Can Bank Branches Be Reinvented Digitally?

As we discussed this week, the writing is on the wall for bank branches, and more will be closed in the months ahead as the digital revolution continues. You can read our latest research in our “Quiet Revolution” report.

Bankwest announced the closure of a significant number of branches on the east coast, as discussed in this segment.

But there was a timely article published by McKinsey “A bank branch for the digital age“.

In it, they argue that digital technology could be harnessed within the branch to enhance customer experience there, and that there is still a role for bank real estate.  We are less convinced, as in Australia at least, the digital revolution is well advanced, and brokers provide an alternative face to face sales channel.   But in-branch tech may give branches some extra utility, for a short while.

Far from rendering the bank branch obsolete, digital technology holds the key to the branch of the future.

The bank branch as we know it, with tellers behind windows and bankers huddled in cubicles with desktop computers, needs reinvention. Most customers now carry a bank in their pockets in the form of a smartphone and only visit an actual branch to get cash or, occasionally, advice. Globally, financial institutions now process far more transactions digitally than in branches, and since the financial crisis of the late 2000s, more than 10,000 US bank branches have closed—an average of three a day.1

Despite such systemic changes, branches remain an essential part of banks’ operations and customer-advisory functions. Brick-and-mortar locations are still one of the leading sales channels. Even in digitally advanced European nations, between 30 and 60 percent of customers prefer doing at least some of their banking at branches, according to McKinsey research.

Changing customer behavior and the emergence of new technologies spell not the end of the branch but rather the advent of the “smart branch.” Smart branches use technology to boost sales and improve customer experience significantly. When done right, applying the concept transforms the way a bank branch operates (reduced staffing), significantly lowers real-estate requirements, and alters customer interaction (targeted, relevant sales and service-to-sales programs)—with a resulting 60 to 70 percent improvement in branch effectiveness, as measured by cost savings and increased sales.

Our research shows that although many banks have started to adopt elements of the smart-branch model, most are not extracting the full value potential. Making branches smart is not a matter of simply installing new machines or buying a suite of tablet computers. Smart-branch transformation builds on three pillars: the seamless integration of cutting-edge branch technology, which has become cheaper, more reliable, and more accessible; the adoption of radically new, teller- and desk-free branch formats at every location; and the use of digital technology and advanced analytics to improve the operating model in branches, including personalized, data-driven sales and real-time performance management and skill development.

 

US Corporate Trade Warnings Portend Softer Capex – Fitch

Growing concerns in the US business community about the potentially adverse effects of tariffs could cause modest deterioration in US manufacturing activity and capital spending by YE 2018, according to Fitch Ratings.

The escalation of the US-China trade dispute and the notable absence of constructive negotiations point to a continuation of trade-related uncertainty for US businesses through the second half of the year.

We expect approximately 3% growth in aggregate capital spending for Fitch’s universe of rated US corporates in 2018, following 6% growth in 2017, due in part to the cash benefits of tax reform. However, warnings that business strategies may be altered and capital projects delayed, along with potential pressure on exports, suggest capex trends could weaken. We currently expect aggregate capex to decline 0.8% in 2019. This may mark a potential inflection point in the current late-stage business cycle.

Several US companies, including Harley Davidson, Brown-Forman, and General Motors (GM), have spoken out on the potential adverse effects of escalating trade tensions. Harley-Davidson plans to move production of motorcycles for EU markets to its non-US plants to avoid retaliatory tariffs that would add an average of $2,200 to the cost of motorcycles exported to the region from the US. Brown-Forman cautioned that trade issues could negate benefits of a strong economy with the uncertainty making it difficult to accurately forecast earnings. GM indicated that potential US auto tariffs would raise prices of its vehicles, reduce its global competitiveness and lead to a loss of US jobs.

Comments by companies across various sectors, including electrical equipment, appliances and components, and food, beverage, and tobacco, were noted in the Federal Reserve’s June meeting minutes and the Institute for Supply Management’s (ISM) Purchasing Manager survey. This reflects broadening concern over the influence trade-related uncertainty is having on business sentiment and growth plans. Moreover, industry groups such as the US Chamber of Commerce and the Alliance of Automobile Manufacturers that support the business community are lodging complaints to the Trump Administration.

