Tag: The Conversation

MasterCard survives £14 billion class action but more could follow

From The Conversation.

Convenience often comes at a cost. As consumers, many of us are resigned to seeing a surcharge or “processing fee” on goods and services when we pay by credit or debit card. At present, it is lawful for businesses to charge consumers these fees although the amount should be limited to the actual cost to the retailer of the transaction.

Bank charges for processing card payments were capped in the UK in 2015, but many businesses have continued to charge consumers inflated fees to generate further profit. Even the government’s tax department routinely adds a surcharge of up to 2.4% to bills paid by card.

Now, the government has announced that charges for paying by debit or credit card will be outlawed completely from January 2018. This raises several questions, not least whether retailers will simply increase their prices to cover any shortfall. Many companies argue that fees are there to cover their transaction costs, which consist of an “interchange fee”, levied by the card issuer such as Visa or MasterCard (capped by law at 0.3%) and the “merchant fee”, charged by the bank for handling each payment. This is not capped but for large businesses it should not amount to more than about 0.3%.

It is also unclear how the ban will be policed. Local authority Trading Standards departments are tasked with dealing with complaints from buyers, but the widespread flouting of the current cap indicates that embattled officers are under-resourced to deal with the issue.

Class action rejected

Future charges are to be outlawed, but what about the millions in surplus fees paid by consumer buyers in the past? A recent attempt to secure £14 billion in compensation for UK consumers was recently rejected by the Competition Appeal Tribunal (CAT).

The new law covers all card companies. dean bertoncelj / Shutterstock.com

The trailblazing claim against MasterCard, initiated by Walter Merricks, who was head of the Financial Ombudsman Service from 1999-2009, was the first collective claim of its kind under new rules introduced by the Consumer Rights Act 2015.

Previously, US-style class actions were not permitted under UK law and consumers affected by price fixing or anti-competitive behaviour had to either actively opt in as a named participant in a claim, or bring proceedings on their own behalf. In cases where the loss to the consumer was relatively small, the cost of bringing a claim meant that pursuing the trader was often not worthwhile.

Under collective proceedings rules, there is no need to register for a stake in the claim – anyone who fulfils the criteria is automatically joined in the action unless they expressly opt out. Under the new Consumer Rights Act, claims can be brought by a suitable representative of the group affected. In the Mastercard case it was Walter Merricks, on behalf of every consumer who purchased goods from a retailer in the UK between 1992 and 2008.

Had the claim succeeded, it would have given individual consumers the collective legal power to call a corporation to account. Ultimately, the claim faltered under the huge complexity of trying to quantify the total compensation payable, and then allocate it fairly among consumer claimants. Notwithstanding the CAT’s decision, the case has prompted fears from card companies that the UK will see a tsunami of similar claims, possibly resulting in vast payouts.

Onslaught of action

What happens next will be scrutinised closely by banks and other credit providers. The decision is the latest chapter in an onslaught of legal action against MasterCard dating back to 2007. The fees charged to retailers are determined in large part by interchange fees agreed between groups of banks and in 2007, MasterCard was subject to an investigation by the European Commission, which ruled that its interchange fees were anti-competitive and violated the EU Treaty.

MasterCard appealed the ruling but the European Court of Justice confirmed the decision in September 2014. Fees were subsequently capped at 0.3% of the transaction value for credit card payments and 0.2% for debit card payments.

In July 2016 MasterCard was ordered to pay substantial damages to the supermarket Sainsbury’s, after it successfully sued MasterCard over processing fees. While the court in this case acknowledged that electronic payment arrangements benefit both customers and retailers, it ultimately concluded that MasterCard’s charges were excessive and breached EU and UK competition law. This judgement potentially paves the way for a wave of further claims from retailers who were charged similar rates.

MasterCard is not the only lender affected. Visa was also investigated in 2007, but managed to avoid formal sanctions by agreeing voluntarily to reduce its fees and improve transparency around charging.

The British government’s move to scrap charges completely by January 2018 promises greater transparency over future prices paid by consumers. But, future class actions should not be ruled out. The recent rejection of Merricks’s case against MasterCard was down to the complexity of computing individual losses – if this issue is remedied then future claims could well succeed.

Author: Joanne Atkinson , Principal Lecturer, Law, University of Portsmouth

Taxing empty homes: a step towards affordable housing, but much more can be done

From The Conversation.

Vacant housing rates are rising in our major cities. Across Australia on census night, 11.2% of housing was recorded as unoccupied – a total of 1,089,165 dwellings. With housing affordability stress also intensifying, the moment for a push on empty property taxes looks to have arrived.

The 2016 Census showed empty property numbers up by 19% in Melbourne and 15% in Sydney over the past five years alone. Considering that thousands of people sleep rough – almost 7,000 on census night in 2011, more than 400 per night in Sydney in 2017 – and that hundreds of thousands face overcrowded homes or unaffordable rents, these seem like cruel and immoral revelations.

Public awareness of unused homes has been growing in Australia and globally. In London, Vancouver and elsewhere – just as in Sydney and Melbourne – the night-time spectacle of dark spaces in newly built “luxury towers” has triggered outrage.

This has struck a chord with the public not only because of its connotations of obscene wealth inequality and waste, but also because of the contended link to foreign ownership.

Early movers on vacancy tax

Against this backdrop, the Victorian state government has felt sufficiently emboldened to legislate an empty homes tax. Federally, the shadow treasurer, Chris Bowen, recently backed a standard vacant dwelling tax across all the nation’s major cities.

Similar measures have come into force in Vancouver and Paris. And Ontario’s provincial government recently granted Toronto new powers to tax empty properties .

