Tag: The Conversation

Houses aren’t more unaffordable for first home buyers, but they are riskier

From The Conversation.

Climbing house prices seem to scare people but houses are relatively more affordable today than they were in 1990, it’s actually interest-rate risk that’s the bigger problem for first home buyers.

If you look at latest numbers on house prices, as a measure of affordability, they use a “median measure” – that is, the ratio of median house price to median salary. According to the latest Demographia survey, the price of the median Sydney house is 12.2 times the median salary, and it is 9.5 in Melbourne.

But it’s simply misleading to compare median-based measures of housing across different time periods in the same location. These simple median measures do not take into account differences in interest rates in different time periods.

A house in 2017 that costs nine times the median salary, when mortgage interest rates are less than 4%, is arguably more affordable than a house in 1990 that costs six times the median salary. Interest rates in 1990 were 17%.

Consider this simple example. In 1990 a first home buyer purchases an average house in Sydney priced at A$194,000. With mortgage interest rates at 17%, the monthly mortgage repayments were A$2,765 for a 30-year mortgage. But in 1990 the average full-time total earnings was only A$30,000 per annum, so the buyer’s mortgage repayments represented over 111% of before-tax earnings. In 2017 a first home buyer purchasing a Sydney house for A$1,000,000, with interest rates at 4%, is only required to pay A$4,774 every month, or 69% of their before-tax average full-time total earnings.

So, relatively, houses are substantially more affordable today than they were in 1990. The lower interest rate means the costs of servicing a mortgage is lower today than it was 25 years ago, or even 50 years ago.

However, those lower interest rates also mean today’s first home buyers face greater perils than their parents or grandparents.

Interest-rate risk

Interest rate risk is the potential impact that a small rise in mortgage interest rates can have on the standard of living of homeowners. This does not consider the likely direction of interest rates, rather how a 1% change in interest rates affects the repayments required on a variable rate mortgage.

When interest rates rise so do mortgage repayments. But the proportional increase in repayments is higher when interest rates are lower. For example, if mortgage interest rates were 1%, then increasing interest rates by another 1% will double the interest costs to the borrower. When interest rates are higher, a 1% increase in interest rates will have a lower proportional affect on their repayments.

If we go back to the example from before, the interest rate risk of the first home buyer from 1990 is much lower than that of the 2017 buyer. If mortgage interest rates rose by 1% in 1990, repayments would rise by only 5.7% to $2,923. For the 2017 buyer on the other hand, a 1% increase in interest rates would see their repayments rise by over 12% to $5,368 per month.

This has the potential to financially destroy first home buyers and, due to the high reliance of the retail banking industry on residential real estate markets, potentially create a systemic financial crisis.

Interest rate risk has an inverse relationship to interest rates – when interest rates fall, interest rate risk rises. As a result, interest rate risk has been steadily increasing as mortgage interest rates have fallen. Given that we have record low interest rates at the moment, interest rate risk has never been higher.

Putting it all together

Compounding all of this is the general trend of interest rates.

In 1990 mortgage interest rates were at a record high and so our first home buyer could reasonably expect their repayments to decrease in the coming years. They could also reasonably expect that, as mortgage interest rates fell, demand for housing would increase (all else being equal) and so would house prices, generating a positive return on their investment.

But our 2017 first home buyer is buying when interest rates are at record lows. They cannot reasonably expect interest rates will fall or for their repayments to go down in future years. It’s also unlikely that house prices will increase as they have for previous generations.

So while the current generation of first home buyers find housing much more affordable than their parents, they face substantially higher interest-rate risk and a worse outlook for returns on their investment. If we wish to address the concerns of first home buyers we should look into these issues rather than exploiting misrepresentative median-based measures of house affordability.

Apart from addressing issues with the supply of housing, governments need to investigate ways to reduce interest rate risk over the longer term.

Author: Jamie Alcock, Associate Professor, University of Sydney

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We would make the point that income growth is static or falling, prices relative to income are higher in many urban centres, and the banks are dialing back their mortgage underwriting criteria (especially lower LVR’s, reductions in their income assessment models and higher interest rate buffers). All of which work against lower interest rates, which are now on their way up, so this article seems myopic to us!

However, we agree the interest rate risk is substantial, and more than 20% of households are in mortgage stress AT CURRENT LOW Rates. We also think the risks are understated in most banking underwriting models, because they are based on long term trends when interest rates were higher.

Capital gains tax concession is too generous: economists poll

From The Conversation.

As the federal budget approaches, the government is grappling with ways to enhance housing affordability, including reforming the current 50% capital gains tax (CGT) deduction on property investment.

The Economics Society of Australia (ESA) Monash Forum polled economists on this proposition:

Capital gains tax deductions for housing investment should be removed because they overstimulate the housing market, contributing to rising house prices.

This is a deliberately more extreme measure than the proposal reportedly being considered by the federal government, which is to cut the current discount to 25%. But we wanted to assess more generally the effect of capital gains taxes on the housing market.

The poll found 44.4% of economists agreed with a statement that the tax deduction should be removed entirely (22.2% agreeing and 22.2% strongly agreeing). But 40.7% disagreed with the statement (22.2% disagreeing and 18.5% strongly disagreeing); while 14.8% of respondents were uncertain.

