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PM’s $32b can’t fix housing without the private sector

The Albanese government will go to the next election with a worthy $32 billion worth of housing programs – and next to nothing to show for it.

Tenants will still be squeezed by high rents; mortgage holders will still be paying much more than they once hoped; and first home buyers will still face the daunting hurdles of high deposits and unaffordable repayments.

Which opens the way, either before the election, or in negotiations over a possible hung parliament afterwards, for popular but flawed silver bullet solutions.

The Coalition proposes to release super for home buyers; the Greens argue for a rent freeze; and many – most eloquently the Greens but also key crossbenchers and a strong cohort within Labor ranks – want changes to negative gearing and capital gains tax.

The debate over the taxation of housing has been revived by senators Jacqui Lambie and David Pocock, by Westpac chief economist Luci Ellis and, most recently, by the government’s National Housing Supply and Affordability Council in its inaugural State of the Housing System Report.

‘‘A gradual transition to a more consistent (tax) system across tenure types may contribute to a more equitable housing system,’’ the report says.

Today’s graphic, created from ABS data by Ray White Group chief economist Nerida Conisbee, shows how important private investors, supported by tax arrangements, are to Australia’s rental stock.

Changes over the next year will help housing markets before the election. A reduction in immigration, if it happens, would ease demand on rental markets.

Borrowers will benefit from the stage three tax cuts. Sameer Chopra, the head of research in the Pacific for real estate heavyweight CBRE, estimates that for a double-income family the July 1 tax change will provide another $110,000 in borrowing capacity.

And a dribble of housing openings will take place. In the past two months tenants have moved into 228 social accommodation homes in the Melbourne suburb of Prahran and into 130 affordable apartments in Sydney’s Macquarie Park, both part-funded by the Commonwealth’s Housing Australia and their respective state governments.

Nevertheless, the Albanese government approach, which is to increase supply, while correct, will not deliver enough homes to make a difference before the next election.

‘‘Housing affordability is expected to deteriorate further over the forecast horizon,’’ the State of the Housing System concludes.

Similarly, Treasury’s Budget Paper 1, which reported that dwelling investment declined in both 2022-23 and 2023-24, forecast no improvement in 2024-25.

‘‘Interest rates and elevated construction costs are weighing on the demand for new housing,’’ Treasury says.

The cycle will turn, with dwelling investment expected to jump by 6.5 per cent in 2025-26, but after the next election. ‘‘The government’s $32 billion housing plan will deliver the biggest investment in over a decade, enable construction of more homes, reduce red tape and planning hurdles, train the necessary workforce, and support Australians into home ownership and those in the rental market,’’ the budget paper says.

It’s a targeted suite of mostly supply-side programs, supported by many experts, and with a focus on the social and affordable housing sectors, which have been neglected for decades, and on the infrastructure and construction capacity needed to deliver new housing.

But it will take time.

Two of the landmark initiatives, the Housing Australia Future Fund Facility and the National Housing Accord Facility, which will eventually support the construction of 40,000 social and affordable homes, have been delayed in parliament, and the first tranche of funding – just finance approval, not even a start on construction – is not due to be announced until the September quarter.

Adding to the Albanese government’s challenge is a program, full of acronyms, like HAFFs, and NHAFs, which in my experience most lay people, and quite a few experts, simply don’t understand.

Eleven days before Treasurer Jim Chalmers handed down his third budget, the chairwoman of the National Housing Supply and Affordability Council, Susan Lloyd-Hurwitz, delivered the State of the Housing System Report.

Lloyd-Hurwitz says she is encouraged by the ‘‘concerted efforts’’ of the government and the ‘‘raft of reforms’’, particularly to planning, announced by states and territories.

Nevertheless, she says, the Albanese government is ‘‘unlikely’’ to meet its ‘‘suitably ambitious’’ housing target of 1.2 million new homes in the five years starting in July, ‘‘without further significant effort’’.

Lloyd-Hurwitz says ‘‘although this crisis is at its heart one about insufficient supply, there are many other contributing factors … (and) we should resist the temptation to see any one of these factors as the driving force’’.

She notes ‘‘the resumption of immigration at some pace, planning system weaknesses, rising interest rates, skill shortages, elevated construction company insolvencies, weak consumer confidence, cost inflation and low productivity in the construction sector’’.

The budget, to its credit, does not try for a silver bullet solution but does aim to address a number of those challenges.

Master Builders Australia chief executive Denita Wawn welcomes many of the budget initiatives but warns the industrial relations landscape continues to hold the industry back. She says the new industrial relations laws will cut almost 8000 jobs, and reduce new housing supply by 15,000 homes, over the next five years.

Damon Roast, the construction economist at cost management and advisory firm WT, backs the training initiatives to boost construction capacity – such as the 15,000 fee-free TAFE and VET places from January 2025 – but notes the additional trades will not be in place for several years.

‘‘On a three-year view, cost escalation in the building sector is set to increase around 5 per cent per annum across major capital cities,’’ he says.