Both Vancouver (above) and Melbourne now have a 1% capital value charge on homes left vacant. Tim Welbourn/flickr, CC BY-NC

Emulating Vancouver, Victoria’s tax is a 1% capital value charge on homes vacant for at least six months in a year. Curiously, though, it applies only in Melbourne’s inner and middle suburbs. And there are exceptions – if the property is a grossly under-used second home you pay only if you’re a foreigner.

Also, as in Vancouver, tax liability relies on self-reporting, which is seemingly a loophole. This might be less problematic if all owners were required to confirm their properties were occupied for at least six months of the past year. But that would be administratively cumbersome.

This highlights a broader “practicability challenge” for empty property taxes. For example, how do you define acceptable reasons for a property being empty?

In principle, such a tax should probably be limited to habitable dwellings. So, if you own a speculative vacancy, what do you do? Remove the kitchen sink to declare it unliveable?

How can we be sure a home is empty?

Lack of reliable data on empty homes is a major problem in Australia. Census figures are useful mainly because they indicate trends over time, but they substantially overstate the true number of long-term vacant habitable properties because they include temporarily empty dwellings (including second homes).

About 150,000 dwellings in Sydney and Melbourne, including many apartments, are ‘speculative vacancies’, but establishing tax liability isn’t simple. Dean Lewins/AAP

Using Victorian water records, Prosper Australia estimates about half of Melbourne’s census-recorded vacant properties are long-term “speculative vacancies”. That’s 82,000 homes.

Applying a similar “conversion factor” to Sydney’s census numbers would indicate around 68,000 speculative vacancies. Australia-wide, the Prosper Australia findings imply around 300,000 speculative vacancies – 3% of all housing. That’s equivalent to two years’ house building at current rates.

According to University of Queensland real estate economics expert Cameron Murray, a national tax that entirely eliminated this glut might moderate the price of housing by 1-2%. Therefore, although worthwhile, dealing with this element of our inefficient use of land and property would provide only a small easing of Australia’s broader affordability problem.

Making better use of a scarce resource

Taxing long-term empty properties is consistent with making more efficient use of our housing stock – a scarce resource. A big-picture implication is that tackling Australia’s housing stress shouldn’t be seen as purely about boosting new housing supply – as commonly portrayed by governments.

It should also be about making more efficient and equitable use of existing housing and housing-designated land.

Penalising empty dwellings is fine if it can be practicably achieved. That’s especially if the revenue is used to enhance the trivial amount of public funding going into building affordable rental housing in most of our states and territories.

But empty homes represent just a small element of our increasingly inefficient and wasteful use of housing and the increasingly unequal distribution of our national wealth.

One aspect of this is the under-utilisation of occupied housing. Australian Bureau of Statistics survey data show that, across Australia, more than a million homes (mainly owner-occupied) have three or more spare bedrooms. A comparison of the latest statistics (for 2013-14) with those for 2007-08 suggests this body of “grossly under-utilised” properties grew by more than 250,000 in the last six years.

Our tax system does nothing to discourage this increasingly wasteful use of housing. It’s arguably encouraged by the “tax on mobility” constituted by stamp duty and the exemption of the family home from the pension assets test.

A parallel issue is the speculative land banks owned by developers. The volume of development approvals far exceeds the amount of actual building. In the past year in Sydney, for example, 56,000 development approvals were granted – but only 38,000 homes were built.

In many cases, getting an approval is just part of land speculation. The owner then hoards the site until “market conditions are right” for on-selling as approved for development at a fat profit.

Properly addressing these issues calls for something much more ambitious than an empty property tax. The federal government should be encouraging all states and territories to follow the ACT’s lead by phasing in a broad-based land tax to replace stamp duty.

Such a tax will provide a stronger financial incentive to make effective use of land and property. The Grattan Institute estimates this switch would also “add up to A$9 billion annually to gross domestic product”. How much longer can we afford to ignore this obvious policy innovation?

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

Market-driven compaction is no way to build an ecocity

From The Conversation.

As Melbourne hosts the Ecocity World Summit this week, we might ponder the progress of Australia, a “nation of cities”, toward achieving sustainable urbanism.

Australian metropolitan planning has long subscribed to what urban geographer Clive Forster called the “compact city consensus”. This is a commitment to consolidated, well-designed, low-energy cities with high usage of public and active transport. But after decades of halting pursuit, we seem no closer to this ideal.

The 2016 State of the Environment report makes critical findings on metropolitan development. It casts these trends, at least in part, as market-driven compaction rather than planned consolidation. Leanne Hodyl’s much-reported 2014 study showed that:

High-rise apartment towers are being built in central Melbourne at four times the maximum densities allowed in Hong Kong, New York and Tokyo – some of the highest-density cities in the world.

She concludes that Australian regulation of high-rise development is uniquely weak.

Market prevails over planning

The compact city vision that has guided Australian metropolitan strategy for at least three decades was intended to realise sustainability in a form that departed from the extensive, car-dependent monocentrism of the post-war metropolis.

Yet planning has not been the principal directional force for urbanisation during this period. Instead, it has been dominated by a far more powerful political consensus, neoliberalism.

Whatever one thinks of the compact city ideal – and it is contested among urbanists – its realisation required a commitment to planned urbanisation. But that was never likely during an era of relentless hollowing-out of state capacities, including those needed to manage cities.

Instead, other forces have shaped the course of urban change. These include national policies (especially immigration, taxation and financing), technological innovation, cultural shifts, political economy (notably neoliberal governance) and increasingly unrestrained market power. This set of transformational “furies” can be grouped under the rubrics of intensification and pluralisation.

These forces have undeniably produced many welcome and stimulating changes in our cities. However, our current course, if left uncorrected, will potentially drive Australian cities further away from the ideal of sustainable urbanism.

The increases in “bad pluralities” – notably social polarisation and poverty – betray this ideal as much as physical failings do. Rising social ills, especially the ice plague and family violence, are markers of this betrayal.

