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As we move on into the spring it is an opportune time to “take stock” and see where the Australian economy, and its housing market, are heading.
Yesterday we received the official economic growth data from the ABS, which while surprising on the high side, confirmed the medium-term outlook I pitched in August last year.
The smart money was punting on relatively uninspiring real growth of 0.9% in the second quarter, which was going to be driven by an inventory rebuild after the floods. Instead, we generated substantially greater 1.2% real GDP growth, which was notable for being surprisingly broad-based. This was even more impressive given the flood-induced contraction in the first quarter was revised down from -1.2% to -0.9%, which meant that the second quarter was starting off a higher base.
The details surrounding <country-region><place>Australia</place></country-region>’s economic growth engine were revealing. Net exports actually detracted 0.5 percentage points from the GDP result due to a slower-than-expected recovery in coal volumes. Had net exports been flat, the real GDP growth estimate would have been +1.7%, which is a little higher than the RBA’s priors. The good news is that coal exports should recover forcefully in the third quarter. The public sector also lopped off another 0.4 percentage points from growth as the government tries to eliminate its deficit before the next election.
A reader referred me to a statement I had made in August 2010. Specifically, I argued, “the economy is about to embark on a period of above-trend growth.” Naturally, I am no weather forecaster. So I will admit that I did not predict the savage <state><place>Queensland</place></state> floods, or the Japanese earthquake-cum-tsunami-cum-nuclear crisis.
Yet even in the face of these unanticipated events (and some extraordinary geopolitical turbulence in the Middle East and Europe), yesterday’s statistics tell us that real private final demand in Australia – that is, private consumption plus private investment – has been advancing at a well-above trend 5.4% annualised pace over the first six months of 2011 (see chart). There is no doubt that had <country-region><place>Australia</place></country-region>’s export market not been cruelled by the east coast floods in the first quarter of 2011, real GDP growth would have been strikingly strong.
<a href="/images/stories/joyeseptember81.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyeseptember81thumb.gif"></a>
Here HBSC’s chief economist, Paul Bloxham, comments: “Domestic demand is rock solid. That’s the key message from [yesterday’s] GDP release. Yes, the <state><place>Queensland</place></state> floods have disrupted coal exports, but the domestic economy has continued to grow strongly.”
Notwithstanding the many hysterical claims that both consumer spending and the non-mining economy are weak or in recession, including from some of the RBA’s conflicted independent board members, the non-mining sector managed to expand by 1.2% in the June quarter. Even the reportedly death-spiral-bound manufacturing sector grew by a vigorous 2.8% over this period.
It also turns out that Australian consumers are spending money at very normal rates. Consumption increased by a strong 1% (real) in the June quarter, and has risen by a trend-like 3.2% over the last 12 months, which is its best rate in a year and accounted for almost half of all GDP growth. Importantly, there has been a shift in consumer spending away from goods towards services, which surged 2% in the quarter and are growing at an annual rate of 5.5% (the highest since 2008).
On this note, RBS’s highly regarded chief economist Kieran Davies argues: “This supports our view that the monthly retail sales numbers – which continue to exert a strong influence on financial markets – are no longer a good guide to overall consumer spending. It also makes us wonder about the link between consumer [confidence surveys] and spending, which our past research has shown is not a consistent predictor of consumption.”
In concert with healthy consumer activity, we saw the household savings rate fall from a recent high of 11.7% to 10.5% while real, net per capita disposable income increased by 2.9% over the June quarter to hit its highest level ever ($48,988 for every man, woman and child in Australia).
In summarising the GDP numbers, UBS chief economist Scott Haslem opined: “Today's data reveals much more underlying strength in the economy in the second quarter than anticipated, with the likely temporary weakness in exports and the unwinding of public capex from the GFC stimulus masking a 'private economy' expanding above trend.”
 
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So where does that leave <country-region><place>Australia</place></country-region>’s housing market? Based on the latest RP Data-Rismark findings, Australian dwelling prices are down a modest 2.9% over the last 12 months. This, however, conceals considerable cross-sectional dispersion. For example, whereas the <city>Sydney</city> and <city>Canberra</city> markets have actually realised capital gains of 0.5% and 1.9% respectively, <city><place>Melbourne</place></city> homes are off by 4.3% after surging 29% over 2009 and 2010. A flood-weary <city>Brisbane</city> market is also down 6.6% over the year, while <place><city>Perth</city></place> home values have fallen by a slightly smaller margin. After quite extraordinary growth during much of the 2000s, the cost of housing in <city>Perth</city> and <city><place>Brisbane</place></city> has not risen in three to four years.
The 2011 outcomes are broadly in line with what we forecast in October 2010. At the time, I commented, “Our analysis suggests that a substantial increase in rates would put some downward pressure on dwelling prices…. It is now just a matter of time before the RBA and/or the banks raise rates again.” As it happened, we got a sharply felt double hike a month later in November.
The additional dynamic in 2011 has been the remarkable conviction of households that they will be hit by more rate hikes. As recently as August this year, Westpac’s survey analysis suggested that Australians were budgeting on another two rate hikes with an amazing 29% of respondents expecting more than four hikes. In a sense, therefore, the housing market has been behaving as if it is being constrained by interest rates that are actually higher than current levels. In central banker speak, this is the benefit of “jaw-boning” on rates: that is, compelling behavioural changes without actually having to touch the interest rate lever.
<a href="/images/stories/joyeseptember82.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyeseptember82thumb.gif"></a>
Set against these challenging conditions are some reasons for optimism.
First, the RBA has, in practice, ignored the very high core inflation numbers that were published by the ABS in the first and second quarters of 2011. That is to say, consumers’ hawkish interest rate expectations have not been satisfied.
Second, economists believe that there will be no hikes this year. Indeed, Goldman Sachs and Deutsche Bank are both bravely predicting interest rate cuts (!) in October and November, according to Bloomberg data. AMP and Westpac forecast one cut before the year is out. And Macquarie Bank and Westpac are predicting that rates will be a full percentage point lower (i.e., the equivalent of four cuts) by the end of next year.
If these projections prove accurate, we are likely to see a rebound in housing activity. I should add for the record that I do not personally agree with them. I believe the next move in rates will still be up, not down, and do not think the RBA will be relaxing policy until some time in the second half of 2012.
But let’s hope I am wrong: in particular, let’s cross our fingers that the third-quarter inflation numbers prove benign, and the RBA does not as a consequence feel the need to tighten the screws again. Nobody wants an inflation problem in this country: inflation is, after all, a tax on prudent net savers, and inevitably means higher rates for those of us with loans.
A third positive portent is to be found in the housing finance data. In August <country-region><place>Australia</place></country-region>’s largest mortgage broker, AFG, reported that it had written $2.7 billion worth of new finance, which was its single best month in one and a half years. This was reinforced by positive official housing finance data from the ABS. Specifically, the ABS reported that the number of new owner-occupied loans rose by a healthy 1% in July, following upwardly revised growth of 0.6% in June. Indeed, approvals have now risen for the last four consecutive months. Having said that, they remain well below previous peaks, and are consistent with soft prevailing conditions.
<a href="/images/stories/joyeseptember83.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyeseptember83thumb.gif"></a>
As a final observation, we are seeing some de facto cuts in the fixed-rate home loan market caused by the inversion of the yield curve. It is now possible to get three-year fixed-rate loans for around 6.4%, which is substantially below the headline standard variable rate of over 7.5%. This is based on a more bearish economic outlook, which is being driven by both the offshore turbulence and conflicting domestic data, such as today’s unemployment survey. Only 600 net new jobs have been created in the last 3 months, which has forced the unemployment rate up to 5.3%. This will help the RBA do its inflation-fighting job and, at the margin, reduces the probability of future rate hikes.
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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chrisjoye-JYhJsTrNRC

