with unexpected events. Third there is the risk of a roll back of reforms.

The global economy is currently in good shape, and valuations on financial markets are high. Global GDP has been growing for nine consecutive years now, and output has surpassed the levels prior to the financial crisis (IMF 2017). Growth has not only been sustained for a number of years, it is also relatively broad based. And, according to recent estimates by the International Monetary Fund (IMF), growth is expected to continue in the coming years (IMF 2018). Projections suggest that the world economy will expand by 3.9% in 2018, compared with 3.7% in 2017. These favorable economic outlooks, together with inflation and interest rates that remain below their historical averages, contribute to high valuations on financial markets.

As regards the regulation of financial markets, much progress has been made since the financial crisis. G20 reforms that have been agreed upon post crisis aim at enhancing the resilience of the financial system, ending too-big-to-fail, reforming derivatives markets, and transforming shadow banking into a resilient source of finance. Many of the reforms are well under way, and a first assessment of their effects becomes feasible.

Does this mean that all is well and that markets are resilient with regard to future shocks? I will argue in the following that it is not the time to be complacent:

Favorable economic prospects may lead to an underestimation of risks to financial stability.

Resilience should be assessed against the ability of the financial system to deal with unexpected events.

There is the risk of a roll back of reforms.

1 Favorable economic prospects may lead to an underestimation of risks to financial stability

Market participants are currently quite optimistic. This reflects that the European economy is in good shape and that the global economy, too, is expanding at a brisk pace. Market participants, bolstered by the current growth forecasts, are expecting interest rates to slowly start picking up again. And not only are market participants optimistic, the range of expectations has also narrowed down. Yet, this optimism and convergence of expectations may harbor risks for financial stability.

Assuming that the current outlook will be sustained, risks to financial stability will be limited. A gradual upturn in interest rates would strengthen the stability of the financial system. Banks may see their interest margins recover – in particular if interest rates stay out of negative territory. Life insurers and pension institutions would find it easier to generate returns and to honour promised payments to customers.

But how would markets respond to an unforeseen economic slowdown? What if interest rates stay low for much longer? What if political risks materialize and risk premiums increase abruptly? Such unexpected events may affect many market participants at the same time – thus potentially threatening the functioning of the entire financial system.

A resilient financial system needs to be in a position to weather also unexpected, but by no means unrealistic, scenarios. During the extended spell of low interest rates, risk has been growing in the global financial system. Low interest rates and strong growth might cause risks to be underestimated. These risks can be mutually reinforcing in the financial system. Therefore, the resilience of the financial system might be overstated.

The good economic conditions might lead markets participants to ignore the risks of scenarios involving heavy losses. Gazing into the rear view mirror for too long increases the risk of overlooking hazards on the road ahead. The longer booms persist, the greater the inclination to extrapolate current trends, and the weaker are incentives to take precautions against unforeseen events. If the real economy takes a worse path than expected, that would also drive up credit risk.

In Germany, for example, the number of insolvencies has almost halved in the past years, dropping from just over 39,300 in the year 2003 to a little more than 20,000 in the year 2017 (Federal Statistical Office of Germany 2018). To put that number into perspective: There are just over 11,000 municipalities in Germany. Hence, there has been an average of less than two insolvencies per municipality. Reflecting these numbers, credit risk provisioning for German banks is currently at record lows. Moreover, we know from empirical studies that entry and exit of firms is an important mechanism behind innovation and, ultimately, economic growth (Foster, Grim, Haltiwanger, and Wolf 2018).

Yet, low default rates on loans are a backward-looking indicator and do not provide a good proxy for future risks. Larger banks use their own risk models to assess risks as a basis for their capital requirements. These banks might underestimate the risks which might arise if economic activity unexpectedly worsens. This might, in turn, also lead to an underestimation of how much capital is needed to provide sufficient buffers against losses.

