Tag: The Conversation

Budget 2017: lack of competition is why government is moving so hard against the banks

From The Conversation.

With it’s latest budget the government has made a number of moves to create a level playing field in the banking system. It’s taxing the five largest banks, announced a review of rules around data sharing, a new dispute resolution system for banks and other financial institutions, and new powers for the regulator to make bank executives accountable.

All of this is on top of a Productivity Commission inquiry into the competition within the Australian financial system, announced this week.

While some of these moves – such as the bank levy – will have a positive effect on making smaller banks more competitive, there are more policies that could be considered. These could include the separating out of the retail arms from the other areas of the large banks, increasing the capital requirements of larger banks to equal those of smaller banks, and developing new sources of funding for smaller banks.

More for competition

A new “one-stop shop” for dispute resolution will replace the existing three schemes – Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. Called the Australian Financial Complaints Authority (AFCA), it will give consumers, businesses and investors a binding resolution process when dealing with financial services companies. The scheme will provide for a basis for more competition as disputes on financial services are consistently resolved regardless of the provider.

And A$1.2 million has been given to fund a review of an open banking system in which customers can request banks to share their data, which could assist financial startups and other competitors enter the market and compete against the big four banks. Banks will likely be forced to provide standardised application programming interfaces (API) that enable financial technology companies to provide services for interested consumers.

The government has also provided A$13.2 million to the Australian Competition and Consumer Commission (ACCC) to further scrutinise bank competition and to run the AFCA. This follows a House of Representatives report that called for an entity to make regular recommendations to improve competition and change the corporate culture of the financial industry.

The ACCC will provide Treasury with ongoing advise on how to boost competition in the sector. This may include a reduction of cost advantages of big banks, barriers to entry for new firms including change costs for consumers.

A more concentrated and changing finance sector

All of these changes come after a decade of consolidation and upheaval in the financial system, which has hurt competition and increased risk.

This chart shows the market shares of the big four Australian banks in terms of Australian loans and deposits:

Market share Big 4 banks. Australian Prudential Regulation Authority

As you can see, since 2002 their market share has grown from 69.7% to 79.6% for loans and from 66.3% to 77.3% for deposits. Also, the gap between market dominance in loans versus deposits has closed since the global finance crisis. This means the big banks are attracting a greater share of bank deposits, which has an impact on the smaller banks.

With limited access to deposits, which is a relatively cheap way of raising capital, smaller banks have had to rely on the more expensive wholesale debt markets. Small banks also have difficulties to tap other funding sources such as covered bonds. This makes their products less competitive, and they have struggled as a result.

In part, that’s because a number of banks disappeared or merged with the big banks after the global financial crisis. This includes St George, Bankwest, Bendigo Bank, Aussie Home Loans, Adelaide Bank, RAMS and Wizard.

The Murray Inquiry found the big four banks have less than half the capital set aside for emergencies than some smaller financial institutions do. Again, this makes the smaller banks less competitive and needs to be addressed. The government should increase the capital requirements of larger banks to close the cost advantage for larger banks.

In addition, rising house prices have led to a further increase in the concentration of mortgage and other housing loans in the Australian banking system. Today Australian banks have about twice as many mortgages on their books as in the next highest developed economy.

New financial startups, such as peer-to-peer lenders, have entered the banking system. In time they may rival the big banks in areas like personal lending, but they remain small in terms of market share. And the big banks’ unwillingness to share data may be a hindrance.

Something needed to be done

The concentration in the banking sector does not provide the best outcome to all Australians. It has led to a low range and low quality of financial services as well as high costs. This needed to be addressed.

The new banking levy will support competition, as it pushes up the cost for the big banks. The review into data sharing could also be a boon to financial startups and other competitors, although we don’t yet know what the outcome will be.

But even stronger government actions may needed to create a level playing field. The government should consider separating out of the retail arms, from the other areas, of the large banks. Failing that, the low capital buffers of the big banks need to be addressed.

Author: Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology Sydney

Budget 2017 charts new social and affordable housing agenda

From The Conversation.

Under pressure to tackle deepening housing affordability problems, Treasurer Scott Morrison has included various housing policy measures in his budget, some relating to Australia’s small sector of social and affordable housing.

One headline-grabber is the creation of a new entity, the National Housing Finance and Investment Corporation (NHFIC). This will source private funds for on-lending to affordable housing providers to finance rental housing development. However, the bigger issue for the sector remains federal and state funding.

This public funding is the money that, along with tenants’ rents, co-funds state and territory housing and homelessness services. Here too Morrison is proposing reform, particularly to the primary federal-state funding arrangement for social and affordable housing, the National Affordable Housing Agreement (NAHA).

A couple of months ago we suggested the NAHA needed a reboot. Recognising the seriously run-down state of the system, we argued for an increase in funding from its present starvation level. Morrison now proposes a new federal-state funding agreement, the National Housing and Homelessness Agreement (NHHA).

The level of federal funding will be the same as under the old NAHA. But the Commonwealth will press states and territories for action in defined “priority areas”. In effect, this looks like a return to a Canberra-led reform agenda for social and affordable housing unseen since the early Rudd government.

Setting aggregate supply targets

In what appears a significant passage, the budget papers reveal the government’s “priority areas” for the NHHA. We’ll consider these in turn, and then the recurring issue of inadequate funding.

Lack of transparency on the costs incurred by state and territory housing authorities in operating their social housing portfolios has been a particular problem under the NAHA. This is an area where federal engagement is welcome.