While some economists support the current role of the CGT discount to avoid taxing the capital gains that arise as a result of inflation increasing house prices, as opposed to the valuation in the land or property due to development (Saul Eslake, Rodney Maddock, Nigel Stapledon and Doug McTaggart), others believe the tax should also apply to the gains as a result of inflation (Kevin Davis and Margaret Nowak).

Many argued the principle of the CGT discount is not a bad policy, however the level of the discount is generous and is open for abuse.

They also pointed out that changes in one type of tax will distort the economy, especially if it is only targeted to one type of asset, in this case property. Instead some economists suggested the approach should be a holistic reform to fix tax inefficiencies, and tax treatment should be equal between all forms of investment and saving.

Most of the economists agreed housing affordability policies should be focused mainly on housing supply and housing market constraints (as well as transport and infrastructure) to solve the crisis. Other policies such as shared-ownership schemes and government-backed bonds are also being considered.

Capital gains tax

The capital gains tax (CGT) is calculated at the effective marginal tax rate of the investor, on the capital gains made at the time of sale of the asset. Investors who hold an asset for longer than 12 months receive a 50% discount on the CGT liability, at the time of sale. For superannuation funds, the discount rate is 33.3%.

Owner-occupiers are fully exempt from capital gains tax on the sale of their primary residence.

Some of the options reportedly being considered by the federal government include decreasing the CGT concession to 25%, decreasing it to 40% discount (as recommended in the Henry Tax Review) only for property investments, or some other reduction in the CGT discount for property investments.

Another option is completely removing the concession if the property is sold in the initial investment years; and phasing the discount in after the investment has been held for some specified number of years.

The economists’ arguments for and against

Economists who supported removing capital gains tax deductions for housing investment said the discount provides incentives to over-invest in property rather than other assets that provide income. So by eliminating or reducing the CGT discount, the cost of capital will increase and buyers will reduce their demand for property, resulting in lower, more affordable house prices.

Those who agreed with the statement argue any change in the CGT discount to address property speculation should also be accompanied by reforming negative gearing. They argue that eliminating the CGT discount for property only would push residential investors towards cheaper properties or towards investing in other assets that maintain the CGT discount.

Most studies find no evidence of capital gains advantages being a main incentive for investors holding residential property. However it appears to be a small factor in the intention of investing in residential property.

Those against the statement argue the timing may not be right as the housing cycle is currently at its peak, and the double digit house price appreciation rates are only seen in the inner-ring suburbs of metropolitan cities and only for houses and not apartments.

Economists would expect to see only a short-term drop in house prices if the CGT deductions are eliminated, as investors switch away from property and into other assets. So the remaining residential investors in the market would purchase cheaper properties, potentially still crowding out first-home buyers.

They would also hold the property for a longer period. In the medium to long-term, the reduction in residential investment would impact on the new and existing supply of housing, resulting in housing shortage and rising house prices.

You can read the economists’ individual answers by clicking below.

The ESA Monash Forum is a joint initiative between Monash Business School and the Economic Society of Australia. Maria Yanotti was a guest writer for the Forum.

Explainer: the financialisation of housing and what can be done about it

From The Conversation.

A recent United Nations report on the right to adequate housing identifies the financialisation of housing as an issue of global importance. It defines the financialisation of housing as:

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

The UN Special Rapporteur on the Right to Housing argued that treating the house as a repository for capital – rather than a place for habitation – is a human rights issue. Leilani Farha explains her role as the UN Special Rapporteur on the Right to Housing

The financialisation of housing has been central to wealth creation in Australian households since at least the second world war. Today, it underwrites the bank of mum and dad, amateur property investors as landlords, asset-based welfare, and foreign real estate investment.

Australia’s financialised housing system

Following Prime Minister Robert Menzies’ “Forgotten People” speech, Australian governments have effectively subsidised housing investment through taxation incentives for home ownership.

Capital gains exceptions, the exclusion of the primary home from pension calculations, negative gearing, tenancy policies that favour property owners, less restrictive mortgage financing arrangements and first home owner grants are commonly cited examples.

These policies and practices underpin many of the benefits of property investment. But they also change the way Australians think about their home. Houses have shifted from being valued as a place to live and to raise a family towards being viewed also as a place to park and grow capital.

This strongly influences Australians’ decision-making about buying and selling property. It also affects how they think about and use housing equity for business, retirement, family and other purposes.

21st-century winners

Owner-occupiers and property investors benefit most from a financialised housing system.

While many Australians own investment properties, these investors tend to be amongst the wealthiest in our society, challenging the myth of the “mum and dad” investor. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows, for example, that “over 50% of owners are in the top wealth quintile, and over three-quarters are in the top two quintiles”.

Property investors also tend to have higher incomes, with 70.3% earning in the top 40% of all incomes. They can access their housing equity by buying and selling when market conditions are right. The home can also be treated like an ATM via redraw mortgages.

Linked with foreign investment policies, this system can expose local housing markets to foreign investors and shifting global capital and financial markets. This can change the investment dynamics of local property markets and rental stock.

