The New Daily – Page 3 – Digital Finance Analytics (DFA) Blog

Why the trend to use cards instead of cash should be a big worry

The revelation that Australian consumers are using card payments more often than cash is a worry because of a lack of fee transparency, an expert has warned.

The Reserve Bank of Australia reported this week that 52 per cent of all transactions are card payments, with only 37 per cent by cash.

Three years ago, cash was 47 per cent and card only 43 per cent.

Cash payments were most common for fast food, cafes, restaurants, bars and pubs, and least common for holidays and household bills. And the biggest users were Australians aged 50 to 65, and those in the bottom half of the income bracket.

Professor Rodney Maddock, a researcher at the Australian Centre for Financial Studies, said the transition to cards is premature because the current system is “wasteful” and “a mess” compared to cash.

“Most people have got no idea of the true cost they’re incurring when they use a credit card or a debit card or Eftpos or BPay. The current system makes it really, really hard for anybody to understand that,” he told The New Daily.

“Some of the fees are paid by the user, some by the merchant and some by the banks. It’s completely opaque.”

How the system works is that banks charge merchants ‘interchange fees’ for every credit or debit card payment they accept. The merchants claw back this money with surcharges (‘If you buy less than $15, we charge you $2’) and with higher prices across their stores.

The banks keep a percentage of these fees, pay a slice to the credit card company whose logo is on the card (probably Visa or Mastercard), and give the remainder as perks to rewards card holders.

Then customers must factor in annual fees and rates of interest charged by their banks.

In a recent paper, Professor Maddock and a colleague called for card holders to be treated the same as ATM users. A message should flash up on the screen asking the card holder if they were willing to pay the fee, they wrote.

“We want all of those costs to be transparent to the customer, because they are paying too many different ways. It’s too hard to tell as a customer what in the hell you are doing.”

Another academic, Professor Steve Worthington at Swinburne Business School, a researcher on the global payments sector, agreed that card fees are “incredibly opaque, incredibly not well understood”.

His particular concern was that consumers might not realise credit card rewards programs have recently been “devalued”.

“It is a very open question if they are worth it in any way, shape or form,” Professor Worthington told The New Daily.

Mozo, a financial product comparison website, has estimated that the average credit card spend required to earn $100 is now $22,426 a year, up from $18,765 in 2015 – and that the average customer would need to spend $60,000 a year on their card to make it worthwhile.

Rewards programs are being devalued because of new Reserve Bank regulations designed to improve transparency by putting caps on interchange fees.

Professor Maddock said the changes have not simplified card payments enough.

“The Reserve Bank has got itself into an awful mess having to regulate lots of different points in the system. It would be a lot simpler if they just regulated at one point.”

Mike Ebstein, a payments consultant and former second-in-charge of credit cards at ANZ, disagreed that card payments are inferior to cash. He said the advent of cards was a “quantum leap in convenience and security”.

“It’s baloney. There is a huge cost to the economy from the cash transactions that remain,” he told The New Daily.

“Merchants that accept cash don’t get value until they bank, there’s shrinkage, there’s pilferage, there’s security.

“Most advanced economies around the world are promoting the transition away from cash towards card payments, which are much more trackable.”

The Australian government has commissioned a taskforce headed by former KPMG chair Michael Andrew to investigate the ‘black economy’. It is widely expected to recommend further curbs on cash payments.

‘Generation Rent’ and the ruinous rule of unfair and unjust laws

From The New Daily.

Shadow Treasurer Chris Bowen gave a good speech on Tuesday, promising to super-size Labor’s planned banking royal commission.

Originally intended to flush out illegal and deceptive activity in the banks, a royal commission should, he says, spring clean their legal activities too because that’s where the real damage to the economy is occurring.

Actually, Labor doesn’t need a royal commission to address the problem Mr Bowen described – namely, the hodge-podge of regulations being used to deal with the housing-credit bubble. A bit of well-written legislation would do the job just fine.

He is right, however, that we have a problem.