All levels of government should be pressed to quantify the level and type of need for housing in the community. And they should be made to set clear “new supply” targets for meeting that need.

That said, the federal government should stop pretending to be shocked at the lack of new social housing delivered by those authorities under the NAHA. The shortfall in NAHA funding has been obvious for years. It simply is too low to bridge the gap between the rents low-income public housing tenants can afford to pay and the costs of properly maintaining the system, let alone growing it to keep pace with rising need.

Residential land development

The stress laid on this issue within the budget policy statement reflects the federal government’s stated concern about “the supply side” of the housing affordability problem. It has framed state government planning controls as an impediment to new housing development.

However, merely loosening requirements and offering existing land owners the prospect of greater development does not ensure it will actually happen.

To ensure land owners don’t just sit on development opportunities speculatively, the federal government should use its NHHA leverage. This could include pushing the states and territories to make greater use of land tax, which would spur development and bring under-utilised land and housing to market.

Inclusionary zoning

Inclusionary zoning is a specific type of planning mechanism. It requires housing developments (above a certain size) to include some proportion of dedicated affordable housing. Ideally, this should be rental housing preserved as “affordable” in perpetuity.

Inclusionary zoning is long established in other countries and has long been demanded by housing advocates in Australia. It is now the subject of increasing interest from planning authorities – for example, the Greater Sydney Commission.

The co-financing arrangements for the NHFIC could incorporate active use of land-use planning powers for inclusionary zoning. Development sites – or developer levy proceeds – could be part of state and territory contributions to funding affordable housing development.

A commitment to build into the NHHA incentives for stepped-up use of inclusionary zoning by state governments is, therefore, very welcome.

However, the budget papers indicate that state compliance with this NHHA expectation might involve not only housing dedicated to affordable rental housing, but also “dedicated first home buyer stock”. This seems to raise the prospect of developers meeting inclusionary zoning requirements simply by reserving some newly built units for first home buyers rather than investors.

The best way to enhance first home buyer prospects vis a vis investor landlords would be to level the playing field by winding back investor negative gearing and capital gains tax concessions, not through this kind of tinkering. And to cast such “FHB reservation” initiatives as in any way equivalent to inclusionary zoning for affordable rental housing would be a highly retrograde step.

Renewing affordable housing stock

An interesting inclusion in the proposed terms of the NHHA is a clause about renewing affordable housing stock.

First, it appears positive in acknowledging the need for a public housing overhaul and indicating a new level of federal government interest in making this happen.

At a minimum, states and territories should be required to undertake a comprehensive audit of their existing portfolios. The level of outstanding disrepair has to be costed. They also should identify where renewal can best take place, balancing need for expanded and upgraded housing with sensitive treatment of existing communities.

Second, it indicates federal backing for further transfers of public housing as a growth path for the affordable housing industry. However, as our recent research for AHURI shows, this is feasible only if the operating cost gap is funded.

Past community housing growth through transfers, particularly following the 2009 housing ministers’ commitment to expand community housing to 35% of all social housing, involved an understanding that Commonwealth Rent Assistance, paid through Centrelink to transferred tenants, would help cover that gap.

Without additional funding in the NHHA, a new phase of growth through transfers requires a recommitment by governments to use rent assistance as an effective operational subsidy to community housing providers. A new target and timeframe to replace the 35% benchmark also need to be considered.

Homelessness services

Previously the subject of a separate funding agreement (the National Partnership Agreement on Homelessness), homelessness services have struggled for years in the face of that agreement’s pending expiry and short-term extensions.

The NHHA will fund homelessness services on an ongoing basis, which the sector has welcomed.

Funding shortfall remains

As we’ve indicated throughout, the objectives of the NHHA – and of the social and affordable housing system generally – will continue to run up against the reality that decent housing of this kind costs more than low-income households can afford to pay.

This applies especially to people living on the miserable level of benefits such as Newstart. A subsidy is required, both to build up the stock and to keep it in good order.

Clearer targets, more transparent cost accounting, and innovations like NHFIC finance won’t bridge the gap. On the contrary, to successfully use those initiatives to build more stock, both state and territory housing authorities and non-government affordable housing providers need a larger subsidy than present funding provides.

The budget has indexed NHHA funding to wages. It would be nice to think that land and housing prices will increase only in line with wages.

In reality, properly funding the growth and maintenance of our social and affordable housing stock will require more than what the federal government is offering.

Authors: Chris Martin, Research Fellow, Housing Policy and Practice, UNSW; Hal Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW

Tiny houses: the big idea that could take some heat out of the housing crisis

From The Conversation.

If you could have a new home, exactly to your specification for about a year’s average salary wouldn’t you take it? Many people, in the US, UK and Europe want to find an alternative housing solution that is cheap and mortgage free but also ecologically sustainable. The solution may be to build so-called “tiny houses” – very small dwellings, often built on trailers, that make the most of unused, unwanted or free sites in the city or country.

The tiny house is, indeed, tiny. It comes in at less than 25 square metres, but is able to provide comfort and security at minimum cost. These are primarily wooden buildings and can be bought ready-to-use or can be assembled by their future occupant. For as little as £15,000, you can buy a kit, or for up to £50,000 you can get a fully assembled and fitted-out home for two.

Because of their size they can be built on a steel-framed base similar to a trailer or caravan, meaning they can be mobile and therefore capable of use on temporary sites. They are usually single-space dwellings, sometimes with an open loft for sleeping reached by a ladder or steep stair with a shower room below. Most people would choose to set up a permanent or temporary connection to conventional services, but you can also go “off-grid” with solar panels, wood burners, and bottled gas for energy needs and chemical toilets or outhouses for sanitation.

