Tag: The Conversation

Banks can’t fight online credit card fraud alone, and neither can you

From The Conversation.

Online credit card fraud is on the rise in Australia, but pointing the finger at any one group won’t help. It’s an ecosystem problem: from the popularity of online shopping, to the insecure sites that process our transactions, and the banks themselves.

A recent report from the Australian Payments Network found that:

  • the overall amount of fraud on Australian cards increased from A$461 million in 2015 to A$534 million in 2016
  • “card not present” fraud increased to A$417.6 million in 2016, up from A$363 million in 2015
  • 78% of all fraud on Australian cards in 2016 was “card not present” fraud.

“Card not present” fraud happens when valid credit card details are stolen and used to make purchases or other payments without the physical card, mainly online or by phone.

While these numbers may seem alarming, it’s important to put them in context. Australians are increasingly carrying out transactions online; the report notes that we made 8.1 billion card transactions totalling A$715.5 billion in 2016.

The shift towards online credit card fraud also comes at the cost of other types of fraud. Cheque fraud, for example, was down to A$6.4 million in 2016, from A$8.4 million in 2015.

Still, it’s fair to ask: are the banks doing enough to keep our details secure?

The banks and security

The banks currently have a range of measures in place to protect customers from card fraud:

  • Chip and pin: Australia mandates the use of “chip and pin” technology. This replaced the need to swipe the magnetic strip on credit cards and is recognised as being more secure.
  • Two-factor authentication: Many Australian banks use text messages or tokens that generate a unique, time-limited code to help verify the legitimacy of transactions.
  • Monitoring of customer habits: Australian banks typically have a complex set of algorithms that monitor the spending habits and transactions of their customers. They frequently have the ability to identify a suspicious (often fraudulent) transaction and block it.

Overall, Australian financial institutions are investing time and technology into the prevention of fraud. However, recent allegations that the Commonwealth Bank of Australia breached anti-money laundering laws suggest that the big banks are not immune from the problem.

Data breaches and malware

Credit card fraud is going where the action is.

According to the research company Neilsen, “nearly all online Australians have used the internet to do some form of purchasing activity”. This means that Australians are increasingly sharing their credit card details with companies around the world.

Large-scale data breaches are a common occurrence. Many organisations have been compromised in some way, including Australian companies like Kmart and David Jones. A variety of personal information can be exposed, and this often includes customers’ credit card details.

Batches of stolen credit card details can be sold on the dark web to other motivated offenders. In one UK example, such details were being sold for as little as £1 per card.

Offenders are also using different types of malware, or computer viruses, to obtain the personal information of unsuspecting victims. In many cases, this includes bank account and credit card details through successful phishing attempts (or spam emails).

The liability fight

Banks will generally refund customers for any fraudulent losses incurred on their credit cards. However, customer must take “due care with their confidential data”.

There is also an onus on the customer to check their credit card statements and notify their bank of any suspicious activity.

But this may not always be the case. In 2016, the former Metropolitan Police Commissioner in the UK made headlines for suggesting that customers should not be refunded by banks if they failed to protect themselves from fraud.

Instead, he argued that customers were being “rewarded for bad behaviour” rather than being encouraged to adopt cyber-safety practices, such as antivirus software and strong passwords.

These statements were met with anger by many advocacy groups who equated them with victim blaming. It was further exacerbated by a leaked proposal by the City of London Police to shift the responsibility of fraud losses from banks to the individual.

While this recommendation was never adopted, the tension may continue to grow when it comes to fraud liability.

Looking for answers

Pointing the finger of blame at any one party is not a constructive solution. Banks alone cannot combat online credit card fraud. Neither can their customers.

There are simple steps to reduce the likelihood of online fraud: having up-to-date antivirus software and strong passwords is an important step. There are sites such as haveibeenpwned that demonstrate how vulnerable and exposed our passwords can be.

Still, it’s difficult to protect against social engineering techniques used by offenders to manipulate victims into handing over their personal details. Not to mention, the risks posed by third-party data breaches, which are beyond the control of individuals.

The introduction of mandatory data breach reporting legislation in Australia in 2017 may have a positive impact. By requiring organisations to let their customers know when their personal information has been compromised, individuals can be proactive about cancelling cards, changing passwords and taking out credit reports to check for fraudulent activity.

Businesses also need to recognise the importance of protecting their customer information. It is critical to overcome the mentality that cybersecurity is simply a technology problem or an IT issue. It should be firmly on the corporate management agenda.

Fraud is inevitable, regardless of the technology being used. Collaborative efforts between banks, businesses, government and individual consumers must improve.

No one group alone can effectively end online credit card fraud. Nor should they be expected to.

Author: Cassandra Cross, Senior Lecturer in Criminology, Queensland University of Technology

Egalitarian or Edwardian? The rising wealth inequality in Australia

From The Conversation.

Recent commentary on levels of inequality exposes the myth that Australia is an egalitarian society in which the privileges of birth have little currency.

Focusing on inequality in the distribution of incomes ignores an equally important dimension of inequality: wealth. Wealth is much more unequally distributed than income. Therefore, ignoring wealth inequality skews perceptions of social inequality.

