Digital Finance Analytics (DFA) Blog – Page 791

Flexible work: how the gig economy benefits some more than others

Self-employment is on the rise in the UK. The latest government statistics put it at 4.79m, which represents 15% of all people in work. And, in recognition of this changing nature of employment, the prime minister has commissioned a review of workers’ rights. One of its chief tasks is to address concerns that millions are stuck in insecure and stressful work.

Flexible working and self-employment are inevitable solutions to the growing “gig economy”, in order to best manage projects and fluctuating work flows. A flexible lifestyle may be desirable for the highly paid IT consultant. But for the call centre worker on a zero-hours contract, it means a pension, mortgage and income protection are all illusory.

In Tim Ferriss’ book The 4-Hour Work Week, creative freelancers live the dream. They work anywhere, anytime, provided they deliver agreed outputs. And, as social scientist Richard Florida suggests in his view of the “Creative Class”, high-tech workers, artists and musicians typically gravitate to dynamic and open urban regions, with good schools, sporting and shopping facilities. These high-earning creative types then generate jobs for contingent workers whose rights must be protected from abuse. The challenge for urban planners is to attract such talent at both ends of the flexible working spectrum.
Creative class chill. shutterstock.com
Flexibility in self-employment, however, presents a quite different scenario for those with zero-hours contracts. These are increasingly common employment contracts where employers do not guarantee the individual any work and the individual is not obliged to accept any work offered. They are a hot topic for debate, with significant polarisation of views.

The recent investigation into Sports Direct’s use of zero-hours contracts showed them in a particularly negative light and there is talk of the company moving to fixed hours. New Zealand banned these types of contracts in April. And an employment tribunal in London recently ruled that Uber drivers should be classed as workers, rather than self-employed. Yet for some – students, for example – a zero-hours contract is better than no contract at all.

Despite the latest outrages over zero-hours contracts, theories of workplace flexibility have been around for many years. The academic John Atkinson put forward a well-known model for the “flexible firm” in 1984. It advocated that companies retain a core group of workers and use a flexible workforce that is determined by and responsive to business demand.
Julie Davies
The model also distinguishes between functional and numerical flexibility. This has long been the operating model in the entertainment industry where the supply of staff is driven by business demand. It is a continuing theme in discussions about employment trends in the fourth industrial revolution.

A business staple

The high-profile coverage of zero-hours contracts might give the impression that they are one of the dominant forms of employment contract in the UK. But, government statistics show that 903,000 people were employed on them during April to June 2016 – this is just 2.9% of all people in employment. They are most likely to be young, part-time, women, or in full-time education. Typically they work 25-hours per week and a third say they would prefer more hours in their current jobs.

Zero-hours contracts, however, are actually less prevalent than other forms of flexible and non-standard employment such as shift work, annualised hours and temporary contracts. And they are only slightly more common than agency work.

In effect, they can be seen as equivalent to the long-established position of a casual contract, something which has been the staple of the business model in the leisure, entertainment and culture industry for years. When work is seasonal, margins are narrow and covering the minimum wage is a challenge for employers, many of whom simply cannot afford surplus staff.

Juggling act

One sector that experiences significant fluctuation in demand is the entertainment business. Blackpool, a seaside resort on the north-west English coast, whose main industry is tourism, is a good example of how difficult it is to get this right. There is a seasonal and school holiday cycle, which introduces one level of fluctuation. Then there are other unpredictable factors that affects the need for staff.
Unpredictable weather in Blackpool. jremes84 / Shutterstock.com
The famously variable British weather affects the relative popularity of indoor and outdoor attractions. And the city is host to a number of events, ranging from major darts competitions, musical acts and theatre productions, to small weddings and functions. The skills required varies significantly too. Whether it’s the annual British Homing Pigeon World Show (January), the world ballroom dancing championships (May), or the annual Rebellion punk reunion festival (August). Flexibility is a daily challenge for many businesses in similar situations.

So, in a world of increasing flexibility and insecurity, we will watch with interest to see the outcome of the government’s review of modern employment. Matthew Taylor who is running it has a wide remit that includes security, pay and rights; progression and training; finding the appropriate balance of rights and responsibilities for new models; representation; opportunities for under-represented groups; new business models. Taylor has said that “most part-time workers, and even most zero-hours workers, say they have chosen to work this way”. Let’s see whether the evidence really bears this out.

Authors: Julie Davies, HR Subject Group Leader, University of Huddersfield; Mark Horan, Senior Lecturer Human Resource Management, University of Huddersfield

RBA Holds Cash Rate

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year, but growth in global industrial production and trade remains subdued. Economic conditions in China have steadied recently, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets.