US leading economic indicators currently suggest overall business sentiment remains strong and manufacturing activity continues to expand due to a healthy growth outlook. The US Purchasing Manager’s Index (PMI) was near peak levels, rising to 60.2% in June from 58.7% in May. The index has only exhibited slight volatility in response to trade developments over the past year. The Philadelphia Fed’s survey of business intentions, a good bellwether of future capital spending plans, has recently declined slightly from very healthy levels, perhaps in response to protectionist threats.

Eurozone PMIs continue to signal expansion but have consistently declined since the beginning of 2018. Earlier in July, we noted increased trade tensions have raised the risk that additional tit-for-tat measures could have a greater impact on global economic growth than those seen so far. This would particularly be the case given the fact that investment and net exports are key components of GDP.

According to the ISM, expansion in new orders, production and employment drove the increase in the June US PMI reading. Inventories continue to struggle to maintain expansion levels, as a result of supplier deliveries slowing further. Labor constraints and supply chain disruptions continue to limit full production potential and price increases across all industry sectors remain on the rise. Additional rounds of tariffs could place further upward pressure on input costs, disrupt supply chains and weaken manufacturing activity in the near-term.

Why the war on poverty in the US isn’t over, in 4 charts

From The US Conversation.

On July 12, President Trump’s Council of Economic Advisers concluded that America’s long-running war on poverty “is largely over and a success.”

While the council’s conclusion makes for a dramatic headline, it simply does not align with the reality of poverty in the U.S. today.

What is poverty?

The U.S. federal poverty line is set annually by the federal government, based on algorithms developed in the 1960s and adjusted for inflation.

In 2018, the federal poverty line for a family of four in the contiguous U.S. is $25,100. It’s somewhat higher in Hawaii ($28,870) and Alaska ($31,380).

However, the technical weaknesses of the federal poverty line are well known to researchers and those who work with populations in poverty. This measure considers only earned income, ignoring the costs of living for different family types, receipt of public benefits, as well as the value of assets, such as a home or car, held by families.

Most references to poverty refer to either the poverty rate or the number of people in poverty. The poverty rate is essentially the percentage of all people or a subcategory who have income below the poverty line. This allows researchers to compare over time even as the U.S. population increases. For example, 12.7 percent of the U.S. population was in poverty in 2016. The rate has hovered around 12 to 15 percent since 1980.

Other discussions reference the raw number of people in poverty. In 2016, 40.6 million people lived in poverty, up from approximately 25 million in 1980. The number of people in poverty gives a sense of the scale of the concern and helps to inform the design of relevant policies.

Both of these indicators fluctuate with the economy. For example, the poverty population grew by 10 million during the 2007 to 2009 recession, equating to an increase of approximately 4 percent in the rate.

The rates of poverty over time by age show that, while poverty among seniors has declined, child poverty and poverty among adults have changed little over the last 40 years. Today, the poverty rate among children is nearly double the rate experienced by seniors.

The July report by the Council of Economic Advisers uses an alternate way of measuring poverty, based on households’ consumption of goods, to conclude that poverty has dramatically declined. Though this method may be useful for underpinning an argument for broader work requirements for the poor, the much more favorable picture it paints simply does not reconcile with the observed reality in the U.S. today.

Deserving versus undeserving poor

Political discussions about poverty often include underlying assumptions about whether those living in poverty are responsible for their own circumstances.

One perspective identifies certain categories of poor as more deserving of assistance because they are victims of circumstance. These include children, widows, the disabled and workers who have lost a job. Other individuals who are perceived to have made bad choices – such as school dropouts, people with criminal backgrounds or drug users – may be less likely to receive sympathetic treatment in these discussions. The path to poverty is important, but likely shows that most individuals suffered earlier circumstances that contributed to the outcome.

Among the working-age poor in the U.S. (ages 18 to 64), approximately 35 percent are not eligible to work, meaning they are disabled, a student or retired. Among the poor who are eligible to work, fully 63 percent do so.

Earlier this year, lawmakers in the House proposed new work requirements for recipients of SNAP and Medicaid. But this ignores the reality that a large number of the poor who are eligible for benefits are children and would not be expected to work. Sixty-three percent of adults who are eligible for benefits can work and already do. The issue here is more so that these individuals cannot secure and retain full-time employment of a wage sufficient to lift their family from poverty.

A culture of poverty?

