Property Investment and the Financialisation of Housing

An important report from the Special Rapporteur to the UN Human Rights Council highlights the “financialization of housing” and its impact on human rights. If you want to understand the rise in property investment in Australia, and the problem of housing affordability, read this! Sydney and Melbourne are “Hedge Cities”.  You cannot fix housing affordability without addressing the investment class.

The financialization of housing has its origins in neo-liberalism, the deregulation of housing markets, and structural adjustment programmes imposed by financial institutions and agreed to by States. It is also tied to the internationalization of trade and investment agreements which, as discussed below, make States’ housing policies accountable to investors rather than to human rights. The financialization of housing is also the result of significant changes in the way credit was provided for housing and more specifically, of the advent of “mortgage-backed securities”.

The amount of money involved in the purchase of housing and real estate is almost impossible to digest. Cushman and Wakefield, an American global real estate services firm engaging in $90 billion worth of real estate sales per year, publishes an annual report entitled “The Great Wall of Money” which includes a calculation of the amount of capital raised each year for trans-border real estate investments. The total in 2015 was a record $443 billion, with residential properties representing the largest single share. The report notes that “cross border flows will continue to transform real estate investment across the globe”

Housing prices in so-called “hedge cities” like Hong Kong, London, Munich, Stockholm, Sydney and Vancouver have all increased by over 50 per cent since 2011, creating vast amounts of increased assets for the wealthy while making housing unaffordable for most households not already invested in the market. Land prices in the 35 largest cities in China have increased almost five-fold in the past decade and prices for urban land in the top 100 cities in China have increased on average by 50 per cent in the past year.

The report examines structural changes that have occurred in recent years whereby massive amounts of global capital have been invested in housing as a commodity, as security for financial instruments that are traded on global markets, and as a means of accumulating wealth. The report assesses the effect of those historic changes on the enjoyment of the right to adequate housing and outlines an appropriate human rights framework for States to address them. The report reviews the role of domestic and international law in that sphere, and considers the application of principles of business and human rights.

The report concludes with a review of States’ policy responses to the financialization of housing and some recommendations for more coherent and effective strategies to ensure that the actions of global financial institutions and actors are consistent with ensuring access to housing for all by 2030. The Special Rapporteur suggests that, as a way forward, States must redefine their relationship with private investors and international financial institutions, and reform the governance of financial markets so that, rather than treating housing as a commodity valued primarily as an asset for the accumulation of wealth they reclaim housing as a social good, and thus ensure the human right to a place to live in security and dignity.

  1. The expanding role and unprecedented dominance of financial markets and corporations in the housing sector is now generally referred to as the “financialization of housing”. The term has a number of meanings. In the present report, the “financialization of housing” refers to 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. It refers to the way capital investment in housing increasingly disconnects housing from its social function of providing a place to live in security and dignity and hence undermines the realization of housing as a human right. It refers to the way housing and financial markets are oblivious to people and communities, and the role housing plays in their well-being.
  2. Housing and real estate markets have been transformed by corporate finance, including banks, insurance and pension funds, hedge funds, private equity firms and other kinds of financial intermediaries with massive amounts of capital and excess liquidity. The global financial system has grown exponentially and now far outstrips the so-called real “productive” economy in terms of sheer volumes of wealth, with housing accounting for much of that growth.
  3. Housing and commercial real estate have become the “commodity of choice” for corporate finance and the pace at which financial corporations and funds are taking over housing and real estate in many cities is staggering. The value of global real estate is about US$ 217 trillion, nearly 60 per cent of the value of all global assets, with residential real estate comprising 75 per cent of the total.  In the course of one year, from mid-2013 to mid-2014, corporate buying of larger properties in the top 100 recipient global cities rose from US$ 600 billion to US$ 1 trillion.3 Housing is at the centre of an historic structural transformation in global investment and the economies of the industrialized world with profound consequences for those in need of adequate housing.
  4. In “hedge cities”, prime destinations for global capital seeking safe havens for investments, housing prices have increased to levels that most residents cannot afford, creating huge increases in wealth for property owners in prime locations while excluding moderate- and low-income households from access to homeownership or rentals due to unaffordability. Those households are pushed to peri-urban areas with scant employment and services.
  5. Elsewhere, financialization is linked to expanded credit and debt taken on by individual households made vulnerable to predatory lending practices and the volatility of markets, the result of which is unprecedented housing precarity. Financialized housing markets have caused displacement and evictions at an unparalleled scale: in the United States of America over the course of 5 years, over 13 million foreclosures resulted in more than 9 million households being evicted. In Spain, more than half a million foreclosures between 2008 and 2013 resulted in over 300,000 evictions. There were almost 1 million foreclosures between 2009 and 2012 in Hungary.
  6. In many countries in the global South, where the majority of households are unlikely to have access to formal credit, the impact of financialization is experienced differently, but with a common theme — the subversion of housing and land as social goods in favour of their value as commodities for the accumulation of wealth, resulting in widespread evictions and displacement. Informal settlements are frequently replaced by luxury residential and high-end commercial real estate.
  7. While much has been written about the financialization of housing, it has not often been considered from the standpoint of human rights. Decision-making and assessment of policies relating to housing and finance are devoid of reference to housing as a human right. Issues related to business and human rights have received some attention in recent years. However, the housing and real estate sector — the largest business sector with many of the most serious impacts on human rights — appears to have been mostly ignored.
  8. A report on the topic is timely as States embark on the implementation of the Sustainable Development Goals. If the commitment in target 11.1 to ensure access for all to adequate, safe and affordable housing and basic services is to be achieved by 2030, it is essential to consider the role of international finance and financial actors in housing systems. That will help to identify and address more effectively patterns of systemic exclusion, to ensure more meaningful human rights accountability for issues of displacement, evictions, demolitions and homelessness, and the engagement of all relevant actors in the realization of the right to adequate housing.
  9.  Constructing human rights accountability within a complex financial system to which Governments are themselves accountable, involving trillions of dollars in assets, may seem a daunting task. However, the global community cannot afford to be cowered by the complexity of financialization.8 The present report aims to cut through some of the complexity and opaqueness of finance in housing to expose the central relevance and necessity of the human rights paradigm at multiple levels, from the international to the local.
  10. The report builds on important work undertaken by the previous Special Rapporteur on the right to housing. In her 2012 report on the impact of finance policies on the right to housing of those living in poverty (A/67/286), she warned of emerging trends towards the financialization of housing encouraged by States’ abandonment of social housing programmes and increased reliance on private market solutions. She documented attempts by States to rely on the private market and homeownership, which increases inequality and fails to address the housing needs of low-income and marginalized groups. More fundamentally, she called for a paradigm shift through which housing would once again be recognized as a fundamental human right rather than as a commodity. The present report takes up that challenge.