Commodity prices have risen over recent months, following the very substantial declines over the past few years. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years.

Financial markets are functioning effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Government bond yields have risen, but are still low by historical standards.

In Australia, the economy is growing at a moderate rate. The large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports. Household consumption has been growing at a reasonable pace, but appears to have slowed a little recently. Measures of household and business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although there is considerable variation in employment growth across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The September quarter inflation data were broadly as expected, with underlying inflation continuing to run at around 1½ per cent. Subdued growth in labour costs and very low cost pressures elsewhere in the world mean that inflation is expected to remain low for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

The Bank’s forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.

In the housing market, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Turnover in the housing market and growth in lending for housing have slowed over the past year. The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Lenders Are Inconsistent In Their Interest-Only Conversations

Building on yesterday’s post which discussed the interest-only loan debt trap, today we show that lenders are having quite varied conversations with their borrowers.

We took a cross section of households who have interest-only loans, and mapped their experience to a selection of specific lenders, looking at whether there was, as part of the purchase or refinance discussion, any explicit exploration of how the capital amount was to be repaid. Remember this is looking at the transaction from the perspective of the household, not the lender.

The average is that 43% of households with interest-only loans had an explicit discussion, but whilst some lenders achieved a score above 90%, others were much lower. A wide variation. The policy as set out by APRA is not being universally applied.

We also found that newer loans are more likely to be funded in the context of an explicit capital repayment discussion, whereas older loans were less likely to include such a discussion. This, we think, reflects lenders reacting the regulator guidance in the past couple of years. But there is clearly more to do.

It also reinforces the point there is a cadre of loans shortly to come to reset and review, where householders suddenly find they are asked some hard questions about capital repayment – perhaps for the first time. If they do not pass muster, an interest-only loan may not be available, forcing them to move to another lender (if available), or different loan structure, where repayments to principle are included. This could get quite nasty.

Should, we ask, lenders be contacting borrowers, outside the review cycle, to preempt the problem? Unless they have a watertight record of an explicit capital repayment discussion, we think they should.

Home Prices Higher In Most States – CoreLogic

CoreLogic says that capital city dwelling values shift half a percent higher in October 2016 based on their Home Value Index. They have reached a new record high for the month, with values rising across six of the eight capitals.

Apart from Adelaide (-1.3%), Hobart (-2.8%) and Perth (-1.5%), every capital city recorded a rise in dwelling values over the past three months, with the Canberra housing market recording the largest increase in values after a 5.6% quarterly rise.

Sydney continued as the stand out based on annual capital gains, recording the largest year-on-year increase; dwelling values are now 10.6% higher over the past 12 months. Detached houses (+10.9%) are showing only a slightly higher rate of capital gain compared with units (+9.1%) across Sydney, highlighting the healthier supply/demand dynamic that exists across the Sydney region for higher density housing.

The divergence in performance between houses and units is most clearly evident in Melbourne and Brisbane. The annual rate of capital gains in Melbourne remains strong at 9.1%, however there is a substantial difference in growth rates between houses and units, with house values up 9.6% compared with a 5.2% increase in unit values over the past year. Brisbane’s housing market has shown a larger capital gain spread, with house values up 4.7% compared with a 1.4% fall in unit values over the year.

According to CoreLogic, another sign of market strength can be seen in auction results. In fact, over the past two months, clearance rates across Sydney have dipped below 80% only once. A year ago auction clearance rates were consistently trending around the mid 60% range, albeit on volumes that were about 20% lower than last year.

While dwelling values have broadly risen during October, rental yields in Sydney and Melbourne remain depressed, with gross yields at record lows. The typical Sydney and Melbourne house is now providing a gross rental return of just 2.8%. Taking into consideration holdings costs, expenses and vacancy, the net rental yield for houses is likely to be closer to 2% in these markets. Markets where value growth hasn’t been as strong are seeing healthier yield profiles, with Hobart demonstrating the highest gross rental yields of any capital city.

Should banks play a role in teaching kids about how to manage money effectively?

From The Conversation.

The Commonwealth Bank has long been active in the space of financial literacy – that is, educating young people about the importance of managing money effectively.

Just recently it announced an overhaul to its “Start Smart” financial literacy programs, which aim to teach children about money.

The program reportedly includes showing children that “a man is not a plan” by discussing financial inequality and offering positive representations of women managing money.

The catch phrase seems progressive but is loaded with assumptions about women, men, their relationships, and their financial choices. This downplays the economic and social reasons why women’s financial opportunities and experiences tend to differ from men’s.