Cutting back

There are now so many tiny house enthusiasts that it can justifiably be described as a movement, with online forums for practised and aspiring builders to share ideas and experiences. These houses are both cute and eccentric. Perhaps they tap into a common aspiration that people had as children to build a fort, a tree house, or a den. However, they also meet the deep human need to find a home that is just right for us. For those who have built their own Tiny House there is a special sense of connection to something made by their own hand, tuned to their own needs, even if they have used other people’s plans and commercially available components.

Tiny house advocates are attracted for both practical and cultural reasons. Although the idea of sorting out your main living expense for the price of a family car is undoubtedly a key motivation, it is also about empowerment of the individual to step outside the corporate idea that “bigger and more expensive is better”. Tiny house owners no longer aspire to an island kitchen unit or a wide screen TV in the basement, and it’s fair to say that buying stuff slows right down when you have nowhere to put it.

It is also about environmental responsibility and sustainable living. These buildings, simply because of their size, use considerably less energy both in their construction and running costs. The inclusion of other simple efficiencies such as LED lighting, super-insulation, and water reclamation simultaneously boosts ecological credibility and lowers monthly bills.

A sustainable life

We might think that this sort of living stems from ultra-modern, post-capitalist thinking, but in truth, it isn’t a new concept. The historic roots of the tiny house movement are in the traditional buildings that 17th-century settlers first built when homesteading North America and before that in earlier European rural precedents. These were simple, often one room buildings, built on minimal stone foundations and made from local timber hewn to shape.

The modern versions are often built to the same or better construction standard as full size houses, but contemporary American tiny house owners relate to the early settlers’ way of life using minimal resources, and to Henry David Thoreau’s book Waldon: A Life in the Woods, an important and influential record of the author’s experiment to live a sustainable life.

However, there are hurdles to overcome in tiny house living. A major issue is identifying suitable and available sites. In both Europe and North America planning legislation is clearly aimed at conventional buildings with expensive, long-term connections to services such as water supply, drainage, electricity and gas. Obtaining permission to set up a tiny house in an urban area close to employment and resources isn’t easy.

In the UK, the problem can be even more difficult with planning permission hard to obtain unless the building type meets recognised size, type and materials guidelines. The mobility aspect of many tiny houses can be a bonus here as in theory it enables owners to take advantage of temporary sites with the capacity to relocate when permission expires, or their requirements change.

The crucial question, of course, is whether the tiny house helps solve the larger housing problem in the UK, where housing charity Shelter estimates 250,000 dwellings are needed each year. It is a possibility if planning restrictions on dwelling size and typology can be relaxed and construction companies are willing to take on such low cost work on the small sites these buildings can utilise. However, a fundamental problem of providing any affordable accommodation in property hotpots would also need to be addressed by government legislation, ensuring these desirable little residences were only occupied by their owners and not gobbled up by absentee investors.

Author: Robert Kronenburg, Roscoe Professor of Architecture, University of Liverpool

Budget 2017: government still [just] tinkering with housing affordability

From The Conversation.

It’s unsurprising that in the lead-up to this year’s federal budget there was a lot of discussion about housing affordability as its centrepiece. Over the past 20 years price-to-income and price-to-rent ratios have doubled. Sydney’s price-to-income ratio is over 12, making it the second-least-affordable city in the world. Melbourne is in fourth place.

And in a budget tableau as bland as this one, it wouldn’t have taken much to really play up the housing affordability policies.

Yet the measures in this budget involve not much more than tinkering.

On the minus side, the biggest announcement was a “first home super saver scheme”, which would allow voluntary contributions of A$15,000 per annum and A$30,000 in total (per person if in a couple) to superannuation for prospective first home buyers from July 2017. These could be withdrawn and taxed at 30 percentage points below the normal marginal rate and used for a deposit.

This will cost the government A$250 million over four years and do absolutely nothing to help first home owners. We have seen this movie before, with 50 years of first home owner grants in one form or another. All that happens is that this subsidy goes into the price of existing housing. Sellers benefit, buyers get no joy.

It’s bad economics, somewhat costly, and a cruel hoax on prospective home buyers who are struggling with an out-of-control housing market.

But the biggest minus of all was the absence of any measure whatsoever to address negative gearing and CGT exemptions for rental properties. Sorry, there is one: you now won’t able to deduct an airfare to the Gold Coast to “inspect” your rental property. The government has boxed itself in on this, with Labor having taken a plan to the last election to tackle both of these issues (full disclosure, the Labor plan bears a good deal of resemblance to my McKell Institute plan).

Nonetheless, it is reflective of the state of our politics that the one thing that could really help the most (and which the PM has agreed with very publicly in the past) is off the table.

But the measures aren’t all bad. On the plus side, there were incentives for people over 65 to downsize by allowing A$300,000 of the proceeds of a sale of their main residence to go into their superannuation, above the controversial A$1.6 million cap announced in last year’s budget.

Will the budget encourage older Australians to downsize? Maybe. One measure of how powerful an incentive it will be is that it costs only A$30 million over the four-year forward estimates period. This is not a big government spend.

It’s also unclear whether it will be a large enough financial incentive to overcome the emotional and psychological barriers to moving from the family home after many years in it. There was also a conspicuous absence of reforms to stamp duty, which is a major impediment to downsizing.