21st-century losers

Richard Ronald recently highlighted the emergence of “Generation Rent”. While some young people will eventually inherit from their parents, those whose parents rent or are over-leveraged mortgage-holders are increasingly shut out of home ownership.

This suggests a growing polarisation in housing opportunity.

People earning middle and lower incomes, younger people whose parents are not home owners and women who have lost a home or never gained housing wealth are among the most disadvantaged.

Pensioners who rent face housing insecurity and difficulties making ends meet. People remain homeless despite it costing government less to provide permanent supportive housing to end homelessness than to provide services to the homeless.

People living in public, social and other “affordable housing” can be doubly disadvantaged.

First, due to their affordable housing tenure, these groups have not built any capital in their housing.

Second, some residents face eviction through large-scale public housing redevelopments by governments that view their homes as key real estate assets.

Housing experts call for action

In their book, David Madden and Peter Marcuse explain how to definancialise the housing system.Verso Books

David Madden and Peter Marcuse have shown how to definancialise a housing system. They argue that even the term “affordable housing” is a financialised way of thinking about housing provision.

They call for an increase in public and social housing, and for an end to the eviction or rehousing of public and social housing tenants. Some affordable housing advocates agree, arguing for an increase of “at least 2,000 new dwellings a year for ten years” in New South Wales alone.

More affordable housing and low-cost social rentals, which peg housing costs to income, are needed. Government and not-for-profit builders could provide such housing. This would also require “new ways to finance affordable-rental housing”.

Private rentals need to be more secure, too, so tenants have the regulatory support to treat their housing like a home. Removing no-cause eviction is an important start.

A long-term plan for overhauling the taxation system is key. This would, however, need to limit the financial risks to current home owners and investors.

A slow winding back of tax breaks for investment properties would encourage property owners and investors to move their housing wealth into other asset classes over the long term.

This would help to ameliorate the current “distorted investment pattern that disadvantages the supply of affordable rental housing”.

 

Authors: Dallas Roger, Senior Lecturer, Faculty of Architecture, Design and Planning, University of Sydney;  Emma Power, Senior Research Fellow, Geography and Urban Studies, Western Sydney University

 

Australia finally has crowd-sourced equity funding

The Conversation.

The Senate has passed a bill to allow companies to access crowd-sourced equity (CSF). But its conditions make 99.7% of Australian companies ineligible and the lowered governance requirements that some companies may qualify for may not outweigh the costs of accessing CSF.

CSF is similar to other forms of crowdfunding in that it enables companies to raise funds through an online portal. The difference is that investors receive a share of the company rather than a product or service. They can now buy up to A$10,000 of equity in a company through a licensed CSF platform.

Eligible companies will be able to raise up to A$5 million a year this way. The government sees this as a remedy for a shortage of finance for small and medium enterprises (SMEs) and start-ups.

Over the 15 months since the idea was first touted – a different bill was introduced in 2015 – the legislation has undergone a series of changes and proposed amendments. This include fundamental aspects such as the size and type of companies that are eligible.

The bill that passed was introduced in late 2016 and contains improvements on the original. But there is still more to do to create a thriving CSF culture.

The safeguards

The bill that passed the Senate introduces three safeguards to protect investors.

1) Regulation imposed on companies seeking capital from CSF

At first glance, the regulation imposed on companies seems reasonable. Eligible companies are able to raise A$5 million through CSF. This is generous when compared to other countries that have capped CSF at A$2 million. Further, while companies must produce a disclosure document when they raise capital through CSF, it is not as onerous as those required for other methods of fundraising.

However, one key feature of the legislation is that it restricts CSF to public unlisted companies that are limited by shares, and with less than A$25 million in gross assets and annual revenue. These criteria alone exclude proprietary companies and many public companies. More than 99.7% of companies will not able to raise capital through CSF.

The legislation excludes foreign companies from raising CSF in Australia. It also excludes companies and their related parties from accessing CSF if their purpose is investment. This can be contrasted with other countries. In New Zealand, all companies can access CSF. In the United States, United Kingdom and Canada, only a small proportion of companies are excluded.

The more inclusive approach adopted by these countries allows CSF to achieve the aims of promoting innovation and remedying the shortage of finance that SMEs face.

2) Regulation imposed on crowd-sourcing platforms

Crowd-sourcing platforms, and Australia already has a few, must have a financial services licence. The platform also must comply with a range of obligations specified in the 2016 bill, such as vetting the companies seeking capital through CSF. This allows the intermediary to act as a gatekeeper, but compliance will be onerous.

The fact that only a small pool of companies can access CSF will lead to ferocious competition. The platforms could find it challenging to generate profits. This would affect the viability of platforms and create a barrier to entry.

We have already seen examples of overseas intermediaries struggling in this sphere. For instance, in Italy, where very few companies can use CSF, only one CSF intermediary now exists. In New Zealand, a number of intermediaries were quickly established but some have already withdrawn from the market.

3) Regulation imposed on investors

Australia has not imposed a general cap on investment as other countries have.