The circumstances of poverty limit the odds that someone can escape poverty. Individuals living in poverty or belonging to families in poverty often work but still have limited resources – in regard to employment, housing, health care, education and child care, just to name a few domains.

If a family is surrounded by other households also struggling with poverty, this further exacerbates their circumstances. It’s akin to being a weak swimmer in a pool surrounded by other weak swimmers. The potential for assistance and benefit from those around you further limits your chances of success.

Even the basic reality of family structure feeds into the consideration of poverty. Twenty-seven percent of female-headed households with no other adult live in poverty, dramatically higher than the 5 percent poverty rate of married couple families.

Poverty exists in all areas of the country, but the population living in high-poverty neighborhoods has increased over time. Following the Great Recession, some 14 million people lived in extremely poor neighborhoods, more than twice as many as had done so in 2000. Some areas saw some dramatic growth in their poor populations living in high-poverty areas.

Given the complexity of poverty as a civic issue, decision makers should understand the full range of evidence about the circumstances of the poor. This is especially important before undertaking a major change to the social safety net such as broad-based work requirements for those receiving non-cash assistance.

Author: Robert L. Fischer Co-Director of the Center on Urban Poverty and Community Development, Case Western Reserve University

Base Metals Price Drop May Signal Lower Growth

The trade wars are, according to Moody’s, already impacting base metals pricing, and may signal lower growth ahead.

We can see falls from the charts.

Though it goes practically unmentioned, one of the more unexpected developments of late has been the stunning collapse of Moody’s industrial metals price index. In part, the industrial metals price index’s average of July-to-date is a deep 8.2% under its June 2018 average because of uncertainties stemming from trade-related issues. Since worries surrounding a trade war came to the fore following June 14’s close, the base metals price index has sunk by 13.0%.

Nevertheless, the base metals price index’s month-long average had peaked some time ago in February 2018, where the subsequent slide by the index through mid-June reflected a loss of momentum for global
industrial activity.

Moreover, the base metals price index’s improved performance since 2016 falls considerably short of its strong showing of 2010 and 2011. Though the industrial metals price index’s latest 52-week moving average tops its contiguous 52-week moving average of the span-ended July 17, 2017 by 19.9%, it remains 8.8% under its current recovery high for the span ended September 20, 2011. The latter 52-week observation overlapped very brisk annual growth rates for the world economy of 5.4% for 2010 and 4.3%
for 2011.

The roughly 10% average annual increase by China’s real GDP of 2010-2011 goes far at explaining both 2010-2011’s average annualized advances of 4.9% for world economic activity and 27% for the industrial metals price index. By contrast, current consensus expectations call for a slowing of China’s economic growth from 2017’s actual 6.9% to 6.6% in 2018 and 6.4% in 2019. In turn, the IMF expects the world economy to grow no faster than 3.9% in both 2018 and 2019 following 2017’s 3.7% increase.

However, a consensus forecast compiled by Bloomberg News in mid-July projected slower rates of growth for world real GDP of 3.7% in 2018, 3.6% in 2019, and 3.3% in 2020. These projections for world growth seem to be inconsistent with the accompanying consensus forecast of a steady and uninterrupted climb by the 10-year U.S. Treasury yield from July 19’s 2.85% to 3.55% by the end of 2020.

Lower Industrial Metals Price Index May Block Higher Treasury Yields

Throughout the current business cycle upturn, advances by the 10-year Treasury yield have been difficult to sustain without an accompanying upswing by the industrial metals price index. For example, when the
10-year Treasury yield’s month-long average peaked for the current recovery at the 3.58% of February 2011, the base metals price index was merely 0.1% under its April 2011 high of the current upturn. In response to a 25% plunge by the base metals price index’s moving three-month average from April 2011 to December 2011, the 10-year Treasury yield’s accompanying three-month average sank from 3.48% to 2.05%, respectively.

Until the base metals price index approaches its latest high of February 2018, the 10-year Treasury yield is unlikely to remain at or above 3% for long. In fact, there is a very real possibility that by later this summer, the industrial metals price index may begin to record year-to-year declines, which in the past  were often accompanied by year-to-year declines for the 10-year Treasury yield. A year-to-year decline by the base metals price index could arrive fairly soon. For example, July 18’s industrial metals price index was less than each of its previous month-long averages starting with August 2017. Over the course of just one month, the industrial metals price index’s yearly increase sagged from the 26.2% of June 18, 2018 to the 6.0% of July 18.