There are, in fact, scenarios which could hit the financial system hard.One risk scenario is a faster-than-expected upturn in interest rates. For instance, risk premiums in international financial markets might increase unexpectedly. A rapid increase in interest rates would drive up short-term funding costs and hit particularly those financial institutions that have invested into low rate, fixed term assets. In Germany, for instance, 44% of housing loans are fixed-rate mortgages with a maturity of more than ten years, this number being up from 26% at the beginning of 2010. An abrupt increase in interest rates would put pressure on banks – their funding costs would go up, and their interest income would, initially, rise at a slower pace. An abrupt rise in interest rates would also send valuations down from their current high levels and thus cause losses.

A second risk scenario is that of persistently low interest rates which would incentivize a search for yield. Empirical results for the US show that risk-taking by banks intensifies if interest rates are low for long (Buch, Eickmeier, and Prieto 2014; Dell’Ariccia, Laeven, and Suarez 2017). Also, life insurers and pension institutions would find it increasingly difficult to generate sufficient income to cover the returns that some of them have promised to pay.

2 Resilience should be assessed against the ability of the financial system to deal with unexpected events

The resilience of a financial system has two key components – buffers against risks and the risks themselves. Notwithstanding difficulties with the definition of capital and liquidity buffers, these can be measured with a reasonable degree of certainty. On average, banks’ capital ratios have increased since the crisis. Within the euro area, the Tier 1 capital ratio, which is measured in relation to banks’ risk-weighted assets, increased from 8.8% in the year 2008 to 14.7% in 2016 (CGFS 2018). This raise has been achieved by a decline in total assets, a decrease in average risk-weights, and by a strengthening of banks’ capital positions. Measured relative to banks’ total assets, bank capital has increased to a lesser extent, from 3.7% in the year 2008 to 5.8% in 2016.

Banks have also built up buffers against liquidity shocks. By the end of 2016, the Liquidity Coverage Ratio (LCR) was 130% on average in an international sample of around 90 large banks (CGFS 2018). More than 90% of those banks had already met the regulatory requirement of the LCR set at 100%. Banks’ long-term resilience against liquidity shocks has also substantially improved. In particular, the Net Stable Funding Ratio (NSFR) has increased significantly from 43% in 2012 to 115% in 2016 (CGFS 2018).

Notwithstanding higher levels of capital in the banking sector, global debt levels remain elevated. At 144% of GDP, private non-financial sector debt has been higher in late 2017 than its pre-crisis level of 125% in 2007 (BIS 2018). This trend is explained, not least, by increased leverage in the corporate sector, particularly in emerging market economies. Complacency with regard to the resilience of the financial system is thus a risk, and assessment of debt sustainability might be overly positive.

Moreover, measuring risks and the associated losses when these risks materialize is difficult. Risks to global financial stability are genuine uncertainties, rather than well-defined risk scenarios with estimates of probabilities and losses-given-default attached to them. Writing contracts that describe all relevant contingencies and that condition the responses of the contractual parties on these outcomes is typically not feasible.

In addition, risks are highly endogenous and depend on the ability of the financial system to adjust to shocks. Seemingly small shocks can propagate in the financial system and become contagious (Allen and Gale 2000). Contagion effects can arise in the financial system whenever market participants are contractually highly interconnected or if investment strategies are very similar. In that situation, a relatively minor shock can affect the functioning of the entire financial system – with negative implications for the real economy.

The financial system needs to have sufficient buffers to be able to absorb even unexpected events, which can become mutually reinforcing in the system. Two examples can illustrate such systemic events:

First, risks stemming from an interest rate hike, revaluations in markets and increased credit losses could materialize simultaneously. Asset values might plunge; write-downs would erode equity. And, in particular, credit risk could increase if economic activity unexpectedly declines.

Second, common exposures to the same risk factor can trigger systemic risks. Take one example based on the German financial system. One of the German banking system’s strengths is its large number of smaller credit institutions operating directly within the regions in which they are based. Yet, the bulk of Germany’s smaller credit institutions – its credit cooperatives and savings banks – are highly exposed to interest rate risk. This might undermine stability precisely when interest rates climb more briskly and more strongly than anticipated. Small though these institutions may be individually, together they account for a significant share – roughly 50% – of lending to domestic enterprises and households (Deutsche Bundesbank 2018). If those institutions were to run into difficulties, the repercussions for the economy as a whole could be severe.