There was also good news on affordable housing with the establishment of the National Housing Finance and Investment Corporation (NHFIC). It will provide A$63.1 million over four years to operate a so-called “bond aggregator” that aims to provide cheaper financing for community housing providers. This is a good idea that should have a positive effect, and help address the high cost of funds that often plagues financing of housing for low-income earners.

Consistent with the recent populist policy announcements by this government, foreign purchasers of Australian properties were targeted in this budget. There will no longer be a capital gains tax (CGT) exemption for primary residences of foreign and temporary tax residents, and the grandfathering will only last until June 30 2019. There will also be a lower threshold for CGT withholding (A$750,000, down from A$2 million) on foreign tax residents, and the rate will be increased from 10% to 12.5%.

There were some wishy-washy words about the crucial issue of housing supply. The government has definitely identified the key role that supply plays. They are proposing a variety of “city deals” to provide incentives for zoning reform — especially in western Sydney. That’s all good, but whether it is anything more than the budget-summary feel-good headline – “Working with the states to deliver planning and zoning reform” – remains to be seen.

There was also the announcement of a tax on foreign owners who leave their properties vacant. This is supposed to raise A$16.3 million over four years — which is a rounding error in the scheme of things.

We had a housing affordability crisis before this budget, and we will have one after it. If the first step to recovery is acknowledging that one has a problem, then the government is still on step one.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

The agile working style started in tech but it could work for banks

From The Conversation.

The purpose of the “agile” working style is to help businesses adapt to turbulent markets by adopting a fast and flexible approach to work. In one sense, it should come as no surprise that ANZ’s chief executive Shayne Elliot recently announced that ANZ will be shifting parts of its workforce to this style.

With the bank’s recent withdrawal from Asia and subsequent lower than expected revenues, this is part of ANZ refocus on its core business. In fact, each of Australia’s big four banks might be looking to become more efficient and responsive in the face of a tightly regulated market and slowly building retail banking competition from newer financial technology companies.

In another sense though, it’s surprising that one of Australia’s largest banks should signal such a profound change in work style. Finance is certainly not where agile got its start.

The origins of agile

The forerunners of agile stretch back as far as the Plan-Do-Study-Act method developed by Walter Shewart at Bell Labs in the 1930s and the Toyota Production System, based, in part, on the quality and systems thinking of Shewart’s student, William Edwards Deming.

However, agile as we understand it today is seen as emerging from software programming communities. It crystallised when 17 software developers gathered at the Snowbird ski resort in Utah in 2001 to share and refine their approaches to software development.

One of the participants had been reading a book on major companies coping with turbulent markets, called Agile Competitors and Virtual Organizations: Strategies for Enriching the Customer. Drawn to the agile’s connotations of speed and responsiveness, the group eventually adopted it as the moniker for their movement.

They published their views in The Manifesto for Agile Software Development, intending to help accelerate developers’ efforts to reliably produce software of the highest quality. Agile has since spread beyond the confines of IT to the other types of work and other organisations.

How to work in an agile style

As academics Rigby, Sutherland, and Takeuchi explain, agile now covers a broad range of methods, each varying according to their guiding principles and work rules. The three most well-known methods are scrum, lean, and kanban.

Scrum focuses on structuring teams to work across functions in a business, using creative and adaptive teamwork, daily stand-up meetings, and project reviews to quickly invent solutions and improve team performance.

Lean focuses on eliminating waste in systems and does not prescribe work rules to achieve this in the same way as scrum.

Kanban aims to shorten the time between the initiation and completion of work by visualising workflows, restricting the work being done at each stage in development, and measuring work cycle times to detect improvement.

ANZ seems to be most interested in the scrum method. ANZ’s Head of Product Katherine Bray stated:

There are vestiges of roles that we recognise, but with the underpinnings of hierarchy totally blown apart…[A scrum coach] is not your boss, that’s a coach, who is a peer. That product owner is not your boss, they’re a product owner who defines the how, and you galvanise around that.

Going back to the origins of agile and system thinking, it seems clear the agile approach is most likely to succeed where the organisation adopting it possesses structural modularity. Modularity proposes that organisations structure themselves in a way that allows teams to produce work that is layered, discrete, and testable.

This is what Bray is talking about – a radically new approach to roles and work styles at ANZ.

We might dismiss this whole reorganisation as marketing theatre, but intensifying competition and rapid change are all too real. This means many Australian businesses will have to come to terms with agile approaches if they are to remain responsive and competitive.

By taking up agile’s shift from top-down management to teams that organise themselves, and from a focus on compliance to a focus on innovation, ANZ is making its intent clear. It wants to achieve different results by doing things differently – surely a sane approach to change.

Yet this idea challenges the conventional structure and ethos of banks and similarly run businesses. These organisations are built to be secure and centralised in service of efficiency; modularity pushes them to be integrated and decentralised in service of innovation.

Modularity and agility are not easy to achieve. But they are fast becoming necessary if large companies, like ANZ, are to move with the times and adapt well to market turbulence.

Authors: Massimo Garbuio, Senior Lecturer, University of Sydney; Dreu Harrison, Research Assistant, University of Sydney

Affordable housing is not just about the purchase price

From The Conversation.

Solving the affordable housing crisis is a high priority for state governments around Australia.

This is understandable given the hyper-inflated property markets in many Australian capital cities. Rising concerns that interest rates will increase over coming years also fuel the unaffordability fires.