2015’s Bout of Industrial Commodity Price Deflation Swelled Spreads and Sank Equities

The last severe bout of base metals price deflation was linked to problems in China and an earlier run-up by U.S. Treasury bond yields, or the taper tantrum of 2013-2014. After setting a localized peak in August 2014, the industrial metals price index’s month-long average would ultimately plunge by a cumulative 35.5% before bottoming in January 2016. In addition, an even deeper 71.0% plummet by crude oil’s month-long average price from a June 2014 peak to a February 2016 bottom overlapped the slide by base metals prices.

The 2014-2015 episode of industrial commodity price deflation helped to shrink the moving yearlong sum of the pretax operating profits of U.S. nonfinancial corporations by 10.3% from a second-quarter 2015 top to a first-quarter 2017 trough. Even after excluding the especially hard hit petroleum and coal industries, the remaining operating profits of nonfinancial corporations sank by a cumulative 7.8% from 2015’s second quarter to 2017’s first quarter.

The combination of industrial commodity price deflation and the shrinkage of profits helped to drive the U.S.’ high-yield default rate up from September 2014’s now 10.5-year low of 1.6% to January 2017’s eight-year high of 5.9%. Moreover, the month-long averages of the high-yield bond spread and the longterm Baa industrial company bond yield spread ballooned from the 331 basis points and the 145 bp, respectively, of June 2014 to the 839 bp and 277 bp of February 2016. In addition, the month-long average for the market value of U.S. common stock sank by a cumulative 12.9% from a May 2015 high to a February 2016 bottom.

A subsequent recovery by operating profits helped to lower the default rate to June 2018’s 3.4%. And expectations of a further expansion of profits from current production now lend critical support to a likely continued slide by the default rate to 2.3% by June 2019.

Nevertheless, Moody’s Default Research Group has upwardly revised its default forecast. The predicted U.S. high-yield default rate for 2019’s first quarter has been ratcheted up from 1.9% as of April 2018 to 2.5% as of July. Still the latter would be significantly under the 3.8% average of 2018’s first quarter. Not only do expectations of yearly declines by the default rate constructive for corporate credit quality, they also lend support to equity market performance and systemic liquidity.

Sydney Auctions Lowest Since 2012

From CoreLogic.

The final data from CoreLogic shows the weak trends are continuing. Sydney’s final clearance rate dropped to 46.9 per cent last week across 408 auctions, the lowest clearance rate the city has seen since December 2012.

Auction statistics

 

Last week saw 1,178 homes taken to auction across the combined capital cities, returning a clearance rate of 52.0 per cent after the previous week recorded a clearance rate of 52.6 per cent across 1,411 auctions. Over the same week last year, 1,627 homes were taken to auction and the clearance rate was a stronger 69.4 per cent.

Auction clearance rate

 

Melbourne’s final clearance rate came in at 56.2 per cent across 559 auctions last week, similar to the previous week when 631 auctions were held and a clearance rate of 56.1 per cent was recorded. This time last year auction volumes were higher across the city with 756 homes going under the hammer returning a clearance rate of 74.9 per cent.

Sydney’s final clearance rate dropped to 46.9 per cent last week across 408 auctions, the lowest clearance rate the city has seen since December 2012. In comparison, 552 auctions were held across Sydney over the previous week returning a clearance rate of 50.1 per cent while this time last year, 609 homes went under the hammer, returning a clearance rate of 69.2 per cent.

Across the smaller auction markets, clearance rates improved everywhere except Brisbane. In terms of volumes, Adelaide was the only city to see an increase with an additional 8 homes taken to auction over the week.

Of the non-capital city markets, the Hunter region recorded a 70.6 per cent final auction clearance rate across 17 results, followed closely by Geelong where 70.4 per cent of the 27 auction results were successful.

Banking Industry Risks Are Higher – S&P Global Ratings

S&P Global Ratings has just come out with a significant comment on “some weaknesses in the effectiveness of regulation in the banking sector, and the conduct, governance, and risk appetite shown by Australian banks”.  Finally!!