Generally, resilience with regard to such systemic events should be measured with regard to the mechanisms that are in place to deal with losses. Equity capital, for example, provides an ex ante insurance mechanism. Whenever risks materialize, the value of equity adjusts, and dividend payments can be suspended. Thereby, equity investors bear upside and downside risks. Standard debt contracts, in contrast, are insensitive to the borrower’s situation. Risks are not shared unless the debtor enters insolvency proceedings and unless risk sharing occurs through haircuts. Insolvency proceedings, however, are often inefficient, may create distortions if investments are postponed, and may lead to the liquidation of viable parts of businesses.

Market participant needs to hedge against negative scenarios – by making sure that they put enough capital into any investment and basing expectations on the most realistic scenarios possible. But what happens when risk materializes that the individual cannot readily grasp, when risks become mutually reinforcing in the system?

At the system level, the credibility of regimes for the recovery and resolution of financial institutions is a crucial element of resilience. In 2011, the Financial Stability Board published an international standard for sound resolution regimes: the “key attributes of effective resolution schemes for financial institutions” (FSB 2011). Their overall aim is to establish a framework that allows for systemically important financial institutions to exit the market without endangering financial stability. In particular, the burden of losses should be shifted from taxpayers to shareholders and creditors. This reduces moral hazard and funding advantages due to public bail-outs.

While the “key attributes” are applicable to all kind of financial institutions, their implementation has so far advanced mostly for banks. In the European Union, the attributes have been transposed via the Bank Recovery and Resolution Directive (BRRD) for all EU members as of 2015. For euro area countries, the Single Resolution Mechanism was established in 2016 with the Single Resolution Board as a common resolution authority. The new rules were applied for the first time in 2017. These first applications highlight shortcomings that need to be addressed (Deutsche Bundesbank 2017). For example, the decision that failing banks have reached their point of non-viability should be based on more specific criteria in order to avoid (costly) delays of the “failing or likely to fail” decision. Moreover, the first applications of the BRRD revealed discrepancies in bail in rules according to the European resolution framework, state aid rules, and national insolvency laws. Finally, contagion risks that might emerge from banks’ cross-holdings of each other’s liabilities can be mitigated by implementing holding restrictions.

3 There is the risk of a roll back of reforms

Fading memory of the crisis and a favorable economic environment intensify pressure to relax financial regulations. The risk of a roll back of reforms is particularly acute when business models of incumbent financial institutions are under pressure as a combination of excess capacity in some markets, changing patterns of globalization, and technological change.

Since the financial crisis, reforms have been initiated – the impact of which is now gradually making itself felt in the markets. Higher capital and resilience of the financial system are a stated objective of these reforms. We can now begin evaluating the effects of the reforms. Have they achieved their objectives? Do the reforms bring with them unintended side-effects?

Under the German presidency in 2017, the G20 have agreed on a framework for a structured evaluation of the reforms (FSB 2017). A structured evaluation is needed to gauge the costs and benefits of reforms. Such an analysis needs to take the perspective of society as a whole because not all the costs being discussed in the public arena are in fact costs to society. The costs of failures in the financial system should be borne by those who cause them – the shareholders and potentially also the creditors of financial institutions – rather than by the taxpayer. Technically speaking, the reforms aim at cutting implicit subsidies for systemic institutions. For the private sector, funding costs are thus going up. Yet, society benefits because costs of financial distress are shifted from society to the originators. Also, if financial crises occur less often and are less severe, reforms carry a lower economic and social price tag. Finally, benefits of the reforms can only be reaped over the longer term, whereas higher funding costs tend to be recognized immediately.

Evaluation, therefore, means making the costs and rewards of the reforms for society as a whole more transparent and disclosing any unintended side-effects. So far, there are no indications that the reforms have impaired the ability of the financial system to provide services and to lend to the real economy. The evaluation of the reforms should not be used as a pretext to water them down or weaken the resilience of the financial system. Ultimately, a stronger, better capitalized, and more resilient financial system promises a “double dividend” in terms of growth and stability.

Precarious employment is rising rapidly among men: new research

From The Conversation.