The US caps investment by those with less than US$100,000 of income or net worth to US$2,000 or 5% of the annual income or net worth (whichever is greater) within a 12-month period. If annual income or net worth is equal to or greater than US$100,000 they can invest 10% of their annual income or net worth (to a maximum of US$100,000) within 12 months.

In the UK, an investor should not invest more than 10% of their net assets in non-readily realisable securities (such as equity in an unlisted company) in a 12-month period.

The Australian legislation adopts a more balanced approach. It only limits the amount investors can invest in each company to A$10,000.

One contentious issue in the 2015 bill was the duration of the cooling-off period that allowed investors to withdraw their offers if they changed their mind. A cooling-off period can be a boon for investors but problematic from a business perspective as it could result in market manipulation. Industry contested the proposed five-day cooling-off period.

As a result, the 2016 bill shortened the period to 48 hours. This would be similar to the cooling-off period applied in the Canada. However, after debating this matter in the Senate, the final legislation was amended again and the cooling-off period is back to five working days.

The trade-off

Like its predecessor, the 2016 bill attempts to remedy the issues raised by the fact that only a small percentage of companies are able to access CSF. For instance, it reduces corporate governance requirements for newly registered or converted public companies if they wish to access CSF.

Consequently, if a proprietary company desires to raise funds through CSF it can convert to a public company and be exempt from certain compliance requirements imposed on public companies for a period of five years:

  • It is not required to hold an annual members’ general meeting for five years.
  • It is only required to provide online financial reports to shareholders for a period of five years. No hard copies are required to be sent out.
  • While public companies have to appoint an auditor within one month of registration, for the first five years companies eligible for limited governance requirements do not need to do so until they raise more than A$1 million from CSF or other offers requiring disclosure.

At first glance this may be appealing, but the concessions do not outweigh the significant costs of converting from a proprietary to a public company.

For instance, if the company raises more than A$1 million it will have to appoint an auditor. The company will also be deemed an “unlisted disclosing entitity” and be obliged to continuously disclose information. This can be costly.

How to make it work

In the end, the small number of companies that can access CSF, as well as the regulatory burden on the companies and platforms, creates a barrier to a thriving CSF culture. But there are different models that may be used to remedy this issue.

One idea is to create a new type of company that allows SMEs to raise capital while at the same time limiting their governance requirements.

Another, more complex option would be to review all the types of companies that we have under the statute to see whether these forms of corporations fulfil their objectives. This review is overdue and may provide answers to a range of problems facing businesses and investors. It may, for instance, result in a simplification of the corporate structure.

The current legislation is just a first step to closing the funding gap for SMEs.

Author: Marina Nehme, Senior Lecturer, Faculty of Law, UNSW

The latest ideas to use super to buy homes are still bad ideas

From The Conversation.

Treasurer Scott Morrison wants to use the May budget to ease growing community anxiety about housing affordability. Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence.

It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.

A seductive idea with a long history

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.

Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.

Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.

Having learned from that that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.

Using voluntary super savings for deposits

The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.

Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.

First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.

But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.

In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.

A “shared equity” scheme for super funds

The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.

Details are scarce, but the proposal raises several questions.

First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?

Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.

Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.

If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.

Focus on what matters

If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.

On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little – we estimate they would be about 2% lower than otherwise.

The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing, while helping improve the budget bottom line.

At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.

The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.

While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.

Authors: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute

Embracing the bots: how direct to consumer advertising is about to change forever

From The Conversation.

Soon, advanced computers won’t just be driving you to work, they’ll be selling you stuff as well. We can already see this in the form of chatbots.

Chatbots are artificially intelligent pieces of software, capable of maintaining a conversation with a human. While they aren’t perfect yet, they have markedly improved in recent years, leading some to claim 2017 will be the year that we finally see mass adoption.

Chatbots can already do some incredible things, such as operating a medical helpline, helping you plan your vacation, and even talking with you when you can’t sleep.

In the world of advertising, this represents a huge step. Chatbots are personalised, to the point, and all knowing, thanks to consumer tracking, big data, and machine learning. With the likes of Facebook jumping aboard, all of this is right in your pocket.

The rise of chatbots

According to American research firm Gartner, 85% of customer interactions will be managed without a human by 2020. Given this, businesses are beginning to invest and experiment in the space. Their bots have the capacity to do a great many things – provide personalised support for many customers at once (not just VIPs), recommend products and services, and assist during and after a sale. All without the need for humans.

The strength of bots is their ability to have tailored conversations, give personalised offers, and offer convenient purchases. Armed with data and serious computing, they can analyse patterns in our speech to decide when and what to advertise. They can also increase engagement and bring your brand personality to life.

In addition to all of that, bots are novel and a little bit human. This means we are less likely to get distracted than we would be with other digital options, like banner ads.

Personal assistant or sales assistant?

“Hey, I see you’re going to Gary’s party on Saturday. Need any help?”

What sounds like a conversation is the future of direct to consumer advertising. Chatbots won’t just remind me about Gary’s party, but accept his invitation, order a gift based on Gary’s preferences, arrange an Uber to the party, and maybe even move around tomorrow’s appointments for me.

Is this a personal assistant or advertising? The potential of chatbots is that they will be both: advertising will be intelligent, help will be on-demand, and it will feel like we’re being assisted rather than sold to.