The industry has welcomed the more than $5 billion in infrastructure funding, particularly for western Sydney and south-east Queensland.

Tom Forrest, the chief executive of developer lobby Urban Taskforce, calls the Albanese government’s commitment to funding the roads and water that underpin new housing a ‘‘Eureka moment’’.

‘‘The states need to build on this by removing, or reducing, a range of state government taxes and levies on new housing,’’ he says.

In particular, the NSW government needs to reconsider two new levies, the Sydney Water Development Servicing Plan and Housing and Productivity Contribution, which, on modelling by the Urban Development Institute of Australia, will add up to $80,000 to the cost of a new lot in western Sydney.

Those issues underline the housing challenge. All three tiers of government have much to do, but more than 90 per cent of the new homes needed will only happen if their development, construction and ownership is feasible for the private sector.

Robert Harley is a former property editor of The Australian Financial Review. He is at rob@rharley.com.au

PM’s $32b can’t fix housing without the private sector2024-05-17T16:44:18+10:00

The treasurer is telling a big fib

Treasurer Jim Chalmers stood in front of 600 guests at his post-budget speech in Parliament House yesterday and repeated a big budget fib.

This is not semantics or a small rounding error. The discrepancy is significant – worth tens and tens of billions of dollars in spending.

Chalmers claims he has successfully curtailed the growth in real (inflation adjusted) government spending to 1.4 per cent annually over six years. If he was actually achieving this spending restraint, Chalmers would deserve high praise.

This writer would be at the front of the line to shake the treasurer’s hand and would dedicate column inches to such fiscal discipline.

But the evidence of the Albanese government’s spending performance is very different, according to its own budget document. Real government payments (even discounting for the high inflation rate) are on track to be up 4.5 per cent in the year ending June 30.

Next year, real spending growth is forecast to be 3.6 per cent, before any election goodies and further ‘‘unavoidable’’ spending surprises. Labor’s track record so far is about triple the 1.4 per cent claim.

Chalmers uses two routes to get to his claimed 1.4 per cent average over six years.

First, he includes minus 4.9 per cent in 2022-23 – a cut in real spending due to the unwind of COVID-19 stimulus in the previous year.

Second, he is counting on projected weaker spending growth beyond 2025. This is unrealistic and will never be achieved because it allows for no future new spending, including for elections.

The budget projects real spending growth of 1.8 per cent in 2025-26, 0.8 per cent in 2026-27 and 2.4 per cent in 2027-28.

I called the treasurer out on this at a pre-budget press conference last week, and was prepared to let it slide if he stopped boasting about it.

But yesterday he brazenly stood up in the National Press Club speech and repeated it to a big, important crowd, saying Labor was ‘‘restricting real spending growth to an average of 1.4 per cent, compared to 4.1 per cent under our opponents’’.

The former Coalition government’s spending included $300 billion of pandemic stimulus. Labor supported this, and in some cases advocated for additional outlays.

Stripping that stimulus out, the Coalition’s pre-COVID-19 spending averaged 2.1 per cent real growth over seven years, according to economist Chris Richardson, similar to the 2 per cent real spending growth cap Chalmers’ old boss, former treasurer Wayne Swan, admirably set as one of his budget rules, before breaching it.

Chalmers has imposed no such spending rule.

As an aside, Chalmers is right that shadow treasurer Angus Taylor is being deceitful by criticising tens of billions of dollars of extra spending from the automatic indexation of welfare payments and pensions. This would occur under both sides of politics. Indexation is not a real spending increase.

Nevertheless, federal spending as a share of the economy is forecast to hit 26.6 per cent of GDP in 2025-26. Take out the pandemic years and this is the highest since the mid-1980s.

It’s higher than the Rudd government stimulus during the 2008-09 global financial crisis, and it’s due largely to cost blowouts on the National Disability Insurance Scheme and aged care under the former Coalition government and now Labor.

The only government that achieved sustained spending restraint was Labor’s Bob Hawke and Paul Keating in the late 1980s – three years of real spending going backwards by about $100 billion a year in today’s dollars.

Until there is any evidence of Chalmers and Finance Minister Katy Gallagher delivering on the claimed low spending growth, the treasurer should stop repeating the disingenuous claim.

The treasurer is telling a big fib2024-05-17T16:41:52+10:00

HOW TO BUY OVER THE BORDER

Property Investors from Sydney and Melbourne are increasingly looking further afield in the hunt for value. But how do you go about buying in an unfamiliar property market?

When looking to buy an investment property, Sydney homeowner Alex De Muelenaere didn’t consider buying in his own backyard. Instead, the 35-year-old CFO of emissions accounting business Pathzero looked north, recently settling on the purchase of his first investment property – in Brisbane.

De Muelenaere is among a new wave of Sydney and Melbourne investors eschewing their home states to invest further afield. He says strong interstate migration, the relative affordability of property and the capital growth tailwinds expected to accompany the 2032 Olympics were the key drawcards of the Queensland capital.

