Posts by Sandra Morris

Australians Are Working Longer So They Can Pay Off Their Mortgage Debt

Rachel Ong, Curtin University; Gavin Wood, RMIT University; Kadir Atalay, University of Sydney, and Melek Cigdem-Bayram, RMIT University

Rising mortgage debt is affecting everything from employment to spending, as Australians approach retirement, our study finds. Higher levels of housing debt among pre-retirees are linked to them working for longer.

We found for a home owner aged 45-64 years, the chances of being employed are around 40% higher for every additional A$100,000 in mortgage debt owed against the family home.

There’s also a link between house price changes and household spending. For every A$100,000 increase in the value of a person’s house, annual household spending of home owners increased by around A$1,500. These home owners are willing to increase their spending because they’re able to borrow more against their home to finance it.

Long-run trends in mortgage debt

Australians are paying down their mortgages later in life. The percentage of home owners aged 25 years or over who are carrying a mortgage debt climbed from 42% to 56% between 1990 and 2013.

Mortgage debt burdens among pre-retirees have soared. For home owners aged 45-54 years, the incidence of mortgage debt has nearly doubled from 36% to 71%. Among those aged 55-64 years, this incidence has more than tripled from 14% to 44%.

These trends reflect at least two things. Higher housing cost burdens have resulted in a decline in home ownership rates among young people. Those able to access home ownership are doing so later in life and by taking on higher levels of debt relative to their incomes.

Flexible mortgage products also now allow home owners to unlock wealth stored in the family home whenever required, and not just their retirement years.

Higher mortgage debts, longer working lives

Australians are working longer because they are paying down their mortgages later in life.

Our modelling, based on the 2001-2010 Household, Income and Labour Dynamics in Australia (HILDA) survey data, shows that pre-retirees aged 55-64 years are 18% more likely to continue working for every A$100,000 increase in their mortgage debt.

On the one hand, unexpected increases in housing prices could have caused buyers considering home ownership to borrow more in order to buy a house, and encouraged homeowners to spend more by withdrawing the equity from their homes. These mortgagors then have to extend their working lives to meet higher mortgage repayments.

On the other hand, longer life expectancy may have encouraged many Australians to plan longer working lives. Carrying higher levels of mortgage debt later in life could be a financial tactic to finance their spending over a longer lifespan.

Borrowing more, spending more?

Our analysis found some differences between subgroups of home owners and between periods preceding and following the global financial crisis.

Before the global financial crisis highly indebted home buyers were more prepared to use their mortgages in order to bridge the gap between spending plans and income. After the crisis, home buyers with large mortgages were less willing to use their mortgages in this way.

In contrast, the spending plans of indebted households who both own their home and a second investment property seem more sensitive to house price movements since the global financial crisis. Property investors with mortgage debt increased their average yearly spending after the crisis from A$1,700 to over A$2,800 for every A$100,000 increase in their housing wealth.

On the other hand, for home owners with no investment properties, average yearly spending tightened from A$1,700 to A$1,500 for every A$100,000 increase in their housing wealth. This suggests investors with debt are not so risk-averse as other homeowners.

Housing, productivity and the economy

Mortgage debts have important economy-wide effects through interactions with labour markets and consumer spending.

Ageing is often associated with lower rates of labour force participation and declining physical and mental health, which can result in reduced productivity growth. If people are extending their working lives to repay higher mortgage debt, this could mitigate some of the productivity consequences of population ageing, albeit at the expense of greater exposure to debt in later life.

When real house values are rising, home owners and property investors are able to borrow more against their home to finance their spending. In the short run this can help offset the effect of stagnant wages (on their spending) and thereby sustain growth momentum in the economy.

But if wages fail to pick up, these higher levels of debt can be a drag on growth. High levels of indebtedness also increase exposure to house price and interest rate risk, and pose a threat to macroeconomic stability.

The ConversationOur research makes a compelling case for considering housing differently, as essential economic infrastructure. Housing needs to be re-positioned from the periphery to a central place within national economic policy debates. This could be crucial to an understanding of how our housing system can promote rather than curb economic growth in Australia.

Rachel Ong, Deputy Director, Bankwest Curtin Economics Centre, Curtin University; Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University; Kadir Atalay, Senior Lecturer in Economics, University of Sydney, and Melek Cigdem-Bayram, Research Fellow, RMIT University

This article was originally published on The Conversation. Read the original article.

News: Reserve Bank Puts Interest Rates On Hold at 1.5 Per Cent

The Reserve Bank has left the official interest rates on hold at a record low of 1.5 per cent.