The economy and housing market are stronger than you think

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Traditional approaches to thinking about supply have concentrated on publicly subsidised construction programs that target those on the threshold of poverty. Many observers argue that state and federal governments should radically increase the stock of affordable homes to attenuate demand pressures. Yet aside from exhausting scarce taxpayer funds, these initiatives typically yield only a trickle of properties while spawning a new layer of bureaucracy. In both <country-region>Australia</country-region> and the <place><country-region>US</country-region></place>, the affordable housing movement has for many decades focused energetically on this line of attack with, we believe, limited results. 
If a more enduring change is to be made to the functioning of our housing market, it will require much more drastic steps. As we have shown <a href="https://www.mrcltd.org.au/research/home-ownership/volume_1.pdf">here</a>, the root cause of escalating house prices is regulatory constraints on new construction. In view of such, the most effective way to reduce the costs of home ownership is through eliminating the major obstacles to increasing supply. This is, of course, much easier said than done. Academics have for a considerable period of time now been frustrated in their attempts to crack the housing needs-production mismatch by the wide prevalence of ‘NIMBYism’ (see Portney (1991), <place>Downs</place> (1994), Fischel (2001), and Nelson (2003)). 
Not-in-my-backyard style sentiments refer to the incumbent resident’s profound aversion to the prospect of relaxing spatial restrictions (this might go some way to explaining the existence of high-cost, low-density areas). In terms of the ownership opportunities available to “outsiders”, there is an inherent conflict of interest in having current property owners determine limits on dwelling dispersion. As a matter of fact, local government decision-making processes seem to be calibrated so as to minimise the supply of new housing while maximising the value of existing properties. 
In the context of a nation’s global housing objectives, this is exceedingly perverse. And yet council members must also have an intimate understanding of the issues that confront the households they represent. In a funny sort of way, this situation is analogous to the governance problems that tainted corporate boards in the 1980s. (Perhaps we should recommend that a certain proportion of councillors live outside their areas of interest, in a manner not dissimilar to the premium public companies place on the role of non-executive directors!) 
There may, however, be another explanation for the pervasiveness of this behaviour among owner-occupiers. NIMBYism could be a rational response to the absence of markets that enable residents to hedge the risks associated with changes in the values of their properties. Although the expected effects of fresh construction are frequently benign, households may be more concerned about the second moment—that is, its impact on the variance of expected outcomes (see Fischel (2001)). Since it is not currently possible for them to insure against fluctuations in property prices, they are instinctively doing the best they can to reduce the probability of some unlikely future event. This obviously intimates toward significant gains from trade were one to establish a market in which to exchange synthetic claims on home equity (Rismark is working on just such an initiative with RP Data and the ASX). 
Returning to the task at hand, we can think of at least two trajectories that would help to liberate the supply side so that it can more easily adapt to changes in demand. 
The first would be to create a centralised zoning authority at the regional or state level with the ability to approve projects quickly. This approach might afford a number of advantages, such as capitalising on economies of scale, and providing builders with a homogenous set of guidelines over wide tracts of territory. On the other hand, the costs could be quite high. It is, for instance, hard to imagine that this über-authority would be able to successfully circumvent the prejudices of local partisans. Indeed, there is the distinct risk that it would have to engage in protracted negotiations with municipalities prior to any new projects being approved.
Philosophically, we also think that there is a lot to be said for devolving decision-making and allowing consumers to have greater control over their lives. Massive government consolidation is hardly conducive to enabling individual liberties. And unless localities are bypassed altogether, they will doubtless retain some capacity to delay the construction of new dwellings. Yet probably the most damning objection to this initiative is that it could run roughshod over the idiosyncrasies of local ecological needs. Our ambition is not to plaster the nation with obtrusive housing, but rather to stimulate supply within a framework that gives a strong voice to municipal preferences. A centralized zoning agency might only contribute to heightened acrimony with little tangible impact on supply. 
In light of the above, we would not advocate a top-down approach. We do, however, believe that there is a role for state-based provision of model zoning codes (which could be adopted voluntarily by councils), and a call for distributing more information about the most efficient ways in which to deal with the legal complexities that plague the planning process. Few would contest the claim that a simplified set of ordinances apropos new construction could significantly improve the welfare of all constituents. (The NSW and Queensland governments’ recent endeavours in this area provide promising precedents.) It does, nonetheless, seem somewhat foolish to try to micro-manage each suburb’s zoning protocols from <city><place>Canberra</place></city>!
 
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An alternative tactic might be to maintain the status quo and allow localities to determine dwelling dispersion, while allocating each “targets” for new supply (see the flow chart below). In principle, individual suburbs could be given a quota of permits for a fixed, say, 12-month, period, which would be based on the size and density of their current housing stock, environmental considerations, and relative prices. Expensive regions typified by low concentrations would face commensurately high quotas (think Bellevue Hill or Toorak).
This is motivated by the standard economic argument that rising prices reflect excess demand. Our goal is not to bring unwanted units to market, but simply to satisfy the aspirations of Australian households. As such, current prices are a critical guide to understanding where demand exists. The targets could be enforced by linking them to state and federal government funding. Municipalities that fail to expand supply in line with their mandated objectives would experience cuts in their fiscal aid. Equally, proactive councils that manage to boost the stock of new homes would be rewarded via more generous funding. 
One obvious attraction of this approach is that local administrators retain control over urban planning policy. At the same time, it also instils powerful incentives to dissuade decision-makers from insidiously exploiting land release programs and zoning laws so as to constrain supply and maximise the prices of existing properties. Execution issues could nevertheless arise. First, will the system be based on the issuance of permits or actual units built? Since we are hoping to augment supply, not the number of new permits, it makes sense to use the latter as the final measure. Yet in the early days it might be more appropriate to focus on accelerating the approval process by monitoring the quantum of permits passed. Second, what requirements will there be with respect to the kinds of dwellings built? Affordable housing advocates would almost certainly lobby for low-priced properties. We would, however, advise against dictating to local authorities – where practicable, power should remain with the people. Having said that, it might be worthwhile stipulating two constraints: 
1. A minimum floor size area based on recent construction in the region. We want to ensure that councils do not “game” the system by building units that are too small for the current market; and 2. A minimum number of single-family detached homes. Communities should not be allowed to meet their targets by simply erecting one large skyscraper. Again, this number (or, more accurately, the smallest proportion of detached units to overall supply) could be conditioned on construction experience in the locality. 
Third, should state governments oblige councils to develop properties in specific areas? No. We think it is best to let the neighbourhoods themselves decide where to build. Finally, will the targets condition on the number of applications actually submitted? Yes, when setting quotas, authorities should take into account developer demand. 
While this sounds fine in theory, how will it work in practice? In the beginning, communities will have to put a lot of thought towards identifying those districts in which they are willing to decrease dispersion, balancing the costs of new development against the social gains derived from expanding supply. Increasing densities around commercial areas would seem like a natural way in which to make affordable housing available. Along similar lines, producing single-family detached homes in a few focused locales could make a lot of sense. At the end of the day, it will be incumbent on councils to craft a vision of their region’s future urban structure. 
One issue that will undoubtedly exercise the minds of policymakers is how best to handle those residents who are adversely affected by the new construction. This is, after all, just a microcosm of the wider problem associated with NIMBYism. Occupiers situated in close proximity to the development should certainly be compensated for any inconvenience caused. But where will the money come from? Well, although our scheme encourages municipalities to expand the supply of housing, it does not advocate the complete abolition of impact fees on development. Hence, as long as councils are able to satisfy their building quotas, they should feel free to tax the relevant participants where appropriate. These charges could then be used to cover the social costs of new construction, and in particular, to recompense dwellers for any complications that come to pass. 
A more sophisticated approach might be to pool the funds raised through impact fees and use them to establish a house price “insurance” program for affected residents. Economists have long recognised the grave financial risks implicit in the household’s real estate investment (see Caplin and Joye (2002d)). In spite of this, there are few practical proposals for creating markets to diversify away the principal threats to our standard of living. It is, for instance, far more likely that a property will decline in value owing to unfavourable economic conditions than it will burn down. And yet whereas there is a sizeable industry dedicated to insuring the home against physical damage, there remains virtually no way for households to hedge the risk of declines in the value of their real estate holdings (see also Shiller (1993)).
<a href="/images/stories/joyeseptember6.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyeseptember6thumb.gif"></a>
Click to enlarge
 But relief may be closer than we think. In the US, there is a nascent “equity assurance” movement that attempts to offer exactly this service. These schemes have been successfully deployed in several urban areas to stem the tide of middle-class flight, restore home owner confidence in the local housing market, and revitalise transitional communities by both retaining and attracting dwellers (see Hersch (2001)). While each program has its own peculiarities, the fundamental objective is to develop vehicles through which households can eliminate a large proportion of any future price depreciation. 
There is no reason why Australian councils could not offer similar products (through private intermediaries) to residents troubled by the notion that new development detracts from the value of their properties. Indeed, we would be happy to work with municipalities to design such schemes. The contractual structure might look something like this: if the value of the occupier’s home did not increase by an amount that it would have in the event that the construction had not taken place (as measured by a regional house price index), the insurer undertakes to pay the owner the difference at the time they decide to sell. Upon receipt of payment, succeeding households have no further claims with respect to the effects of the development on that specific property.
Here it is instructive to highlight the divergent implications of cash or in-kind compensation (e.g., corporate contributions to, say, a neighbourhood park) and plain-vanilla insurance. While both are directed at alleviating the angst of residents, they have different repercussions. When householders accept compensation, they still bear the burden of the downside risk invoked by the development.
Conversely, insurance is a contingent claim that helps to protect home owners from aversive future outcomes — if the construction has no effect, payments will not be made. An equity assurance program should therefore be more effective in allaying the fears of NIMBYs, since their troubles are typically a reflection of uncertainties associated with ‘potential’ price paths. The key decision node for the developer will then be: do the adverse consequences of the construction outweigh the present value of the prospective profits they hope to realise (see also Fischel (2001))? 
On a related note, a futures markets based on house price indices has already been established by the Chicago Board of Trade in the <country-region><place>US</place></country-region>. Similar efforts are underway here in <country-region><place>Australia</place></country-region>. It suffices to say that these projects hint at an exciting alternative reality, in which home owners will be able to equitise the major risks to their standard of living by cost-effectively trading claims (or derivatives therein) on real estate equity.
 This article derives from Part Four of the <a href="https://www.mrcltd.org.au/research/home-ownership/volume_1.pdf">2003 Prime Minister’s Home Ownership Task Force Report</a>, entitled “Innovative Approaches to Reducing the Costs of Home Ownership”, which was authored by Joye, Caplin, Glaeser, Butt and Kuczynski.
 Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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NIMBYism hurting Australia's housing future