The bots will recognise patterns, learn from us, and their suggestions will be there at exactly the right time. And unlike the personalised suggestions already provided online courtesy of consumer tracking, this advertisement will have a human touch and embrace natural conversation – the new wave of advertising will allow us to upscale personal selling in a way we’ve never seen before.

But they’re not there just yet

One thing standing in the way of widespread chatbot adoption is that they are a little creepy. This cause of this creepiness is two-fold.

First, there’s the uncanny valley. This is the phenomena, where we perceive a non-human as creepy because it is almost (but not quite) human. Some suggest that the answer here lies in not asking the bot to “act” human, rather, just let it be a bot.

A second source of “creepiness” is a feeling of invasiveness that might arise if the bot appears to know something that you haven’t told it. It is a delicate balance for bots: they should know enough to be helpful, but not enough to give consumers a sense of invaded privacy. They must use the information responsibly to build trust, and aim to provide a valuable service.

But the technology isn’t mature yet. This manifested spectacularly last year when a Microsoft chatbot named Tay started sending out offensive tweets. Even the CEO of a virtual assistant company has warned of the damage of a “low-IQ” bot. If advertisers exploit this technology before it’s ready, bots could become just another thing to be ignored when the “ads are on”.

This isn’t about the transaction, it’s about the relationship.

Looking forward

Artificial intelligence is constantly progressing, spurred on in part by competitions like the Loebner prize. With enough data and time, chatbots could become very convincing. In addition to seeing our bots become more seamless and eloquent, we could also see them more integrated across different technologies and functions: already users of virtual assistants can utilise them across loads of devices.

Likewise, bots can talk to other bots, coordinating a valuable experience for the consumer behind the scenes. Imagine how much more important these interactions will become as we enter our increasingly connected future. In addition to knowing what Gary wants for his birthday, will our bot also lock the house behind us and drive us to the party? If on the way home the bot reminds us to stop and get milk and some antacids (maybe that second slice of cake wasn’t a great idea), will we think of this as advertising or just thoughtful?

It’s a call we will all be making soon, as these bots increasingly enter our home and work lives.

In many ways, they are already here.

Authors: Kate Letheren, Postdoctoral Research Fellow, Queensland University of Technology
Charmaine Glavas; International Business Lecturer, Queensland University of Technology

The blockchain could help advertisers lock up our attention

From The Conversation.

While technology has been making more devices “smart”, and we carry phones with all sorts of sensors, these haven’t yet been systematically applied to advertising’s central problem – engagement. The blockchain, however, will make advertising much smarter.

Traditional advertising – think of posters on bus stops and TV commercials – is easy to ignore and its effectiveness is hard to measure. Even online advertising has problems measuring engagement. But with the blockchain, advertisers will be able to tap into the data in our devices, automatically pull together multiple sources of information, and even offer rewards to consumers.

What is the blockchain again?

Think of the blockchain as a kind of a public spreadsheet. This spreadsheet is stored simultaneously on a bunch of different computers and is encrypted.

When someone transfers a Bitcoin (or anything else you’re trading on the blockchain) the transaction is verified by all of the computers, encrypted and added to the spreadsheet, where everyone can see. The encryption and transparency are what make the system secure.

Bitcoin and other cryptocurrencies, such as Ripple XRP and Ether, sit on top of the blockchain. They can be used as currencies, transferred between people just like normal money. Or they can be used as a kind of token, the transfer recorded to signify when something has been exchanged.

A computer program known as a smart contract has evolved out of this system. It can execute specific actions when predefined conditions within the blockchain are fulfilled – such as automatically paying a farmer when crops are delivered. But smart contracts could also have huge implications for advertising.

Advertising is going to be more complex

Advertising in the age of blockchains and smart contracts will be something more like an ecosystem. Information and value will flow and be captured in numerous directions. Using smart contracts, many different entities and data streams will be brought together.

Let’s imagine Jane sees an advertisement for a pair of shoes on her smartphone. The advertiser asks that, in exchange for Bitcoin, she reveal her identity by turning on her camera and taking a selfie. She must also allow the advertiser to access her SIM and verify with the phone company that it is indeed Jane who owns the phone. The advertiser would also like to know where Jane is located using the Google Maps application on her phone.

Individually, none of these actions are new. What will be new is having a smart contract to tie it all together.

At the initiation of this advertising effort, the parties involved in the smart contract are Jane, the advertiser, the phone company and Google. A predefined reward (in the form of Bitcoin) promised by the advertiser will be released to Jane only once all parties fulfil their part of the contract. Jane must take a selfie and send it to the advertiser, the phone company must confirm with the advertiser that Jane indeed owns the phone used to take the selfie and Google must release Jane’s location to the advertiser.

There are a few implications from this example.

Consumers like Jane will now be empowered to choose whether they want to give up their privacy in exchange for something. Jane could choose to block Google Maps from revealing her location, for example.

Advertisers will know exactly how consumers interact with their ads. By specifying actions for Jane to perform, like taking a selfie after watching an ad, advertisers will overcome the crucial problem of not being able to verify whether people are actually paying attention.