The bank board last changed the rates in August, cutting them by 25 basis points.

While business investment and employment numbers have improved, the bank board still maintained its conservative approach to rate setting.

“The various forward-looking indicators point to continued growth in employment over the period ahead,” said Philip Lowe, the bank’s governor.

“Wage growth remains low, however, and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens.”

Housing debt remains a major concern for the RBA. “Growth in housing debt has outpaced the slow growth in household incomes,” the bank stated. “The recent supervisory measures should help address the risks associated with high and rising levels of household indebtedness.”

However, there are some positive outlooks. “In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades.”

News: Labor Vows to Reverse Penalty Rate Cuts

Opposition Leader Bill Shorten has pledged to reverse the cuts to Sunday penalty rates if Labor wins the upcoming election.

Cuts to weekend penalty rates for workers in retail, hospitality and fast food industry will be applied starting July 1, under a decision by the Fair Work Commission.

“I promise you this: a new Labor government will restore the Sunday penalty rates of every single worker affected by this cut,” Shorten said at an address to the Australian Council of Trade Unions in Sydney Tuesday night.

Labor’s bill to block the cuts was voted down 73 to 72 in Parliament in June.

Labor employment spokesperson Brendan O’Connor said the party will continue to fight against the cuts when parliament resumes in August.

Earlier this month, Employment Minister Michaelia Cash accused Shorten of hypocrisy on the matter.

“Bill Shorten has no problem with reducing penalty rates when he himself does it, and when his union mates do it in deals with big businesses,” said Cash. “He only objects when an independent umpire does the same thing for small business.”

‘The Way They Manipulate People is Really Saddening’: Study Shows the Trade-Offs in Gig Work

Sarah Kaine, University of Technology Sydney; Alex Veen, RMIT University; Caleb Goods, University of Western Australia, and Emmanuel Josserand, University of Technology Sydney

Uber driver Michelle, thinks her job is fantastic when she’s only after part-time hours. But she’s given it a couple of months and she says she’s not getting anywhere.

To be able to earn A$800 she has to actually pull in A$1,500, averaging 70 hours a week. The money per hour can be good, but only when it really picks up. Looking at the current job market, she doesn’t want to do two full-time jobs to make the same amount of money that she used to earn in an office, working half the time.

She feels exhausted. She used to think people in Melbourne were good drivers, but now that she’s been driving all day, she sees a fair amount of aggression. Six weeks ago she was trying to merge into traffic and a man in a ute next to her showed her a crowbar.

Her latest day off she spent sleeping because she was so tired.

Michelle (not her real name) was one of our study participants. We interviewed 60 ridesharing and food delivery workers like her. And the reality of their experiences is far more nuanced than others make out.

Work in the “gig economy” is often depicted as flexible by businesses and those who run the platforms that offer work, or as exploitative by labour activists and commentators.

A key finding is that gig workers arbitrate between the costs and benefits of gig work. Many interviewees preferred their gig work over other forms of low-paid work (most commonly cleaning, hospitality, retail) because of abusive bosses, underpayment, and underemployment. In comparison, gig work is seen by these workers as providing a more appealing work environment.

While some rideshare drivers note they need to work long hours to earn the equivalent of a full-time wage, they also emphasise their enjoyment of their rideshare work. One food delivery worker summed it up:

It is more flexible. You can do whatever you want. You are on the street talking to the people enjoying. You can do exercise as well on the bicycle. And, it is good money.

Despite these workers’ sense that there are opportunities in gig work – their experience was not overwhelmingly positive. There was a group of workers who felt marginalised, had few choices, and the gig work was a last resort.

These workers saw gig work as a stopgap measure while they looked for “real” jobs. In these cases they were doing it because it got them out of the house, to supplement their income or before starting their own business.

Social versus isolating

The workers in the study saw social interactions as part of their gig work as one of the more enjoyable aspects. What varied between rideshare and food delivery workers was how these interactions took place.

Food delivery drivers often end up crossing paths during their shifts and informally waiting together. As one worker summed up:

You end up knowing most of the riders, because you see them pretty often. You kind of speak with each other, and there is a social club.

By contrast rideshare drivers noted that their work could be quite physically isolating. Some drivers engaged in online forums with other drivers but would never meet up with them. Despite limited social interaction with other drivers, rideshare drivers reported that this is where they derived most of their job satisfaction.

Freedom versus control

The drivers we interviewed expressed a sense of freedom and flexibility because they had “no boss, no set hours”. However, the flip side of this was a sense of limited control over work. As one food delivery worker described:

I currently fit my life around their work…obviously I have to work around busy times – lunch and dinnertime.