Pay gap in the workplace

It’s a bold ambition when you consider the broader context. According to the Workplace Gender Equality Agency, the highest gender pay gap actually occurs in the financial and insurance services industry, where senior management positions continue to be male dominated and the difference between women’s and men’s earnings is 30.2%.

Further, when comparing Indigenous females to non-Indigenous male workers with median incomes, the reported superannuation gap is 39%.

Such programs, like the one Commonwealth Bank is offering, are based on the assumption that a combination of guest speakers visiting schools and downloadable resources hold the key to improving financial literacy teaching and learning.

Why are banks getting involved?

The federal government has invested millions of dollars and entrusted the Australian Securities and Investments Commission (ASIC) to lead initiatives intended to help children understand finance.

We have a National Consumer and Financial Literacy Framework, which foreshadowed the development of the Australian Curriculum.

We also have consecutive National Financial Literacy Strategies led by ASIC, that are intended to drive improvements in the way financial literacy is taught and learned in schools.

Consumer and financial literacy has an elevated status across the Australian curriculum, signalling opportunities for interdisciplinary approaches, particularly in mathematics and economics and business.

Financial literacy projects are big business for consultancies. And for banks, manoeuvring under the guises of corporate social responsibility serves to position brands favourably.

The ANZ bank, for example, conducts its Survey of Adult Financial Literacy every three years. This is considered the leading measure of adult financial literacy in Australia.

And the National Australia Bank (NAB) recently released research claiming to measure financial resilience – weaving socioeconomics and psychology.

These strategies are important to them since their houses are not in order. The recent parliamentary inquiry confirmed that the big four banks are troubled by bad behaviour and more effective regulation is needed.

How do children learn about money management?

Children tend to learn about money within their homes in different ways – and those teaching around this area need to be sensitively attuned to this learning.

Children become socialised and oriented to consumer, economic and financial issues through a series of conversations, observations, and experiences – consciously and unconsciously.

Even primary-aged students make surprising, insightful comments that show mature understandings about earning, spending, saving, and sharing money. This is particularly true in disadvantaged communities.

How is financial literacy taught?

Research into financial literacy education in schools – how it is taught and learned – is an emerging field, typically characterised by program trials and evaluations.

Program evaluations tell short term success stories – the rubber really hits the road when students need to apply their learning in the real world down the track.

In 2012, the OECD and Programme for International Student Assessment (PISA) included a Financial Literacy Assessment for 15-year-old students. Australia ranked fifth out of the 18 participating countries and economies.

The findings showed that students in city schools achieved higher scores than students in provincial and remote schools; and non-Indigenous students significantly outperformed their Indigenous counterparts.

Teaching kids about managing money is most effective when classroom tasks are tailored to meet students’ family backgrounds and interests, and occurs at the point of need.

Students enjoy financial problem solving and decision-making experiences that captivate their imagination, challenge them to think, and prepare them for the real world.

Devising financial literacy lessons that create connections between students’ financial literacy learning at home and at school is hard to do without really knowing the local context and students.

Because Australian classrooms are diverse, this stuff rarely comes together “off the shelf”.

Not reaching the most vulnerable communities

The uncomfortable truth is that workshops by so-called finance literacy experts and downloadable teaching and learning resources may not reach and resonate with Australia’s most vulnerable communities.

Planning for financial literacy learning requires an understanding of the school community, interdisciplinary navigation of the Australian Curriculum, and skilful inquiry approaches.

This is what teachers are trained to do, although they need and crave quality professional learning to hone their craft.

This is where funding and support are needed.

The Australian Qualifications Framework and Professional Standards for Teachers mean teachers have never been more scrutinised and accountable.

When it comes to meeting students’ academic, social and emotional needs on any issue, let’s invest in schools and trust teachers to do what they’re qualified to do.

Authors: Carly Sawatzki, Lecturer, Monash University; Levon Ellen Blue, Research fellow, Griffith University

The Interest-Only Loan Debt Trap

Today we discuss some specific and concerning research we have completed on interest-only loans. Less than half of current borrowers have complete plans as to how to repay the principle amount.

Interest-only loans may seem like a convenient way to reduce monthly repayments, (and keep the interest charges as high as possible as a tax hedge), but at some time the chickens have to come home to roost, and the capital amount will need to be repaid.

Many loans are set on an interest-only basis for a set 5 year term, at which point the lender is required to reassess the loan and to determine whether it should be rolled on the same basis. Indeed the recent APRA guidelines contained some explicit guidance:

For interest-only loans, APRA expects ADIs to assess the ability of the borrower to meet future repayments on a principal and interest basis for the specific term over which the principal and interest repayments apply, excluding the interest-only period

This is important because the number of interest-only loans is rising again. Here is APRA data showing that about one quarter of all loans on the books of the banks are interest-only, and that recently, after a fall, the number of new interest-only loans is on the rise – around 35% – from a peak of 40% in mid 2015. There is a strong correlation between interest-only and investment mortgages, so they tend to grow together. Worth reading the recent ASIC commentary on broker originated interest-only loans.