‘Urban fracking’ undermines the city

Market-driven intensification has in many places permitted a fracturing and ransacking of urban value and amenity, and of human wellbeing, by development capital that has worn the thin robe of legitimacy provided by the compact city ideal.

We might summarise this as “urban fracking”: a new means of blasting through accumulated layers of material and symbolic value to extract profit.

Miles Lewis observed in 1999 that much redevelopment in Melbourne’s middle-ring neighbourhoods was parasitic. That is, it draws on (and thus depletes) existing amenity without adding to it.

More generally, this dispossession of urban value, from public (or communal) to private, takes myriad forms: amenity and infrastructure mining through overdevelopment, transfer of public housing stock to private investors in redevelopment, the continued non-taxation of unearned land value increments, privatisation of assets and services, and fast-tracked and favourable development approvals.

Ill-prepared for climate change

These various plunderings and injuries also potentially reduce the sustainability and resilience of our cities at a time of clear threat, especially the “climate emergency”.

Reducing green space and open space ratios in redevelopment areas raises particular risks for rapidly rising inner-city populations.

Consider that Melbourne City Council has prepared a Heatwave Response Plan, which will evacuate city residents to the Melbourne Cricket Ground, Etihad Stadium and the Convention and Exhibition Centre. The council recognises that 82% of residents now live in buildings “without passive ventilation”. That’s code for the air-conditioned towers that have done little for the cause of sustainability.

New modelling reveals that sea-level rise is likely to flood many inner-city high-rise redevelopment areas in Australian cities. This includes the zones identified for evacuation in Melbourne’s Heatwave Response Plan.

Governance must be restored

As the 2016 Census confirms, our rapidly growing core metro regions are evolving into ever more complex landscapes, which defy simple description. It could be tempting to conclude that the sources of their problems resist identification. But this is not true. At the core of our urban failing is governance in all of its necessary forms – economic, social and spatial.

Our cities appear increasingly unsustainable, chaotic and frankly ungovernable only because we allow this to happen. Long historical stretches of firm urban governance, notably in Brisbane and Melbourne, produced much more balanced and agreeable patterns of urbanisation than we are now experiencing.

The ever-mounting costs and failures of the “long night” of neoliberal governance are resonating ever more strongly within national politics. Economist John Quiggin believes this is feeding a new, if nascent, appetite for public intervention and ownership.

We must hope this desire for restoration of state capacities extends to the cities whose rapidly deteriorating development trajectories threaten national wellbeing.

The first necessity is to reinstate capacities for public economic governance. The need is especially great in the areas of infrastructure and urban services, which powerfully shape the general course of urbanisation.

After decades of relentless privatisation and deregulation, however, there is little to govern and little to govern with.

To improve metropolitan functioning, there will be no escaping the necessity of what the late ANU academic Peter Self described as “rolling back the market”. This will require nationalisation of key assets, especially infrastructure, and stronger regulation of urban amenities, especially energy, transport and hydraulic services.

This is the first, urgent step towards resetting our urban course for sustainability. State governments could do so without delay.

Unfortunately, most cannot yet conceive of a true break from neoliberal urbanism. The New South Wales government recently privatised its land registry. South Australia and Victoria plan to do the same.

If this mindset can be changed, the next imperative is to establish strong planning governance for our metropolitan regions so our freewheeling development furies can be steered towards more sustainable ends. Renewal of governance is the key to surviving let alone thriving in the urban age.

Author: Brendan Gleeson, Director, Melbourne Sustainable Society Institute, University of Melbourne

Four outdated assumptions prevent progress on affordable housing

From The Conversation.

Housing influences everything from productivity and employment through to intergenerational poverty and childhood education. Yet outdated concepts and thinking are shaping Australia’s troubled housing system.

My recent research – involving in-depth interviews with leaders across government, NGOs, the private sector and academia – identified four misguided assumptions about affordable housing.

These key assumptions are about:

  • the difference between housing affordability and affordable housing;
  • home ownership versus renting;
  • stereotypes about those in need of affordable housing; and
  • voters not valuing affordable housing.

Tackling these assumptions could help change how Australians think about their housing system.

Housing affordability versus affordable housing

The cost of home ownership has long been of concern for governments and people. These discussions largely relate to “housing affordability”, as it applies to those who live in – or aspire to live in – their own home.

There are two other categories in the housing market, which are less glamorous and well publicised. These are those in the private rental market (with or without government assistance), and those who cannot access the private rental market (and thus require access to social housing).

“Affordable housing” largely relates to these latter two categories. Specifically, it refers to public and community housing, as well as the affordable end of the private rental market.

It is not well appreciated that the requirements of affordable housing are related to – but not the same as – those for housing affordability. The challenges of home ownership for middle-to-high-income earners are very different to the struggles of low-income earners in finding a place to rent – let alone own. Yet there is an assumption that increasing supply is a silver bullet for both groups.

However, increasing supply for middle-to-high-income earners doesn’t necessarily create more affordable housing for low-income earners. The benefits don’t simply trickle down.

Likewise, actions to improve affordable housing do not necessarily relate to, or affect, the housing investments of middle-to-high-income earners.

Prioritising home ownership over renting

Home ownership is not possible for many, due to various life circumstances. Some people may have been able to access social housing or, due to decade-long waiting lists, have been exposed to the vagaries of the private rental market.

For others, renting is a choice. Private rental has become a long-term option for many Australians: about one-third of Australian households rent.

Despite its importance, the rental market remains the least secure and most neglected pillar of our housing system. Neglect has led to a chronic shortage of affordable rental properties for low-to-moderate-income earners, particularly anywhere near employment.

Australia also lags behind many other countries when it comes to tenancy regulations. Leases of 12 months or less are the norm.

Culturally, home ownership is still seen as superior to renting. Such deeply entrenched views accompany an assumption that renting is a short-term transitional phase, not a desirable end state.