The key regulators who influence bank behaviour – the Reserve Bank, the Australian Prudential Regulatory Authority and the Australian Securities and Investment Commission – are discharging their duties admirably, but are still somehow allowing the banks to gobble up more and more of Australian life.

Australia’s growing private debt to GDP ratio, he points out, is second only to Switzerland’s, at 123 per cent.

Mr Bowen spoke about the need for banks to be “unquestionably strong”, complained about the “composition of the property market, investors versus owner-occupiers”, and repeated regulators’ concerns that household debt is making the economy less resilient.

Well that’s all true. But if he wants to sharpen his rhetoric, he’d should reframe those comments from the perspective of young Australians.

Intergenerational wipe-out

In the space of just 70 years Australians climbed a home ownership mountain, only to find themselves sliding down the other side.

After World War II, only half of private sector homes were owned, either with or without a mortgage, by their occupants.

That climbed rapidly to peak at 71.4 per cent in 1966 – a level that fluctuated a bit, but was essentially maintained until the turn of the millennium.

But as the housing-credit bubble inflated, and prices sky-rocketed, the home ownership rate started sliding – from 69.5 per cent in 2002, to 67 per cent at the 2011 census, and to 65.5 per cent last year.

This is a direct result of the debt bubble that Mr Bowen acknowledged in his speech, and which he rightly points out has been inflated by the property-investor tax breaks of negative gearing and the capital gains tax discount.

But wait, it gets worse. It is the younger generations – new entrants to the housing market – where all the damage is being done.

Twenty- and thirty-somethings are either being locked out of the market forever or taking on budget-crushing mortgage repayments.

Some among those age groups may eventually receive large inheritances from their property-owning parents – assuming, that is, that today’s sky-high valuations do not tumble in the years ahead.

But for those that do not, one of two dismal economic futures awaits.

Firstly, the members of ‘Generation Rent’, on present settings, will face an under-funded retirement.

That’s because Australia’s superannuation system, and the complementary state pension, were calibrated in the early 1990s for a nation in which most people did not have to pay rent in retirement.

Secondly, the young Australians ‘lucky’ enough to secure huge mortgages will wave goodbye to a proportionally larger chunk of their household budget each month over the next 25 or 30 years, if they wish to actually pay off their homes.

Low interest rates, remember, only reduce the interest bill. The principal repayments not only stay the same in nominal terms, but in a low interest-rate environment they are ‘eroded’ more slowly by inflation.

Get to the root of the problem

So the problem, as Mr Bowen defines it, is the overlap and confusion of “ad hoc” attempts by regulators to head off disaster – particularly APRA’s attempts to slow mortgage lending.

But surely it’s better to remove the cause of those policy contortions than to unscramble the omelette.

As it happens, Labor last year pledged to reduce the wealth-redistributing and bubble-inflating tax incentives of negative gearing and the capital gains tax discount.

That policy should go further, but at least it’s a good start.

So, yes, let’s have a royal commission into the illegal practices of the banks.

But as for ending the perfectly legal attack on the finances of young Australians, Labor only has to deliver what it’s already promised.

Affordability may still deteriorate despite a ‘cooling’ housing market

From The New Daily.

Much is being made of a cooling in key property markets, but a senior analyst warns that even a halving of price growth probably won’t help first home buyers.

Louis Christopher, head of SQM Research, said his company’s prediction of 6 to 10 per cent national price growth in 2017 was still looking “intact”, and that even much slower 3 per cent growth in 2018 would be unhelpful.

“Overall, I think affordability will still deteriorate a little in the second half of the year, and that will particularly be the case for Melbourne, where I don’t see a lot of evidence right now of a major slowdown occurring,” he told The New Daily.

“We haven’t made a forecast yet for 2018, but if we were to see smaller price rises but still, say, in excess of 2 to 3 per cent, you would still see affordability deteriorate, assuming interest rates stay where they are.”