Perceptions of the levels of income and wealth inequality are derived from our day-to-day experiences. This means that not mixing with people from the other end of the wealth distribution can colour our perceptions of inequality.

The lack of official data on the wealth holdings of Australians hampers research into trends in wealth inequality. Between 1915 and 2003-04, there is almost no official wealth data to examine.

In 2003-04, the wealthiest 20% of Australian households held 58.6% of total household wealth, and the poorest 20% of households held just 1.4% of total household wealth. In 2013-14, the wealthiest 20% of households held 61% of total household wealth, and the poorest 20% of households held just 1% of total household wealth.

These figures indicate that wealth inequality increased over the decade to 2013-14.

The table below details trends over time in various measures of wealth inequality. The P90 to P10 ratio compares the wealth of households at the 90th percentile with that of households at the tenth percentile. A larger ratio indicates greater levels of inequality.

In 2003-04, households at the 90th percentile held 45 times as much wealth as households at the tenth percentile. In 2013-14, households at the 90th percentile of the distribution held 52 times as much wealth as households at the tenth percentile. This indicates that wealth inequality increased in that decade.

Using the mean and median household wealth figures, it is possible to calculate the ratio of median to mean wealth.

The closer this ratio is to one, the lower the level of inequality. In 2003-04, the ratio was 0.63. In 2013-14, it was 0.57. This also indicates that wealth inequality increased.

 

The distribution of household wealth also varies between Australia’s state and territories, and by location within states and territories.

Households in the ACT recorded the highest mean household wealth (A$890,100). Households in Tasmania recorded the lowest mean household wealth ($595,600).

When these figures are disaggregated by location into capital city households and households located in the rest of the state, the largest wealth gap occurs in New South Wales. The mean wealth of households in Sydney was $971,700, whereas the mean wealth of households in the rest of NSW was $534,700.

The median-to-mean-wealth ratios show wealth was most unequally distributed in Brisbane and Perth.

 

Given a relatively large proportion of household wealth is held in the form of property assets, the recently released Household, Income and Labour Dynamics in Australia Survey report identifies property as the key driver of increasing wealth inequality.

The percentage of 18-to-39-year-olds with property declined by 10.5 percentage points between 2002 and 2014. And the level of debt of those with a mortgage doubled in real terms.

So, fewer young adults have mortgages now compared to a decade ago, and those who do have mortgages have higher levels of debt.

Two other sources of publicly available data on wealth are the lists of the super-wealthy published annually by the Business Review Weekly in Australia and Forbes in the US.

Figures published in the Business Review Weekly show that, after adjusting for inflation, in 1984 the wealthiest 20 Australians held $8.25 billion in assets. In 2017, the wealthiest 20 Australians held $104 billion.

Forbes’ lists of billionaires (in $US) show that the number of billionaires living in Australia increased from two to 26 between 1987 and 2014.

Having an increasing number of billionaires would not be an issue if all Australians’ wealth was increasing at a similar rate. However, if the gap between the wealth of the billionaires and that of the average residents increases dramatically, there is likely to be discontent.

Drawing on figures published in the Credit Suisse Wealth Report, it is possible to compare the wealth of the billionaires with that of average Australians.

In 2014, the wealth of the 26 Australian billionaires was equivalent to 214,914 adults with average wealth.

Recent turmoil in the UK and the US may be an indicator that the “peasants are revolting” and are not willing to return to the 19th century, when the very rich lorded over the masses.

Australia has yet to experience mass demonstrations and voter backlashes. But events overseas should be ringing alarm bells among our politicians in Canberra.

Author: Jennifer Chesters , Research Fellow, Youth Research Centre, University of Melbourne

Allegations against the CBA show the need for a Royal Commission into the banks

From The Conversation.

The Commonwealth Bank is facing another scandal as the Australian Transactions Reports and Analysis Centre (AUSTRAC) launches civil proceedings accusing the bank of being complicit in money laundering.

This exposes a deeply worrying prospect, that the Australian public are vulnerable to crime and terrorism directly funded through the Australian banking system.

AUSTRAC alleges CBA breached the Anti-Money Laundering and Counter-Terrorism Financing Act (2006) 53,700 times since 2012, where transactions were not reported by the bank, or reported too late. The bank faces a potential penalty of A$18 million per breach, which could amount to billions of dollars.

According to AUSTRAC, criminals deposited cash, amounting to tens of millions of dollars, over a period of two years in intelligent deposit machines where it was automatically counted and credited instantly to the nominated recipient account. The funds were then available for immediate transfer to other accounts both domestically and internationally.

In their evidence AUSTRAC details how four identified criminal syndicates were able to readily use CBA ATMs to breach the A$10,000 transaction threshold on 1640 occasions amounting to A$17.3 million. A total of A$625 million of suspicious transactions flowed through these CBA ATMs.

CBA’s response to these serious allegations is that it reports 4 million transactions to AUSTRAC per year contributing to the effort to “combat any suspicious activity as quickly and efficiently as we can.” The bank insists all key personnel have been trained in compliance with the Money-Laundering Act. The CBA acknowledges there was a software fault with a number of their ATMs which allowed these transactions to take place, but apparently this took several years to fix.