The negative rating outlooks on systemically-important Australian banks reflect pressures on the Australian sovereign creditworthiness (Commonwealth of Australia; AAA/Negative/A-1+) and a possible tempering of our current highly supportive opinion concerning the Australian government’s tendency to support banks.

During the past quarter, we revised our economic risk trend for the Australian banking industry to positive from stable. This reflects our expectation that the trend of an orderly unwinding of economic imbalances, including for high property prices and private sector indebtedness, should continue for at least the next year.

By contrast, we recently negatively revised our view of the Australian banking sector’s industry risk. In our view, developments over the past two years in the Australian banking sector, including information coming out of hearings at the ongoing Royal Commission, highlight some weaknesses in the effectiveness of regulation in the banking sector, and the conduct, governance, and risk appetite shown by Australian banks.

Booming jobs numbers, but dig deeper and it’s not all rosy

From The Conversation.

The latest labour market data from the Australian Bureau of Statistics provide an instructive lens into the problems facing the federal government, the RBA, and the economy itself.

The number of people employed rose 50,900 from May to June in seasonally adjusted terms, which was well ahead of forecasts of around 16,500. And that wasn’t just a lot of new part-time jobs. Full-time employment rose by 41,200.

On a year-on-year basis that represents an increase in employment of 2.8%.

No doubt Treasurer Scott Morrison will tout these figures as evidence of the government’s focus on “jobs and growth”. Don’t get me wrong: it’s good that employment is going up.

But dig a little deeper and the story is not so rosy.

One might think that robust increases in the number of people employed reduce the unemployment rate a lot. Not so. The number of people unemployed fell from 715,200 in May to 714,100 in June.

That, of course, is explained by the so-called participation rate – the proportion of people participating or trying to participate in the paid labour market.

The participation rate rose from 65.5% in May to 65.7% in June, leaving the unemployment rate unchanged at 5.4%.

The Australian labour force participation rate is actually pretty high. A useful comparison is the United States – probably the world’s most robust labour market – where the current rate is 62.9%.

The key point is that if more people are going to come into the labour market when it looks better – as they have been consistently – then a continued reduction in the unemployment rate is going to require creating a whole lot more jobs.

So when the prime minister and treasurer point out what a large number of jobs are being created – 400,000 in 2017 – they are both right and wrong. Yes, 400,000 is a demonstrably large number. But it’s just not enough to get unemployment down.

What about wages?

What the data released Thursday did not reveal was anything about what people are paid. Perhaps the most concerning thing about the Australian labour market is that wages are not growing at anywhere near historic-average levels and this has been going on for several years.

Private-sector wages grew over the last year by 1.9% – the same rate as consumer prices (inflation).

In other words, real wage growth is zero.

Unemployment that seems stuck at around 5.4% and real wages growth that is zero. What to do?

The traditional approach would be for the RBA to cut interest rates – and some commentators still advocate this. There are at least three problems with this approach, however.

First, with the official cash rate at 1.5% there is not a lot of wiggle room. Although it is fair to point out that there is precisely 1.5% of wiggle room.

That bring us to problem two, which is that a further cut in interest rates is likely to fuel property prices and, perhaps more importantly, household debt. The RBA has repeatedly shown concern about this, and with good reason.

Third, and this is more subtle, if the RBA does cut rates much further then they will have nowhere to go in the case of a major economic downturn. That would force them to respond to a major downturn with unconventional measures such as quantitative easing.

Another approach would be for the government to run large deficits – also known as fiscal policy. But here, too, there are significant problems.

We have been running pretty large deficits for some time, which has put our credit rating in jeopardy. True, Australia’s net debt-to-GDP ratio of around 18.9% is low by international standards, but there seems little appetite on either side of politics to run that up further.

The final approach is to reform labour market institutions and make them more flexible – sometimes called “microeconomic reform”. It is plausible that this would have a decent chance of lowering unemployment.

But it would also push Australia closer to a United States-style labour model.

None of these options are without real downsides. And none of them seem likely to appeal to the voting public. That’s why the unemployment rate in Australia is a particularly challenging problem.

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

Unemployment Improves In June 2018

The ABS released their employment data for June 2018 today. The headline will read a fall to a 5 year low.

The trend unemployment rate was 5.4% in the month of June 2018, according to latest figures released by the Australian Bureau of Statistics (ABS) today. The trend participation rate remained steady at 65.6 per cent in June 2018, after the May figure was revised up.