With a focus on capital growth over yield, he bought a four-bedroom, two-bathroom house in the coastal suburb of Thornlands, around 45 minutes south-east of the CBD, for $920,000, with the assistance of Brisbane buyer’s agent Colin Lee, founder and chief executive of Inspire Realty.

De Muelenaere says using Lee gave him local expertise in an unfamiliar market as well as ‘‘boots on the ground’’. As a result, he was aware the property was for sale before it was listed and was able to secure it – all without leaving Sydney.

With the median dwelling price in Sydney hitting $1.15 million in April and Melbourne’s investor appeal suffering under the weight of some of the highest property taxes in Australia, investors from Australia’s two biggest states are casting their eyes elsewhere.

Data from REA Group shows 23 per cent of all property inquiries on realestate.com.au came from interstate buyers in 2023, a figure that has been rising steadily recently after hitting a low of 11 per cent during the pandemic. South Australia and Queensland attracted the highest amount of interstate interest, with 29 per cent and 27 per cent of inquiries coming from interstate buyers, respectively, followed by Western Australia.

Lee says that more than 90 per cent of his clients looking to buy in Brisbane are from interstate. ‘‘The fact that Brisbane has been outperforming all capital cities bar Perth is a really good story,’’ he says. ‘‘There’s obviously a lot of talk around the Brisbane market having not only the Olympics, but the emergence of more employment because of that. Plus, there are a lot more migrants – not only interstate but international migrants moving to Queensland.’’

Likewise, Adelaide buyer’s agent Katherine Skinner, director of National Property Buyers, reports ‘‘a huge increase’’ in interstate investors over the past four years. She says the majority are from Melbourne or Sydney and have between $600,000 and $700,000 to spend. ‘‘The buy-in price is still reasonable, and the rental yields are still strong,’’ Skinner says of Adelaide’s property market. ‘‘Adelaide is seen as a market that grows year-on-year, and we don’t tend to have downturns. That said, we don’t historically see huge double-digit swings year-on-year either.’’

Real estate agent Linton Allen, from Perth’s Empire Property, has also observed a ‘‘noticeable uptick in interest from interstate investors, particularly from Sydney and Melbourne’’. Alongside its comparative affordability, Perth ‘‘offers robust rental yields, making it an attractive option for cash-flow-focused investors’’. Historically subject to the fortunes of the mining industry, the Perth real estate market is benefiting from government investment as part of the AUKUS submarine pact and Allen says the diversifying economy means there’s a ‘‘growing optimism around capital growth prospects’’.

Herron Todd White’s April Month in Review report suggests that both house and unit prices across Brisbane, Adelaide and Perth have further to rise.

Picking the right location in an unfamiliar market can be challenging. As with any property investment, the starting point should be the outcome an investor wants to achieve.

‘‘Investors should start with clear goals: are they seeking capital growth, rental yield, or a balance of both?’’ Allen says. Lee says another factor to consider is the buyer’s appetite for renovation to add value or whether they prefer a ‘‘set and forget’’ property. Skinner encourages her clients not to focus solely on rental yield because if they do, they ‘‘tend to sacrifice capital growth in many areas within South Australia’’.

Locations close to amenities with a high ratio of owner-occupiers to renters and below-average rental vacancies are a good place to start.

Lee’s top picks in Brisbane for investors with less than $1 million to spend are Flinders View, Shailer Park and Aspley. For those with a budget of more than $1 million, he tips Carindale, Wavell Heights or Balmoral.

In Adelaide, Skinner recommends Royal Park, Albert Park, Happy Valley and Aberfoyle Park for investors on smaller budgets and blue-chip suburbs such as Prospect, Norwood, Kensington or Unley for those with a budget of $1 million-plus.

In Perth, Allen says buyers will get more bang for their buck by heading inland away from the river or coast. He picks Hamilton Hill and Spearwood for investors with less than $1 million and Beaconsfield for those with bigger budgets.

Naturally, Skinner and Lee suggest that investors will find it easier to navigate an interstate property market and achieve a better result using an expert such as themselves. But using a buyer’s agent is also recommended by Allen, who sits on the other side of the transaction.

He says interstate investors in Perth should ‘‘100 per cent’’ use a buyer’s agent, unless they are expats or very familiar with the state. ‘‘WA stands for ‘wait awhile’ – it’s a big country town and if you’re not from here, it’s a bit of a different world.’’ Allen says a buyer’s agent can help to ‘‘navigate local regulations and nuances, and potentially get you access to off-market opportunities’’.

Lee says the value a buyer’s agent can provide is in the ‘‘art’’ of property buying, providing feedback about the street, neighbourhood and community, rather than the ‘‘science’’ or figures behind a property purchase.

In Skinner’s experience, around a quarter of her interstate investor clients have tried to buy in Adelaide themselves before turning to her for help. ‘‘They have quickly realised that the advertised prices do not equate to property values’’, a quirk of the Adelaide market that makes buying ‘‘very challenging’’ for the unfamiliar.