Proposed solutions to this crisis often focus on opening up new greenfield areas of land in the outer suburbs to develop lower-cost housing. Hence the solution to the affordable housing process is often thought to lie in creating housing with a low purchase price. This approach incentivises developers and housing suppliers to keep the price of new housing stock as low as possible.

This leads to houses that are more costly to own and maintain. Construction savings on features such as insulation, passive solar design, and heating and cooling systems mean such houses have high energy demands. That, in turn, means ongoing living costs such as the cost of air conditioning remain high for the life of the house.

Such houses are also constructed to the minimum standards dictated by the building codes. Poorer design and lower-quality materials can lead to large deferred maintenance costs and lower resilience to natural hazards.

In addition, housing in the outer suburbs has poorer prospects for capital growth, effectively trapping poorer households on the fringes of our cities. The residents of these suburbs also generally face higher transport costs to get to work and services.

Exposed to future risks

We are, in effect, encouraging new home owners to take on larger future risks and costs just so they can buy a house. This keeps government happy by increasing the number of new home owners – a proxy for affordable housing.

But this approach ignores the issue that home owners increasingly cannot afford to continue to own a home, not just buy one.

Increasingly, the first cost-saving action for struggling home owners is to be uninsured or underinsured. About 14% per cent of people have no home or contents insurance whatsoever.

Of those who are insured, many know they are not adequately covered. Back in 2012 it was identified that around one-quarter of home owners and renters had no insurance cover for house contents. Other estimates suggest that nearly one-third of households in Australia remain uninsured. Other studies more recently concluded that 41% of tenants do not have contents insurance.

Events like the recent Cyclone Debbie remind us just how exposed many families are to natural hazards, including physical damage to assets and the associated emotional hardship.

In many cases, families have been financially wiped out as a result of their lack of insurance coverage. These families then go back onto the long waiting list for affordable social housing.

Therefore, by defining affordable housing in terms of only purchase price of housing and number of new home owners, we are dramatically understating the problem of housing affordability.

By facilitating families to invest in houses that require high energy demands to be liveable, and which are located in areas increasingly exposed to natural hazards while households are uninsured or underinsured, we are simply mismanaging the affordable housing challenge.

Reframing affordability

A key action that can be taken is to frame housing affordability in terms of whole-of-ownership-life costs. This means we move away from defining affordable housing in terms of the initial capital cost and instead consider the total cost of owning a house over the term of ownership.

This approach explicitly encapsulates the risks of under-insurance and higher interest rates.

This is the approach used when funding infrastructure and major utilities assets. When planning major infrastructure, cost-benefit analyses must now consider the whole-of-life costs. This is to account for enthusiastic infrastructure advocates deferring costs through to increased maintenance obligations so the capital costs remains low, and hence the project becomes more attractive.

It’s the same for housing development. Therefore, the same approach needs to be adopted for home ownership.

Five ways an Australian housing bubble could burst

From The Conversation.

There’s been quite a bit of speculation over whether Australia has a property market bubble – where house prices are over-inflated compared to a benchmark – and when it might burst. According to housing experts, there’s at least four scenarios where this could happen.

Australia could see a property bubble burst due to:

  • Lending tightening, interest rate hikes and mortgage stress
  • Underemployment and unemployment creating a slow deflation
  • Government intervention failure and market repair
  • Global crisis

These four scenarios focus on different tension points in Australia’s and the global economy. One scenario focuses on the balance of actions between regulators like APRA and the Reserve Bank, combined with household mortgage stress. Another envisions the affect that unemployment might have in certain areas.

Some of the factors we may see play out, such as the federal and state government trying to intervene to “fix” problems in the market, as happens in one scenario. But other factors may be out of the government’s control, for example, where a global crisis pushes up risk premiums.

All of these scenarios highlight just how complicated and interrelated the steps that lead to a property bubble burst could be.

Lending tightening, interest rate hikes and mortgage stress

Associate Professor Harry Scheule, UTS Business School

Following concerns of the housing bubble, bank regulator APRA increases bank lending standards, it also increases the risk weight on Australian mortgages resulting in lower loan supply and higher loan costs. Banks are encouraged to reduce interest-only loans, hold a greater amount of costly capital (making home loans more expensive) and reduce the loan amounts offered to applicants due to higher future interest scenarios.

Following increases in interest rates in the US and Europe, as those markets recover, the Australian dollar begins to decline – forcing the Reserve Bank of Australia (RBA) to increase interest rates.

Higher interest rates lead to higher monthly repayments, as most of Australia’s home loans are adjustable. Interest only loans are the most exposed. Higher interest rates also lead to more mortgage delinquencies.

The banks tighten bank lending standards in response to the increase in delinquencies. This further constrains interest-only borrowers seeking to refinance after the end of the interest-only terms. This means more mortgage stress, as many had expected to roll over the interest-only period indefinitely, but now they are forced to make principal repayments next to interest payments.

The cycle between delinquencies and tightening bank lending standards continues and as a result there’s a noticeable drop in loan supply and a fall in house prices.

Underemployment and unemployment create a slow deflation

Danika Wright, Lecturer in Finance, University of Sydney

Unemployment and underemployment – workers who want to work more but can’t – increase. As the apartment development boom dies down, and without a mining boom to replace it, construction industry workers are at high risk.

Households with a lot of mortgage debt are forced to limit their spending, particularly on discretionary items. This in turn affects companies that employ retail workers, reducing hours and employment.