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As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.
 
Since 2003 <a href="https://mrcltd.org.au/research/home-ownership/volume_1.pdf">I have argued</a> that the future of Australia’s cities more likely lies in “Manhattanisation” rather than sprawl, while noting that the two dynamics are not mutually exclusive. We will increasingly build up rather than build out. 
The great Australian dream of a quarter-acre block will gradually morph into a more convenient “attached” form of housing – be that a duplex, semi, terrace, townhouse or apartment – that, critically, is situated in relatively close proximity to important amenities and places of work.
As I explained in <a target="_blank" title="Christopher Joye" href="https://www.propertyobserver.com.au/residential/three-population-bubbles-will-cause-demand-not-supply-to-skyrocket-christopher-joye/2011082351255">last week’s column</a>, <place><country-region>Australia</country-region></place> will likely have to absorb 2.3 million additional households over the next 15 years alone. BIS Shrapnel estimates that this translates into a new home building requirement of about 3 million properties once you account for demolitions and the historical share of unoccupied homes (e.g., holiday houses, etc). 
Sydney and Melbourne are individually expected to have 5 million to 6 million residents (see chart). This begs the question as to where all these people are going to live. Will we build new cities, allow existing metropolises to expand ever-outwards, permit Manhattan-like densities, or embrace all of the above?
<a href="/images/stories/joyesept11.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyesept11thumb.gif"></a>
The history of our urban development offers a guide. Over the last century, <country-region><place>Australia</place></country-region>’s urbanisation rate has increased inexorably. In 1921 only 42% of us lived in metropolitan areas. By 2011 that share had risen to 63.9%, and is projected by the ABS to increase to nearly 65% by 2026. 
Paradoxically, <country-region><place>Australia</place></country-region> is one of the most urbanised countries in the world, notwithstanding our large and mostly untapped land mass. Our federated structure combined with the socio-economic power of “agglomeration” has led to a single city in each state attracting most of the immediate region’s residents. Indeed, Australia has more of its total metropolitan population living in its two largest cities, Sydney and Melbourne, than any other country save Switzerland. 
Yet if you fly into <country-region><place>Australia</place></country-region>’s major metropolises you will find a common characteristic: with the exception of the CBD pockets, they tend to resemble flat towns. With its much higher inner-city densities, hilly <city><place>Sydney</place></city>, by way of contrast, offers a vision of the urban future that awaits contemporary conurbations. 
Continuing to build out poses a number of problems. Every marginal addition of new land on a city’s periphery necessitates accompanying investments in roads, electricity, water, transport, and sewerage. Up to a point, densification can leverage off existing infrastructure. 
The further we spread our residents, and the workers living in these households, the more we typically have to transport them back to their places of work (and thus the higher their carbon footprint). Densification holds out hope of truncating commute times. 
And in order to build out, we are, by definition, taking fresh greenfields land away from the natural environment in order to use it for the urban one. Building up does not exhaust any new land. 
Los Angeles County is a great example of a metropolitan area that has sprawled inefficiently. The population of 9.8 million is spread across great distances with an incredibly low density of just 798 persons per square kilometer. Unfortunately for LA’s residents, the public transport system is near nonexistent. If you don’t have a car in LA, you find it hard to function. This has historically resulted in serious traffic and pollution problems, in addition to undermining the city’s sense of community. In fact, LA is more like a basket of smaller cities, which have little in common. 
<city><place>New York City</place></city> sits at the opposite end of the density spectrum. There are 8.2 million people cohabiting in attached forms of housing with a density of 10,194 persons per square kilometer (an order of magnitude more than LA), which makes it the densest municipality in the US. 
<city><place>Manhattan</place></city>'s density is two and a half times higher again. This is, in turn, more than 10 times greater than Sydney and Melbourne’s densities of 2,058 and 1,566 persons per square kilometer, respectively. 
To best service its conveniently contiguous residents, <state><place>New York</place></state> has developed a world-class public transport and taxi system that most of its population harnesses. While it is a qualitative observation, New Yorkers also appear to possess a stronger and more homogenous sense of community. You don’t live in <city>Hollywood</city> or <city><place>Santa Monica</place></city>; you simply live in the Big Apple. 
One insight from these two case studies is that Australia’s cities clearly have scope to boost the supply of accommodation in existing urban areas (see chart). While densification has the above-mentioned advantages, it also comes with obvious costs. In particular, existing residents, who are fond of their land-rich blocks, are often resistant to change. In their defence, this may be rational: stymieing supply can inflate prices. This dynamic is exacerbated by the fact that incumbent owners typically control local councils, which regulate the zoning and building approval processes.
<a href="/images/stories/joyesept12.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyesept12thumb.gif"></a>
In <a href="https://mrcltd.org.au/research/home-ownership/volume_1.pdf">my 2003 report to the Prime Minster</a> I presented several policy solutions to the conflict of interest between existing owners, who want to choke supply, and the next generation of buyers, who would like to see it liberated. One of these ideas involved giving local governments new housing supply quotas tied to public funding. This remains an option worthy of further discussion. 
In contrast to a country like Japan, whose population will contract by one-quarter over the next four decades, Australia’s is expected to expand by 60% based on the Treasury’s projections. 
With our rich endowments of natural resources that are conditions precedent for <country-region>China</country-region> and <country-region><place>India</place></country-region> to industrialise, we are lucky to be leveraged to the developing (as opposed to developed) world. This prosperous economic outlook combined with an ageing population implies that our demand for skilled labour will grow over time. 
One way or another, we are going to have to find ways to accommodate 5.7 million new people in the next 15 years, about half of whom will be hard-working immigrants under the age of 40. 
With this challenge in mind, it is interesting to note that perceptions of the “preferred” form of tenure choice differ markedly across cities and societies. Community attitudes to housing types appear to vary according to the city’s geographic, economic and urban needs. Households in <city>Los Angeles</city>, <city>Beijing</city>, <city>London</city>, <state>New York</state>, <country-region>Singapore</country-region> and <city><place>Sydney</place></city> have quite divergent expectations with respect to the category of accommodation they hope to obtain. 
I think that Australian’s understanding of tenure preference will continue to evolve. And here the data tells us an important story: whether you like it not, our cities are stealthily densifying before our eyes. 
My final two charts show the share of <city>Sydney</city> and <city><place>Melbourne</place></city> building approvals accounted for by apartments, semis, and detached houses over the last 20 or so years.
<a href="/images/stories/joyesept13.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyesept13thumb.gif"></a>
 