They will also know whether consumers have adhered to every part of the agreement. If Jane does not allow Google Maps to reveal her location, the advertiser will be aware of this and may release only some of her reward. This is an efficient and cost-effective method of piecing together the profiles of customers.

Finally, the blockchain will enable advertisers to capture value they could not previously, because they could not track or measure interaction with ads.

For example, let’s say the advertiser’s request is more ambitious, and Jane decides to reveal she is using a cab from company X and dropping by cafe Y to pick up a latte before going to the shoe store. The original advertisement has now generated value not only for the advertiser but also for those other entities.

Using the blockchain means all parties will have access to information about what happened. The advertiser could collaborate with other companies like cab company X and cafe Y to boost business. They could even demand those companies chip in to cover the costs.

A few years off

At this point we must go through a reality check.

While some parts of this picture are already being experimented with – Nasdaq has built a marketplace to buy and sell advertising on a blockchain, and others are building the tokens to sit on top – technologically and politically we are still sorely lacking.

There are also many digital blind spots that, like missing links among security cameras, allow some actions to go unobserved and unaccounted for during the advertising process.

But it is possible that in the future, once the infrastructure and our societies have caught up, every digital device will be connected to a blockchain-like system so that all digital actions are accounted for. When that happens, advertisers won’t know what hit them.

Author: Eric T.K. Lim, Senior Lecturer in Information Systems, UNSW; Chee-Wee Tan, Professor in IT Management, Copenhagen Business School

Why higher interest rates should make you happy

From The Conversation.

The Federal Reserve just lifted short-term interest rates a quarter point and signaled that more hikes are to come over the course of the year.

The Federal Open Market Committee raised its benchmark lending rate to a range of 0.75 percent to 1 percent, as expected, and projected two more increases would be likely in 2017.

Numerous commentators have focused on who is hurt by rising rates, particularly those with lots of floating rate debt, such as a credit card balance, or anyone in need of a loan.

Not everyone, however, is negatively affected by rising rates.

There are some individuals and businesses cheering the Fed on as it pushes up rates, including savers, people traveling abroad and foreign exporters and businesses with large cash balances.

Let’s look at why each group may be celebrating the Fed’s action with a champagne toast.

Savers are happy

Interest is the economic inducement – or bribe – that compensates savers for waiting to spend their money in the future instead of squandering it today.

For eight years, the Fed has been giving us virtually no inducement to save because its target interest rate has hovered around zero ever since the 2008 financial crisis. People have been essentially punished for saving money because inflation meant at times you’d be better off stuffing cash in your mattress than in a savings account.

Rising rates means people who save money in certificates of deposits, money market funds and bank accounts will see higher returns. Many elderly people and retirees live off their Social Security checks plus interest and dividends from their savings. Retirees and people with large amounts of cash savings will now earn more money, which enables them to spend more and makes them big fans of the Fed’s current policy.

Even if you don’t have a single penny in savings but live or work in an area with a large number of retirees like southern Florida, Arizona or parts of California, the higher rates should translate into more economic activity and thus more jobs.

Travelers and importers are happy

Another group that should experience an immediate benefit includes importers and people traveling abroad because interest rate changes usually affect a country’s foreign exchange rate.

When rates rise in the U.S., the dollar tends to go up in value, which means it can buy more foreign currency. This makes traveling to other parts of the world cheaper.

In a nutshell, higher rates mean higher yields on U.S. bonds, mutual funds and certificates of deposit, making them more attractive to foreign investors. These investors need dollars to buy U.S. investments and are willing to give up their euros, yen, Swiss francs and other currencies to get ahold of them. By boosting the demand for dollars, the greenback appreciates, and suddenly that trip to Majorca is looking more affordable as fancy Spanish restaurants, flamenco shows, hotels and taxi rides become cheaper, in dollar terms.

This also makes people who export goods to the U.S. – essentially foreign companies – much happier as well at the expense of U.S. companies. Swiss chocolates, Korean phones, Chinese textiles, German beer and many other items will become cheaper for people in the U.S., meaning it should make Americans who prefer these items to their domestic counterparts happy too.

And since a boost in exports supports economic activity in countries selling these items, many foreign governments are also big fans of the Fed’s current policy.

Companies with cash are happy too

A third group that benefits are businesses with large cash reserves.

Nonfinancial companies in the Standard & Poor’s 500 index had about US$1.54 trillion in cash and cash equivalents as of Sept. 30 of last year.

Companies with large cash reserves do not let their money sit in a vault gathering dust. Instead, the money is often put into short-term investments that earn interest. When interest rates go up, they make extra earnings on their cash balances. This increase in profits, without a company doing any extra work, makes some CEOs fans of the Fed’s current policy.

In addition, there are a number of companies that bill customers up front and then make payments much later. Insurance companies are one example. People pay for their insurance policies first and then, if disaster strikes in the future, the insurance company pays out a claim. This means insurance companies hold large amounts of money for long periods of time that they’re hoping earns a good return.

So when rates rise, insurance companies become more profitable as they earn more money on every dollar of cash they have to set aside to cover an eventual claim. As a result, insurers like it when the Fed wants to tighten monetary policy and lift rates.