Both delivery riders and rideshare drivers – found that only particular pockets of time across the day were profitable. This was usually lunch and dinner times, especially weekends for food delivery, and weekends and evenings for rideshare drivers. So while their options to sign on or off the app (the platform that employed them) were flexible, realistically their productive working hours were determined by patterns of consumer demand.

Both the rideshare and food delivery platforms also unilaterally changed the terms and conditions of engagement, which directly affected earning potential. Both groups of workers expressed particular concern about the periodic increases in the commission taken by the platform, reporting cuts to earnings of up to 15%. One driver lamented:

The way they [the platform] manipulate people….is really saddening.

Ridesharing workers were also concerned about being financially over-committed due to the cost associated with purchasing and running a vehicle. This financial burden, coupled with continued changing rules of game, and the capacity for these platforms to arbitrarily “deactivate them” led to anxiety and frustration. One worker described this:

It used to be good before they did all the price cuts and started treating their drivers like trash. We have had 30% cuts since I came on board whilst demand hasn’t matched supply. I make around $10 an hour.

Best of a bad lot

Our emerging findings suggest gig workers often understand the trade-offs between the positive and negative features of their work but see this as a reality of their position within the labour market.

A number of our interviewees felt exploited and/or would prefer better paying “real jobs”, validating the concern on regulation, pay and conditions in this industry. But, gig work allows these workers to meet their immediate needs and gives them a sense of being their own boss.

The ConversationThe gig workers enjoyed the high levels of autonomy in their work, and many of them saw their gigs as the best in a market characterised by low paid jobs.

 

Sarah Kaine, Associate Professor UTS Centre for Business and Social Innovation, University of Technology Sydney; Alex Veen, Lecturer – Early Career Development Fellow, RMIT University; Caleb Goods, Lecturer – Management and Organisations, UWA Business School, University of Western Australia, and Emmanuel Josserand, Professor of management, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

News: Business Conditions Remain Strong Despite Fall in Confidence, NAB Says

Australia’s businesses reported strong conditions despite declining confidence, the National Australia Bank’s (NAB) May business survey found.

The survey, containing responses from more than 400 firms, showed a slight ease in conditions – encompassing trading, profitability and employment – with one index point decline to +12. The drop was attributed to the sluggish construction, finance, property and business services. Despite the fall, it is still well above the average of +5.

“The business sector is looking quite upbeat, maintaining the apparent disconnect with a rather melancholy household sector,” said Alan Oster, chief economist at the NAB. “It is good to see that the strength has been quite broad-based, and even at the state level we have seen some significant improvements in Western Australia, which signals that the worst of the mining sector drag is probably behind us.”

Oster also predicted improvements in profitability and employment. “Profitability has remained elevated for some time now, backed up by solid profit outcomes in the first quarter National Accounts,” Oster said.

“Similarly, the current level of employment conditions is consistent with the recent improvements in ABS employment growth. That has helped to close the previous departure between the NAB and ABS measures of employment, while the NAB index suggests that we can expect more solid employment growth to continue over coming months.”

However, the survey also found a fall in confidence from +13 to +7, two points above the long-run average.

“The wedge between confidence and conditions is likely a reflection of the heightened uncertainty around the outlook, although the degree to which this reflects global versus domestic factors is difficult to gauge,” the bank said.

The bank said economic growth is expected to rise for the second half of the year, but the longer term outlook may not be as positive. “Significant structural headwinds still pose a hurdle that will prove difficult to overcome, keeping wages growth subdued and consumers cautious with their spending,” said Oster.

“The longer-term outlook could be less sanguine as important growth drivers (LNG exports, commodity prices and housing construction) begin to fade.”

News: Sunday Penalty Rate Cuts to be Phased In Over Four Years

The Sunday penalty rate cuts will be phased in over the next four years in a move that angered both employers and unions.

The Fair Work Commission ruled that the reductions to existing penalty rates for fast food, hospitality, retail and pharmacy employees will not take full implementation until 2019-2020.

Fast food and hospitality workers will have Sunday penalty rates cut by 5 per cent next month, and 10 per cent in 2018 and 2019. Their final penalty rate cuts will be 125 per cent and 150 per cent respectively.

Retail and pharmacy workers will take a 5 per cent cut this year, and a further 15 per cent every year until 2020. Their penalty rate cuts will be reduced from 200 per cent to 150 per cent.

Unions argue that the pay cut would devastate workers who sacrificed their weekends to earn money. “I think no matter which way you dress it up, you’re facing pay cuts every single year,” said Australian Council of Trade Unions secretary Sally McManus. “Australian workers are already suffering as a result of stagnant wage growth… They can’t afford a $1.42 billion wage cut.”