Employment opportunities are a major component of house price amenity, in part because demand for housing is pushed higher by inbound work-related migration. So, as there are less jobs nearby, the amenity value of some areas decreases.

The amount of people at risk of defaulting on their mortgage increases in areas where there is a loss of employment or reduced income. In 2008, arguably the last time Sydney house prices went through a correction, the incidence of mortgage defaults and property price declines was geographically localised.

Borrowers who have the least amount of equity in their homes (typically the least wealthy, younger and newer entrants to housing market) are the hardest hit by falling property values. They are more likely to end up “underwater” – that is, owing more than the property is now worth – and face the prospect of a distressed sale. This in turn contributes to the downward spiral in house prices.

Australia has tighter lending criteria than regulators enforced before the global financial crisis in the United States. But concerns by regulators, including APRA, over current lending practices and potentially fraudulent activities raise questions over the real quality of mortgages and the ability of borrowers to repay them.

Government intervention failure and market repair

Professors of Economics, Jason Potts and Sinclair Davidson, RMIT

A combination of low interest rates and low growth in new housing stock drive up Australian housing prices, a situation compounded by poor policy choices by state and federal governments and high demand from foreign residential property investors.

As a result housing is misallocated in the Australian market, across demographic and especially age groups. This produces demographic pressures, as millennials delay leaving home, delay starting families. This leads to political pressure on governments – increases the urge to intervene.

The federal government intervenes, blaming the secondary drivers (particularly the non-voting group: foreign investors). They increase restrictions on foreign investment in residential housing stock.

The federal government also lobbies APRA to increase rules on financial products, while promoting a scheme to subsidise and promote first home ownership.

Because none of these previous measures from the federal government affect the primary drivers of the misallocation of housing, domestic interest rates don’t change, and state governments do not act to release new stock. As a result housing prices continue to grow.

Increasingly alarmed that house prices continue to rise, the federal government starts to panic, threatening ever further regulation and starts to blame the financial system. This triggers the RBA to finally act, raising interest rates.

As interest rates rise, this causes mortgage stress, resulting in default among investors with high amounts of debt, pushing these properties onto the market. These distressed sales finally cause prices to fall.

Global crisis

Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, ANU

International crisis (whether it be political, military, economic) leads to an increase in global risk premiums.

Borrowing costs for Australian banks rise because of this and supply of global capital falls, pushing up mortgage rates in Australia.

The most vulnerable mortgagees can no longer afford their mortgages and are forced to sell their homes.

House prices fall which, coupled with rising interest rates, adds further distress to households’ balance sheets, leading to more selling of houses and so on.

Authors: Jenni Henderson, Editor, Business and Economy, The Conversation; Wes Mountain, Deputy Multimedia Editor, The Conversation

Interviewed: Danika Wright, Lecturer in Finance, University of Sydney; Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology Sydney; Jason Potts, Professor of Economics, RMIT University; Sinclair Davidson, Professor of Institutional Economics, RMIT University; Timo Henckel, Lecturer, Research School of Economics, and Research Associate, Centre for Applied Macroeconomic Analysis, Australian National University.

What is reflation and is Australia experiencing it?

From The Conversation.

Since the 2007 global financial crisis, policy makers have been fighting deflationary (falling prices) and disinflationary (prices rising at slow rate) pressures. But the global economy finally appears to be entering reflation – a period of higher prices together with stronger growth.

This is good news for households, businesses and governments around the world.

Reflation means the end of below trend growth, and this has widespread benefits. As demand grows, firms will expand production and will require more staff. This is good for job seekers, but ultimately it should also lead to higher wages. Although there is scant evidence of that so far in Australia.

The federal government will also benefit from reflation via increased tax revenue, as corporate profits increase and individuals return to the workforce. Meanwhile, government spending should reduce as benefit payments fall.

Year-on-year changes in Australian and US consumer prices. Author provided

Seeing reflation

In its recent update on the World Economic Outlook, the International Monetary Fund (IMF) increased growth expectations both globally and in Australia.

The IMF noted there has been a recovery in investment, manufacturing, and trade. This is consistent with recent manufacturing data that signals there will be solid growth in the coming months.

The manufacturing data also noted that costs are increasing, largely thanks to rising prices for raw materials. Indications are that consumer prices are also turning upwards.

The latest figures show Australian inflation creeping into the lower end of the Reserve Bank of Australi’s target range, but smoothed underlying inflation (which takes out extreme price fluctuations) is still just 1.8%.

This pick up in economic activity has occurred at the same time as corporate earnings have improved. This is a global phenomenon, but Australia is able to benefit from this via trade, particularly in the resource sector.

Investors have been taking advantage of the “reflation trade”, by piling into assets that benefit from rising growth and inflation – companies in emerging markets and who sell discretionary items, such as cars and jewellery, to consumers.

In the 6-month period since the US election, stock markets in the US and Australia have each increased around 11%.

Stock markets continue to rise since the US election. Author provided

What’s causing reflation?

Following the financial crisis, central bankers slashed interest rates to all-time lows, and greatly expanded their balance sheets by purchasing assets, in a bid to stimulate their economies. Until recently this had failed to stimulate global demand, but that appears to be changing.

The White House has moved to deregulate industries, and has promised to increase infrastructure spending in the US.

As the world’s largest economy, reflation in the US results in economic growth elsewhere, particularly in countries like Australia that sell goods and raw materials into the US.

Finally, the political uncertainty of the Brexit referendum and US Presidential election have passed. Both consumers and producers are confident, and this is feeding into other decisions.