Property prices were a huge topic of discussion this week, after Deloitte Access Economics said in its annual business outlook that “gravity may soon start to catch up with stupidity in housing markets”.

UBS also predicted that national price growth would slow to between zero and 3 per cent in 2018.

Treasurer Scott Morrison has even declared victory, saying recently that the Coalition government had achieved a “soft landing” for prices.

In May and June, plenty of data suggested that price growth slowed, auction clearance rates fell and the writing of new home loans, especially to investors, moderated.

But what really matters to first home buyers is price growth, and there is little evidence that affordability has stopped deteriorating, even if prices aren’t growing as ‘stupidly’ anymore.

As seen in the chart above, price growth according to CoreLogic’s measure is only barely moderating, if at all.

And according to SQM Research, Melbourne prices are growing strongly, even if Sydney is showing some weakness.

The blue lines are the asking prices for houses, the purple for three-bedroom houses, red for units and orange for two-bedroom units.

Domain also reported that the national median house price went up 1.7 per cent in the June quarter, and that this pushed the median price to a new record high of $818,416, which was 10 per cent higher than at the same time last year.

Mr Christopher attributed the recent slowdown to APRA’s regulatory intervention, and a blow to investor confidence from the federal budget’s surprise crackdown on negative gearing, via a restriction on tax deductions for plant and equipment depreciation.

“It basically turned thousands of properties from being cashflow positive after tax to being cashflow negative, and that was a direct hit upon negative gearing and fitted in with this view of the Libs being Labor-lite.”

However, prices in the two biggest markets of Sydney and Melbourne appear to be rebounding, and annual price growth rates are holding steady. According to Corelogic, annual price growth for the five capital cities was still sitting around 9 per cent, and monthly price growth for July was tracking around 2 per cent for Sydney and Melbourne.

Even the auction clearance rate is improving slightly. Nationally, the capital city clearance rate was 69.4 in the week ending July 16, up from 68.4 the week before.

Mr Christopher also noted that stamp duty concessions for first home buyers in Victoria and New South Wales were likely to offset any slowdown.

“Basically, it means a saving for a first home buyer of upwards of $25,000 in each state. That’s pretty big money and that type of saving in the past, through former first home owners grants, have moved the market.”

There is of course a sure-fire way to kill price growth: substantial rate hikes by the Reserve Bank. Mr Christopher said national prices could go backwards if we saw six rate increases in a row.

“If we were to see a 150 basis point rise over two years, that would be enough to create a correction in the national market.”

He also noted that even if national price growth continues, there are bargains to be found in Adelaide, Hobart and Perth.

“I can’t stress enough that it’s very much a mixed market and the national number masks a lot of what is happening on a city-by-city basis.

“It’s focussed on Melbourne and Sydney and look, yes, the majority of the population is in those two large capital cities. But affordability is better elsewhere.”

Bank regulator’s edict is sure to drive up home loan rates

From The New Daily.

The days of cheap home loans are running out as regulators force the banks to put more money aside for a rainy day, and it’s likely that everyday Australians are going to foot the bill.

The Australian Prudential Regulation Authority (APRA) on Wednesday told banks they would need to put more money aside to protect them in another economic crisis. That means they will have to put more money into very conservative assets and consequently will have less to lend out.

It’s a move that will cost the banks about $8 billion, but they have until 2020 to make it happen. That figure is likely to go to $18 billion later this year when APRA ups the risk weighting on mortgage debt held by the banks, according to investment bank UBS.

“The move marks another step on the inevitable path to increasing interest rates,” said Martin North, banking expert and principal at Digital Finance Analytics. “The RBA has said cash rates of 3.5 per cent would be normal and the government is going to introduce the bank tax. ”

All that is building pressure on the banks to raise rates to protect their profitability.

Nicki Hutley, chief economist with research group Urbis, said effects won’t be felt straight away as the banks have two and a half years to get to the new rules. But “APRA has said meeting the target will add 10 basis points to interest rates”.

To raise the money needed, owner occupied home loans will have to be targeted because they represent such a big part of the market, Mr North said.