Precarious employment is increasing over time, and it still remains higher for women than men in Australia. But over the last nine years it has increased far more rapidly among men.

This is despite greater workforce participation and lower unemployment rates in Australia’s labour market. The quality of jobs in Australia has been declining.

In a new Bankwest Curtin Economics Centre report, we develop a composite index of precarious employment using data from the Household Income and Labour Dynamics in Australia (HILDA) survey.

The HILDA survey captures job attributes, labour force circumstances and other information about a large and representative sample of Australian workers. The index is based on 12 component indicators that capture different dimensions of precarious employment.

These include measures related to job insecurity like workers’ own views of their future employment prospects, the chance of losing their jobs, and their overall sense of job security.

We also looked at irregular hours, working fewer or more hours than desired, and a loss of work-life balance to capture the degree of control over working hours. For employment protections and other working conditions, the index uses measures related to leave entitlements including sick, family and compassionate leave.

The calculated index is centred on the average measure of precarity across all occupations and industries. Negative numbers mean lower employment precarity than the average and positives convey greater precarity. The larger the value, the more precarious the work, relative to the all-industry average.

The index shows the overall state of the economy has had a significant impact on the level of precarious employment in the labour market.

It shows levels rising for both men and women since the global financial crisis.

However, for men, precariousness is now above 2003 levels, which suggests precarious work is being driven by more than just economic conditions. And while men are still below the levels of women, the two are beginning to converge.

A major source of this trend is an increase in the self-reported probability of losing one’s job and accompanying dissatisfaction with job security.

Despite relatively stable and low levels of unemployment, workers are increasingly concerned that their jobs are at risk. The same holds true for satisfaction with job prospects, which dropped significantly since the global financial crisis and has yet to recover.

As expected, higher skilled occupations such as professionals and managers have more stable employment, while labourers and machinery operators and drivers are in the most precarious job circumstances.

Job insecurity has increased most among clerical and administrative workers and labourers, while for managers the key drivers are the loss of control over working hours and a reduction in work-life balance.

Working for government, a bank or insurance company appears to still be a relatively “safe” option. Industries with the lowest levels of precarious employment are public administration, financial and insurance services, and utilities.

By contrast, accommodation and food, agriculture, forestry and fishing, and arts and recreation services are much more precarious for their employees. Mining and to a lesser extent education have become more precarious in recent years.

Precariousness by industry and occupation

Employment precariousness, by occupation and industry. The index is centred on the overall industry average (as represented by zero). Negative numbers correspond to lower employment precarity than the average, positives convey greater precarity.

Precarious work more prevalent in some industries

There are several factors affecting the likelihood of a worker facing more or less precarious work, including the nature of the industry they are working in.

Some industry sectors, such as manufacturing, construction or mining, have a greater exposure to economic downturns or upturns, and global market forces.

Workers in the mining industry used to be among the most secure, with their sense of optimism supported by strong demand for labour during the heart of the resources boom.

But our index confirms times have changed for the sector.

Precarious work has increased in mining at a greater rate than in any other sector, driven mainly by workers’ sense of job insecurity as the sector shifts to a less labour intensive production phase, and the volatility of global resource prices.

We found employment in other sectors, in hospitality, arts and recreation, or agriculture for example, to be intrinsically more precarious by nature. These industries had irregular or uncertain hours, casual contracts, or relatively low pay.

The expanding role of technology and automation in production is another potential factor driving the growing sense of insecurity in employment, especially among lower-skilled men.

This highlights the need to ensure workers can access retraining and education opportunities that smooth their transition to new, higher skilled jobs, or into other forms of employment.

There is a shared responsibility on governments, employers, and education and training organisations to ensure that no-one is left behind.

Authors: Rebecca Cassells, Associate Professor, Bankwest Curtin Economics Centre, Curtin University; Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy, Curtin University; Astghik Mavisakalyan, Senior Research Fellow, Curtin University; John Phillimore, Executive Director, John Curtin Institute of Public Policy, Curtin University; Yashar Tarverdi, Research fellow, Bankwest Curtin Economics Centre, Curtin University