 
“Over the year to June, the unemployment rate declined by 0.2 percentage points. This continues a gradual decrease in the trend unemployment rate from late 2014 and is the lowest rate since January 2013,” said the Chief Economist for the ABS, Bruce Hockman.

Employment and hours

Trend employment increased by around 27,000 persons in June 2018 and the growth was evenly split between full-time and part-time employment, with both increasing by over 13,000 persons. The net increase of 27,000 persons comprised well over 300,000 people entering employment, and more than 300,000 leaving employment in the month.

Over the past year, trend employment increased by 318,000 persons or 2.6 per cent, which was above the average year-on-year growth over the past 20 years (2.0 per cent).

15 to 19 year olds have contributed around a third of trend employment growth since January 2018. Employment for 15 to 19 year olds increased by over 6,000 in June 2018 and grew by around 58,000 over the last year.

The trend monthly hours worked increased by 3.4 million hours or 0.2 per cent in June 2018, and by 2.6 per cent over the past year.


States and Territories

Year-on-year growth in trend employment was above the 20 year average in all states and territories except for Victoria and Western Australia. Over the past year, the states and territories with the strongest annual growth in trend employment were New South Wales (3.7 per cent), Australian Capital Territory (2.9 per cent) and Queensland (2.6 per cent).

Underemployment

Underemployment (those in work who want more work) is at 9%, and is trending up a little. This is significantly higher than in 2011 when the employment rate was in a similar region, suggesting that more people feel the need for additional work.

Of course the stats are based on a wide definition of “employed” as even a small number of working hours a week shows as an employed person. Alternative measures of unemployment report much higher rates, so there is a question as to the significance and reliability of the numbers. But the trend remains down, which is good news, but in the region above 5%, the level at which the RBA says income growth may start to rise. So we are not there yet!

 

Mortgage Arrears Tick Up In May (Again)

The latest S&P Ratings SPIN index to May 2018, based on their portfolio of mortgage backed securities showed a further move up in defaults compared with last month, from 1.36% to 1.38%.

In fact, Western Australia’s default rates improved a little, as did Victoria, but there were rises in New South Wales of 0.02%, Queensland of 0.04% and Northern Territory up 0.52%.  ACT has the lowest default rate at 0.75%, followed by New South Wales at 1.05% while the Northern territory and Western Australia have the highest rates of 30 default at 2.84% and 2.67% respectively.

Looking across the period in default, the most significant rise across prime loans was in the 61-90 days bracket, up from 0.22% in April to 0.25% in May. 90 day plus arrears remained the same at 0.67%.

Significantly, the larger hikes were see in the major bank portfolios, with the prime spin rising from 1.36% last month to 1.38% in May. There was a rise in 61-90 day past due loans, from 0.22% last time to 0.25%.

Whilst these moves are small, arrears are now as high as they were back in 2011, and interest rates are much lower today, so this highlights the risks in the system. This does not appear to be a seasonal issue, it is more structural.

 

Changes In The Private Rental Sector – AHURI

AHURI is a national independent research network with an expert not-for-profit research management company, AHURI Limited, at its centre. AHURI undertakes evidence-based policy development on a range of priority policy topics that are of interest to our audience groups, including housing and labour markets, urban growth and renewal, planning and infrastructure development, housing supply and affordability, homelessness, economic productivity, and social cohesion and wellbeing.

The have just published a report – “Navigating a changing private rental
sector: opportunities and challenges for low-income renters“, utilising data from both HILDA,  and other sources and using Clapham’s (2005) ‘housing pathways’ approach. As well as presenting data they also recommend a number of policy reforms.

This included HILDA data from 2015, which whilst dated now, highlights the issues in the low-income renter sector.

They say that the Private Rental Sector:

… has been expanding and transforming in a number of ways over the past decade as renters and investors/landlords adapt to rising house prices and rents, particularly in Sydney and Melbourne markets. At the low end of the sector, key developments have been the entry and expansion of the role of online platforms and community agency intermediaries in facilitating access to and tenancy management of private rental rooms and dwellings. The profile of renters is becoming more diverse as long-term renting continues to increase across all income groups, generating high competition for the limited dwellings that are affordable on a low income. The profile of investors/landlords and the lease lengths they choose to set for rooms and dwellings is also more varied.