Variations in the sales process between different jurisdictions is a key risk that unassisted buyers also face, and yet another reason why tapping into local expertise can be useful.

For example, in Adelaide once an offer has been accepted and a property goes under contract, there is typically a cooling-off period of two business days, during which time buyers will get a building and pest inspection and have the sale contract reviewed, Skinner says. ‘‘Only after your cooling-off period has expired do you actually make your deposit payment. So it’s a very different process to other states, and it is one that many clients get a little bit confused by.’’ She adds that while 10 per cent may be the standard deposit, the amount paid is more often a figure agreed on by vendor and purchaser.

‘‘The purchase process in Perth shares similarities with other Australian cities but with local nuances,’’ Allen says. For example, while offers are often made subject to finance approval and a building inspection, there is no mandatory cooling-off period in Western Australia. ‘‘A lot of people from the eastern states say ‘we’ll pop an offer in’. Well, if your offer’s accepted, subject to finance, that’s it. We’re locked in. You can’t ring me four days later and say ‘oh, we’ve had more of a think about it, and it’s all too hard’,’’ he says.

In Brisbane, offers are usually made subject to a finance approval and building inspection period of 14 days, Lee says, with a nominal deposit of a few thousand dollars payable on the acceptance of an offer, followed by a more typical 5 per cent deposit amount when the offer becomes unconditional. ‘‘Sydney and Melbourne are quite different markets altogether. They’re way too hot for any seller to allow for a subject to finance and subject to building and pest offer. You’d have to typically do all of that prior.’’

Opinions are divided on whether it’s essential to visit the location where you’re considering buying. ‘‘Many investors purchase sight unseen, relying on comprehensive virtual tours, local contacts like real estate agents and buyer’s agents, and detailed building and pest inspections to make informed decisions,’’ Allen says.

But Lee cautions that it can be dangerous to rely upon photos or videos provided by the seller’s agent. ‘‘They work for the seller, so of course they are only going to sell the good bits.’’ He recommends his clients visit before making an offer on a property.

‘‘The majority [of our clients] would have never seen their investment,’’ Skinner says. While this is not problematic in the case of investors using a buyer’s agent, she adds that if a buyer doesn’t have someone on the ground who can inspect the property on their behalf, they could be opening themselves up to a huge amount of risk.

‘‘It’s astounding how many people will put offers in sight unseen and not get a building inspection either,’’ Skinner says. ‘‘We might look at the same house, and it would not even be something we would recommend to our clients because the photos are very different to what you’re seeing in person.’’

Once purchased, managing an interstate investment property needs on-the-ground support, Skinner says. ‘‘It would be a very dangerous game trying to manage from interstate yourself and not understanding the legislation here in South Australia in terms of tenancies.’’ Allen says a local property management company and a good handyman are essential. ‘‘Staying informed about local market conditions is crucial for long-distance investment success,’’ he adds.

Lee suggests investors get three rental appraisals on their property from local letting agents and ask them questions such as how much experience they have, how many properties they’re managing, what their fees are, how often they conduct inspections and how they assess prospective tenants. SI

HOW TO BUY OVER THE BORDER2024-05-07T08:43:59+10:00

Failing to achieve goals? Try this out

Lifestyle Focus on identifying cues that will trigger the desired action, writes Amantha Imber.

Can you recall the last time you set a goal?

Maybe it was a New Year’s resolution, a plan to shed some kilos or to escape the hypnotic grip of social media.

If you’re a member of the mere mortal club like I am, it’s quite likely that you never achieved all those goals, despite the best of intentions.

A meta-analysis conducted by Thomas Webb and Paschal Sheeran from the University of Manchester analysed 47 studies on the relationship between goal intention and goal achievement.

They found a significant gap between intending to do something and actually achieving it.

A big reason for this gap is it can be hard to start or find the right opportunity to act.

When hitting a goal involves giving up something you love, such as the daily block of chocolate during your 3pm work slump, and replacing it with something less desirable – and let’s face it, most food is less desirable than chocolate – motivation can be hard to find.

The best of intentions often ends up with us failing to change our behaviour.

Implementation intentions

Psychologists have found that one of the most effective ways to bridge the gap between intentions and behaviour is by having a plan, or an ‘‘implementation intention’’.

Implementation intentions connect opportunities to act with a particular behavioural or cognitive response. In other words, an action is linked to a situation, so the desired behaviour becomes natural or automatic.

A goal is simply ‘I will achieve X’, whereas an implementation intention identifies the context or situation that will trigger the desired behaviour.

Implementation intentions are typically expressed as ‘‘if-then’’ statements. Some examples:

If I am feeling tempted to skip my workout, I will remind myself of my fitness goals and do the workout.

If I am struggling to finish a report and want to procrastinate by checking social media, I will set a timer for 10 minutes and push through on the report until the timer goes off.