Will reflation keep going?

Whether reflation continues is far from guaranteed.

For starters central bankers could raise interest rates more quickly than expected if they think inflation will get out of hand. Already, the US Federal Reserve has indicated discomfort with high share prices. Increasing interest rates, or selling some of its recent asset purchases, could impact demand.

Second, there are already questions about the Trump adminsitration’s ability to enact legislation. The prospects of tax reform and infrastructure spending are fading. The infrastructure package, especially, had potential to increase inflation.

Finally, there are new sources of political uncertainty. Trump appears to have reversed course on engagement in the Middle East and North Korea. The UK faces a surprise general election and Marine Le Pen is still in the running in the French Presidential election.

More uncertainty inhibits firms making investment and employment decisions.

At present, the economic signs are good for a continued reflation of the global economy. This will benefit households as well as investors and corporations. However, this recovery is still fragile and may be thrown off course by policymakers and further increases in geopolitical tensions.

Author: Lee Smales, Associate Professor, Finance, Curtin Graduate School of Business, Curtin University

New statistical methods would let researchers deal with data in better, more robust ways

From The Conversation.

No matter the field, if a researcher is collecting data of any kind, at some point he is going to have to analyze it. And odds are he’ll turn to statistics to figure out what the data can tell him.

A wide range of disciplines – such as the social sciences, marketing, manufacturing, the pharmaceutical industry and physics – try to make inferences about a large population of individuals or things based on a relatively small sample. But many researchers are using antiquated statistical techniques that have a relatively high probability of steering them wrong. And that’s a problem if it means we’re misunderstanding how well a potential new drug works, or the effects of some treatment on a city’s water supply, for instance.

As a statistician who’s been following advances in the field, I know there are vastly improved methods for comparing groups of individuals or things, as well as understanding the association between two or more variables. These modern robust methods offer the opportunity to achieve a more accurate and more nuanced understanding of data. The trouble is that these better techniques have been slow to make inroads within the larger scientific community.

What if these mice aren’t actually representative of all the other mice out there? Cmdragon, CC BY-SA

When classic methods don’t cut it

Imagine, for instance, that researchers gather a group of 40 individuals with high cholesterol. Half take drug A, while the other half take a placebo. The researchers discover that those in the first group have a larger average decrease in their cholesterol levels. But how well do the outcomes from just 20 people reflect what would happen if thousands of adults took drug A?

Or on a more cosmic scale, consider astronomer Edwin Hubble, who measured how far 24 galaxies are from Earth and how quickly they’re moving away from us. Data from that small group let him draw up an equation that predicts a galaxy’s so-called recession velocity given its distance. But how well do Hubble’s results reflect the association among all of the millions of galaxies in the universe if they were measured?

In these and many other situations, researchers use small sample sizes simply because of the cost and general difficulty of obtaining data. Classic methods, routinely taught and used, attempt to address these issues by making two key assumptions.

First, scientists assume there’s a particular equation for each individual situation that will accurately model the probabilities associated with possible outcomes. The most commonly used equation corresponds to what’s called a normal distribution. The resulting plot of the data is bell-shaped and symmetric around some central value.

Curves based on equations that describe different symmetric data sets. Inductiveload

Second, researchers assume the amount of variation is the same for both groups they’re comparing. For example, in the drug study, cholesterol levels will vary among the millions of individuals who might take the medication. Classic techniques assume that the amount of variation among the potential drug recipients is exactly the same as the amount of variation in the placebo group.

A similar assumption is made when studying associations. Consider, for example, a study examining the relationship between age and some measure of depression. Among the millions of individuals aged 20, there will be variation among their depression scores. The same is true at age 30, 80 or any age in between. Classic methods assume that the amount of variation is the same for any two ages we might pick.

All these assumptions allow researchers to use methods that are theoretically and computationally convenient. Unfortunately, they might not yield reasonably accurate results.

While writing my book “Introduction to Robust Estimation and Hypothesis Testing,” I analyzed hundreds of journal articles and found that these methods can be unreliable. Indeed, concerns about theoretical and empirical results date back two centuries.

When the groups that researchers are comparing do not differ in any way, or there is no association, classic methods perform well. But if groups differ or there is an association – which is certainly not uncommon – classic methods may falter. Important differences and associations can be missed, and highly misleading inferences can result.

Even recognizing these problems can make things worse, if researchers try to work around the limitations of classic statistical methods using ineffective or technically invalid methods. Transforming the data, or tossing out outliers – any extreme data points that are far out from the other data values – these strategies don’t necessarily fix the underlying issues.

A new way

Recent major advances in statistics provide substantially better methods for dealing with these shortcomings. Over the past 30 years, statisticians have solidified the mathematical foundation of these new methods. We call the resulting techniques robust, because they continue to perform well in situations where conventional methods fall down.

Conventional methods provide exact solutions when all those previously mentioned assumptions are met. But even slight violations of these assumptions can be devastating.

The new robust methods, on the other hand, provide approximate solutions when these assumptions are true, making them nearly as accurate as conventional methods. But it’s when the situation changes and the assumptions aren’t true that the new robust methods shine: They continue to give reasonably accurate solutions for a broad range of situations that cause trouble for the traditional ways.

Depression scores among older adults. The data are not symmetric, like you’d see in a normal curve. Rand Wilcox, CC BY-ND

One specific concern is the commonly occurring situation where plots of the data are not symmetric. In a study dealing with depression among older adults, for example, a plot of the data is highly asymmetric – roughly because most adults are not overly depressed.