They find that:

The accessibility and affordability of dwellings at the low end of the PRS undoubtedly remains the central issue for vulnerable groups of renters. In seeking to understand how low-income renters navigate changing PRS institutions, we first examine their individual and household income profile, drawing on existing HILDA and Journeys Home data. This background analysis reveals the importance of understanding the connection between individual and household income for low-income renters, beyond existing measures of affordability stress at the household level, which can conceal the difficulties faced by individuals as they navigate access to the PRS. Factors to be considered include the interim solutions individuals may seek when locked out of formal rental pathways (such as more informal or supported pathways into the PRS), and the consequences of persistently low individual and household incomes over time.

 

Applying an individual–household income typology within the HILDA data we find that:

  • more than half (55%) of low-income (Q1–Q2) individuals in a low-income (Q1–Q2) household who are renting privately remain in this household group over a five-year period
  • this group of private renters is most likely to make a transition into social housing and is less likely to move, but when they do move it is typically ‘forced’ (i.e. their property is no longer available to rent)
  • low-income renters are least able, in terms of personal savings, to afford the upfront and relocation costs of a move.
    In examining formal, informal and supported rental arrangements of individuals who have experience of or are at risk of homelessness, drawing on the Journeys Home longitudinal survey, we find the following.
  • Individuals and households in the lowest 20 per cent of the income distribution (Q1) are least likely to rent in the formal PRS, with over 70 per cent reporting a lack of affordable housing as an obstacle to finding more secure housing. The main type of living arrangements for those with Q1 individual (40%) and Q1 household (31%) incomes was renting from friends and family.
  • Among Q1 individuals renting in the formal PRS, the main transition between consecutive waves of the HILDA data was to move into an informal arrangement where they rent privately from friends and family (24%).
  • Transitions in individual income groups showed that 70 per cent of Q1 individuals and 74 per cent of Q2 individuals remained in the same income group over the data collection period (2011–14).

They state:

The formal institutions within the PRS designed to overcome barriers to accessing and managing tenancies for low-income renters have not kept up with the pace of change occurring within informal rental living arrangements. Any reforms to existing formal institutions intended to deliver better outcomes for private renters on a low-income must grapple with an increasingly complex and fragmented PRS. There is a clear need for centralised forms of assistance delivered via the statutory income system of support, but also a need for more devolved initiatives that can target informal and supported pathways through state and local government tenancy regulation and policy intervention. Within this framing, policy reform should take into account the following:

  • Centralised reforms of rental housing assistance and regulation must seek to redress the growing imbalance in horizontal equity (treating those with similar incomes and wealth the same) and vertical equity (reducing the divide between those at the top and bottom of the income and wealth distribution). This includes reviewing the adequacy of wages, statutory incomes and rental assistance in view of rising costs of living.
  • There is clear evidence that the informal pathway into the PRS is expanding through the reach of online platforms to exploit and disrupt formal paths to access and management. Regulation of informal rental practices, particularly in the context of online intermediaries and the growth of room rentals, must ensure that supply and access to urgent housing is not impeded, whilst also ensuring that tenants have adequate recourse to live in safe and secure rental housing.
  • As the community sector expands its focus, there is growing capacity to establish more formal and enduring institutions at the low end of the PRS via a supported pathway delivered through an expanded community housing and welfare sector, in a similar manner to the social rental agencies developed in Belgium (see, for example, Parkinson and Parsell 2018). However, existing policy assumptions surrounding time-limited supported housing in the PRS, including financial subsidies through head-leasing initiatives, are highly problematic for those whose individual and household incomes remain low over time. A
    AHURI Final Report No. 302 87
    viable supported pathway into the PRS will require appropriate incentives for landlords to set their rents to be comparable with social housing rentals.
  • The emergence of different types of landlords (offering properties and rooms on a short- through to long-term basis), combined with the expanded reach of online platforms, provides opportunities for policy makers to assume a more direct role in better matching landlords with tenants. This includes targeting of landlord financial and taxation incentives to encourage supply of a mix of leasing options, dwelling types and locations at the low end of the market.

The findings and directions outlined in this report, together with those from an international and national institutional review of sector change and innovation, will inform the broader Inquiry report on The future of the private rental sector to provide a more detailed blueprint for institutional reform.