But what is happening at the coal face? To find out we included some specific questions in our household survey, and today we present the results.

We were surprised to find that around 83% of existing interest-only loan holders expect to roll their loan to another interest-only loan, and to keep doing so. More concerning, only around 44% of borrowing households had an explicit discussion with the lender (or broker) at their last loan draw down or reset about how they plan to repay the capital amount outstanding. Some of these loans are a few years old.

Around 57% said they knew the capital would have to be repaid (we assume the rest were just expecting to roll the loan again) and 26% had no firm plans as to how to repay whereas 39% had an explicit plan to repay.

Many were expecting to close the loan out from the sale of the property (thanks to capital appreciation) at some point, from the sale of another property, or from another source, including an inheritance.

Thus we conclude there is a potential trap waiting for those with interest-only loans. They need a clear plan to repay, at some point. It also highlights that the quality of the conversation between borrower and lender is not up to scratch.

We think some borrowers on an interest-only loan may get a rude shock, when next they try to roll their interest-only loan. If they do not have a clear repayment plan, they may not get a new loan. There is a debt trap laid for the unwary and the APRA guidelines have made this more likely.

Next time we will delve further into the interest only mortgage landscape, because we found the policies of the lenders varied considerably.

Investment Lending On Again

The latest data from APRA for September shows the portfolios of individual banks in Australia as well as details of total loan exposures.

Total lending for housing went to $1.5 trillion, up 7 billion in the month. Of that $5.2 billion was for owner occupation and $1.8 billion for investment loans. As a result 35.5% of loans are for investment purposes.

Looking at the portfolio data, we see that Westpac and CBA had the bulk of the growth, across both owner occupied and investment loans. NAB grew in both categories, whereas ANZ dialed back their investment lending (perhaps from reclassification?). It is worth noting that ING is also growing their owner occupied portfolio and Members Equity Bank grew strongly. Pressure on some of the regional banks continues.

This has done little to change the relative market shares, with CBA in first place on owner occupied loans, and Westpac first on investment lending, but with CBA now nipping at their heals.

Finally, here is the relative investment lending portfolio growth. On a 3 month annualised basis, the total market grew 2.8%, but now three of the major players are operating above system growth, though still below the 10% speed limit imposed by APRA last year.

There has clearly been a focus on energising investment lending, as we predicted in our Property Imperative report. We expect momentum to continue for some time to come, hampering the RBA’s ability to cut the cash rate if they needed to. We still believe further macroprudential measures are needed.

Home Lending Remains Strong In September To $1.6 Trillion

The RBA released their credit aggregates for September today. Overall, lending for housing rose 0.5% to reach another record $1.6 trillion, up $8.6 billion. Within that, owner occupied lending rose 0.6%, up $6.1 billion and investment lending rose 0.4% or $2.5 billion. This is a slightly lower growth rate than a year back (7.5%), but is still strong, well above inflation and wage growth. This means household debts will continue to rise.

The monthly growth rate for investment mortgages shows a sharp move up, and from March 2016, as banks started to focus on lending to this sector. Lending for owner occupation growth rates fell a little, having peaked at the end of last year.

The annualised analysis shows a tilt down, but if recent trends continue, this will reverse. This is hardly a good indicator that housing lending is under control. Indeed, we saw another high auction clearance rate at the weekend.

It is worth noting that there was $1bn of mortgages being switched between owner occupied and investment categories. The proportion of loans for investment purposes is still stitting at 35%. In addition, the proportion of lending to business continues to fall, rising just 0.3% this month, or $2.9 bn. Lending for personal finance fell again, down 0.1%.

The RBA said:

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $45 billion over the period of July 2015 to September 2016, of which $1.0 billion occurred in September 2016. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

Note we have used the seasonally adjusted data in our analysis. You can read our analysis of the companion APRA monthly banking stats here.

ANZ Exits Asian Retail Banking Businesses

ANZ today announced an agreement to sell its Retail and Wealth business in Singapore, Hong Kong, China, Taiwan and Indonesia to Singapore’s DBS Bank. This continues its realignment of its business away from Asia, although ANZ will focus on running a world class Institutional Bank in Asia they said.