<a href="/images/stories/joyesept14.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joyesept14thumb.gif"></a>
In 1992 only 24.1% of all building approvals in <city><place>Sydney</place></city> were for apartments. By 2011 that number had risen to nearly half (or 48.4%). An even more striking story of densification is in evident in <city><place>Melbourne</place></city>. Twenty years ago just 4.6% of all new approvals were apartments. Today that share has rocketed to 34.8%. 
Over the next 50 years our cities will densify much more than most can currently imagine. As a community we should prepare for that future today by investing in the supply-side infrastructure required to support it.
Christopher Joye is a leading financial economist and works with <a target="_blank" title="Rismark International" href="https://www.rismark.com.au/">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Start spreading the news - Australian cities must become more like Manhattan

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In my<a href="https://www.propertyobserver.com.au/residential/house-prices-will-be-55-higher-in-a-decade-christopher-joye/2011082551288" title="House prices will be 55% higher in a decade" target="_blank"> column last week</a>, I argued that it was reasonable to believe that over the next decade credit and house price growth would be driven by disposable incomes, all things being equal. 
My regular sparring partner Steve Keen <a href="https://www.propertyobserver.com.au/economy/china-our-one-saving-grace-as-australias-debt-driven-love-affair-with-house-prices-faces-the-chopping-block-steve-keen/2011082951327" title="Steve Keen" target="_blank">responded </a>with a detailed critique in which he rejected my arguments, and sought to re-cast his infamous <a href="https://www.propertyobserver.com.au/https://www.smh.com.au/articles/2008/10/20/1224351149788?page=fullpage">September 2008 claim</a> that “there's no point in paying a mortgage on an asset that is going to fall by 40% or so in the next few years.” 
Like most of Keen’s predictions, such as the “best-case scenario” during the GFC being 11% unemployment and a recession “more severe than 1990 and lasting 1.5 times as long” (unemployment peaked at 5.8% while there was no recession), his 2008 projection proved way wide of the mark. 
For the record, Australian dwelling prices are today 13.3% higher than when Keen put his reputation on the chopping block, and 89% higher than the level at which Keen expected them to be. 
Keen now tells us that he thinks Australian house prices will plummet by 40% over the next decade (or 13 years since his original declaration). That actually represents a forecast downgrade given a two-fifths decline in prices from today’s level is equivalent to a 32% fall in September 2008 terms. 
Keen further dismisses my proposition that the growth in Australian housing costs over the last 20 to 30 years can be explained by simple reference to incomes and interest rates. 
Instead, he points to a 50% “correlation” between a much more nebulous conception, which he calls the “mortgage accelerator” (the rate at which housing credit accelerates or decelerates), and changes in house prices over time. 
Setting aside the fact that Keen offers no evidence of any causality between these two variables, and rises in house prices could just as easily cause an acceleration in credit (rather than the other way around), Keen’s “correlation” still fails to explain half of the times-series change in Australian dwelling values. 
Indeed, when I look at the relationship between Keen’s “mortgage accelerator” variable, which he supplied to me, and a more precisely-measured estimate of changes in dwelling values – RP Data-Rismark’s Hedonic Index – I get a much lower 12% correlation. 
More importantly for the Keen critique, I will show that by indexing up median Australian dwelling prices by per capita disposable incomes and changes in borrowing capacity (as determined by mortgage rates) one can account for about 90% of the rise in Australian housing costs over the last two and a half decades. 
If we accept that the big structural changes that took place over the last 20 to 30 years are behind us, we can then project with confidence that future dwelling prices will be determined by household purchasing power, ceteris paribus. 
The structural changes I am talking about here include the circa 40% plus reduction in variable mortgage rates from the 12.6% average that prevailed between 1980 and 1995 to the 7.3% level that has held since (see the grey line in the first chart below). 
This was brought about by the RBA’s adoption of a so-called “inflation-targeting” approach to monetary policy in the early 1990s, which has helped keep inflation, on average, within the central bank’s target 2% to 3% band and allowed nominal interest rates to remain lower than had previously been the case. (There was a cap on lending rates in Australia until the early 1980s, which makes like-for-like comparisons prior to this period difficult.) 
Consigning double-digit inflation and commensurately high mortgage rates to history has in turn empowered households and businesses to undertake a once-off upward adjustment to their borrowing capacity (or leverage) in recognition of the 40% reduction in the cost of debt. 
In the chart below, this can be seen by the rise in the RBA’s household debt-to-disposable income ratio from the early 1990s onwards, which coincided with the time that the RBA started using its 2% to 3% inflation target (refer to the red and blue lines). Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust311.gif"><img src="/images/stories/joyeaugust311thumb.gif"></a>
You can see that in 2005-06 (i.e., several years prior to the GFC) Australia’s household debt-to-disposable income ratio started to flat-line. 
The RBA’s (and my) central case is that this will continue: that is, the “new normal” will be one where credit growth is bounded by incomes. This brings me to one of Keen’s factual errors. 
In his article, Keen asserts, “My data comes from the RBA; Chris’s comparable figure clearly uses different data to conclude that ‘Australia’s household debt-to-disposable income ratio has, in fact, flat-lined since a number of years prior to the GFC’, since RBA data shows it rising from 115% to 135% from 2005 until now.” 
In private discussions with Keen I have confirmed that his statement is, in fact, wrong. That is, I was using the correct RBA ratios, and he has arrived at very different (and presumably specious) numbers through his own independent calculations. 
According to the RBA’s official measure, <country-region><place>Australia</place></country-region>’s household debt-to-disposable income ratio hit 155% in 2006, which is where it remains today. It has not, as Keen maintains, expanded from 115% to 135% over this period.  The striking deceleration in Australian housing credit growth since its peak in late 2004 can be vividly seen in the next chart (refer to the downward-sloping black line).
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust312.gif"><img src="/images/stories/joyeaugust312thumb.gif"></a>
A third major structural change I highlighted was the extra growth in disposable household incomes over the last couple of decades resulting from the emergence of multi-income families (and the rise in the female participation rate) and the decline in Australia’s “non-inflationary” unemployment rate, which is thought to be around 5% today (see the blue and red lines in the chart below).
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust313.gif"><img src="/images/stories/joyeaugust313thumb.gif"></a>
If, as discussed, these structural shifts have run their course, household earnings will be the main driver of future dwelling price changes. This in turn implies a long-term house price growth rate of about 4% to 5% per annum, assuming normalised productivity growth and more investments in the supply-side (the absence of which could produce higher growth). This is notably less than 7.8% per annum pace that has applied since the mid-1980s. 
We tested this position by surveying the top 21 market economists, including the major bulls and bears, on their own outlook. As it happened, the average and median of the forecasts for Australian house price growth over the next 10 years was 4.4% and 5% per annum, respectively. 
 