Every Consumer of Financial Products Should Read This!

In a speech “The role of financial regulation in protecting consumers“, the Governor of the Central Bank of Ireland highlights the abundant empirical and theoretical research to show that consumers do not always act in their own best interest in making financial decisions and that biases can be exacerbated by the design of financial products.

This is a very important issue, especially given the current debates about the role of banking, and the cultural behaviour of bankers. In a word, without appropriate regulation and protection, consumers are at a significant disadvantage. More needs to be done to empower consumers in their dealings with financial services firms.  International financial literacy studies indicate that a majority of the world population do not have sufficient knowledge to understand even basic financial products and fail to make effective decisions to manage their finances and the risk associated with them.

A vast empirical literature shows that consumers tend to make poor financial choices, taking on too much debt, misunderstanding investment risk and choosing financial products that do not match their needs. Over recent decades, the formal economic theory to rationalise these patterns has been developed, with insights from economics and psychology blended in the vibrant fields of behavioural economics and behavioural finance.

The fast pace of financial innovation has created a complex world for consumers, where the range of available financial products is broad, and the consequences of financial choices are significant. Coupled with this, the typical household tends to have a limited personal track record in making financial decisions, since the purchase of financial products happens only infrequently. This is problematic, since the demands for financial sophistication and knowledge are sizeable if a consumer is to navigate safely through the options put forward by providers of financial services. Financial decisions often require consumers to assess risk and uncertainty, for example, and to consider trade-offs between the near term and the long term. A growing body of academic literature shows that, among the general population, the level of financial knowledge, skills and ability to consider such complexities is low.

There is also a growing body of evidence from the field of behavioural economics that consumers are subject to behavioural biases when making decisions. In other words, decisions are affected by emotions and psychological experiences, by rules of thumb and accepted norms. For example, consumers can exhibit present-biased behaviour, which leads them to over-value payoffs today relative to payoffs in the future, a bias which can be associated with self-control problems.  In addition, households can be overly attached to the status quo and suffer inertia bias, taking default options in financial contracts, failing to switch product or provider even when there are clear benefits to switching.  Retail investors also tend to follow naïve investment strategies rather than identifying superior options.  Consumers can also exhibit loss aversion bias, meaning that they care more about potential losses than making equivalent gains.