Home loans make up 40 per cent of the loan market according to the latest Reserve Bank of Australia figures. Mortgage rates have fallen with the the RBA cash rate, which has come down from 7.25 per cent 10 years ago and they have been spared some of the pressure elsewhere in the system.

APRA in March forced the banks to cut their limit on interest-only loans from 40 per cent to 30 per cent of total residential lending by the end of the year to reduce the risk from investment property lending. And back in late 2014 speed restrictions were introduced to prevent residential investment loan books growing by more than 10 per cent a year.

That has all pushed up residential property investment mortgage rates to around 6 per cent. Personal loans, which often fund spending like car purchases and weddings, have interest rates of 12 to14 per cent with major banks. They have been held steady in recent years despite falling official rates.

And credit card rates have actually risen slightly while the rate environment has fallen.

Given the rises already in other lending areas and their small relative size on banks loan books, home owners will be hit to meet the costs of APRA’s new requirements, Mr North said

“SME’s and home mortgages will be the targets of rate rises,” Mr North said, adding that corporate lending could also be tightened.

Bank shares actually rose following APRA’s announcement because investors thought the regulator might have taken tougher action than it did.

The banks and pollies have conned a generation

From The New Daily.

While a lot of things are ‘unknown knowns’ in finance, there’s an awful lot of ‘known knowns’ too – and one of those is about to hurt mortgage holders.

The Australian Prudential Regulatory Authority (APRA) has announced it will require big and small banks to hold more capital in reserve as a buffer against financial shocks.

That has forced the government to adopt APRA’s view that the effects of such a tightening are unknown, but probably benign.

Treasurer Scott Morrison said on Wednesday that the change “should not significantly impact loan pricing or consumers’ ability to access finance” and shouldn’t affect “business growth plans, dividends policies or [require the banks to undertake] equity capital raisings.”

Actually, the effects are more certain than that. Like a balloon squeezed at one end, the cost of holding extra capital has to bulge out somewhere else – either as lower profits and dividends, or higher borrowing costs charged to customers.

The other option is for banks to raise capital through new share issues, which effectively dilutes the earnings per share – analysts say the Commonwealth Bank is in the most likely to take this route.

The big four banks have a long tradition of passing on new costs to borrowers, and although not large in this case, the APRA change will be exacerbated by increases in the banks’ offshore borrowing costs plus changes to the way they are required to calculate the risk of their loan portfolios.

A double blow

The APRA move comes just a day after the RBA reminded borrowers that it considers its ‘neutral’ cash rate – the rate at which it is trying neither to slow nor stimulate the economy – to be 200 basis points higher than today over the longer term.

Mortgage rates are not determined solely by the short-term borrowing rates the RBA has control over, but as a rough proxy for future rates it is warning mortgage holders to add a ‘2’ to the first part of their home-loan rate.

Current standard variable rates – or, rather, the more accurate ‘comparison’ rate which includes all fees – are sitting at about 5.3 per cent, so households need to ask themselves if they can afford 7.3 per cent in a couple of years time.

This is an inevitable change that many lending managers have glossed over with customers in the past couple of years.

It’s also what former Treasurer Joe Hockey failed to mention when he said there had “never been a better time to borrow” in 2013.

In the midst of an expanding credit bubble, only a few voices were pointing out that when record-low interest rates normalised due to global forces, or if local macroprudential measures put the squeeze on home loan rates, our record private debt would become a problem.

Well we’re on a one-way trip to realising that problem now.

For a very long time Australian banks got away with soaking up too much of the nation’s working capital. The big four banks shares make up a monstrous 25 per cent of the value of the ASX200, while the nation’s biggest employers, Wesfarmers (owner of Coles) and Woolworths are worth just 5 per cent.

For too long the banks have lent at levels that could only be made ‘safe’ by an implicit government guarantee of their liabilities.

And for too long politicians in Canberra told voters to disregard the common-sense notion that huge debts were a problem.