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Another way to resolve this debate is by working out what proportion of Australian house price growth can be explained by incomes and interest rates.  To address this question, Rismark’s research group took the median Australian dwelling price in June 1985 and indexed it up by: 
(1) the change ABS disposable incomes per household before interest repayments; and 
(2) the change in household borrowing capacity that resulted from movements in mortgage rates (assuming a fixed, 80% loan-to-value ratio and a constant disposable income-to-mortgage repayments ratio).
This “income- and interest rate-adjusted” median dwelling price can then be compared to actual median prices over time. The next chart presents the results of the analysis.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust314.gif"><img src="/images/stories/joyeaugust314thumb.gif"></a>
Observe how the confluence of rising household incomes and declining mortgage rates over the 1990s meant that “purchasing power-adjusted” median house prices (black line) rose to be well above actual median prices (red line) for the entirety of the period between 1993 and 2003. 
It was only in the years after 2003 that the median price implied by changes in purchasing power and actual prices started to diverge, a trend that was brought to a halt by the 2007-08 crisis. 
Today we find that around 88% of the change in Australian housing costs since 1985 can be explained by mortgage rates and household incomes. 
Here it should be noted that these are two “demand-side” variables, and asset prices are ultimately determined by the intersection between demand and supply. 
Demand- and supply-side factors not accounted for in this work include shifts in household preferences – there is, for example, evidence that families are willing to spend more of their incomes on buying housing services because it is a “superior good” – and, of course, the availability of housing assets (i.e., supply) to satisfy demand-side needs. The latter refers to both the quantum of homes listed for sale (i.e., effective supply) and the number of dwelling required to practically accommodate the resident population (underlying supply). 
ANZ’s economists recently completed a similar exercise using capital city median prices (in contrast to our all regions price) and a slightly different treatment of mortgage rates. In particular, ANZ “smoothed out” movements in mortgage rates over time to capture the underlying structural change. 
ANZ’s results are nevertheless very similar. They find that the median house prices imputed by increases in purchasing power (via incomes and interest rates) sat well above transacted prices between 1993 and 2003. As at 2011, ANZ’s analysis could explain 93% of the total change in dwelling prices since 1986 (see the next chart below).
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust315.gif"><img src="/images/stories/joyeaugust315thumb.gif"></a>
While the powerful long-run relationship between house prices and household purchasing power will continue to hold, there is inevitably significant year-on-year variability. 
In 2007, Australian capital city dwelling prices rose by 13.6%. In 2008 they fell by 2.5%. In 2009 and 2010 they appreciated again by 12.1% and 5.3%, respectively. Yet if we look over the span of the last seven to eight years, we find that the average growth in housing costs and incomes has been nearly identical. 
This year dwelling prices look like they will be down a bit, unless the RBA starts cutting rates, as Westpac, Goldman Sachs and Deutsche Bank expect they will. 
In addition to the fact that in November 2010 the RBA boosted rates to a level above their historical average, the principal driver of the soft conditions in 2011 has been the exceedingly “hawkish” Australian consumer. 
In February Australians expected, on average, more than three further rate hikes (i.e., an 8.5%-plus mortgage rate), according to Westpac-Melbourne Institute analysis. 
Even in the midst of the recent financial market turbulence, consumers were still banking on two more rate hikes when surveyed in August. A remarkable 29% of all respondents thought there would be more than four future hikes. 
When Australians eventually buy into the idea that rates are not heading higher, housing market conditions will likely improve.
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Housing prices aren't for the chopping block, despite the Steve Keen prophecy: Christopher Joye

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Where will house prices be in 10 years’ time? It’s a question that confronts almost every buyer. Framed differently, what are reasonable expectations for the return I will make on my biggest lifetime investment? 
We recently tried to tackle this subject through some independent analysis. In particular, we surveyed 21 leading market economists – including all the big bulls and bears – for their expectations of nominal house price growth over the next 10 years. To the best of our knowledge, a survey of this kind has never been conducted before. And the (anonymised) results, which I will come to shortly, are fascinating. 
Before commencing this test, our own projection was that, all else being equal, nominal house price appreciation would average about 4.5% per annum on the basis that this was a fair benchmark for disposable income growth over the ensuing decade. 
By way of historical context, disposable income on a per household basis has averaged a healthy 5.8% per annum over the plast 10 years, and 4.9% per annum over the past 18 years. 
Yet for a range of reasons that I have explained many times before – including the once-off, 40% plus reduction in nominal interest rates over the 1980 to 2011 period – historical house price appreciation has consistently outperformed disposable income growth. 
For example, we estimate that between 1982 and 2011 median Australian house prices rose at a 7.7% compound annual growth rate. 
Taking an alternative, and demonstrably more robust, approach, we examined every individual purchase and sale transaction in Australia since 1990 to work out what the median “buy-and-hold” return was. As the first chart below shows, this landed at a strikingly similar 7.8% per annum pace (before transaction/holding costs). 
Interestingly, the best and worst performing cities were <city>Perth</city> and <city><place>Sydney</place></city>, respectively. Since 1990 the median <city><place>Perth</place></city> home owner has realised an impressive 10.3% per annum capital return before including rents. Sydneysiders, on the other hand, have typically fared one-third worse.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust251.jpg"><img src="/images/stories/joyeaugust251thumb.jpg"></a>
Folks sometimes forget that in addition to (potential) capital growth, all housing assets generate income, one way or another. In the case of investment property, this is known as the rental yield. In respect of home-owners, it is called the “imputed” rent, or, in effect, the rent you save. 
If we take historical gross rents and cut them in half to control for residential transaction/holding costs, the ‘total return’ yielded by Aussie housing over the last 20 to 30 years creeps up into double-digit territory (see <a href="https://www.propertyobserver.com.au/trends/economy/aussie-housing-market-outperforms-shares-with-significantly-less-risk/2011081851211">this article</a> for our analysis). 
Yet these guides strike us as being far too ambitious when thinking about the future. Sure, if Westpac chief economist Bill Evans is right and the RBA slashes interest rates four times, we could see the housing market storm back with near double-digit gains, much like it did in 2009. 
And it is certainly true that housing is probably your best “hedge” (as the economy’s most interest rate-sensitive sector) in the event that the resources boom genuinely blows up and our central bank is compelled to change course. 
While the current leverage in the household system cannot realistically increase much further, it is sustainable. As the next chart illustrates, Australia’s household debt-to-disposable income ratio has, in fact, flat-lined since a number of years before the GFC. This tells us that the “new normal” for credit growth is income growth, which is why the two lines have moved sideways.
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust252.jpg"><img src="/images/stories/joyeaugust252thumb.jpg"></a>
 
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When we think about future household income growth, we want to control for the effects of reductions in marginal tax rates, the rise of multi-income households, and the secular decline in the unemployment rate during the 1990s and 2000s. 
We also assume that the productivity malaise of the last 10 years is not blindly repeated. This suggests to us that a reasonable, non-inflationary disposable income growth rate for households is going to be in the 4% to 5% per annum ballpark, which, depending on your specific assumptions, is a 10% to 30% discount to the historical precedents provided above. 
Another way of thinking about this is to presume that disposable household incomes will not outperform wages (which they have done in the past). Average Australian weekly wages have risen at a 4.4% per annum pace since 1990, which is in the middle of our credible range. 
With the above background in mind, we undertook a survey of <country-region><place>Australia</place></country-region>’s top 21 market economists. The results of this (anonymised) analysis are revealed for the first time in the chart below. 
In short, the “average” and “median” expectations for nominal house price growth over the next 10 years were 4.4% per annum and 5% per annum respectively (as represented by the blue and black lines in the chart). 
This is an important finding: the “market” is telling us that future house price appreciation is going to be around 40% lower than its historical rate. That seems like a fair assumption to us.
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust253.gif"><img src="/images/stories/joyeaugust253thumb.gif"></a>
While all the “market” bears were included in our survey (with the exception of the academic Steve Keen, who does not meet our “market” definition), the lowest forecast was a still believable 0% per annum. This implies a one quarter decline in Australian home values in real, or inflation-adjusted, terms over the next decade (and much more if we deflate by incomes). The highest prediction was 7% per annum, which is still a nontrivial 10% discount to the 20-year growth rate. 
The key take-away from this analysis is that in “income-adjusted” terms Australian house prices are not going anywhere over the next decade. Naturally if we look at house prices in “absolute” terms, this work suggests that they will likely be 55% higher in 10 years’ time. 
Including net rents, that will provide a reasonable total return that is around 4% to 5% per annum higher than inflation. Once you account for the effects of leverage (i.e., the fact that most people buy a property with an 80% home loan), the actual return on your equity is substantially higher again, assuming, of course, that the historical (inflation-targeting) level of interest rates remains roughly the same. 
Having said that, please pay particular heed to <a href="https://christopherjoye.blogspot.com/2010/05/so-how-risky-is-your-home">my repeated warnings</a> about individual property level risk.
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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House prices will be 55% higher in a decade: Christopher Joye

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As we look back on 2011, Property Observer is republishing some of our most noteworthy observations of the year.
 