Unfortunately this response in the circumstances only provokes further questions.

Regulators asleep at the wheel

What this really shows up is the government’s “light touch” regulatory approach which translates into soft touch regulation. It seems regulators in Australia are too frightened to take action even when there is mounting evidence of illegality.

AUSTRAC itself did not launch any proceedings under the Anti-Money Laundering and Counter-Terrorism Financing Act until 2015. This followed a lengthy report of the Financial Action Task Force which concluded:

[AUSTRAC’s] graduated approach does not seem to be adequate to ensure compliance.

Since then AUSTRAC has taken action against Tabcorp on a money-laundering case which reached a A$45 million settlement in February 2017. This contrasts with far larger fines imposed on international banks for money laundering including a US$1.2 billion fine for HSBC and a US$262 million fine for Standard Chartered in 2012 from the US Justice Department.

At a US Senate hearings in 2012, a HSBC chief compliance officer famously quit his post on the spot in answering money laundering allegations, implying he could not defend the indefensible.

The Australian banking industry has faced minimal pressure to reform compared to other countries, where the restructuring of the banks is progressing. Australia has seen a succession of inquiries however each has focused on particular aspects of the banks functioning and proposed specific reforms.

It will require a Royal Commission into the Australian banks to examine the structural and systemic failures of the banks. The banks have become the main providers of not only retail but investment banking, insurance, superannuation and financial advice, and this deserves critical scrutiny.

If the AUSTRAC allegations against the CBA are proven in the Federal Court, this matter is of a different order of magnitude to earlier problems. It suggests a degree of irresponsibility which is unacceptable in major financial institutions.

It also suggests it’s deeply embedded in the banks cultural and operating processes, which undermines the security of Australian citizens. This would demand a substantive inquiry into the management, integrity and culture of the banks that only a Royal Commission could provide.

In the meantime, the CBA needs to provide firm evidence to the Australian public that none of its ATM machines can continue to be used for money laundering. It also needs to prove there are procedures in place for ensuring all suspicious banking activity by potential criminals or terrorists is fully reported to the Australian authorities as soon as the CBA has any knowledge of such activity.

Author: Thomas Clarke, Professor, UTS Business, University of Technology Sydney

Affordable housing shortfall leaves 1.3m households in need and rising

From The Conversation.

A new report by the Australian Housing and Urban Research Institute (AHURI) reveals, for the first time, the extent of housing need in Australia. An estimated 1.3 million households are in a state of housing need, whether unable to access market housing or in a position of rental stress. This figure is predicted to rise to 1.7 million by 2025.

To put it in perspective, 1.3 million is around 14% of Australian households. This national total includes 373,000 households in New South Wales, where the number is expected to increase by 80% to more than 670,000 by 2025 under the baseline economic assumptions of the modelling.

The first graph below shows the average annual level of housing need to 2025. The second, showing the percentages of households, permits a direct comparison by state. NSW and Queensland are in the worst position. The ACT is calculated to have the lowest proportional level of need.

What does this mean for households in need?

Housing need is defined as:

… the aggregate of households unable to access market-provided housing or requiring some form of housing assistance in the private rental market to avoid a position of rental stress.

This includes potential households that are unable to form because their income is too low to afford to rent in the private rental market. These households would traditionally rely on public housing and community housing to meet their needs. However, more and more are being forced into the private rental market, paying housing costs they are unable to afford without making significant sacrifices.

To 2025, on average 190,000 potential households in NSW will be unable to access market housing in a given year. The graph below is the most revealing as it illustrates the gap between affordable housing demand and supply.

The lack of social housing and subsidised rental housing prevents such households forming under affordable conditions. Many will manage to form but will have to spend well over 30% of their income on housing costs to do so, putting them in a position of financial stress.

The results also reveal the increasing pressure the affordable housing shortfall places on the housing assistance budget, notably Commonwealth Rent Assistance.

The absence of a significant new supply of affordable housing – there has been no large-scale program since the National Rental Affordability Scheme (NRAS) began in 2008 – has left state governments trying to find ways to plug the affordability gap.

Responses have been largely on the demand side, such as first home buyer concessions recently announced in NSW. But such incentives are no use for low-income households. To help them, intervention needs to be on the supply side.

How does Australia compare?

The AHURI research built on ideas emerging from research into housing need in the UK. It revealed interesting differences between the two countries.

UK government policy prior to 2010 emphasised the role of the planning system in helping to substantially increase affordable housing supply. This reflected evidence from England and Scotland that found a link between low levels of new housing supply and higher and rising house prices.

In this project, we found plenty of evidence of deteriorating housing affordability in Australia. But we did not find a particularly strong relationship between housing supply and price growth. This might reflect how other drivers of deteriorating housing affordability are more important in Australia – such as tax incentives for investors.

These findings suggest we need to look more closely at how new supply and investment demand interact, and in what circumstances boosting new supply is likely to improve affordability.

From our analysis of individuals’ labour market circumstances and incomes, it was also clear that the Australian workforce has not escaped the erosion of secure, full-time employment opportunities seen in other countries.