The APRA tightening is just a small step towards returning banks a more traditional role – not stoking a credit bubble, but sensibly leveraging the savings of some households and businesses, to allow other households and businesses to expand.

That more subdued role should, eventually, start to ease Australia’s private debt problem.

But that’s little comfort for the generation that took on eye-watering debts at record low interest rates – the generation that will be hurt most by the ‘balloon bulge’ of rising bank costs.

‘Hawkish’ RBA spooks borrowers and sends Aussie dollar soaring

From The New Daily.

The Reserve Bank has scared heavily-mortgaged households and pushed the Australian dollar to its highest level in two years by appearing to signal interest rate hikes.

In the minutes of its July 4 meeting, released on Tuesday, Australia’s central bank said it now estimates the “neutral” official cash rate to be 3.5 per cent – a full 200 basis points above where the cash rate is now.

That effectively means the RBA thinks it can substantially increase the cash rate, currently at a record-low 1.5 per cent, without curbing economic growth. Banks can be expected to eagerly pass on any rate rises to borrowers.

Many RBA watchers interpreted the inclusion of the estimate as a strong hint the central bank is now ‘hawkish’ (inclined to lift rates), as it is highly unusual for it to discuss the “neutral” rate at a policy meeting.

Economist Stephen Koukoulas described the language as “aggressive”.

“RBA has just effectively tightened monetary policy: the 3.5 per cent neutral rate reference will see AUD go to the moon and [interest rate] hikes priced in,” he wrote on Twitter.

The Australian dollar jumped up higher after the minutes were released at 11:30am on Tuesday – a sign that investors interpreted the statements to flag rate rises. The Aussie strengthened against the US dollar from around 78 US cents to over 79 US cents by late afternoon.

James Glynn, senior economics reporter at the Wall Street Journal, described the minutes as “hawkish”.

“Talking openly about a 3.5 per cent neutral rate will allow RBA to assist APRA in doing a job on the housing market.”

The official cash rate has been at a record-low 1.5 per cent since August last year, as the central bank tries to help the Australian economy recover from the aftereffects of the global financial crisis 10 years ago.

This record low rate, followed more or less by the commercial banks, has helped jobs – but also ballooned house prices and household debt, especially in Sydney and Melbourne.

Another line in the RBA minutes suggested it knew full well what it was doing by publishing such a market-sensitive number.

“The implications of statements by central banks in the major economies for the future path of monetary policy had been a focus for financial market participants more recently,” the RBA board said.

However, there were sceptics.

Sally Auld, economist at JP Morgan, said the bank’s discussion of the neutral rate was unlikely to be “interpreted as some sort of signal”.

“We don’t think this is the case – after all, the discussion is sympathetic with the RBA’s consistent description of policy settings over the past year as accommodative,” Ms Auld wrote in a research note.

The RBA did note there was “significant uncertainty” around estimates of the neutral rate.

Other complicating factors were that the minutes explicitly said that “holding the accommodative stance of monetary policy unchanged” would be “consistent with sustainable growth in the economy and achieving the inflation target over time”.

This is where the RBA usually heralds interest rate rises.

Another reason to doubt the RBA’s intentions was that it said “developments in the labour and housing markets continued to warrant careful monitoring”.

All eyes will be on the release of the latest labour market figures on Thursday.

The spike in the Australian dollar after the release of the minutes, and the steady appreciation against the US dollar in recent days, are likely to worry the central bank.

This is because the RBA said in the minutes that an “appreciating exchange rate would complicate” Australia’s economic growth.

Australia’s retirement system on collision course with property market

From The New Daily

Australia’s retirement income policy is on a collision course with trends in home ownership and the result will be more older Australians struggling to support themselves in retirement. It will also make the superannuation system more inequitable.

The housing price boom is causing a major social change in Australia and the results of it are not being factored into policy making.

The latest figures from the 2016 census show that home ownership dropped markedly. Households renting rose to 30.9 per cent of the total, compared to 29.6 per cent in mid-2011. In the late 1980s, only 26.9 per cent of households rented.