There is a serious myth doing the rounds that the retirement of Australia’s “baby boomers” – i.e., those born between 1946 and 1961 – will trigger a massive new wave of housing supply that will swamp incoming demand and depress prices. 
This was exemplified in an <a target="_blank" title="Baby boomers: Sell now or forever hold your family home" href="https://www.propertyobserver.com.au/residential/baby-boomers-sell-now-or-forever-hold-your-family-home/2011081651189">article last week</a> by the commercial property advocate Chris Lang. Without resorting to statistical evidence, Lang likely terrified many retirees with his sensational claim that if they didn’t get rid of their homes within the next 12 months they would have to wait until 2025: 
“Baby Boomers are facing an enormous challenge. And the sad fact is that they are probably not even aware of the problem. You see, if they haven’t sold their traditional inner-suburban homes before 2012 they need to be prepared to hold onto them until 2025, because there simply won’t be a market for that type of property before then.” 
Based on the best available government forecasts, Lang’s statements are both factually flawed and misleading. Indeed, the opposite is very likely true: over the next 15 years there will be a much larger absolute increase in the number of non-retirees (aged under 65) in Australia relative to those aged 65 years and over. 
The ABS and BIS Shrapnel project that we will have a net increase of 3.7 million new people under 65, compared with 2 million retirees. This will result in 2.3 million new households added to Australia’s conurbations, which will need to buy or rent a home in which to live. 
As I will show below, whether baby boomers decide to downsize or not will have no impact on this tsunami of population growth-driven housing demand. 
A proper understanding of these issues requires one to dive into the data. And the starting point for any such analysis is, of course, population projections. Both the ABS and Treasury produce comprehensive estimates of Australia’s population change out to 2050. 
One interesting characteristic of the ABS’s analysis is that they have consistently underestimated Australia’s population growth and have, as a consequence, been forced to repeatedly revise up their projections (see the first table below, click to enlarge).
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust231.gif"><img src="/images/stories/joyeaugust231thumb.gif"></a>
In 2003, the ABS projected that there would be 26.4 million people living in <place><country-region>Australia</country-region></place> by the end of 2050 (today there are 22.7 million residents). 
In 2005, it upgraded this base-case projection to 28.2 million folks. And then in 2008 it revised it again to 34.2 million. That is, a 30% increase over the 2003 numbers. 
The Treasury then came along and threw a further spanner in the population works with its 2010 Intergenerational Report. Harnessing seemingly conservative assumptions, the Treasury concluded that we would, in fact, have 35.9 million residents living in Australia by 2050 (a stunning 36% increase over the ABS’s 2003 estimates, as illustrated in the next chart below).
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust232.gif"><img src="/images/stories/joyeaugust232thumb.gif"></a>
The bizarre thing about the Treasury analysis was that it presumed a very substantial slowdown in the pace of net overseas migration from our 249,000 per annum rate over recent years to just 180,000 per annum between 2012-2050. This is the reverse of what one would reasonably expect given Australia’s ageing population, which, Treasury forecasts, ultimately creates financial mayhem for the nation. 
The Intergenerational Report tells us that there are currently five people of working age for every retiree. By 2050 Treasury thinks this will decline to 2.7 workers for every aged person.  At the same time that an ageing population is driving up the government’s health and pension costs, the number of workers in the economy paying taxes will shrink. This results in what Treasury euphemistically calls a “fiscal gap” from 2030 onwards: that is, government spending starts to exceed government revenues, which precipitates perpetual deficits and a sharp rise in government debt (see next two charts).
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust233.gif"><img src="/images/stories/joyeaugust233thumb.gif"></a>
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust234.gif"><img src="/images/stories/joyeaugust234thumb.gif"></a>
 
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As Treasury notes, one partial solution to this problem is to import more skilled labour. Aside from being working members of the community, migrants tend to be younger than the existing residents. The ABS estimates that 85% of migrants are under the age of 40, compared with 55% for the resident population. 
One objection to immigration is the allegation that <country-region><place>Australia</place></country-region> is an intrinsically xenophobic country. While this is refuted by cross-sectional studies of international attitudes to immigration (where <place><country-region>Australia</country-region></place> ranks as one of the more open-minded nations), it does not fit with the cultural facts either. 
More than one in four (27%) of all current Australians were born overseas. Nearly one in two of us (48%) have at least one parent born in another land. We have, therefore, an exceptionally multi-cultural society. Much like the <country-region><place>United States</place></country-region>, we are an immigrant nation.
Notwithstanding our economic needs for more productive workers, Treasury assumes that our annual intake between 2012 and 2050 is about 25% lower than recent averages (see next chart). I don’t think there is any good reason for this, and I strongly suspect that it was motivated to avoid punching out a 2050 population number that started with a “4”. In view of public concerns about infrastructure, amenities and congestion generally, a government forecast that our population is going to double within four decades would be politically tricky. Much better to simply allow the numbers to creep up on us, as they have done in the past.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust235.gif"><img src="/images/stories/joyeaugust235thumbs.gif"></a>
So how many new households will Australia have over the next 15 years, and what does this mean for the number of new dwellings that will have to be built to accommodate them? 
BIS Shrapnel recently addressed this question. In recognition of the repeated revisions to Australia’s population projections, and the latest immigration trends, BIS asked the ABS to combine their 2008 base-case scenario (known as ‘Series B’) with their higher-growth ‘Series A’ option (and some other assumptions), to create an up-to-date benchmark for Australia’s population change. 
Based on this analysis, BIS concludes that Australia’s population will likely increase by 25% to around 28.3 million people by 2026. That means there will be 5.7 million new Australians within 15 years. About 45% of these folks arrive organically via (net) births, while 55% will be immigrants. 
BIS projects that this translates to about 2.3 million new “households”, with, on average, 2.5 people per household, by 2026. 
Now before I address the issue of the demand for homes relative to any available supply, it is instructive to parse this population data more thoroughly. 
It turns out that Australia actually has three population bubbles emerging over the next 15 years: the current baby boom; the children of the “boomers”; and the boomers themselves. 
As the chart below shows, there will be 2.6 million new workers aged between 20 and 64 added to the population by 2026 that will need to buy or rent homes. In contrast, the number of retirees will only increase by 2 million. 
If we then look at the total rise in the non-retiree share of Australia’s population, the figure increases to 3.7 million people (i.e., between 0 and 64 years) who will require homes.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust236.gif"><img src="/images/stories/joyeaugust236thumb.gif"></a>
If we move from individuals to household units, BIS forecast that the number of working “households” aged 20-64 years will increase by 1.2 million compared with a 1.1 million increase in non-working retiree households over the next 15 years. 
 
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A key take-away from this analysis is that the overall, 2.3 million increase in the number of Australian households has to be accommodated. Irrespective of whether they are renters or home owners, we will have to build dwellings to house them. 
Taking historical data on demolitions and unoccupied dwellings (e.g., holiday homes, etc), BIS conclude that around three million new homes will have to be added to the current dwelling stock over the next 15 years. 
This is a Herculean construction challenge. It would represent a 33% annual increase in the number of new homes that have been built on average over the last 15 years. BIS does not think we will get there, and forecasts a <personname>sma</personname>ller 28% annual rise in housing supply, which results in a cumulative dwelling stock deficiency of about 240,000 homes by 2026 (see next chart).
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust237.gif"><img src="/images/stories/joyeaugust237thumb.gif"></a>
Whether retirees choose to downsize or not will have no impact on the fact that we will be short circa 3 million homes. If some retirees choose to downsize, that will be good news: it means that the 1.2 million new “working” households will have an opportunity to buy larger homes in established suburbs that are relatively close to their labour markets. But we will still need to build new homes for those retirees selling their properties. That is, the overall demand-supply equation is unchanged. 
Based on the latest Productivity Commission report into aged care, the balance of risks seems to lean in favour of many retirees staying put. The ordinarily conservative PC have recommended that the Commonwealth fund a subsidised “equity release” (or “reverse mortgage”) program that would enable retirees to cash out the equity built up in their homes without selling them. 
Under the PC’s proposal, the cost of this loan would accrue at just 2.5% per annum (or the inflation rate) until it capitalised up to some maximum level. At this point, the government would stop charging interest (as happens with standard reverse mortgages), and the retiree would not have to repay the loan until they died or sold the property. 
There would likely be huge demand for such a cheap and effective product. We estimate that if all retirees who own a home today took one of these products out, the government would liberate about $150 billion in funding to help aged care. And since the government would have an asset on its balance-sheet – i.e., the loans – there would not, in principle, be any increase in net government debt. 
Assuming that many retirees want to remain in close proximity to the suburbs in which they have spent most of their lives, the end game is going to be higher city densities. 
In 1921, only 42% of Australians lived in metropolitan areas. Today that figure is 64%, which is projected by the ABS to rise further over the next decade and a half. Increasing densities in existing cities provides for powerful “network effects” and scale economies, which is why this has been the dominant urbanisation trend in recent times. 
Denser cities are also more environmentally friendly with a lower carbon footprint compared with dispersing households across the country, and having to transport them long distances to and from labour markets. 
Contrary to some incorrect claims, Australia’s housing problem is going to be one of too much demand, not excess supply.
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Three population bubbles will cause housing demand, not supply, to skyrocket