The combination of widespread insecure, part-time employment opportunities, high housing costs and low supply of rented social housing means the housing of many working Australians is extremely precarious.

How was the research done?

The research modelled housing need at the state and territory level to 2025 using an underlying set of economic assumptions and interrelated models on household formation, housing markets, labour markets and tenure choice.

The models were underpinned by data from the Housing, Income and Labour Dynamics in Australia (HILDA) Survey, the Australian Bureau of Statistics (ABS) and house price and rent data.

This research delivers, for the first time in Australia, a consistent and replicable methodology for assessing housing need. It can be used to inform resource allocation and simulate the impact of policy decisions on housing outcomes.

The intention is to further develop the model to assess housing need at the level of local government areas.

So, what are the policy implications?

The scale of the affordable housing shortfall requires major action from federal and state governments.

NRAS had its problems but at least delivered a supply of below-market housing. Australia cannot rely on the private sector to deliver housing for low-income households without some form of government subsidy as it is simply not profitable to do so.

The question is what government is going to be prepared, or even able, to spend big to close the affordable housing supply gap?

 

Authors: Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University; Chris Leishman, Professor of Housing Economics, University of Adelaide

 

Computer says no: robo-advice is growing but we still don’t trust it

From The Conversation.

People are open to receiving financial advice from robots, our studies show, but there might be a way to go to in convincing people to trust them over a human.

We surveyed 138 people about their attitudes to, and preferences for, superannuation advice from a human or a computer. Unsurprisingly, most stated they would prefer to deal with a human across a broad range of financial decisions.

Some did prefer the computer – these tended to be younger people, and those on higher incomes. In a follow-up study we tested whether this would change after people actually used the technology.

We did this by exposing 101 people to an online calculator, in which they learned how increasing their superannuation contributions would change their income in retirement. We compared these to another 101 people in a control group who simply read some general information about retirement income.

A little over half of our sample indicated that they would trust robo-advice. Those who got advice from the online calculator showed a small, but statistically significant, increase in trust towards robo-advice. However, most still stated they preferred human advice, and were slightly less willing to pay for automated advice after trying out the calculator.

The openness of younger people is encouraging, as they tend to be the most disengaged from their superannuation, but also have the most to gain from getting it right (as the benefits will build up for longer).

How the robots could help

Automated financial advice systems (so-called “robo-advisors”) have great potential to extend the reach of professional financial advice.

Digital technology has quietly revolutionised the world of banking and financial services. Automatic Teller Machines (ATMs) were an early example of a computer replacing a human worker. Interestingly banks responded to this increasing productivity by employing more people.

Financial advice is the latest frontier for automation, with a number of “robo-advisors” beginning to interact with customers. Even though we face a growing number of financial decisions, most Australians currently don’t get formal financial advice. Cost is a significant barrier to this.

Like many digital products, robo-advisors are costly to design and build, but once up and running they can serve large numbers of people. These bots could extend low-cost and dependable advice to those who currently miss out.

Robo-advice is currently a small part of the financial services market, but it is forecast to grow rapidly. In the US, firms such as Betterment and Wealthfront have begun to disrupt the wealth management industry. In Australia robo-advice products are being developed both by startups and industry incumbents.

But financial advice is about more than numbers. While technology can easily handle the maths, people may also need the human touch. They may want emotional support and motivation, rather than just the cold hard facts, to get them to confidently engage with these difficult and important decisions. Trust requires good design.

Digital technology might also prove useful in getting people more engaged with their financial decisions. Most Australians pay remarkably little attention to their superannuation, even though it makes up a significant portion of our overall wealth (second only to the family home).

Robo-advice could help people learn, and try out different scenarios, without the worry of appearing ignorant to a person. Unfortunately, our experiment found little evidence for this – overall levels of motivation, and perceptions of autonomy and competence were unchanged.

Distinguishing between people who were initially more engaged or less engaged with their superannuation, our study showed that the online calculator had a greater impact on those who were initially less engaged. This suggests robo-advice might prove most useful to those who need it the most, making them feel more competent and in control.

So for those of us who don’t pay enough attention to our financial decision-making, the robots are here to help.

 

Authors: Andrew Reeson, Behavioural Economist, CSIRO; Andreas Duenser, Research Scientist

 

Here’s why it’s so hard to say whether inequality is going up or down

From The Conversation.

Is inequality rising or falling? The answer, if recent public debate is anything to go by, may appear at first to depend on who you ask.

Part of the reason why we get such conflicting narratives about whether it’s rising or falling is that economic inequality can be measured in different ways, using different data sets.

And you might get a different answer depending on whether you’re talking about income inequality or wealth inequality. Income is the flow of economic resources over a certain time period, while wealth is the stock of resources built up over time.

We can draw some insights from the newly released Household Incomes and Labour Dynamics in Australia (HILDA) 2017 report, which reveals the latest results of a longitudinal study that has been running since 2001.

But it doesn’t show the whole story. Combining HILDA’s results with data from the Australian Bureau of Statistics’ income surveys gives a more comprehensive picture of trends in economic inequality in Australia.