If I come home from work and feel tempted to snack on junk food, I will eat a piece of fruit instead.

If I find myself sitting for more than an hour, I will stand up and take a short walk.

Identifying cues to act

When thinking about the first part of the statement, you need to specify an internal or an external cue.

An internal cue is a sensation or thought, such as feeling stressed. An external cue refers to something happening in your environment, such as opening the pantry and spying chips to snack on, or opening Instagram on your phone.

Cues can be related to good opportunities to act, such as when you are in an environment where it becomes easy to perform the desired behaviour. Alternatively, cues can focus on specific obstacles, such as a couch and a television.

To optimise the effectiveness of your implementation intention, research has found it will be more likely to work if you are as specific as possible with your cue and behaviour. Specify ‘‘eating an apple’’ as opposed to ‘‘eating something healthy’’.

Make sure you will actually encounter the cue. While this may sound obvious, don’t use the cue ‘‘when I get home from work’’ if you work from home most of the week.

And ensure the plan is viable. If your cue is ‘‘arriving home’’ and the behaviour is ‘‘eating fruit’’, make sure you have fruit in the house. Again, this may sound obvious, but ‘‘obvious’’ does not always equal ‘‘applied’’.

Making implementation

intentions work

Write down the behaviour you want to change. For example, you might want to stop sleeping in on the weekend so you can wake up at the same time every morning.

Think about a cue that would present a good opportunity to engage in the behaviour.

Your alarm going off is an ideal cue to change behaviour by getting up immediately rather than reaching for the phone.

Craft your implementation intention as an if-then statement: If my alarm goes off in the morning, I will remind myself of my goal to improve my sleep and get out of bed immediately and go for a walk in the morning sunlight.

Pin your implementation plan somewhere prominent in your home – so you are constantly reminded of it. Even better, pin up the plan where your cue occurs, such as the kitchen, the office, the bedroom.AFR

This article is an edited extract from the book The Health Habit.

Failing to achieve goals? Try this out2024-04-16T16:52:13+10:00

Nobel winner’s tips for investors

Behavioural economics Daniel Kahneman transformed our thinking, writes Tim Mackay.

Despite winning a Nobel Prize in economics, Daniel Kahneman was an unlikely economist. For one, he never undertook a single course in economics. For another, he was a psychologist. His body of research is vast and multifaceted, but at its core it challenged conventional wisdom on how we make investing decisions.

With Amos Tversky, Kahneman was the pioneer of behavioural economics and is well known for debunking the idea that people always make rational decisions in their own self-interest.

Kahneman died on March 27 at the age of 90 after transforming our understanding of investing. His research shows the intersection of personal finance and psychology is far more ‘‘personal’’ than it is financial. Here are some of his critical discoveries for investors.

Kahneman’s greatest insight was that investors make mistakes, which sounds obvious. But his groundbreaking realisation was that our mistakes are the norm, not the exception.

We rush to judgment using mental shortcuts (or heuristics), leading to persistent biases in our decisions. Even when evidence suggests we ought to rethink, we often cling to our initial judgments.

None of us like being wrong. But once you accept mistakes are inevitable, you can seek to understand them and become a better investor.

Kahneman found we hate losing money far more than we enjoy gaining it. Losing $100 hurts twice as much as the pleasure from gaining $100. It has been shown golfers play better when putting for par (fearing the ‘‘loss’’ of a bogie) than when putting for the ‘‘gain’’ of a birdie.

As humans evolved, threats were always far more consequential than opportunities. If you spotted a deer, it could feed you for a few days. But if you spotted a lion, it could end everything.

Our objective as investors is to gain returns, but our behaviour is driven more by fear of loss. We tend to prematurely sell assets that are gaining value and retain assets that are losing money. We desperately want our losers to win. One solution is to accept you will win a few and lose a few, but it’s the overall portfolio performance that really matters.

Avoid looking at your portfolio too often. A ‘‘loss’’ each day for a week could still be a ‘‘gain’’ over a month. When you look more often, you trade more, and you lose more money.

A study revealed 74 per cent of professional fund managers think they are above average. The other 26 per cent thought they were average. Mathematically, this is impossible – half must be below average.

Kahneman believed this was our key bias. ‘‘What would I eliminate if I had a magic wand? Overconfidence,’’ he said.

The vast array of financial information available online creates the illusion of understanding. This leads to excessive trading, timing the market, under-diversification and risky investments.

When we research investments, we typically seek out and value more highly any information that supports our existing view. And we downplay information that calls it into doubt. .

Seek objective feedback, diverse and contrary opinions and stick to an objective re-balancing plan.

Kahneman and Tversky provided important insights into ‘‘anchoring bias’’ and the ‘‘endowment effect’’.

Anchoring bias describes the fact that investors rely too heavily on the initial opinion or piece of information they are given on any topic. Imagine you were told a widget sells for between $85 and $100 but is available for $75. You might view this as a good deal.