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What’s been the best store of wealth over the last decade? It’s a question I will seek to quickly address today. 
In order to do so, I have taken all the major asset class information over the period January 2001 through to July 2011. This spans a number of economic and financial market booms and busts. 
Australian house prices had a stellar run through to end 2003, but then went nowhere for a couple of years. They recovered at a sprightly clip over 2006 and 2007 yet came to a grinding halt in 2008. A combination of 9.6% mortgage rates and the GFC conspired to push national prices down about 2.6% over the 2008 calendar year. 
In 2009 and 2010 we saw the Aussie housing market shake off these headwinds. Indeed, the RBA’s reduction in mortgage rates to around 5% supplied ample momentum. 
But as is the case with all good things, they tend not to last. And the RBA has prudently started to apply the interest rate brakes as inflation pressures have reared their ugly head. The coincidence of two de facto rate hikes in November last year with the community presumption that many more are to come has seen prices cool 2% year-on-year. 
The Australian share market had a slow start to the 2000s, and even after incorporating the benefit of dividends fell by 8% in 2001, and a much more painful 15% in 2003. 
Following this nadir, Aussie shares rebounded very vigorously indeed through to their late 2007 peak. As most now know, Australian and global shares (including dividends) suffered a catastrophic 40% to 50% slide during the GFC and still remain more than 20% below that peak. 
In the chart and table that follow (click to enlarge) I compare Aussie housing, Aussie shares, government bonds, and cash, over the past 11 years. The specific data I have used include the ASX All Ordinaries Accumulation Index (which reinvests dividends), the RP Data-Ri<personname>sma</personname>rk Combined Capital Cities Index plus 50% (or half) of the RP Data-Ri<personname>sma</personname>rk hedonically-estimated gross rents (to control for around 2% pa worth of property costs), the total returns realised by 10-year Australian government bonds, and the total returns delivered by 90-day bank bills.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust181.gif"><img src="/images/stories/joyeaugust181thumb.gif"></a>
The chart suggests that a national portfolio of housing has comprehensively outperformed all other investment categories over this tumultuous period. What is also fascinating is that AAA-rated Australian government bonds have delivered almost the same returns as Australian shares (plus dividends) with vastly lower risk. 
On the question of risk, the table below shows us that there have been five months over the last 11 years where Aussie shares have fallen in value by more than 5% (the worst being a stunning 14% loss). None of the other asset classes have had a single monthly loss of five per cent plus. 
This just hammers home the point that if you get your market-timing wrong with shares, you could be underwater on your investment for many years. Think, for example, of all the poor folks who piled into Aussie shares around the market apogee in 2007 (see the peak of the red line in the chart above).
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust182large.gif"><img src="/images/stories/joyeaugust182.gif"></a>
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Aussie housing market outperforms shares, with significantly less risk

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In a speech a number of years ago, the head of economic analysis at the RBA looked at the amount of income the representative Australian household had left over after buying a home – at the median price at that time – and servicing all their interest and principal repayments on a home loan (at prevailing rates).




The conclusion was counter-intuitive. The RBA analysis showed that Australian households actually had more income left over after all housing costs – that is, buying a home and meeting their mortgage repayments – than at any other time in recorded history. (The RBA’s research went back to the early 1980s.) Since this work stopped in June 2007, we recently decided to update it with a few tweaks. 



The RBA looked at first time buyers acquiring a home in the 30th price percentile (i.e., a cheaper-than-average home). We simply examined the "average household" –calculated by dividing the ABS's quarterly disposable national income estimate by the number of households each quarter – buying the "average dwelling" in Australia, which is defined as the average sales price in a quarter. The income estimates from the ABS are the only regular (or quarterly) income data that are made available by government. The dwelling price data is sourced from RP Data, which captures 100% of all home sales in Australia. 



We then assume that the borrower has a 10% deposit and a 30-year standard variable rate home loan, which requires him or her to repay both interest and principal. Finally, we "inflation-adjust" all the data to make households' positions comparable over time. The results of this work are enclosed in the chart below (click to enlarge).
 
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust161.gif"><img src="/images/stories/joyeaugust161thumb.gif"></a>
The key question we are trying to address is this: do households in 2011 have more or less disposable income after buying a home and paying down the mortgage than their predecessors? 
Like the RBA, we find that – contrary to popular myth – today's households actually have more disposable income than at any other point since we began our analysis in 1993. 
Of course, there are some good explanations for this. Per capita disposable income has been growing very strongly, and has outpaced house price appreciation over the past seven to eight years. Over the longer term, we have had a structural decline in the unemployment rate from the double-digit peaks in early 1990s to just 5.1% today. And then we have had the rise of multi-income households care of a secular increase in the female participation rate. 
A final crucial difference is the decline in inflation – aka “price stability” – which has permitted lower nominal mortgage rates. As I have argued many times before, the cost of price stability is occasional spikes in interest rates, assuming that the RBA is prepared to do its inflation-targeting job. 
Unfortunately, the RBA’s inflation-fighting resolve is becoming an open question with a board majority-controlled by conflicted business executives. The bank has thus far ignored the last six months of core inflation data that was 40% above its target, and has yet to respond to its own forecasts for above-target price pressures out to 2013. 
The healthy incomes and balance sheets of Australian households are one reason why house prices are unlikely to fall much, especially if the RBA begins cutting rates in order to appease community demands that it prioritises the maintenance of growth and employment over its once-dominant price stability objective.
Christopher Joye is a leading financial economist and works with <a target="_blank" title="Rismark International" href="https://www.rismark.com.au/">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Plenty of loose change keeps Aussie house prices resilient