Stigmas and stereotyping of those in need

Stereotypes abound about those who require affordable housing. This, in part, is fuelled by media portrayals and lack of lived experience.

People who experience housing stress or need assistance are in fact diverse. They include the homeless through to essential workers on moderate incomes.

A significant proportion of people in social housing are aged under 14 or older than 55. Home owners can even encounter unforeseen surprises: one in five experience instability in their housing tenure.

Stigmas associated with affordable housing can lead to a wider lack of empathy for those in need, and a reluctance to ask for help by those who need it.

The alienation of those with a mental illness or disability can be even worse. This has many implications, not least for planning decisions. A “not in my backyard” mentality of local residents has blocked more than one plan for affordable housing.

Voters not valuing affordable housing

Government at all levels play an active role in Australia’s housing system. Taxation settings, financial regulation, infrastructure development, land use planning, immigration and income support all affect housing outcomes. Likewise, commercial operators, NGO, government and community housing providers are all shaped by the regulatory and policy structures of government (and its many silos).

The fragmentation in policies, providers and services perpetuates the serious gaps in housing provision.

Mental health patients in hospitals and domestic violence victims are unable to leave because their only pathway is homelessness. Desperate families compromise on food, education and health while waiting on social housing availability.

Significant frustrations expressed with government decision-making are at least partly voters’ responsibility. The electorate seems to tolerate perpetual changes of government policies and the inconsistencies in state and Commonwealth government objectives.

Shelter is a key part of our existence. Yet a lack of wider public awareness about the role affordable housing plays in both society and the economy means voters don’t rate it as a priority. Until they do, governments are unlikely to make it a priority, either.

Author: Fiona McKenzie, Co-Founder and Director of Strategy, Australian Futures Project, La Trobe University

How Trump’s nominee for the Fed could turn central banking on its head

From The Conversation.

President Donald Trump on July 10 nominated Randal Quarles to be one of the seven governors of the Federal Reserve System, the central bank of the United States.

Before I get to Quarles and his qualifications, it’s important to understand the Fed and what it does. Its decisions are vital to every person on the planet who borrows or lends money (pretty much everybody) since it has enormous influence over global interest rates. Its board of governors also influences most other aspects of the global financial system, from regulating banks to how money is wired around the world.

Quarles, for his part, is clearly qualified for a job at the pinnacle of financial regulation. He has held numerous positions in the U.S. Treasury Department, including undersecretary for domestic finance under George W. Bush, and was the U.S. executive director at the International Monetary Fund (IMF). He has also worked on Wall Street for The Carlyle Group and founded his own investment company, The Cynosure Group. He also has a law degree from Yale.

The issue that I believe deserves careful scrutiny, however, does not involve his qualifications. Rather it’s a view of his that, if allowed to permeate the Fed, would represent a seismic shock to how the central bank operates and could potentially have severe consequences if – or when – we stumble into another financial crisis like the one we endured only a decade ago.

Trump Fed nominee Randal Quarles, left, talks with then-central bank Chair Alan Greenspan in 2002. Reuters/Hyungwon Kang

How the Fed controls the world

Currently, the Fed rules the financial world using a very simple model: A handful of very smart people sit together at least eight times a year and decide how to execute the country’s monetary policy.

The implications are enormous. In the words of the Fed itself, decisions made in these meetings:

“trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit and, ultimately, a range of economic variables, including employment, output and prices of goods and services.”

Janet Yellen currently chairs this group, called the Federal Open Market Committee (FOMC), and its decisions, like those of the Supreme Court, are final. There are few or no absolute rules, and there is no appeal.

Quarles, however, has described the discretionary decisions of this small group as “a crazy way to run a railroad.”

Instead, Quarles argues that the Fed should use a rules-based approach, with little or no discretion. Economic data would be plugged into a simple model, which would spit out the decision the Fed should take.

Since the model would be well-known and the relevant economic data (such as GDP, inflation rates, etc.) are already widely publicized, everyone from Wall Street to Main Street who cares about interest rates would be able to predict how the Fed is going to react under such a rules-based approach.

The Taylor rule

While Quarles has not specifically referred to which rule he would favor, a frequently cited one is called the “Taylor rule.”

It is named after Stanford economist John B. Taylor, who proposed it in 1993 as a new guiding principle for central bank decision-making. In recent years, the rule has gained much interest among people who watch and study the Fed.

The Taylor rule states that the Fed should establish short-term interest rates using a mathematical formula. It would use the current rate as a starting point and then factor in data tied to inflation and GDP, both based on the difference between the actual figures and the bank’s targets.

John Taylor created his eponymous rule to guide central bank decision-making. AP Photo/Ted S. Warren

Inflation is an important variable because price changes impact people’s standard of living, while GDP growth affects the number of jobs available in the economy.

Since it would rely on a few human inputs from the Fed, the Taylor rule is somewhat flexible, enough to accommodate different situations by allowing central bankers to specify the importance of inflation compared with GDP growth.

Some countries, like Germany, primarily focus on keeping inflation extremely low. Others, such as the U.S., try to balance both inflation and GDP growth roughly equally. Central banks in some developing countries like those in Africa often put stronger emphasis on boosting economic growth with less regard to inflation.

But that’s about as far it will stretch.

Why does this matter?

In general, the Taylor rule would lead central banks to increase interest rates when inflation is high or when unemployment is very low. Conversely, the rule indicates central banks should lower interest rates when inflation is too low (or there is deflation), when economic growth is poor or unemployment is climbing.

But therein lies the rub. Rules work well when things are “normal,” but when the unexpected happens, they become much less useful – even harmful.

If the Taylor rule were an effective and straightforward method of transforming complex choices into simple, easy-to-understand decisions, the question is, why doesn’t every central bank use this rule?