Households owning outright dropped most markedly, from 32.1 per cent to 31 per cent while those owning with a mortgage dropped from 34.9 per cent to 34.5 per cent of households.

That is bad news for retirees because it means that more people will find themselves renting as they give up work.

“It’s a big thing because the family home is exempt from the pension assets test,” Grattan Institute research fellow Brendan Coates said.

“If you don’t own a home you will have to put aside more money to support yourself in retirement because of rental costs.”

The Association of Superannuation Funds of Australia recently found that to afford a comfortable retirement in a capital city a couple would need more than $1 million saved. That’s almost double needed by a couple who owned their home.

The trouble with saving large amounts like that is that it puts you outside the limits of the age pension assets test.

“Now most people in retirement get the pension,” Mr Coates said.

Holding a lot of assets outside the home means your pension will be discounted once you trigger the assets tests limits. And recent changes have made the situation worse.

In January this year, assets test limits for part pensions were cut by around $200,000. For single non-home owners the new limit is $747,000 and for couples $1 million, compared with $943,250 and $1.32 million previously.

So retiring without a home means many people will get less from the pension while they run down their retirement assets and will face rising rents as time goes by.

As this table from the Grattan Institute shows, renting leaves people far more vulnerable to financial stress.

While many renters on a pension may be be eligible for Commonwealth rent assistance, it maxes out at $132.20 per fortnight for a single and $124.60 for couples. Rents for a two-bedroom apartment average between $593 a week in Sydney and $329 in Adelaide (less in the regions), and have grown at around 1.6 times the rate of inflation over the past 30 years.

So being a renter will increasingly squeeze your income as your savings diminish and welfare won’t bridge the gap.

The toughening of the assets test and the rise of renting retirees “brings into stark contrast the treatment of home owners and non-home owners”, Mr Coates said.

Currently about half of age pension payments go to people with more than $500,000 in assets and 20 per cent to those with more than $1 million, most of whom are home owners.

It will also widen the gap between home owning and non-home owning superannuants as those without homes will struggle to build balances and have to spend what they have quicker to pay their housing costs.

Owner-occupiers are propping up the market

From The New Daily.

Australian regulators are trying valiantly to cool the property market by curbing investor lending, but demand appears stubbornly strong.

The latest housing finance data for May, published by the Australian Bureau of Statistics on Tuesday, showed a surge in owner-occupier lending is compensating for a drop in investor loans.

For the fourth month in a row, the total amount of money lent for mortgages across Australia declined slightly, from $33.3 billion in January to $32.8 billion in May.

Over the month, housing finance fell -0.3 per cent in value, on the trend measure, driven by a -1.5 per cent shrinkage in loans to investors.

However, owner-occupier loans rose +0.4 per cent in value over the month.

Owner-occupiers are surging back into the market, lured by the juicy rates on offer by the banks. The share of new loans going to investors has been gradually declining, from 40.3 per cent in January to 37.3 per cent in May.

The modest dent in mortgage lending may disappoint the Australian Prudential Regulation Authority, if indeed it is trying to cool the market overall. Or it might simply be satisfied that more owner-occupiers are getting in.

A comparison of mortgage lending in May each year shows that cheaper loans to owner-occupiers are blunting the impact of the investor rate hikes by the banks.

The big drops in 2015 were the last time APRA attempted to cool the market. As the chart above shows, the effect was temporary.

So the regulator had another go. In March this year, the regulator announced that banks would have to limit “higher-risk” interest-only loans to 30 per cent of new residential mortgages, down from 40 per cent.

The banks were also instructed to keep investor lending “comfortably below” the 10 per cent annual growth rate APRA imposed in December 2014 – which was interpreted as an even lower benchmark.

Banks have responded by hiking rates for investor and interest-only mortgages, gradually widening the gap relative to the Reserve Bank’s cash rate, in order to comply with the tighter rules.