It takes two

Many people’s first reaction when hearing that interest rates are rising is one of panic and dread.

The result is less cash sloshing around in the system, which makes mortgages, car loans and credit lines all more expensive. In other words, borrowers take it in the teeth.

However, like most things in life, there are two sides to every story. For every individual, business and government that is borrowing money, however, someone else is lending it. Another name for lenders is savers who want to invest the money they’re setting aside for future use and make a little (or big) return in the meantime.

Savers and many other groups are cheering the rise in rates, which helps move the U.S. back to a more “normal” interest rate policy – the recent period of near-zero rates has been unprecedented – and also signals the economy is on a surer footing. That should make all of us, even borrowers, a bit happier.

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

How Facebook and Google changed the advertising game

From The Conversation.

Creativity and spectacle are becoming less important than the personal information used to target ads. The sponsored links on a Google search or in your Facebook feed are very effective, but for a completely different reason than your favourite television commercial.

When you think about advertising what comes to mind is probably the art. Memorable ads are often creative, clever or emotional. Something along the lines of a big, viral Australian beer ad, or maybe something from the Super Bowl.

These ads had a symbiotic and reciprocal relationship with the media they played alongside. Big sporting events or television shows draw a certain audience, and advertising agencies created a spectacle to match. This isn’t the game anymore.

Google and Facebook dominate digital advertising

According to Jason Kint, CEO of digital content industry group Digital Content Next, Google and Facebook captured all of the US$32.7 billion growth in digital advertising spending in the first half of last year. Everyone else’s share shrunk by 3%.

Kint’s estimate came after earlier predictions by Morgan Stanley analyst Brian Nowak that some 85% of new ad spend in 2016 would be split between these two companies.

Google and Facebook both make money by pairing user-generated content and personal information with advertising.

Google’s search engine serves sponsored results alongside other results in response to user search queries. Content posted by users on YouTube is often preceded by ads that mimic many of the traditions of television ads. Google-hosted display ads also appear on non-Google websites.

Facebook uses information users have given it, such as age, gender, relationship status and location. The site uses this to display ads from advertisers seeking to target people by specific characteristics.

Although they both use some of the same social signals, it is often a slightly different process: Facebook has monetised personal data, while Google has monetised activity.

‘The internet of you’

Unlike earlier forms of advertising that were targeted to generalised audience segments by broad demographic characteristics, the forms of advertising used by Google, Facebook and their competitors are more precise.

They use specific activity (such as searching for a term like “hotels”) or status information (changing a relationship status to “engaged”) to find people most likely to be interested in chosen ads.

More recently, data generated in a more passive way – from going about daily activities like travelling to work or cooking meals – are also added to our searches and what we post on Facebook. This information is collected through in-home and wearable devices like Google Home and mobile phones.

All of this data generation and collection leads to personalisation, or what wearable device maker Jawbone calls “internet of you” – “technology tailored to you, with your own data driving the experience”.

Hosain Rahman, CEO of wearable devices maker Jawbone, says internet-connected devices should be “organised around you”.

Ads are precision targeting

The personalisation and precision of these new ads are changing the nature of advertising. It’s no longer about entertaining, delighting or making a personal connection; it’s about precision targeting.

It is easy to imagine gyms seeking new clients by targeting those who have shown search interest in getting fitter, enabled by online tracking, but what about using step-counting devices to promote those shoes to someone who has actually started walking just a little more?

These are the kinds of data-supported advertisements of the “internet of you”.

Such strategies pose difficult ethical questions about privacy and personal information as users may have consented to the data use without actually reading or understanding long and complex terms-of-service documents.

These approaches also upend a common and understood – although widely criticised – approach to funding internet content with display ads. As the media theorist Douglas Rushkoff put it:

We are not the customers of Facebook, we are the product. Facebook is selling us to advertisers.

But on the “internet of you”, users may find they are both the customer who purchased a product and the target of a secondary customer (an advertiser) who bought their data.

What this means for advertising

With Facebook and Google dominating, many other web publishers are at a loss as to what to do. They find it difficult to find the “right solution to the big question of driving payment for quality content”, as the founder of the website Medium recently put it.

In an end-of-year update for marketers, Google highlighted the biggest issue in this new world – trust. Companies “must find ways to reassure consumers and position their brands as trustworthy”.

One way to create engaging and trustworthy advertising is by showing an interest in what customers already care about, which is helped by knowing as much about them as possible.

However, if users find precisely targeted ads creepy or feel unable to trust the devices in their homes and on their bodies, they may push back against marketers that deploy them. That would force ad makers to look once again to content that works alongside the media it funds.

Author: Travis Holland , Lecturer in Communication and Digital Media, Charles Sturt University

Does Western Australia have the highest unemployment in the country?

From The Conversation Fact Check.

In the lead-up to the March 11 state election, Western Australian Labor leader Mark McGowan said the state has the highest unemployment rate in Australia. Is that correct?

Checking the source

When asked for sources to support his statement, a spokeswoman for McGowan said by email:

The first source is the Australian Bureau of Statistics stats for January (most recent) – below is the table on their summary page showing WA as the highest on a seasonally adjusted basis. In addition we had The West [Australian] citing the same stats here.