The design of financial products and services can serve to ease or exacerbate these biases.  In this context, behavioural economics shows that framing matters – put simply, firms can present the same information in different ways and this can lead to different choices by consumers.  A key insight from the recent experience with financial crisis and from the growing literature on behavioural economics, is that consumers do not always act in their own best interest. In addition, market forces do not always act to reduce consumer mistakes. Firms face their own incentives when designing and framing products, and these incentives may not align with the best interests of the consumer. For example, analysis by the Office of Fair Trading in the UK shows that firms can frame prices in a way that plays on consumer biases. Empirical research also suggests that firms can choose to market the salient features of products that appeal to consumer biases, while shrouding the less favourable aspects that could alter a consumer’s choice to purchase that product. The interactions between misaligned incentives and behavioural biases can adversely affect consumer welfare, and there are many examples of analytical work that highlight such costs.


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.


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


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

Nearly 2M Households Locked Out Of Property Market

The latest data from our households surveys highlights the core problem facing many Australian households at this time. There are nearly 2 million households who are unable to purchase their own home.

Across the states, 33% reside in NSW, 26% in VIC, 20% in QLD and 11% in WA.

We can segment these households using our core analytics. Around 8% of these we classify as “first time buyers”, who are actively seeking and saving to purchase; 28% we identify as “want to buy”, who are saving with the hope to buy in the future; and 64% as “property inactive”, who for all intents and purposes are not actively seeking to enter the market at the moment. This inactive group continues to grow relative to the general population. All three groups are likely to be renting, living family or friends, or in other less permanent housing options.

We can also split these down across the states. From example, in NSW there are 228,000 households actively trying to get into the market, 185,000 in VIC, 158,000 in QLD and 85,000 in WA.  This provides important insights into the size of the housing problem in the country.

This is an critical additional perspective, which we need to bear in mind as we consider the 20% of existing households with a mortgage who are in some degree of mortgage stress at the moment and the 30% of households who hold investment property.

Once again, this is a big, systemic issue which needs mature and joined up policies to address the core elements that have combined to make such an intractable problem. Changing settings at the margins will not be sufficient to rectify an inter-generational emergency.

Households who do not hold property are significantly less confident finally speaking, as results from our household finance confidence security index show.


VIC FTB To Get Stamp Duty Relief

According to various media reports, the Victorian Government has announced changes to stamp duty attached to buying property today.  Currently, first time buyers in Victoria get a 50 per cent stamp duty discount, but from July, the duty will be removed for first-home buyers in the state where the property costs less than $600,000. In a band between $600,000 and $750,000 there will be stamp duty reductions regardless of whether the property is new or existing. It will assist owner occupied buyers.

Around 25,000 people a year are expected to benefit from the changes with average first-home buyer saving an extra $8,000. Those buying close to the tax limit of $650,000 would be $11,000 better off.

In the financial year 2013-14, the Victorian Government received $3.5 billion in duty, now it stands at $5.7 billion. The changes would cost about $800 million over four years.

Also, a $50 million “HomesVic” program will begin in January 2018 to give about 400 buyers an option to co-purchase a home with the government in an equity share. Buyers will need a 5 per cent deposit to be eligible, and equity up to 25 per cent for each property which the government will recover when the property is sold,  The scheme will target couples earning up to $95,000 and singles earning up to $75,000.

Additional measures include a 1% land tax on vacant property and removal of some investment property stamp duty incentives.

These measures add to the to the land release and country first owner grants already announced. Combined they could make quite a difference to the market.

Mortgage Stress Grinds Higher

We have just rerun our mortgage stress models, incorporating data to 1st March 2017. Household budgets remain under pressure, thanks to flat incomes and rising living costs – and some lifts in mortgage rates. You can read more about our approach to measuring mortgage stress here. Our current analysis concentrates on owner occupied mortgages.

Overall, 21.78% of households are in some degree of mortgage stress. We look at mild stress, meaning they are managing to meet repayments, but are doing so by cutting back on other expenditure, putting more on credit cards, and seeking to refinance or restructure to reduce monthly payments.  19.08% of households fall into this group. An additional 2.7% of households are in severe stress, meaning they are likely to miss repayments, or are in default, or are looking to sell. We look at household cash flow, not a set percentage of income going on the mortgage.

Here are the postcodes across Australia with the highest levels of stress.

Harristown, QLD 4350, which was the highest count in December 2016, still is first, followed by Leumeah NSW 2560. Leumeah  is a suburb of Sydney, Macarthur/Camden, about 40 kms from the CBD.  The average age of the people in Leumeah is 35 years of age. Around 37% of households there have a home loan mortgage.

Third is Frankston VIC 3199, which is a suburb of Melbourne, Bayside, It is about 39 kms from Melbourne.  Frankston is in the federal electorate of Dunkley. The median/average age of the people in Frankston is 38 years of age. Around 30% of households here have a mortgage.

Fourth highest is Merriwa 6030, a suburb of South Western, Heartlands, WA. It is about 35 kms from Perth in the electorate of Pearce. 41% of homes here are mortgaged.  The average age of the people in Merriwa is 35 years of age.