HILDA data show lower income inequality than the ABS

Firstly, you need to know that when we are talking about income, most people are referring to the disposable income of the household, not individuals.

That’s all the income that members of a household receive from various sources, minus tax. You can then then adjust for the number of people in the household, accounting for the differing needs of adults and children to get what economists call “equivalised household disposable income”.

The HILDA survey, funded by the Department of Social Services and conducted by the Melbourne Institute, has followed some 17,000 individuals every year since 2001. (The most recent ABS income survey final sample consists of 14,162 households, comprising 27,339 persons aged 15 years old and over.)

One commonly used way to measure inequality is called the Gini coefficient, which varies between zero (where all households have exactly the same income) and one (where all the income is held by only one household). The Gini coefficient for equivalised household disposable income varies between about 0.244 in Iceland to 0.397 in the United States (with most other high income OECD countries falling between these two levels), but is as high as 0.46 in Mexico and 0.57 in South Africa.

The latest HILDA report puts Australia’s Gini coefficient at 0.296 and notes that it has “remained at approximately 0.3 over the entire 15 years of the HILDA Survey.”

The HILDA surveys show a lower level of income inequality than the ABS figures do. Some of the differences between these estimates will reflect the broader definition of income used by the ABS, and the significant changes in this definition over time.

In a sense, the HILDA longitudinal survey is like a video where the same people are interviewed every year, whereas the ABS surveys are like a snapshot of the Australian population taken every two years.

But there are also problems with longitudinal surveys because participants often drop out of the survey over time. Also the survey is based on people who were living in Australia in 2001, thus leaving out immigrants who have arrived since that time. While the survey has refreshed the sample in 2011 to address this problem, this attrition may reduce the representativeness of the sample. In addition, the sample size of the ABS surveys is about 50% greater than HILDA, which will reduce sampling errors.

ABS data show inequality has risen

The Australian Bureau of Statistics (ABS) has conducted income surveys since the late 1960s, although it is only surveys since 1982 that are comprehensive and available for public analysis. These ABS surveys are also used in most of the international data sources that compare income inequality across countries – the OECD Income Distribution database and the Luxembourg Income Survey.

The ABS data show a clear increase in both wealth and income inequality over the mid- to long run.

The chart below shows two long series of estimates from the ABS surveys – those published in 2006 by researchers David Johnson and Roger Wilkins (who now oversees the HILDA survey) from 1981-82 to 1996-97, and official figures prepared by the ABS, from 1994-95 to 2013-14.

Despite the differences in income measures and equivalence scales, the long run trend from the ABS figures is clear.

There are periods in which inequality fell, but overall inequality rose over the whole period – including in the most recent period to 2013-14. The Gini coefficient in 2013-14 is a little lower than its peak just before the Global Financial Crisis, but the difference is not large.

True, there have been changes in the ABS’ survey methodology over the years but these changes should not have an effect after 2007-08, as income definitions haven’t changed in a major way since then.

Wealth is much more unequally distributed than income

The ABS also publish information on the distribution of net worth – that’s household assets minus liabilities. Wealth is much more unequally distributed than income.

According to the ABS, the Gini coefficient for net worth in 2013-14 was 0.605 (compared to a Gini coefficient for income of 0.333). This is a clear increase from a Gini of 0.573 in 2003-04.

Put another way, ABS data show a high income household in the richest 20% of the income distribution has an income around 5.4 times as high as the average household in the bottom 20% of the income distribution, as this chart demonstrates:

In contrast, ABS data show that on average households in the richest 20% of the distribution of net worth have wealth of around $2.5 million or more than 70 times higher than the net worth held on average by households in the bottom 20% of the wealth distribution, as this chart demonstrates:

Somewhat surprisingly, however, the Credit Suisse Global Wealth Report puts wealth inequality in Australia at below the world average (and the mean and median levels of net worth at among the highest in the world).

This largely reflects the still high level of home ownership in Australia and the high levels of wealth in home ownership, which accounts for nearly half of total net worth on average.

Reconciling conflicting trends

While these two major sources of data show conflicting trends on income inequality, the ABS sample size is much greater. Ultimately, however, the reasons for the differences between the findings of the ABS and the HILDA survey are not obvious.

One way forward would be for the ABS and the Melbourne Institute to jointly analyse the differences between their findings to identify why their estimates of inequality diverge.

Author: Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

Home ownership falling, debts rising – it’s looking grim for the under 40s

From The Conversation.

Home ownership among young people is declining, as mortgage debt almost doubles for the same age group, results from the Household Income and Labour Dynamics in Australia (HILDA) survey show. It also shows young people are living with their parents longer.

The Melbourne Institute of Applied Economic and Social Research undertakes the survey every year. It’s Australia’s only nationally representative household longitudinal study, and has followed the same individuals and households since 2001.

The survey shows the rate of home ownership among 18 to 39 year olds declined from 36% in 2002 to 25% in 2014. In the same age group, the decline in home ownership has been largest for families with dependent children, falling from 56% to 39%.

Even for those in this group who manage to buy a home, mortgage debt has risen dramatically. In 2002, 89% of home owners in this age range had mortgage debt. By 2014 this had risen to 94%.

