An Australian Household’s Choice: Housing Deprivation or Financial Debt

Mar 29 2017

Delivering reform that is Pareto Optimal is a challenging task. This is especially true for the Finance and Housing sectors. Compounding this challenge is the need to enhance quality of life opportunities of low income and welfare dependent households. The following discussion demonstrates a current and major challenge faced by authorities – a challenge that has all the hallmarks of being a ‘wicked problem’. A critical part of this discussion is that it identifies an imminent potential unintended consequence that could significantly affect the wellbeing of households – particularly those on low incomes. Namely, without viable alternatives – which currently do not exist, regulatory reforms further restricting the access to particular forms of alternative financial services could result in an increase in housing deprivation experienced by households typically regarded as poor – deprivation they may be willing to trade-out of for increased financial debt.

Key highlights:

“When considered in isolation implementing price-caps and controls may seem to have merit – … any merit soon loses its appeal when the effects (unintended) of recent reforms are considered in more depth and especially if considered in conjunction with the need to obtain housing essentials.” “The effects of the recent reforms include … reducing competition.”

“When this financial problem is considered through a housing lens the problem is necessarily respecified. Previous research clearly shows that housing essentials are being secured through the use of SACCs and Consumer Leases.”

“Wellbeing is a complex construct. It is a product of many different factors. Two important influences are housing and finances”

“On the eve of another tranche of reforms it is argued that there are a number of questions that need to be answered. In particular a deeper understanding of ‘what’ consumers are securing with these financial services is necessary if we are to truly appreciate the ‘why’. Failing to address key questions such as the ones above through robust and independent investigations is necessary if the risk of unintended consequences is to be negated (minimised).”

“A particular concern is the lack of (economically) viable alternatives to SACCs or Consumer Leases.”

Policy Questions that need an answer

Key questions that we need answers to if policy is going to mitigate the risk of unintended consequences are:

1. Has government intervention led to a situation where the market is less efficient – i.e., less likely to innovate and reduce costs?

2. Do (potential) customers have sufficient information to make an informed choice?

3. To what extent are customers making systematically making bad decision? (i.e., do they need to be saved from themselves?

a. If there is evidence that customers are making systematically bad decisions? If so, to what extent are any of the future proposed changes likely to address these errors?

Essentially, I believe that the challenge is complex and has not been adequately scoped. A more nuanced understanding is required if the risks of unintended consequences are to be mitigated.