Let’s take a closer look at what those numbers really mean.

Who is counted in the unemployment rate?

The Australian Bureau of Statistics (ABS) considers a person to be unemployed if they were aged 15 years and over and were not employed during the labour force survey reference week, and:

  • had actively looked for full-time or part-time work at any time in the four weeks up to the end of the reference week and were available for work in the reference week; or
  • were waiting to start a new job within four weeks from the end of the reference week and could have started in the reference week if the job had been available then.

The unemployment rate is the number of unemployed persons expressed as a percentage of the labour force. This is a reasonable indicator of the overall health of the labour market and economy.

The ABS collects labour force statistics on a monthly basis, but adjustments are made to these estimates to take into account seasonality and previous trends.

Is Western Australia’s unemployment rate the highest in the country?

The most recent Australian Bureau of Statistics labour force monthly figures show that, when using the seasonally adjusted metrics, the unemployment rate is the highest for Western Australia at 6.5%. This is closely followed by South Australia at 6.4%. These figures support the claim that unemployment is the highest for Western Australia.

However, when using trend estimates, the unemployment rate is marginally higher in South Australia: 6.7% compared to 6.6%.

Trend figures are typically more reliable than seasonally adjusted figures. And – as with all labour market statistics produced by the ABS – there is a degree of statistical error in such estimates because the figures are based on survey data.

Overall, there’s very little difference between first and second place in the unemployment ranks, with only 0.1 (rounded) of a percentage point difference between the two states using either metric.

The unemployment rate for Western Australia is higher than Tasmania’s unemployment rate, as McGowan said.

The Conversation/ABS – Labour force, January 2017, CC BY-ND

Recent unemployment trends

Unemployment rates typically follow economic cycles. When the economy is doing well, unemployment is low. When the economy is flagging, unemployment will begin to rise.

Unemployment rates and other labour market indicators such as labour force participation and employment rates will also be affected by the population composition of an area and any changes in this composition.

Changes in the unemployment rate across Australia’s states and territories over the last 15-plus years demonstrate that these largely follow the economic cycle (Figure 2). Over the course of the mining boom, unemployment rates decreased, falling to a low of 2.7% in Western Australia and 4.2% nationally.

In the wake of the global financial crisis, unemployment rates begin to rise again after a short reprieve in 2009 and 2010. Since this point, unemployment rates for all states and territories have been on an upward trajectory.

Comparing 2012 with the most recent figures, the unemployment rate in Western Australia has risen most sharply across all states and territories – from the lowest rate alongside ACT in 2012 to the current highest rate alongside South Australia.

Over the same period, the unemployment rate in NSW has fallen, while in Tasmania and Victoria the rate initially climbed before returning to around the same level.

Figure 2: Unemployment rate, Jan 2000 – Jan 2017, trend estimates. ABS Labour Force Statistics, Jan 2017, Cat No.6202.0

It is less clear to what degree the state government in Western Australia has helped “create” the current labour market conditions being experienced in that state. (McGowan’s full quote was: “It is true the Liberals and Nationals have wrecked the state’s finances, and have created the highest unemployment in the country in Western Australia, higher than Tasmania, higher than South Australia…”, but checking the claim about the state’s finances is a separate and bigger question beyond the scope of this FactCheck, which has focused only on employment.)

As I explained in this previous FactCheck, a government’s influence over the labour market is constrained by what is happening in the wider global economy. Taking credit for jobs growth, or laying blame when the unemployment rate goes up, is valid only to a certain degree.

Verdict

McGowan’s statement that “the highest unemployment in the country [is] in Western Australia, higher than Tasmania, higher than South Australia” is correct when based on the most recent seasonally adjusted figures from the Australian Bureau of Statistics.

Trend estimates are typically a better data source to use and show that South Australia is marginally higher than Western Australia. However, there is very little difference.

It is less clear to what degree the current state government helped “create” this situation. Western Australia’s unemployment rate has been increasing since the global financial crisis. A similar pattern is seen across most Australian states and territories.

Since 2012, WA’s unemployment rate has risen at a faster pace than other states and territories, from the lowest in 2012 alongside ACT to the highest now alongside South Australia.

Changes in the population composition of the state along with the economic cycle are likely to be driving these trends. – Rebecca Cassells

Review

This is a sound FactCheck. It notes that the Australian Bureau of Statistics provides more than one measure of the unemployment rate. While Western Australia has the highest state unemployment rate in January 2017 on a seasonally adjusted basis, South Australia has a higher trend estimate. It is less clear, however, that the trend estimate is considered more reliable than the seasonally adjusted estimate, particularly for the most recent month of reported figures.

I agree with the caveat that it is less clear that the current state government helped “create” this situation. The potential for state governments to influence the overall state of the economy in the short term is very much constrained.

I would stress even more that the unemployment measures provided each month by the ABS are only estimates, based on surveyed samples of individuals, not the whole population. State unemployment rates in particular are quite volatile month to month, with changes up and down of 0.3-0.4 percentage points quite common. Differences in unemployment rates between states of 0.1 percentage points in any specific month are not particularly informative. – Michael Coelli