Outliers are another common challenge. Conventional methods assume that outliers are of no practical importance. But of course that’s not always true, so outliers can be disastrous when using conventional methods. Robust methods offer a technically sound – though not obvious, based on standard training – way to deal with this issue that provides a much more accurate interpretation of the data.

Another major advance has been the creation of bootstrap methods, which are more flexible inferential techniques. Combining bootstrap and robust methods has led to a vast array of new and improved techniques for understanding data.

These modern techniques not only increase the likelihood of detecting important differences and associations, but also provide new perspectives that can deepen our understanding of what data are trying to tell us. There is no single perspective that always provides an accurate summary of data. Multiple perspectives can be crucial.

In some situations, modern methods offer little or no improvement over classic techniques. But there is vast evidence illustrating that they can substantially alter our understanding of data.

Education is the missing piece

So why haven’t these modern approaches supplanted the classic methods? Conventional wisdom holds that the old ways perform well even when underlying assumptions are false – even though that’s not so. And most researchers outside the field don’t follow the latest statistics literature that would set them straight.

There is one final hurdle that must be addressed if modern technology is to have a broad impact on our understanding data: basic training.

Most intro stats textbooks don’t discuss the many advances and insights that have occurred over the last several decades. This perpetuates the erroneous view that, in terms of basic principles, there have been no important advances since the year 1955. Introductory books aimed at correcting this problem are available and include illustrations on how to apply modern methods with existing software.

Given the millions of dollars and the vast amount of time spent on collecting data, modernizing basic training is absolutely essential – particularly for scientists who don’t specialize in statistics. Otherwise, important discoveries will be lost and, in many instances, a deep understanding of the data will be impossible.

Author: Rand Wilcox, Professor of Statistics, University of Southern California – Dornsife College of Letters, Arts and Sciences

Housing still out of reach for many even as rents fall in post-boom Western Australia

From The Conversation.

As rents soar in Melbourne and Sydney, the rental market in Western Australia has become more affordable for low-wage workers since the end of the mining boom. But many households still struggle to find affordable accommodation.

Today Anglicare released its annual national Rental Affordability Snapshot, which includes a focus on each state.

In WA, 14,123 private rentals were advertised at the beginning of April, up 8% from a year ago. With increased stock, rents are becoming more affordable across the state. The median rent in the Perth metro area fell 11% to A$350; by 6% in the Southwest and Great Southern regions; and by 7% in the Northwest, including the Pilbara and Kimberley.

Following years of inflated rents during the mining boom, working families in WA are seeing some real improvement in rental affordability – defined as less than 30% of household income. More than 46% of properties listed in Perth were found to be affordable for a couple both earning minimum wages and receiving Family Tax Benefit in 2017, compared to 39% in 2016. Similar families could afford 23% of properties in Melbourne and only 4% in Sydney.

Single parents on a minimum wage had far fewer options. They could afford only 6% of listed properties in Perth. In all of Sydney and Melbourne, only one property was affordable for single parents on a minimum wage.

The situation remains dire for households on fixed incomes in WA – as it does for similar households across Australia. A person on a disability pension could afford only 25 properties (0.2% of available properties). A single parent could afford 48 (0.3%). And pensioners could afford 105 (2.7%) in all of WA.

People on Newstart or Youth Allowance had no affordable options in the entire state. This includes boarding houses and share houses, where rooms are rented out individually.

What are the consequences?

With more than 18,500 households on the waiting list for social housing and an average wait time of three years, most low-income households must find somewhere to live in the private rental market. When housing is unaffordable, low-income households end up paying a large percentage of their income on rent. Doing this means they forgo basic necessities, borrow money to stay afloat and, in some cases, experience homelessness.

The number of people at risk of homelessness is increasing every year. More than 24,000 Western Australians sought help from a homelessness service in 2016, an increase of 5% from the previous year.

The slowing state economy has brought insecurity and uncertainty to many working families. With growing rates of unemployment and under-employment, and increased casualisation of the workforce, many WA households are in precarious financial circumstances.

Anglicare WA financial counsellors report an increase in requests from tenants who have had to break their lease due to a job loss or needing to move interstate for employment. They find themselves liable for the period the rental remains vacant in the soft housing market, as well as the difference between the rent they paid and the likely reduced rent for new tenants.

Landlords remain protected from the loss, while the tenants often end up paying for a home they no longer live in.

What can be done?

To start with, increasing the stock of social housing would go some way to overcoming the lack of affordable options for people on low incomes.

The creation of affordable housing bonds, similar to those discussed by Treasurer Scott Morrison in his address to the Affordable Housing and Urban Research Institute earlier this month, would create a pool of funds for social housing providers to use to build more stock. However, such a mechanism is still many years off.

In the meantime, increasing the rate of Newstart from the current $268 per week to ensure a basic standard of living for job-seekers would bring households living in poverty back from the brink of homelessness.

Two other policy options would also help improve housing affordability for people on low incomes. The government should remove distortions in the tax system that inflate the cost of housing and discourage institutional investment in the private rental sector. Commonwealth Rent Assistance could also be increased and better targeted.

The main conclusion from this study is that broader discussions about housing affordability overlook the fact that the private rental market is not capable of meeting the needs of many people on low and fixed incomes without trapping them in poverty by consuming most of their available funds.

Author: Shae Garwood, Honorary Research Fellow, School of Social and Cultural Studies, University of Western Australia