The answer is as simple as the Taylor rule itself. Sometimes a country faces an economic quandary, such as what the U.S. experienced during the oil price shocks of the late 1970s. Back then, inflation was too high and GDP growth was too low, leaving the country stuck in what is known as a period of stagflation.

In these circumstances, the Taylor rule breaks down. It tells central bankers there is nothing they can do to improve economic conditions. The rule signals that interest rates need to be raised to combat high inflation, yet at the same time that would weaken already-sluggish GDP growth.

Had the U.S. followed the Taylor rule back then, it would have done nothing. Instead, the Fed raised interest rates and broke the back of inflation expectations.

What’s crazier

Simply put, central bankers around the world – including those at the Fed – have not adopted rules-based monetary policy using the Taylor rule or another because in times of economic crisis, a simple precept usually fails to provide effective solutions.

The current ad-hoc approach provides maximum flexibility and allows central bankers to reach for untested methods that help them get the economy back on track.

Quarles may be right. It might be a crazy way to run a railroad. But then again, monetary policy – and the US$18.6 trillion U.S. economy – is a bit more complex than operating a train on a set of rails. The crazy thing might be to do it any other way.

Author: Jay L. Zagorsky, Economist and Research Scientist, The Ohio State University

Three reasons the government promotes home ownership for older Australians

From The Conversation.

Government strategies to manage population ageing largely assume that older Australians are home owners. There is often an implied association between home ownership and ageing well: that is, older Australians who own homes are seen as having made the right choices and as being less of a budget burden.

The problem with this approach is that not everyone is or can be a home owner. A great many households are, for many reasons, locked out of home ownership.

My analysis of 20 years of federal government ageing strategies and age-focused analyses of the housing system shows that Australian governments of all persuasions have shared three common beliefs about the economic value of home ownership in later life. They have promoted home ownership as:

  • somewhere to live;
  • an asset to rent or sell; and
  • a way to access and spend equity.

Somewhere to live

Australian governments have valued and promoted home ownership because it provides somewhere to live in later life, with no regular ongoing costs such as rent.

As a 2015 Productivity Commission report argued:

Because the majority of older Australian households own their homes outright, their housing costs are typically very low, yet they enjoy the benefits from continuing to live in their homes. […] This source of value (relative to overall household expenditure) becomes markedly more important with increasing age.

Owning a home is seen as largely cost-neutral, though the costs of maintaining housing are recognised in some documents. In contrast, the privately rented home is discussed as an ongoing financial burden.

Home ownership is seen to provide economic security by freeing up income, so that people have greater disposable income for discretionary lifestyle spending in later life.

In other words, owning a home enables home owners to be consumers. While this can be seen as ensuring quality of life in older age, it also connects strongly with a broader government goal of growth in consumer spending.

An asset to rent or sell

Governments have also valued home ownership as an asset that people can rent out or sell so they can pay for costs associated with moving to “age-appropriate” housing. This includes paying bonds for retirement villages or nursing homes.

It has been suggested that older home owners are better equipped than, say, renters with the financial resources to make “appropriate” choices for housing and care in later life.

For example, they might be able to afford to buy housing within an “active lifestyle community”. And any leftover funds can fund higher levels of consumption in retirement.

So, home ownership has been understood as an individualised way of managing the risks of ageing.

People who own higher-value housing are better off in this scenario, as they will reap greater profits if they sell their home, or secure a higher income if they rent it out.

However, these benefits can be difficult to access. This is due to the very high costs of housing in some cities, and the risks associated with some retirement housing.

Accessing (and spending) housing equity

The third way governments have seen value in home ownership is through new financial products that enable home owners to access – and spend – home equity.

Emphasis is usually placed on the capacity to make a proportion of the home “liquid” while retaining overall ownership and the ongoing right to live in the house. For governments, this has two benefits:

  • It enables older people to pay for more of the costs of older age, including for aged care. This is a way of shifting these costs away from the government in situations where people are seen as having the capacity to co-contribute.
  • It enables home owners “to pay for additional services over and above the approved care”, according to the Productivity Commission. This supports government goals for economic growth by expanding the aged care market.

Funds released in this way enable lifestyle “choice” and better care in older age.

Home owners are winners

These three benefits suggest a system in which home owners are equipped with greater spending power – and hence choice – in older age. They are likely to have access to higher levels of care, and to be more able to make choices that enable them to age “well”.

Quite curiously, in some documents baby boomers are distinguished as desiring higher-quality services in later life. The capacity to access and spend home equity is seen as enabling this possibility.

The promotion of home ownership as a way of funding care in later life is part of a broader policy trend toward making people personally responsible for the opportunities they have in life. While this may make intuitive sense, it is unjust because it ignores factors that shape income and investment opportunities, including home ownership, over the life course.

Data from the 2016 Census show that households living on the median single-person income could not afford the median rent in Australia, and that home ownership is increasingly out of reach.

Single older women are among the fastest-growing group of homeless people in Australia. And, for non-home owners, poverty in later life is on the rise.

Australia needs ageing strategies that do more than assume everyone is a home owner – or that home ownership is a simple choice.

Author: Emma Power, Senior Research Fellow, Geography and Urban Studies, Western Sydney University

City planning suffers growth pains of Australia’s population boom

From The Conversation.

Australia has the highest rate of population growth of all the medium and large OECD countries. And more than three-quarters of the growth is in four cities: Sydney, Melbourne, Brisbane and Perth. But urban planning for this growth is often inadequate.For a start, attempts to reduce infrastructure costs and save agricultural land by imposing urban growth boundaries have foundered.

In Melbourne, the statutory urban growth boundary has repeatedly been pushed outwards. The city is struggling to meet its urban consolidation targets.