On the other hand, employers believe the reductions should be phased in two years instead of four. “Retailers need a break and they need it now,” said National Retail Association chief Dominique Lamb.

Russell Zimmerman, head of the Australian Retailers’ Association, also said the long phase-in period prevents businesses from employing more staff. “What this will do is create an incredible amount of extra work for retailers, who won’t be able to employ more people as quickly as they would like,” he said.

Employment Minister Michaelia Cash said the decision showed the commission’s impartiality. “Nobody got exactly what they wanted. The unions wanted it set aside, employer groups wanted a speedier transition process,” Cash said. “What this does now is give certainty.”

Nevertheless, Cash insisted that the cuts are helpful for small business while impacting only three to four per cent of Australia’s workforce. “The adjustments to Sunday penalty rates will even the playing field for Australia’s small businesses, which have to pay more for staff on Sundays than big businesses who do deals with big unions,” Cash said. “This will help thousands of small businesses open their doors, serve customers and create jobs on Sundays.”

How Much Should You Spend on Vacation?

We know that travelling is a great investment – it allows you to take a break from work, refreshes your mind and boosts your overall productivity. Furthermore, visiting new places and learning about other cultures can be a memory of lifetime. But how much is too much when it comes to spending on vacation?

According to Rubina Ahmed-Haq, a personal finance blogger with alwayssavemoney.ca, people should allocate no more than four per cent of their annual income for vacation. “Unless you have no debt, spending more than this amount will erode your long-term savings,” Ahmed-Haq told The Globe and Mail. That means if your take-home pay is $50,000, the holiday spending limit would be $2,000.

This limit is for a good reason – in case things go wrong on your holidays, you can still go home and survive. The recent Fyre Festival fiasco is a good example of this.

“Never charge your holiday on credit unless you have the cash already in the bank,” said Ahmed-Haq. “Want to spend more? Save longer.”

The four-per cent budget should cover everything, including entertainment, souvenirs and emergency fund.

“Keep a copy of your itemized budget handy in your wallet,” said Mandi Rogier at USA Today. “Check on it periodically to make sure you’re staying on track. If you find yourself overspending, you may need to cut back on tickets and souvenirs on the last few days of your trip.”

FactCheck Q&A: Does Australia Have One of the Highest Progressive Tax Rates in the Developed World?

Kathrin Bain, UNSW

The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9:35pm. Thank you to everyone who sent us quotes for checking via Twitter using hashtags #FactCheck and #QandA, on Facebook or by email. The Conversation


Excerpt from Q&A, May 15, 2017. Quote begins at 0.50.

Look, we just need to keep in mind that we have one of the highest progressive tax rates in the developed world at the moment. – Innes Willox, chief executive of the Australian Industry Group, speaking on Q&A, May 15, 2017.

When Q&A host Tony Jones asked if wealthy people should pay more tax, the AiGroup’s Innes Willox said that Australia already has one of the highest progressive tax rates in the developed world.

Is that true?

Checking the source

When asked for sources to support Innes Willox’s statement, a spokesman for the AiGroup clarified that Willox was referring to top marginal tax rates.

The spokesman referred The Conversation to OECD tax statistics, and two charts built using that data, saying that:

This shows that Australia has a relatively high top marginal tax rate (49%) but not the highest among OECD countries (Sweden is top, at 60%). The rub is that our top marginal rate cuts in at a relatively lower level of income than most other OECD countries (2.2 times our average wage).

You can read his full response and see those charts here.

Is it true? Not exactly

Looking at OECD data, Australia’s highest marginal tax rate is higher than the OECD median. Out of the 34 OECD member countries in this data set, Australia ranks 13th for the top marginal rate of tax, meaning 12 countries have a higher top marginal rate, and 21 countries have a lower top marginal rate.

However, a straight comparison like this can be misleading. More than half (19) of the OECD countries impose “social security contributions”. The OECD defines social security contributions as “compulsory payments that confer an entitlement to receive a (contingent) future social benefit”. It notes that they “clearly resemble taxes” and “better comparability between countries is obtained by treating social security contributions as taxes”.

When social security contributions are taken into account, Australia’s “ranking” in terms of top marginal rate of tax drops to 16 out of the 34 OECD member countries – making it still higher than the OECD median top marginal rate, but not by much.

The other point noted by the AiGroup spokesman was that Australia’s top marginal tax rate applies at a relatively low level of income compared to most other OECD countries.