However, if you were simply told a widget costs $75, you’d be far more likely to ask: what is a widget? And you’d question its true value. The deliberate ‘‘anchor’’ placed first in the information you are given distorts your analysis and is a common pitfall in financial decision-making.

The endowment effect is a term coined by Richard Thaler, and in a 1991 study, Kahneman and colleagues proposed that it occurs, in part, due to loss aversion. When we own something – such as a BHP share – we give it more value than it might objectively hold. This leads to a paradox where we are more likely to keep a BHP share we own rather than acquiring one we don’t, despite the result being the same in both scenarios – ownership of the share.

This cognitive bias skews our perception, often preventing us from selling assets when it might be prudent to do so, as we overestimate their worth due to personal ownership. SI

Tim Mackay is an independent financial adviser at Quantum Financial.

Nobel winner’s tips for investors2024-04-16T16:50:42+10:00

RBA won’t cut interest rates until 2025

Australia is expected to be almost the last major advanced economy to deliver an interest rate cut, after hot US inflation caused professional investors to push out bets for a local monetary easing until early next year.

The deferral of an expected rate reduction until February is later than the Albanese government had hoped as a federal election approaches.

It raises the possibility of the Reserve Bank of Australia’s interest rate policies and inflation becoming central issues at the federal election due by May next year.

Money market traders this week pushed back their expectations for the RBA’s first rate cut from November after stronger-than-expected US inflation figures raised fears that local prices could continue to rise rapidly.

It means the RBA’s first rate cut could come months after other central banks cut rates, according to market pricing from ANZ.

Former RBA official Jonathan Kearns said it would cut rates later than other central banks because it didn’t raise them as much.

‘‘Monetary policy was less tight in Australia than it was in other countries, and so therefore the disinflationary impetus coming from monetary policy has been less,’’ the Challenger chief economist said.

‘‘Inflation is largely services-driven now.

‘‘If you think about what wage growth is in Australia [4.2 per cent], and what productivity growth is, based off that inflation is not coming back down to 2.5 per cent unless we get a fairly significant slowing in wages growth or increasing productivity growth.’’

The European Central Bank and the Bank of Canada are tipped to move first, with markets fully priced for them to start easing cycles in July.

They are expected to be followed by the US Federal Reserve and the Bank of England in September, and by the Reserve Bank of New Zealand in October.

A delay in rate cuts would make an early election unlikely – as the Albanese government hopes for multiple reductions before going to the polls.

But rate cuts by May next year are not a guarantee, with a handful of economists tipping a prolonged period of rates on hold, as well as the possibility of further increases.

AMP chief economist Shane Oliver said rate cut forecasts were more distant in Australia because inflation took off later than in other advanced economies.

Markets pushed back expectations for rate cuts in Australia and America this past week after US inflation accelerated to an annual rate of 3.5 per cent in March and core US inflation – which excludes the volatile food and energy categories – was a higher-than-expected 3.8 per cent.

But Dr Oliver said local markets had over-reacted to US economic news, predicting a rate cut in August or September, despite fears high inflation could prove sticky.

‘‘I think investors appear to be assuming Australian inflation will go the same way as in the US,’’ Dr Oliver said.

‘‘A big factor behind the upside surprise and US inflation in January and February . . . was owner-occupier rents. In the US, rents have something close to a weight of 35 per cent in the CPI [consumer price index], whereas in Australia it’s about 6 per cent.

‘‘Even though rents are rapidly rising here, they’re not going to have anywhere near the same effect they have in the US.’’

Dr Oliver also said households in Australia were feeling the pain of high interest rates due to the dominance of variable-rate loans, whereas consumers in the US were still ‘‘alive and well’’.

While Australian households had cut back on spending, Westpac chief economist Luci Ellis said per capita consumption in the US was increasing. This, she said, was in large part because of the Biden administration’s loose spending.

‘‘In the United States, the federal government is running a budget deficit of around 6 per cent of GDP, with no consolidation in sight or even being seriously discussed,’’ Dr Ellis said.

‘‘Income tax brackets are indexed to the CPI, so American households are not seeing that drag from higher tax payments.

‘‘Together with the fact that average mortgage rates paid have risen far less in the United States, macro policy is barely touching the sides for the US consumer.’’

Dr Ellis said the Albanese government’s more prudent budget policy was helping the RBA to take some heat out of the economy and negated the need for further monetary tightening.

RBA won’t cut interest rates until 20252024-04-16T16:48:28+10:00

Financial risk warning as more home owners struggle

Home loan hardship applications jumped ‘‘materially’’ in the past year, and the risk posed to the economy by stretched borrowers ‘‘warranted ongoing close attention’’, the regulatory group in charge of the financial system urged.

The Council of Financial Regulators said there was an increase in ‘‘the share of households who had fallen behind on loan payments’’ and that its members – the Reserve Bank, Treasury, banking regulator and market regulator – ‘‘expect some further increase in the period ahead’’.