In Brisbane, a 2015 University of Queensland study found well-connected individuals own 75% of rezoned greenfield areas but only 12% of comparable land immediately outside the rezoning boundaries. The researchers conclude that rezoning was primarily driven by these landowners’ relationship networks.

In turn, planning is failing to protect high-value environments from urban development. Policies to preserve koala habitat around Brisbane have failed. Land clearing has increased since 2009.

And in Western Australia, under Perth’s draft strategy, 50% of the remaining feeding habitat of the endangered Carnaby’s black cockatoo and 98 square kilometres of banksia woodland will be lost.

Despite their expanding area, Australian cities have less green open space. In attempts to reduce the costs of new infrastructure to meet the needs of increasing populations, average housing block size has been reduced.

New suburbs have virtually no backyards because the planning process has failed to mandate minimum garden areas. The result is urban heat islands that lack greenery and recreation space.

Costly housing of poorer quality

Rising populations require more infrastructure. In Australia, the developer contributions required to fund new local infrastructure are passed on to new home buyers in the form of higher house prices, reducing affordability.

Alternative methods could eliminate up-front hits on new home owners. An example is benefit assessment districts, where infrastructure is funded by bonds and repaid by the beneficiaries over decades. But state governments are resistant to this because new public loans are seen as a threat to state credit ratings.

Governments are also reluctant to use value capture, which involves applying a levy on increased property values arising from greenfield or brownfield rezoning. The levy proceeds pay for infrastructure or affordable housing.

Governments have seen such a levy as increasing developer costs and thus decreasing affordability. However, if value capture is signalled in advance, developers will reduce the price they pay for new sites to take account of the levy. In high-cost London, affordable housing targets of 35% have been applied to developers, compared to the 5% proposed for Sydney.

Furthermore, poor planning for high-density developments in Melbourne has allowed developers to meet increased population demand by constructing “vertical slums” of micro-apartments of under 50 square metres with windowless bedrooms.

Such developments are illegal in comparable world cities. A recent report found that weak planning controls have allowed Melbourne’s high-rise apartments to be built at four times the densities allowed in Hong Kong, New York and Tokyo.

Due to the supposed effects on affordability and saleability, developers are not being required to provide new open space for higher-density urban populations. In some cases, these services aren’t being funded because governments set caps on developer contributions to local infrastructure to reduce dwelling costs.

According to the Local Government NSW association, necessary state government infrastructure for higher population densities is often lacking too.

Politics of traffic

Urban population growth forecasts are driving estimates of huge increases in traffic congestion costs. However, electoral politics are also overriding pro-public transport strategies such as metro rail.

Three major motorway projects initiated during the Abbott era in Sydney, Melbourne and Fremantle cut through left-leaning inner-city electorates, while appealing to outer-suburban swing voters.

Inner-city motorway developments are still proceeding. WestConnex (Sydney), Western Distributor (Melbourne) and Legacy Way (Brisbane) are driving investments in private profit-making transport infrastructure. Comparable cities overseas, such as San Francisco, Toronto, Vancouver and Los Angeles, stopped building inner-city motorways years ago.

The business cases for new motorways also omit significant community costs. In the case of WestConnex, these include:

  • the costs of the extra sprawl induced by longer but quicker commuting trips;
  • the time and revenue costs of capturing tens of thousands of daily public transport trips; and
  • loss in value of properties near to interchanges.

Deficient business cases caused four inner-city motorways – Cross City Tunnel, Lane Cove Tunnel, Clem 7 Tunnel and Airport Link – to go into receivership in the last few years, as the demand was never there.

Overstretched public transport services are a source of rising political tensions. AAP/Joel Carrett

Hostage to the Growth Machine

Part of the problem is Australia’s acute vertical fiscal imbalance.

For instance, 80% of Sydney’s taxes go to the Commonwealth, not the state government. This means the federal government reaps the income gains from bigger city populations, while the states lack the resources to provide adequate urban infrastructure and services for these growing populations.

Perhaps the shortcomings of planning resulting from the need to accommodate fast-growing populations could be mended with reduced growth.

But Australian cities show all the symptoms of Molotch’s notion of a Growth Machine: a large cast of actors – the development industry, property owners and many more – have a vested interest in continued rapid population growth, and lobby to keep that growth going.

Author: Glen Searle; Honorary Associate Professor in Planning, University of Queensland and, University of Sydney

What income inequality looks like across Australia

From The Conversation.

With affordable houses increasingly out of reach, wage growth slow and household debt high, Australians are certainly feeling poor. But how do they compare to their neighbours? New Census data confirms there’s a lot of variability in income.

The Census breaks the country up into 349 geographic regions (named in quote marks below), some of which cover more than one major town and some of which group related suburbs within cities. We examined 331 of these regions, excluding those containing fewer than 1,000 households.

The data show there are high levels of income inequality within these regions. A simple way to measure this is to look at the ratio of income between those who are well off (the top 20% within a region) and of those who are relatively disadvantaged (the bottom 20%) in the Census data. In Australia the weekly household income for the top 20% (A$1,579 per week) is 3.5 times the income of the bottom 20% (A$457).

The “Melbourne City” region has the most unequal incomes in Australia, where the top 20% have an income that is 8.3 times as high as those in the bottom 20%. “Adelaide City” (ratio of 5.5) and the “Sydney Inner City” (4.8) also have quite high levels of inequality.

Two of the poorest regions in the Northern Territory also have very high inequality. These are the vast region that encircles Darwin, called “Daly, Tiwi, West Arnhem” (ratio of 5.2) and the “East Arnhem” region (5.3).

However, there are regions with varying income levels, that also had relatively low inequality ratios. The region of “Molonglo”, in South Canberra (ratio of 2.2), “West Pilbara” in Western Australia (2.4) and “Kempsey, Nambucca” on New South Wales’ north coast (2.5) all have low levels of inequality.