More significantly, the average home debt rose considerably. Expressed in December 2015 prices, average home debt grew from about A$169,000 in 2002 to about A$337,000 in 2014. Low interest rates since the global financial crisis have meant mortgage repayments for these home owners have remained manageable, but this group is very vulnerable to rate rises.

Detailed wealth data in the survey, collected every four years since 2002, show this increase in debt and decrease in ownership are part of a trend in the wider population. HILDA shows 65% of households were in owner-occupied dwellings in 2015, down from 69% in 2001.

In fact, the decline in home ownership has been greater than the decline in owner-occupied households. This is largely because adult children are living with their parents for longer.

For example, the HILDA data show that the proportion of women aged 22 to 25 living with their parents rose from 28% in 2001 to 48% in 2015. For men this proportion rose from 42% to 60%.

Among those who manage to access the housing market, the data shows that the growth in home debt is not simply because they are borrowing more to purchase their home. A surprisingly high proportion of young home owners (between 30% and 40%) actually increase their debt from one year to the next, despite most of them remaining in the same home. Even over a four-year period – for example, from 2010 to 2014 – at least 40% of young home owners with a mortgage increase their nominal home debt.

The proportion of people with home debt that exceeds the value of their home – that is, negative equity – has also risen. In 2002, 2.4% of people had negative equity in their home; in 2014, 3.9% had negative equity. This is a relatively small proportion, but this could change as even small decreases in house prices will result in substantial increases in the prevalence of negative equity.

How this changes with location, income and profession

In 2014, less than 20% of Sydneysiders aged 18 to 39 were home owners, compared with 36% or more in the ACT, urban Northern Territory and non-urban regions of Australia. To a significant extent this reflects differences across regions in house prices.

Sydney and Melbourne have particularly high house prices, while non-urban areas generally have comparatively low house prices. Regional differences in the incomes of 18 to 39 year olds also play a role.

Those with the highest home-ownership rates are professionals and, to a lesser extent, managers. They experienced relatively little decline in home ownership.

For workers in other occupations, home ownership has declined substantially. In 2014 home ownership was especially rare among community and personal services workers, sales workers and labourers.

This decline represents profound social change among this age group, where renting is increasingly becoming the dominant form of housing. In 2002, 61% of people aged 35 to 39 were home owners – a clear majority of their age group. By 2014, this proportion had fallen to 48%.

The changing housing situation of young adults is part of a broader change in the distribution of wealth in Australia. The HILDA Survey shows that differences in average wealth by age have grown since 2002. For example, in 2002, median net wealth of those aged 65 and over was 2.8 times that of people aged 25 to 34. In 2014, this ratio had increased to 4.5.

The decline in home ownership among young adults and this broader trend in wealth have implications for their long-term economic wellbeing and indeed for the retirement income system. Even if house price growth moderates and many of those currently aged under 40 ultimately enter the housing market, it’s likely that a rising proportion will not have paid off the mortgage by the time they retire. It may be that many will resort to drawing on superannuation balances to repay home loans, in turn increasing demands on the Age Pension.

Author: Roger Wilkins, Professorial Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, University of Melbourne

How to reshape the financial system? First ditch the idea of the free market

From The Conversation.

Ten years ago the financial system collapsed and governments around the world intervened to save it. Much of the subsequent legislation, regulation and angst has attempted to make the system less risky so it does not collapse again. But few have asked a more fundamental question: what is the purpose of the financial system and does it do what it’s supposed to do?

Ten years on and the global financial system remains chronically dysfunctional. My concern is not that it collapses again but that it continues on its current course.

Yet an alternative way of doing things is possible. Over many years the finance industry has developed a set of powerful tools which could be used to improve well-being and solve our environmental problems. For example, to avoid dangerous climate change, the required rapid shift away from fossil fuels requires enormous levels of investment into low carbon infrastructure.

We mostly know how to do this technically, and the funds are available; there is a savings surplus where trillions of dollars are sitting in government bonds earning negative returns that could be mobilised into the low carbon economy. So why is this investment not happening at the scale required?

A sustainable future requires investment but the payoff is worth it. shutterstock.com

Instead, these powerful financial tools have been co-opted by the finance industry for the purpose of growing its own revenue and importance, with resultant collateral damage to society and the environment.

Blame is commonly attributed to the neoliberal rule of the market, greed and deregulation.

My diagnosis is different: financial markets are the creation of society, and we have set them up in the wrong way, based on faulty economic theories. Governments have outsourced the management of societies’ assets to the finance industry and set the industry the wrong incentives. So we need to rethink how we want our assets managed and reset the incentives to achieve this.

Government power

The tools of finance are powerful because they are used to allocate society’s capital, and this determines the future direction of the economy. So, the Chinese government, for example, has decided to direct finance, in co-ordination with other policies, towards manufacturing-export industries, and these sectors have rapidly grown.

In the UK economy, this decision has been given to the finance sector, which invests people’s savings, for example via pension funds and bank accounts. The justification is that free markets will make the best decision on where to allocate resources. The most efficient users of capital will be able to pay the best return so everyone will be better off.