Loan arrears advanced at their fastest for at least two years in January, from historically low levels.

‘‘Hardship applications had risen materially over the past year,’’ the council said in its quarterly statement issued yesterday. ‘‘Risks to the Australian financial system from lending to households warranted ongoing close attention but remain contained.’’

The council said the risk to broader financial stability hung on the outlook for inflation and unemployment.

‘‘Risks to household balance sheets, and in turn financial stability, would increase if inflation were to remain high for longer than anticipated or if labour market conditions deteriorate more than expected,’’ it said.

The jobless rate ticked up to 4.1 per cent in January, from 3.9 per cent in December.

The council said bank lending standards remained sound ‘‘despite the competitive lending environment’’, which is heating up again with a rise in below-the-line discounting.

Banks increased their provisioning for bad loans, last month’s profit updates revealed.

National Australia Bank, for example, said credit impairment costs rose 17 per cent to $193 million in the December quarter. Westpac announced a $189 million impairment charge for the first quarter, 47 per cent higher than the second half average.

Ninety-day arrears – the most at risk of default – rose 9 basis points to 0.95 per cent at Westpac in the October-December. At NAB, the number was steady at 0.75 per cent of its home lending book.

‘‘The last leg of this tightening cycle could prove to be the most challenging, as savings are depleted, unemployment rises, and higher interest rates continue,’’ S&P warned last month.

The council also said that, despite the challenging conditions in commercial real estate, the risks were contained ‘‘due to banks’ low exposures, conservative lending practices and the relatively strong financial positions of . . . owners’’.

Stress in overseas commercial real estate may, however, bleed into Australia because of the concentration of foreign ownership in the local sector, and the council said it would continue to monitor the situation.

It also stressed the importance of government and industry collaborating to ‘‘ensure the sustainable arrangements or cash distribution in Australia’’ as the only major distributor, Lindsay Fox’s Armaguard, warned it needs more funding to stay afloat.

Financial risk warning as more home owners struggle2024-03-13T16:47:09+11:00

NSW tops states with the highest rent increases

Surging rents fuelled by housing supply shortages have pushed rental affordability to its worst level in 17 years and will keep pressure on inflation for some time yet, a new report warns.

Lower-income households are being hit hardest by rising rents, and the poorest fifth – those earning $49,000 per year or less – would need to pay more than 25 per cent of their pre-tax income for any advertised rental, data company Proptrack said. It defines affordable rent as accounting for less than 25 per cent of a household’s pretax income.

The rate of rent increases was expected to remain high in an undersupplied housing market, making it even tougher for the Reserve Bank to bring inflation back to the middle of its target range, Proptrack senior economist Angus Moore said.

‘‘The rapid pace of rent growth we’re seeing has been adding to inflation, particularly since rents are quite a sizeable part of the CPI basket,’’ Mr Moore said. ‘‘Given that advertised rent growth has been quite strong, and tends to lead growth in average outstanding rents, we’re likely to continue to see rents making a solid contribution to inflation for a little while yet.’’

Rent inflation hit a decade high of 7.8 per cent last year and has remained above 7 per cent since, Australian Bureau of Statistics data show. This has meant rent’s proportion of the CPI basket grew 6.03 per cent in January, an increase of 28 basis points from the same time last year.

Rents surged 11.5 per cent in calendar year 2023 after growing 15.6 per cent in 2022, Proptrack data show. To start 2024, national median advertised rents have risen to $600 a week from just over $400 in 2020.

Rents at the most affordable end of the market have increased by 43 per cent in the past five years, compared to 30 per cent for the most expensive rentals. This equates to a 10th percentile rental going from $280 per week in 2018-19 to $400 today.

Mr Moore called for more rental support for low-income renters such as Commonwealth Rent Assistance, following similar calls from developers, think tanks and housing groups in recent months.

‘‘Without support, renting would be impossible for many of these households given their incomes,’’ he said.

Grattan Institute’s Brendan Coates in January urged the Albanese government to increase funding for the rent assistance scheme by 22 per cent, on top of a 15 per cent rise in last year’s budget.

It’s not just the poorest households struggling with affordability, as median-income households could only afford four out of 10 advertised rentals compared to being able to afford 60 per cent of listings three years ago.

NSW was the least affordable state for renters. Rental affordability has deteriorated significantly in NSW over the past three years and is at its lowest-ever level after median rents rose to $700 a week. As a result, a median-income NSW household can only afford to rent about three out of 10 properties advertised.

This was followed by Tasmania and Queensland. In Tasmania, a household earning median income for Tasmania – equivalent to approximately $79,000 per year – could only afford to rent one in five advertised rentals, the lowest share of any state.

Queensland rents, meanwhile, have surged 45 per cent in three years, leading to a median income household for the state – about $107,000 – only being able to afford three of 10 properties advertised across the state.