For our analysis, we used equivalised household income. Equivalisation is a technique in which members of a household receive different weightings, based on the amount of additional resources they need.

The Australian Bureau of Statistics assumes that the first adult in a household has a weighting of 1, each additional adult a weighting of 0.5, and each child a weighting of 0.3. Total household income is then divided by the sum of the weightings for a representative income.

Incomes across Australia

For the whole of Australia, the equivalised median household income (the income in the middle of the distribution) is A$878 per week. The region with the lowest median income was “Daly, Tiwi, West Arnhem” in the Northern Territory, at A$510 per week.

However, several regional areas like “Maryborough, Pyrenees” (northwest of Ballarat in Victoria), “Kempsey, Nambucca” (NSW), “Maryborough” (between Bundaberg and the Sunshine Coast in Queensland), “Inverell, Tenterfield” (in NSW’s Northern Tablelands) and “South East Coast” in Tasmania all had median incomes of A$575 per week or less.

At the other end of the distribution, households in leafy suburbs of North Sydney – “Mosman” (NSW) had a median income of A$1,767 per week. Areas like “South Canberra” (ACT), “Manly” (in Sydney’s east) and the mining-dominated “West Pilbara” (WA) all had median incomes of A$1,674 or more per week.

We also looked at the extremes of the distribution. We define high income as those households with an income of A$1,500 or more per week. This equates to about 22% of the population. We defined low-income households as having an income of less than A$400 per week (about 14% of households).

Around 40% of households in the “Daly, Tiwi, West Arnhem” region were classified as being in poverty compared to around 6% in “North Sydney, Mosman” region. Conversely, around 60% of households in this region were classified as having high income, compared with only 6% of households in “Kempsey, Nambucca”.

How segregated are we within regions and cities?

While government policy is often delivered at the regional level, people live their lives at the local or neighbourhood level. However, the relatively disadvantaged and the upper-middle class are often segregated within these regions.

Richard Reeves of the Brookings Institute argues the segregation of the upper-middle class in Australia means this group “hoards” the benefits in the region they live in. Among the location advantages he lists are: access to the best schools, opportunities to network with the wealthy and powerful and the ability to disproportionately accrue capital gains on housing assets. To avoid this kind of “opportunity hoarding”, the rich and poor would need to be evenly spread within a region.

A simple way to look at this is through a “dissimilarity index”. In essence, this measures the evenness with which two groups are spread across a larger area. It ranges from zero to one, with higher values indicating a more uneven distribution and zero indicating complete mixing.

Looking at the distribution of the high income. Across Australia, the dissimilarity index has a value of 0.27. This means that around 27% of high-income households would have to move neighbourhoods to make the distribution completely even.

This varies quite substantially by region. “Far North” (encompassing Cape York in QLD) has a dissimilarity index of 0.42. “Auburn” (in western suburbs of Sydney, NSW) and “Playford” (on Adelaide’s northern fringe) also have quite large values.

Our richest regions tend to have the most even distribution of the wealthy, with “North Sydney, Mosman”, “Molonglo” and “Manly” having values of 0.06 or less.

“East Arnhem” has a very high level of concentration of low income individuals by neighbourhood, with a dissimilarity index of 0.70. The next two highest regions (“Katherine” and “Alice Springs”) are also in the Northern Territory, with index values of 0.53 and 0.55 respectively.

We can also compare the measures we used, to find out how they relate to each other. The following figure shows that the richest regions tend to be those with the highest level of income inequality.

However, as inequality goes up, there tends to be a greater concentration of low income households by neighbourhood (there’s also less of a concentration of high income households).

Have and have nots

It’s true that the level of income mobility is higher in Australia than it is in the US. However, Australia also has prominent examples of economic policies that disproportionately benefit the upper-middle class, such as the capital gains tax discount and superannuation tax incentives.

Australia also has a geographically concentrated income distribution, with the rich living in neighbourhoods with other rich people. The poor are also more likely to live in close proximity to people who share their disadvantage.

If Richard Reeves is right, and the spatial segregation of high and low income households reinforces inequality across the generations, then policies that encourage the mixing of different social classes in the same neighbourhood and region should be a way forward.

 

Authors ; Nicholas Biddle, Associate Professor, ANU College of Arts and Social Sciences, Australian National University;  Francis Markham, Research Fellow, College of Arts and Social Sciences, Australian National University

 

How to tell when the housing market is slowing

From The Conversation.

Looking at data, there is no evidence to support the notion that house prices have peaked or are on the cusp of a downward trend.

House prices in Australian capital cities rose slightly in June after falling in May. But house price indexes only show what’s happening in the market over a short time frame. Housing markets are volatile and you could just be looking at a seasonal blip.

Looking at the market fundamentals, there are no signs of a housing market slowdown. These indicators include economic and population growth, the unemployment rate, new housing construction, and auction clearance rates. They give us an idea both of the overall demand in the market, as well as the ability to pay for housing.

As economic and population growth increase, for example, there is both more money to spend as well as more people in need of housing. The rate of new housing construction tells us what will happen to housing supply, and the percentage of housing successfully sold at auctions gives us an idea of where we are in the house price cycle.

Market fundamentals and key indicators

As you can see in the chart below, economic growth has been relatively strong in both New South Wales and Victoria. Growth in Gross State Product for both states was 2.6% in 2014-15, and even stronger in 2015-16; this was higher than the GDP growth rate of Australia overall.

This suggests that the local economies of both Melbourne and Sydney are performing better than the overall Australian economy. And a strong economy feeds into more demand for housing.

The next thing to look at is the unemployment rate. A low unemployment rate means that fewer people are under pressure to sell their houses or default on their mortgages. This means the chance of sharp price correction in the housing market is lower when the unemployment rate is low.

Again, the unemployment rate in both New South Wales and Victoria is relatively low, around 4.8% in NSW and 6% in Victoria, compared with other states. Unemployment is almost 7% in South Australia, for example.