Australia’s highest marginal tax rate applies to taxable income above A$180,000, approximately 2.2 times Australia’s average wage. The AiGroup spokesman was right to say this is relatively low, with the majority of OECD countries (20 out of 34) applying their highest marginal tax rate at income levels higher than Australia (that is, at income levels higher than 2.2 times the average wage).

However, it is worth noting that based on the latest Australian Taxation Office statistics, for the 2014-15 tax year, only 3% of individual taxpayers fell into the highest tax bracket.

Where Australia does rank amongst the highest in the OECD is the percentage of total tax revenue that is derived from individual income taxation.

In 2014, 41% of Australia’s taxation revenue came from income taxation on individuals. This is the second highest in the OECD (the highest being Denmark at 54%) and significantly higher than the OECD average of 24%.

Verdict

The statement made by Innes Willox that “Australia has one of the highest progressive tax rates in the developed world at the moment” is an exaggeration.

Australia ranks 13th in the OECD for the top marginal rate of tax, and 16th if social security contributions are taken into account.

However, Australia does rely more heavily on personal income tax (when compared to other taxes) than all but one other OECD country. – Kathrin Bain


Review

I agree that the statement is an exaggeration. 13th out of 34 is higher than the median, but it would be equally true to say that more than one-third of the OECD countries have a higher personal marginal tax rate than Australia.

It is always problematic to try to compare tax data across different countries. Although the OECD does try to make the data comparable the differences between tax and welfare systems can lead to misleading comparisons.

It is generally well known that certain Scandinavian countries, such as Sweden and Denmark, have a very high marginal tax rate. However those countries also tend to have a different approach to social and welfare spending. Australia does not have a dedicated social security tax: pensions and income support are paid from general revenue. This structural difference in the tax-transfer systems does limit the comparison.

Australia does have a high reliance on personal income tax, and the top marginal rate is higher than the median OECD level. Although the top marginal rate is relatively low at 2.2 times the median wage, the fact that only 3% of the population are in the top bracket says that we, in fact, have a relatively flat tax structure, with most taxpayers in lower tax brackets. – Helen Hodgson


Kathrin Bain, Lecturer, School of Taxation & Business Law, UNSW

This article was originally published on The Conversation. Read the original article.

News: Rising House Prices Put Pressure on Sydney and Hobart Renters

Increasing house prices in Australia are putting pressures on renters as rental affordability in Sydney reached a record low.

The latest report from Rental Affordability Index found that despite the stability in some parts of the country, low- and moderate-income households are still largely priced out of all metro markets.

Sydney and Hobart are found to be the most expensive cities for renters while Melbourne and Perth are the most affordable. Sydney renters spend an average of 29 per cent of their household income on accommodation, while those in Hobart spend 28 per cent.

 

City Per cent of household income Six-month trend
Sydney 29 -3.8 per cent
Hobart 28 -5.4 per cent
Adelaide 25 -0.7 per cent
Brisbane 25 -0.3 per cent
Melbourne 24 -0.1 per cent
Perth 21 +6.2 per cent

Source: National Shelter, Community Sector Banking, SGS Economics and Planning

 

“Lots of frustrated renters can’t get into home ownership and they stay in the rental market,” said Adrian Pisarski, executive officer at Australia’s peak housing body National Shelter.

“Those people tend to rent down as low as they can so they can save a deposit to meet the gap in terms of housing purchase, and what that does is displaces lower income households in the rental market.”

The index found that despite the negative conclusions, rental affordability has remained stable in most parts of Australia.

“What we found overall nationally is that rental affordability has not improved, it hasn’t declined overall either, except in Sydney and Hobart, where it is worse than it was six months ago,” Pisarski said.

“For most of the rest of the country [it] is pretty stable, but having said that, rental affordability is very bad across the nation.”

Tenants NSW senior policy officer Ned Crutcher said renters, who made up one-third of households in the state, were largely ignored by the government. “Rents are going up and wages are not. On top of that, renters have very little security of tenancy – they can be kicked out at any time,” he said. “This stuff keeps people awake at night.”

Westpac Reports Cash Profit of $4.02 Billion

Westpac has reported an interim first-half cash profit of $4.02 billion, an increase of three per cent as expected by market.

Cash earnings from the consumer bank rose five per cent to $1.511 billion for the six month to March 31, while total loans were up six per cent and deposits seven per cent.

However, the bank said the demand for housing loans, which supported its performance in the consumer sector, is expected to slow down. “We remain positive about the Australian housing market, although we expect price growth to moderate through 2017,” said Brian Hartzer, chief executive at Westpac.

The interim dividend was set at 94 cents per share and will be paid on July 4.