Yet, the reality is that we don’t have free financial markets. People mostly save via capital markets because they are induced to do so by the government. The most important financial variable is the interest rate, which is set by a government agency, the largest asset class are government bonds, only a restricted group of government-mandated banks can accept deposits, and government regulation shapes the way markets work. For example there are over 100,000 pages of pension regulations alone. Plus, the whole system owes its existence to the 2008 bail out. So, seeing that financial markets are not free, the theory that free markets are efficient and reflect peoples’ social preferences is not applicable.

It is evident that the financial system does not efficiently allocate people’s money. The finance sector has grown to an enormous size and looks anything but efficient: half of all savings are ultimately eaten up by charges, less than 4% of savings are actually invested at all (the rest spends its life as perpetually traded abstract financial assets), the system is prone to asset bubbles and crashes, returns have been driven down to close to zero making a pension unaffordable, the level of debt in the economy has increased unsustainably.

Only a small percentage of savings are invested in the real economy. shutterstock.com

Instead of stewarding the corporates they oversee, investment managers encourage corporates to make short-term decisions to boost their share price. The example of banks’ behaviour in the run up to the financial crisis was a dramatic manifestation. More pernicious are incentives for companies to return money to shareholders rather than invest in staff or infrastructure, undermining social cohesion (through inequality) and the long-term prospects of the economy.

Deciding what we want

So how could we achieve a better system? The government currently supports, promotes and sets incentives for finance based on an inapplicable economic theory to perpetuate a system that doesn’t work. Instead, we need to decide on what we want finance to do and set incentives to achieve the outcomes we want.

For example, in return for the continued support of the finance system, the finance industry should have to demonstrate that it is socially useful. Banks that have the right to create money and are guaranteed by governments should preference lending to create jobs and other social benefits (the proportion of lending to the “real” economy by banks is negligible).

To benefit from a tax rebate, pensions and savings products should have to demonstrate a positive social benefit or invest in sustainable infrastructure and R&D. The sustainable finance tools to do this exist and have been tried and tested over an extended period.

Defining what is socially useful is problematic, but it is not a problem that we can duck. Currently the government support for finance has an ethical basis – theoretically efficient free markets to ensure that the economy runs at maximum potential. This may be a worthy value, but it does not apply to our current non-free financial markets. We need to decide what values we want finance to embody, and then set the rules to achieve these.

Author: Nick Silver, Honorary Senior Visiting Fellow at CASS, City, University of London

As Our Economy Changes, The Government is Backing the Wrong Industries

From The Conversation.

The Australian government is still protecting industries that employ a small number of people. This is while the largest employer, the services sector, is subject to the largest tariffs, a recent Productivity Commission report demonstrates.

As a whole, manufacturing still receives 77% of net assistance, largely due to the remaining small levels of tariff assistance, plus some budget measures, according to the report.

“Input tariffs” increase the costs of imported goods and services that go into making things. This makes a business’ activities more expensive for the consumer. And even though the services sector accounts for around 85% of employment, current government policy is penalising this sector, which has the best prospects for future growth.

However, as the report states, it’s the construction industry that is most affected by input tariffs (A$1.5 billion worse off), followed by property and real estate (A$337 million), then accommodation and food (A$294 million). All of these sectors are labour intensive and employ substantial numbers of people, yet are forced to pay unnecessary tariff costs.

Despite all of this, the government is still protecting primary industries such as horticulture, sheep, beef and grains, and in the manufacturing sector in food and metal production, wood pulp and oil and chemicals. All of these latter industries are basic supply or processing industries, that provide inputs into other industries, but not usually the final products.

Tariffs against foreign goods are reducing and now only provide modest assistance to a few industry sectors. The report says this is worth A$4.6 million to manufacturing, and within that sector food and beverages, metal fabrication, wood and paper petroleum and chemicals enjoy the most protection. Together these industries provide a relatively small proportion of total employment (around 7% or just under 1 million employees).

The popular image of our government protecting the motor vehicle and component industries seems to be less true according to these latest statistics.

In terms of budget assistance from the government, it’s not cars but finance and insurance services that benefit most from the public purse followed by sheep, cattle and grain industries. Vehicle production now receives less than half the budgetary support it received eight years ago – down to approximately A$290 million from A$600 million in 2008-09. The government has given up on the motor vehicle industry and its capacity to provide jobs into the future.
More particularly, the Productivity Commission is critical of governmental assistance to the Spencer Gulf industries in South Australia and to the bail-outs for the Arrium steel works in Whyalla, in the same state, which it considers wasteful and distortionary. Arrium went into voluntary administration before an overseas buyer was procured.

The commission is also hostile to green energy production and storage and to the politically sensitive Northern Australian Infrastructure Facility, which it considers a pork-barrelling exercise open to political pressure. It says this facility is likely to fund non-available projects, that will sit on the public books for years, and this is a misapplication of investment resources.

Finally the wrath of the Commission is piqued by the re-regulation of the sugar industry (another declining industry in employment terms) and especially at the granting of charity status to the main marketing arm, Queensland Sugar Ltd. This body must be one of the last remaining marketing monopolies in the primary industries.