The auction clearance rate shows the percentage of housing that was successfully sold out of all the auctions that took place. The clearance rate roughly tracks housing prices – a high rate will normally be observed when house prices are high, and the reverse is also true. For example, the auction clearance rate was around 36-50% in Sydney in 2008.

Although the auction clearance rates in Melbourne and Sydney have dropped in recent months, they are still around 70%. This is comparable with the same period last year, giving no indication of a sudden movement in house prices one way or the other.

The next indicator is the proportion of vacant properties in the housing supply, also known as the vacancy rate. This is used as a gauge of whether there is too much or too little supply of housing in the market. Normally, a housing market is cooling if there are many vacant properties.

The vacancy rate has remained stable in Sydney and Melbourne recently, within a range of 1.7-2.2%. This suggests that there is little evidence of an oversupply of housing, and that housing demand is strong in both markets.

Sydney and Melbourne show signs of strong population growth. This is true not just now, but over the past 6 years. As we can see in the following graph, both cities have recorded growth rates ranging between 13,000 and 43,000 people per quarter.

The strong population growth rate reflects that the fundamental demand for housing in both cities are high. Although more new dwellings have been completed in recent years, the levels are far below population growth. This suggests that there is still more demand than supply in the housing markets in Sydney and Melbourne.

The discrepancy between May’s decline in capital city house prices, and the other indicators that show no slow down in demand, illustrate the problem. These other indicators give you a better idea of overall demand for housing, which is what drives prices over the longer term.

Based on the prices alone, it is too early to tell whether the housing markets in Sydney and Melbourne are slowing or if they are on a downward trend. And the other indicators of the wider economy show us that housing demand is strong. It is only when this changes that you will know that house prices are slowing.

Author: Chyi Lin Lee, Associate Professor of Property, Western Sydney University

Bloom and boom: how babies and migrants have contributed to Australia’s population growth

From The Conversation.

Population change has long been a topic of public debate in Australia, periodically escalating into controversy.

It is inextricably linked to debates about immigration levels, labour force needs, capital city congestion and housing costs, refugee intakes, economic growth in country areas and northern Australia, the “big versus smaller” Australia debate, and environmental pressures.

Views about the rate of population growth in Australia are numerous and mixed. At one end of the spectrum are those who are vehemently opposed to further population increases; at the other end are supporters of substantially higher population growth and a “very big” Australia.

Logically, population debates usually quote Australia’s demographic statistics. But there is value in comparing our population growth in the international context.

Average growth rates compared globally

Although growth rates have fluctuated considerably from year to year, statistics just released by the Australian Bureau of Statistics (ABS) show that Australia’s population grew by 3.75 million between 2006 and 2016. This indicates an average annual growth rate of 1.7%.

As the chart below shows, this was quite high compared to other countries and global regions. Over the decade, other English-speaking countries such as New Zealand, Canada and the US all experienced growth rates lower than Australia’s. The world’s more developed countries in aggregate grew by an annual average of 0.3%.

The world’s population as a whole increased by an average of 1.2% per year.

According to the UN Population Division, Australia ranked 90th out of 233 countries in terms of population growth rate over the decade. The countries or territories with higher growth rates were mostly less developed countries, particularly in Africa, and the oil-rich Gulf states. The only developed countries with faster rates of growth were Singapore, Luxembourg and Israel.

Why Australia’s population growth rate is higher

There are two main reasons for Australia’s high growth.

Net overseas migration (immigration minus emigration) is one major factor. It has been generating a little over half (56%) of population growth in recent years.

Demand for immigration – to settle permanently, work in Australia, or study here for a few years – is high, and there are many opportunities for people to move to Australia. In the 2015-16 financial year about 190,000 visas were granted to migrants and 19,000 for humanitarian and refugee entry. Temporary migrants included 311,000 student visas, 215,000 working holidaymaker visas and 86,000 temporary work (skilled) 457 visas.

Over the last five years, ABS figures show that immigration has averaged about 480,000 per year and emigration about 280,000. This puts annual net overseas migration at around 200,000.

This is high in international terms. UN Population Division data for the 2010-15 period reveals Australia had the 17th-highest rate of net overseas migration of any country.

But it is not just overseas migration driving Australia’s population growth. High natural increase (the number of births minus the number of deaths) also makes a substantial contribution. Natural increase has been responsible for a little under half (44%) of population growth in recent years (about 157,000 per year).

Australia has a relatively healthy fertility rate, which lately has averaged almost 1.9 babies per woman. We also enjoy one of the highest life expectancies in the world.

This combination of an extended history of net overseas migration gains, a long baby boom and a healthy fertility rate has resulted in Australia being less advanced in the population ageing transition than many other developed countries.

In particular, relatively large numbers of people are in the peak childbearing ages. This means that even if migration fell immediately to zero the population would still increase. Demographers call this age structure effect “population momentum”.

Whether Australia’s population is growing too fast

While Australia’s population growth rate is high in a global context, this does not necessarily mean its population is growing too fast. It all depends on your point of view.

It is important to stress that the overall population growth rate is just one aspect of Australia’s demography. A more comprehensive debate about the nation’s demographic trajectory should consider a broad range of issues, such as:

  • population age structure (the numbers of people in different age groups);
  • the health and wellbeing of a rapidly growing population at the highest ages;
  • population distribution across the country;
  • economic growth and development;
  • the contributions of temporary workers and overseas students;
  • appropriate infrastructure for the needs of the population; and
  • environmental management and per-capita carbon emissions.

Progress on issues such as healthy ageing, economic development,and environmental management depend on appropriate strategies to deal with these challenges. Total population numbers will often be relevant to the discussion, but they are only part of the equation.

Author: Tom Wilson , Principal Research Fellow, Charles Darwin University