Victoria was the most affordable state when comparing rents to residents’ incomes, due to its rents declining the most during the pandemic lockdowns and more homes being built relative to other states. A median-income Victorian household can afford more than 50 per cent of listings.

NSW tops states with the highest rent increases2024-03-12T16:41:44+11:00

Why Australia needs an institute for applied ethics

Capitalism depends on government to provide a trusted framework of rules around it. But when politics turns into reality TV, we must ask the ethical questions ourselves.

The capitalist model, detailed in Milton Friedman’s 1962 classic, Capitalism and Freedom, is often criticised by non-economists for celebrating the pursuit of self-interest.

Yet capitalism’s claims to moral legitimacy come not only from its promotion of liberty, but also from its impressive claims to aggregate economic efficiency. Specifically, capitalism claims to produce community outcomes that are Pareto optimal, meaning that no one person can be made better off without at least one other person being made worse off.

Except as required by the law of the land, individuals in a capitalist system are not obliged to attend to the interests of another. They are free to pursue persistently divergent interests, as workers, investors and consumers. And those who run businesses have no social responsibility beyond the pursuit of profit.

But while the capitalist model is founded on the pursuit of self-interest, it will not function in the absence of trust. Mutual confidence in the functioning of the capitalist system is critical to its claimed efficiency benefits. A lack of trust means a suboptimal number and size of transactions, and underinvestment in innovation, with significant implications for the level of aggregate economic activity, productivity and real income growth. Moreover, a sudden loss of trust can have catastrophic social consequences, as the global financial crisis of 2008-09 illustrates.

A recent report by Deloitte Access Economics, commissioned by The Ethics Centre, explains how large gains in economic activity can be achieved with modest improvements in levels of trust.

Readers of this newspaper have observed how trust in business has been undermined by apparent failures to meet community expectations in the treatment of customers in many sectors of the economy, including through impenetrable information disclosures, automated customer call centres and store closures. And, like all other Australians, they would be wondering about their capacity to cope with the many ways in which businesses and governments might make use of advances in AI and robotics.

In the capitalist system, businesses are not to concern themselves with meeting community expectations, except to the extent that doing so increases profit. Ensuring that business meets community expectations is the responsibility of government.

As Friedman puts it, capitalism relies upon a functioning democratic system that both enables and obliges its citizens to elect governments to ‘‘determine, arbitrate and enforce . . . a framework of law’’ to ensure ‘‘free and open competition’’ and protection from ‘‘fraud or deception’’. And Friedman goes on to explain, if somewhat grudgingly, that government also has responsibility for attending to negative externalities and making adequate provision of public goods.

Capitalism casts business and ‘‘the rest of us’’ (Friedman’s expression) as adversaries, and government as our protector.

So, it is something of a paradox that, year after year, surveys of ‘‘the rest of us’’ report that, among the principal institutions affecting our lives – businesses, not-for-profit entities, government and the media – it is government that enjoys the least trust.

Capitalism demands a lot from government. Mostly, our political leaders fall short. Instead of attending to frameworks of law and enforcement, many have preferred the role of business-bashing critic, pointing an accusatory finger at business executives, not themselves, for having failed the pub test or for failing to meet community expectations.

It may be the case that the 24/7 reality TV show, through which citizens get to observe the workings of modern politics, encourages this sort of spectacle.

Yet, no matter its explanation, it is corrosive of effective governance, which depends upon elected officials having some detachment from outrage and mania, not seeking energetic immersion in it.

We have a problem.

Following the global financial crisis, serious thinkers around the world began questioning whether the adversarial contest at the core of the capitalist system might not be its Achilles heel.

Capitalism proposes a system in which business is motivated by nothing other than profit, and its executives by nothing other than self-interest, and leaves it to the rest of us, also motivated by nothing other than self-interest, to elect politicians to protect us with laws that we cannot possibly comprehend and regulatory bodies with which we can have no meaningful contact. This is not an arrangement designed to build trust.

Recent global efforts to make more transparent the social and environmental impacts of business activity, and to have business leaders accept accountability to the community for these impacts, seem to me to be steps in the right direction.

But these will only take us so far. The big problem we have is that, as individuals and as a community, we confront a set of ethical questions that are just damned difficult. And we have not invested sufficiently in respected institutions that might help us think them through.

In all democracies, there is a compelling case for centres of expertise that facilitate sober reflection. This is why we fund universities, a professional public service and, within the public sector, institutions that enjoy a higher level of independence, such as the CSIRO and the Productivity Commission.

Yet, when you reflect on the recent and emerging causes of a loss of trust in democratic capitalist systems, and the economic and social gains that would come from addressing them, you have to think that something is missing. That is why I have come to the view that it is time for us, as a community, to invest in an Australian Institute for Applied Ethics. This is a modest investment, promising very large rewards.

Ken Henry is a former Treasury secretary, and one of 1600 signatories of an open letter calling for federal funding for an Australian Institute for Applied Ethics.

Why Australia needs an institute for applied ethics2024-03-08T16:36:12+11:00