The RBA estimated that, as of June, the standard variable rate for investors was an average of 5.8 per cent, up 30 basis points since November 2016.

And yet, price growth is stubborn.

The latest CoreLogic numbers had dwelling prices increasing by a huge 1.8 per cent in June, the strongest month-on-month increase in two years, despite small (possibly seasonal) dips in April and May.

Treasurer Scott Morrison has already claimed victory. He said earlier this month the Coalition government had achieved a “safe landing” for house prices by relying on APRA, as opposed to Labor’s “hard landing” of cutting tax breaks for investors.

First home buyers will be hoping he was right, as the supposed cooling has so far not translated to greater affordability.

It did take a few months for APRA’s 2015 crackdown to be fully felt. Many experts are predicting the market will cool further this year.

CoreLogic reported this week that the national price-to-income ratio – a popular measure of affordability – reached 7.3 per cent in the March quarter of 2017, up from 7.2 in 2016 and 6.1 in 2007.

The data firm also calculated that it would have taken 1.5 years of gross annual household income to save a mortgage deposit in the March quarter of 2017, compared to 1.4 years in 2016 and 1.2 years in 2007.

A recent Essential Media poll of 1025 people, conducted in June and July, found that 66 per cent believed housing to be unaffordable in their area for someone on an average income – and 73 per cent considered housing to have become less affordable in their area over the past five years.

It’s official. Regular Australians are getting poorer

From The New Daily.

Of all the measures of wellbeing of Australia’s workers and families, one has reliably increased over the decades. That is despite droughts, floods, recessions, changes of government, jobless rises and falls, and housing booms and busts. Until now.

‘Household gross disposable income’ quantifies the cash families and individuals receive from all sources – jobs, investments and other income streams – after taxes and the Medicare levy are paid.

So it is a handy guide to how much national income goes to regular working people. It is measured quarterly by Australia’s statistics bureau in the series on the nation’s finance and wealth.

Since records have been kept, the amount of money Australian families have been free to spend has increased steadily almost every year.

In the past 30 years, there have been only four 12-month periods when money available to spend has declined compared with the previous year.

The first was in the year to December 2002 when Australia – and the world – was whacked by the early 2000s global recession.

The second was the year to December 2009, when all developed economies were in turmoil brought about by the global financial crisis.

Both times, the indicator returned to strong positive growth in the following quarters.

Disturbingly, however, the last two losses of disposable income were in 2015 and 2017, during periods of strong global recovery, robust trade, excellent business revenue and record corporate profits.

‘Household gross disposable income’ fell in the year to December 2015, the transition year from prime minister Tony Abbott and treasurer Joe Hockey to Malcolm Turnbull and Scott Morrison.

There is no obvious explanation for this drop apart, perhaps, from Mr Turnbull’s observation that his predecessor had “not been capable of providing the economic leadership our nation needs”.

The latest figures show that ‘household gross disposable income’ fell again in the March 2017 quarter.

The amount Australian families were free to spend declined between January and March to $278.6 billion for the nation overall. That followed a significant fall the quarter before, down from $299 billion to $296.7 billion.

Hence, the decline over six months was a staggering $20.4 billion. That is the largest dollar decline in history and the steepest percentage drop since the 2002 recession.

Quarterly drops are not uncommon, but four quarterly declines in the space of six quarters – which has just happened – certainly is. Outside global recessions, it is unprecedented.

The figures are better interpreted over a full year, and when matched against the number of households.

Using ABS household numbers, disposable income is now $29,640 per household per year. That is down from $31,960 six months ago. It is well below the $31,650 at the end of 2013.

Allowing for the effects of inflation, earnings peaked in 2011, 2012 and 2013, despite the impact of the global crisis.

Households now, however, are earning about the same as in 2007, towards the end of the Howard years. Since then, of course, executive pay packages, MPs’ salaries, professional incomes and company profits have all risen spectacularly.

The same ABS data showed household net savings increased by a puny $7.69 billion in the March quarter. That is the lowest rise since June 2008.