Once again, remember interest rates are very low, and are expected to rise, so the OECD warning about the risks in the housing sector seem well placed.

Editors Note. We updated this post to reflect the total of mild and stress, when it first appeared, we sorted only on mild stress, which changed the results slightly – and we also added back the latest probability of default metrics as well.


An Australia-wide View Of Insolvency

The latest data from the Australian Financial Security Authority to December 2016 shows the count of personal and business insolvencies across the country.

Here is the count of debtors by state in the final quarter of 2016.

All the above figures refer to personal administrations under the Bankruptcy Act only (and not corporate insolvency). A business related bankruptcy is defined as being one in which an individual’s bankruptcy is directly related to his or her proprietary interest in a business.

Here are the trends. The fall in personal insolvencies in the east coast states explains why currently mortgage delinquency remains contained.

WA appears to be experiencing the brunt of the economic pressure, which  aligns with the higher mortgage default rates we are also seeing in the West and is further evidence of the distress there.

Trade Labour and Trust

From The IMF Blog.

Every two years, the IMF and World-Bank invites global labor union leaders to discuss the global economy and the implications for the labor force. In this podcast, Sharan Burrow, head of the world’s largest trade union federation, says collective action is needed to help better distribute the benefits of growth, if institutions are to regain trust from working people.

Sharan Burrow is General Secretary of the International Trade Union Confederation, and in this podcast she says collective action is needed to help better distribute the benefits of growth.

As head of the world’s largest trade union federation, Burrow lays out—in no uncertain terms, what today’s “stagnating” economy means for the 3 billion people in the global workforce. “It’s certainly not delivering jobs—even where there is growth, particularly for women and young people who are extraordinarily vulnerable.”

While Burrow supports trade and globalization, she says it’s been built on a low wage, labor arbitrage system that has left too many people in insecure and unsafe work.

Burrow also talks about how women’s workforce participation—after having grown significantly in recent years—has come to a near halt, and points out how this is counter-productive.

“The two most significant areas of growth for jobs is investment in infrastructure, and for immediate productivity gains—it’s women’s participation in work,” she added.

Discussing The Bank of Mum and Dad

We discussed our recent research on the Bank of Mum and Dad on the TalkingLifeStyle Smart Money radio show. More first time buyers are getting help from parents – up to 54% in the past quarter. This help varies from a loan for a deposit, a cash present, help with transaction expenses, or ongoing assistance with mortgage repayments or other household expenses.   Parental guarantees are falling out of favour.


You can read our recent research note here.

The link to the programme is here.



The Future Is… Uncertain

Australians and businesses overwhelmingly think our country is a great place to live and have a business. However, Australian consumers and businesses are anxious about what the future holds.

National Australia Bank (NAB) today released a new report which asks consumers and businesses to explore life, work and running a business in Australia – now and in the future.

“Nine in 10 Australians told us our country’s open spaces, people and lifestyle and access to affordable and quality healthcare are the biggest contributors to liveability and their choice to call Australia home,” NAB Chief Economist Alan Oster said.

“There are some clear differences between states. Consumers in SA/NT are much more positive in relation to travel time, living costs and housing – and in Victoria, a love of sport means entertainment options feature more prominently for liveability than any other state.”

Businesses too are optimistic, with 8 in 10 (82%) surveyed viewing Australia as a great place to have a business.

“Australian business people see the economy, our close proximity and strong connections to Asia and the growing population as some of Australia’s key strengths,” Mr Oster said.

“Making the most of these strengths is vitally important for Australia, to support more growth opportunities for businesses and the millions of Australians they employ.”

But despite their current optimism, the report found only 1 in 2 people and 60% of businesses think Australia will be a great place to live and have a business in 10 years’ time.

“There is a clear message of anxiety in the future coming from Australian consumers and businesses,” Mr Oster said.

“Australians identified access to social welfare, living costs, tax levels, jobs and housing affordability as the key factors they expect will deteriorate the most in the next 10 years. Consumers are saying they expect very little progress in the areas already holding Australia back now.

“While a person’s income didn’t affect current perceptions of liveability, there was a large future disconnect between high income earners (earning over $100,000) and those earning under $35,000 a year.”

Businesses are slightly more optimistic.

“Australian businesses expect the things that make our country great now to continue to make us great in the future – this includes our population, proximity to Asia and our innovative and entrepreneurial economy.”

“These insights on how Australians feel about our country may be able to help businesses and governments discover what we’re concerned about, and prompt discussion on how to tackle some of the big issues,” Mr Oster said

About 2,300 consumers and 500 businesses took part in the survey, and full findings can be viewed here.