The Retail and Wealth business being sold includes ~$11 billion in gross lending assets, ~$7 billion in credit risk weighted assets and ~$17 billion in deposits. In the 2016 financial year, the business accounted for approximately $825 million in revenue and net profit of ~$50 million.

Most people currently employed in ANZ’s Retail and Wealth business will join DBS providing continuity for customers and greater opportunities for staff.

Sale price represents an estimated premium to net tangible assets at completion of ~$110 million. ANZ will take a net loss of ~$265 million including write-downs of software, goodwill and property, and separation and transaction costs. The impact is expected to be slightly higher in the first half of FY2017, but offset back to ~$265m in subsequent periods.

The sale is expected to increase ANZ’s CET1 capital ratio by around 15-20 basis points and is expected to be broadly EPS and ROE neutral.

The transaction is subject to regulatory approvals in each market with completions anticipated over the next 18 months progressively from mid-2017.

ANZ will focus on the Group’s core Asian business in Institutional Banking where it is ranked a top four corporate bank with a significant ongoing presence in 15 Asian countries and $43 billion in gross lending assets.

Commenting on the transaction from Hong Kong, ANZ Chief Executive Officer Shayne Elliott said: “Our strategic priority is to create a simpler, better capitalised, better balanced bank focussed on attractive areas where we can carve out winning positions.

“Asia remains core to ANZ’s strategy. This transaction simplifies our business while allowing us to continue to benefit from higher levels of growth in the region through a focus on our largest, most successful business in Asia – banking large corporate and institutional clients
driven by trade and capital flows particularly with Australia and New Zealand.

“By focussing our resources in Asia – whether that is capital, technology or people – on Institutional Banking, we can continue to build a world-class, capital efficient business by strengthening our network and the support we provide to our key institutional clients.

“In Retail and Wealth, although we have grown a profitable business in Asia, without greater scale ANZ’s competitive position is not as compelling.
“Having looked carefully at the business in recent months, it is clear the environment we face has changed and to make a real difference for our Retail and Wealth customers, we would need to make further investments in our Asian branch network and digital capability.

Further investments do not make sense for us given our competitive position and the returns available to ANZ,” Mr Elliott said.

Germany Tightens Residential Mortgage Lending

Moody’s says last Tuesday, German stock exchange gazette Börsen-Zeitung reported that Germany’s Ministry of Finance had proposed a draft law aimed at tightening residential mortgage lending market regulations. Once enacted, German Financial Services Authority BaFin would be authorised to tighten residential mortgage loan origination criteria to prevent house prices from overheating. This would be credit positive for mortgage Pfandbriefe (covered bonds) and residential mortgage-backed securities (RMBS) because it would reduce the risk of households taking on excessive debt during times of inflated house prices.

The proposal comprises four components: a maximum loan-to-value (LTV) ratio, a minimum loan amortisation requirement, a maximum debt-service-to-income (DSTI) ratio and a maximum debt-to-income (DTI) ratio. The finance ministry’s proposal follows the German Financial Stability Committee’s 2015 recommendation to the German government to develop instruments to regulate residential mortgage loan origination.
The government’s proposal would only affect newly originated residential mortgage loans because of a grandfathering rule. Therefore, the credit strength of covered bond programmes and RMBS would improve over time, particularly by reducing borrower default, where a maximum LTV ratio will fall below currently LTV ratios.

Exhibit 1 provides an overview of Moody’s-rated German mortgage Pfandbriefe in which the residential mortgage loan portion exceeded 50% of total cover pool assets as of 30 June 2016. Covered bondholders of ING DiBa’s mortgage Pfandbriefe would benefit the most from a maximum LTV ratio because its cover pool has the highest share of residential mortgage cover assets (97.9%) and the highest weighted average whole-loan-to-lending-value5 ratio (99.6%). Based on lending values, 32.2% of ING DiBa’s residential mortgage cover assets have a whole-loan-to-value ratio above 100%.

The whole-loan-to-value ratio is not only an important driver of the probability of borrower loan defaults, but also of recoveries following a borrower’s default. If the BaFin were to set the maximum loan-to-lending value ratio above 60%, Pfandbriefe would not benefit from improved recoveries following borrower default. This is because under the Pfandbrief Act covered bonds may only be issued against loans backed by up to 60% of the property’s lending value. However, the Pfandbrief Act does not limit how much borrowers can borrow against a property. The same applies to the typical eligibility criteria of an RMBS transaction. Therefore, and because lending to residential borrowers has steadily increased since 2010 (see Exhibit 2), a maximum DTI ratio would be credit positive for mortgage Pfandbriefe and German RMBS. This is particularly applicable in the current low interest rate environment, where borrowers’ affordability for large loans has substantially improved.