Governments will have to look at winding back the remaining (smallish) tariffs affecting domestic service industry sectors – especially those affecting construction supplies, retail and property, accommodation and food.

These impacts flow into local costs that are making Australia a more expensive place to consume or do business both for Australians and overseas visitors.

Author: John Wanna, Sir John Bunting Chair of Public Administration, Australian National University

Giving you more say in your super? Not likely with these changes

From The Conversation.

The government is introducing a raft of changes to the regulation of superannuation in a bid to give consumers more power over their retirement funds. But, in fact, consumers are unlikely to use these new powers and the changes might not improve super fund performance.

The headline change introduces annual general meetings (AGMs) for superannuation funds. Previously these weren’t commonplace, as they are with companies. The government proposes these meetings will help fund members hold superannuation fund trustees and executives to account.

But many of us barely glance at our own superannuation account balances when the six-monthly statement appears in our inbox, so it’s reasonable to predict that, of the 15 million or so superannuation fund members in Australia, only a tiny fraction are likely to go to an annual meeting.

And why would we? One reason shareholders attend listed company AGMs is so they can vote on appointments of directors and remuneration of managers. However, superannuation funds are trusts, not public companies, and members won’t have the same rights even if they attend.

These AGMs will instead offer members the chance to quiz the executives, auditor and actuary, but no votes on material decisions. So this is nothing new: superannuation fund members have virtually no influence over trustee appointments, executive remuneration or other decisions.

Even the industry fund trustees, who are representatives of member organisations in super funds (such as trade unions), are not usually elected by fund members but are appointed by their sponsoring organisations.

If members are consigned to tea and biscuits with the fund chairman, where is the consumer “power” in Financial Services Minister Kelly O’Dwyer’s reforms? It rests mainly with the regulator, the Australian Prudential Regulation Authority (APRA).

The key changes intend to give APRA more responsibility for protecting the interests of superannuation fund members. This is particularly in relation to MySuper – the standardised default superannuation product.

Because superannuation is mandatory for most employees, the system captures many people who don’t have the will or the skill to make active choices about what fund manages their retirement savings. This includes decisions on where their savings will be invested, and what level of life insurance cover they take. Passive members don’t “shop around” for efficient providers, to their own cost.

Following the paternalistic reasoning of the Cooper Review, successive governments have shepherded passive superannuation fund members into MySuper options. MySuper products must have a single diversified investment strategy, are allowed to charge only a limited range of fees and must offer a standard default cover for life and total and permanent disability.

MySuper funds also have to report their investment goals and performance on a dashboard that is supposed to help people make comparisons between similar products. Employers must choose a default fund for their employees from the list of MySuper products.

Even so, MySuper product fees and investment performance vary widely. APRA quarterly superannuation statistics (2017) report that, in 2015, after MySuper was “up and running”, annual fees and costs on a A$50,000 account balance in fixed-strategy MySuper products ranged from $265 per year to $1085 per year (with a median of A$520 per year).

The investment performance of MySuper products also varies considerably. In the same year, the mean annual investment return (gross of expenses) for single-strategy MySuper products was 8.45%, the bottom 10% receive less than a 5.5% return and the top 10% receive more than a 10.9%.

While some variation in returns is due to intentional differences in the design of default investment products, some is related to differences in manager skill or efficiency.

These latest reforms, if passed into law, will mean APRA can refuse or cancel a MySuper authority, at a much lower threshold than applies currently. If APRA has reason to think that a superannuation entity that offers a MySuper product may not meets its obligations, that is grounds to refuse or cancel an authority. Since the default superannuation sector is large, such a decision would be extremely costly to the fund in question.

Under this legislation, trustees of MySuper funds will be obliged to write their own annual report card. Each year, trustees will have to assess the “options, benefits and facilities” offered to their members and the investment strategy (target risk and return). Trustees will also be required to report on the insurance strategy for members, including whether (unnecessary) insurance fees are depleting balances; and to evaluate whether the fund is large enough to do all these at a reasonable cost.

In each case, trustees are required to show that they are promoting members’ financial interests. They will have to compare the performance of their MySuper product to that of other MySuper products.

Even though the trustees score their own card, APRA will also examine these, under the threat that the MySuper authority could be cancelled. It’s not clear how much discipline these rules can impose on trustees, but there are some obstacles to implementation and some possible unintended consequences.

Most superannuation funds know very little about their members. Usually these funds only collect a member’s age, gender, some indication of income, and sometimes their postcode. To show that a financial service, investment or insurance product promotes (or fails to promote) the financial interest of a member will be very difficult on this little information.

For example, two 25-year-old men in the same profession will have very different needs for life insurance if one is single and the other has a non-income-earning partner and a child. But they will look the same to the MySuper trustees.

Also, having an annual peer comparison of investment performance by MySuper trustees will focus on short-term results rather than the long-horizon outcomes needed for a secure retirement.

So the governments’ claim that these changes will “give consumers more power” and strengthen regulation of this large sector are stretching the truth.

Author: Susan Thorp, Professor of Finance, University of Sydney