The total increase in savings for the 12 months to the end of March was just $57.94 billion, the lowest since 2008-09, when the GFC was starting to take its toll.

Why?

As The New Daily has regularly reported, wages have been depressed in the past three years, the tax burden has shifted from corporations and high-income professionals to wage and salary earners, and both unemployment and underemployment remain entrenched.

To economists, this shift of income from the poor and middle to the rich is not just a matter of fairness, it is also a serious drag on the economy.

When household disposable income declines, so does revenue in retail, wholesale, cafes and restaurants, entertainment, the arts, tourism and transport.

These are all key areas for jobs and growth – which everyone agrees are the priorities.

Census makes it official: young Australians are priced out of home market

From The New Daily.

Home ownership has continued to fall among younger Australians, the latest census has revealed.

The Australian Bureau of Statistics provided data to The New Daily on Thursday that confirmed home ownership among the classic ‘first home buyer’ demographic – those aged 20 to 39 – declined again in the 2016 census.

It showed that only 36 per cent of people aged 25-29 said they owned their home outright or with a mortgage – likely the lowest level since at least the 1960s.

Home ownership for the next age group, 30-34, also declined, to 49 per cent, which is likely another record low.

And 35 to 39 year olds also dropped to 58 per cent, down from 61 per cent in the previous census in 2011.

The data is similar to that provided by the ABS to Tim Colebatch at Inside Story.

In fact, rates of fully paid or mortgaged home ownership declined in all groups up to the age of 64.

Overall rates of home ownership did not drop dramatically between the 2011 and 2016 census, as older age groups – which are gradually accounting for a larger share of the population – actually increased their ownership.

The cause may not be as simple as many think.

Similar analysis of home ownership rates by Dr Judith Yates, one of Australia’s leading housing economists, apportioned more than a small part of the blame to growing economic inequality.

Dr Yates provided an estimate of ownership rates to a Senate inquiry in 2015, along with a detailed explanation of the causes.

In her submission, she blamed many of the usual culprits, such as declining rates of marriage and fertility among young people (which makes them less eager to buy homes), rising prices, tax concessions for investors, the scarcity of urban land for development, and demand pressures from population growth.

But Dr Yates characterised several of these factors in a way many others had not: as a consequence of worsening income and wealth inequality, beginning in the 1970s, which she dubbed “The Disappearing Middle”.

“Increasing inequality continued through from the mid-1990s until the late 2000s, having accelerated between 2003-04 and 2009-10 as a result of its uneven economic growth generating disproportionate benefits for those in the top half of the income distribution,” Dr Yates wrote in her 2015 submission.

“Disproportionate growth in incomes at the top end of the income distribution meant increased borrowing capacities for households with high home ownership propensities.”

Her submission also blamed the increasing income disparity on uneven economic growth; high inflation and high interest rates in the 1980s; the burden of HECS debts; and the fact that the financial liberalisation of the 1990s “benefited high-income households”.

“Encouraged by persistent and high capital gains from the mid-1990s generated by population and real income growth and underpinned by housing supply shortages, established households – the primary beneficiaries of increasing income and wealth inequalities – increased their demand both for owner-occupied housing and, increasingly, for investment housing.”

Dr Yates noted that tax concessions for landlords, such as negative gearing and the capital gains tax concession, are also “biased towards high-income households”.

In a way, this is good news. The fact that most of Australia’s mortgage debt is held by “high-income, high-wealth households”, as Dr Yates put it, makes the economy less likely to undergo a US-style mortgage crash, as the Reserve Bank has noted many times, because that global crisis was driven by a boom in lending to low-income households.

The bad news, confirmed by the latest census, is that younger Australians are increasingly squeezed out of the market, not just by demographic change, but by the greater accumulation of wealth at the top of society.

As Dr Yates wrote: “These are the households with an economic capacity to outbid many potential first home buyers and who benefit from tax privileges that provide them with an incentive to do so.”