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You often hear that Australian housing is more expensive than, say, <place><country-region>UK</country-region></place> or US housing, if not the dearest in the world.
Wild fluctuations in currencies make international comparisons hard, to say nothing of profound differences in house price data, household formation and population growth rates, the availability of new housing supply, the urban structure of nations, interest rates, and the legal, tax and institutional features of housing markets around the world.
By way of example, the rate of home ownership in Germany is about 40%, compared with circa 70% in Australia, the UK, Canada, and New Zealand.
In the US there is capital gains tax levied on the owner-occupied home while mortgage repayments are tax-deductible. In contrast, the owner-occupied home is CGT-exempt in Australia, the UK, Canada, and New Zealand, but this comes with a cost: mortgage repayments are not tax-deductible.
One country Australia does share strong commonalities with is, naturally, the UK. The UK also has the benefit of very good housing data that is not plagued by “sample selection biases” (i.e., when you only get a fraction of the total population of home sales, as you do with US house price indices).
So today I wanted to address two simple questions.
First, have Australian housing costs risen more rapidly than their UK equivalents during the last couple of decades?
And, second, how far did UK house prices fall during the GFC, given the near complete disintegration of its banking system, with the whole or partial nationalisation of many of its largest lenders? (UK taxpayers ended up owning 100% of Northern Rock, 83% of RBS, and 41% of Lloyds.)
I ask this question because the correspondence between the Aussie and UK banking systems, which are both dominated by a <personname>sma</personname>ll number of big institutions, and their housing markets (both have near-identical approaches to tax and similar demand and supply fundamentals) makes a study of the UK downturn a credible guide in the event that something – god forbid – catastrophic were to happen here.
That is, it gives us a reasonable indication as to how far Australian house prices might decline if our banking system imploded, the economy careened into an acute recession with soaring unemployment and default rates.
For the purposes of this analysis we have taken the broadest possible <country-region><place>UK</place></country-region> house price measure, which is produced by a group called <a target="_blank" title="Acadametrics" href="https://www.acadametrics.co.uk/">Academetrics</a>. We then compare this with our standard RP Data-Ri<personname>sma</personname>rk Hedonic Combined Capital Cities Index.
The results, which are illustrated in the two charts below (click to enlarge), are fascinating.
First, in the 15 or so years before the GFC, UK housing costs actually increased at a substantially greater rate than their Antipodean counterparts.
Of course, the cataclysmic economic and financial collapse subsequently experienced in the <country-region>UK</country-region> in 2007-08 resulted in a very significant contraction in <country-region><place>UK</place></country-region> dwelling prices.
Specifically, on a peak-to-trough basis, <country-region><place>UK</place></country-region> home values fell by 13.6%. This compares with a <personname>sma</personname>ller 3.9% peak-to-trough decline in Australian dwelling values, which did not have to contend with big increases in unemployment (or arrears).
<a href="/images/stories/joyeaugust111x.jpg" rel="shadowbox" title="Click to enlarge"><img style="border-style: initial; border-color: initial;" src="/images/stories/joyeaugust111thumb.jpg"></a>
Monetary policy also works differently in <country-region><place>Australia</place></country-region>, with almost all borrowers on “adjustable rate” loans. In the UK, the split between variable and fixed-rate loans has historically been around 50:50. This makes it harder for the <country-region><place>UK</place></country-region> central bank to deliver cash-flow relief to borrowers in the event of a crisis.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust112x.jpg"><img src="/images/stories/joyeaugust112thumb.jpg"></a>
The circa 14% drop in UK house prices is noteworthy, but perhaps not as big as some might have expected. For example, the Aussie share market (as measured by the ASX/S&amp;P200) has fallen further in the last month or so. 
And based on a far less-accurate benchmark for US housing costs, the S&amp;P Case-Shiller Index, which unfortunately excludes about 40% of all US homes, the correction on the other side of the Atlantic was twice as steep. This might be partially explained by the fact that <country-region>US</country-region> default rates were nearly three times higher than comparable <country-region><place>UK</place></country-region> arrears (and about 10 times higher than Australian defaults). 
 
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A more interesting finding speaks to relative value. Because of the much stronger run-up in UK house prices prior to the GFC, the overall change in housing costs over the last 18 years has been virtually identical to Australia’s, notwithstanding the sharp recent correction. 
This can be seen in two ways. First, the levels in the charts are similar after accounting for a couple of decades’ worth of value changes. Second, the compound annual growth rates between 1993 and 2011 are statistically indistinguishable (7.3% in the case of <country-region>Australia</country-region>, and 7.0% for the <place><country-region>UK</country-region></place>). 
If we plot the two house price benchmarks on a so-called “logarithmic scale” we can also evaluate their changes on a truly like-for-like basis. A log scale transforms the first chart such that movements in the two lines represent the same percentage change. As you can see in the second chart, the two lines look like one. 
As a final test, we can compare house price-to-income ratios. Luckily the economists at ANZ, which happens to have a British CEO, have done this for us (see the third chart below). It turns out that the <country-region>UK</country-region> house price-to-income ratio is actually higher than <place><country-region>Australia</country-region></place>’s, which suggests that Aussie housing may actually be better priced.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust113x.jpg"><img src="/images/stories/joyeaugust113thumb.jpg"></a>
Based on the analysis above, residential property in <country-region>Australia</country-region> looks to be just as good value as <country-region><place>UK</place></country-region> housing today. Indeed, with demonstrably superior economic and household income prospects, and faster household formation rates, one might reasonably project superior returns in future. 
Christopher Joye is a leading financial economist and works with <a target="_blank" title="Rismark International" href="https://www.rismark.com.au/">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Aussie housing showing up the Brits with all their woes

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You’ve probably woken up this morning a little confused. The <country-region><place>US</place></country-region> government has been downgraded from a AAA rating to AA+ over the weekend. Every newspaper or media outlet you read is talking about financial markets mayhem. One minute you are hearing about higher interest rates, the next there is confident talk they will be slashed. The Aussie dollar has fallen more than seven cents from its high last week to have traded as low as US$1.0378 in this morning’s markets. The local sharemarket is off more than 10% in recent days. Media commentators are working themselves up into hysterics about how <place><country-region>Australia</country-region></place> is hurtling towards recession. All this turbulence is probably doing your head in. 
At times like this, it is useful to reflect on the hard facts. The so-called G7 economies – the US, UK, Germany, France, Japan, Italy and Canada – only actually account for about 30% of global economic growth, which is what we are really worried about (see chart). The higher-growth emerging and developing countries account for about 60% (i.e., they are far more important). About 30% to 40% of Australia’s exports go to two of these countries alone: China and India. 
So while the IMF projects that the world economy will advance at a healthy 4% to 5% per annum clip this year and next – with Australia’s trading partners expected to expand at an even faster pace – it believes that growth in the US and Europe will be much lower (and likely downgraded further).
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust81.gif"><img src="/images/stories/joyeaugust8thumb.gif"></a>
The financial markets and media commentators have not yet really understood that the global centre of economic gravity is rapidly shifting away from the North Atlantic countries towards the emerging world and <place>Asia</place> in particular. <country-region><place>Australia</place></country-region> is lucky to be situated in this region, and to possess the vital ingredients these high-powered nations require in order to fulfill their industrialisation and urbanisation plans: viz., natural resources, like iron ore, coal and natural gas, for steel and energy. 
Already our floating exchange rate is acting like a reflexive “shock absorber” and relieving pressure on the economy during this time of uncertainty. The seven cents sliced off the Aussie dollar (and counting) will make our export- and import-competing industries temporarily more competitive. While this is great news for those sectors, the one drawback is that a depreciating currency means we are likely to import more inflation from China and India (the huge appreciation in the Aussie dollar over the last year had been working in the opposite direction). 
As it stands, Australians remain in rude health. The unemployment rate is at its so-called “full-employment” level of just under 5%. Private wages including bonuses grew by 4.1% over the last year. Disposable household incomes rose by even more than this amount. And, if push comes to shove, the RBA can inject enormous stimulus into the economy by cutting home loan rates to as low as 2% to 3%. 
In this context, one surprisingly resilient store of wealth during financial market turmoil tends to be Australian housing. 
Compared with shares, this was certainly the case during the 1987, 2002-03, and 2007-08 equity corrections, when local share prices plummeted by 44%, 15% and 50%, respectively and cruelled the retirement plans of so many Australians who were “overweight” in this risky asset class. 
It was also true in the 2001 “tech wreck”, when global shares, which have historically attracted about 30% of all Australian super fund money, fell by about 40 to 50%. 
During the recent GFC, the peak-to-trough fall in Australian home values was just 3% to 4% notwithstanding that an inflation-focused RBA kept mortgage rates at 9.6% as late as August 2008 (see chart). That’s less than what the Aussie sharemarket lost in a single day last week.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust82.gif"><img src="/images/stories/joyeaugust82thumb.gif"></a>
A final test case is the 1991 recession, when despite a spike in the unemployment rate to 11%, and double-digit mortgage rates, overall Australian house prices moved sideways. 
 
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As regular readers will know, our central case remains that the RBA will hike interest rates once or twice more. This should continue to put mild pressure on the housing market, which has suffered from a combination of the RBA’s de facto double rate hike in November last year and the very “hawkish” expectations of consumers, who have been working on the basis that they would be hit with another two to three hikes. If this comes to pass, a modest downward adjustment in dwelling prices should present prospective buyers with attractive investment opportunities before a very robust recovery as the RBA normalises rates over 2012-13. 
I should note here that this view is quickly slipping into the minority despite the extraordinarily high “core” inflation readings in the first and second quarters of 2011 (these core estimates strip out unusual events like the floods that affect the “headline” numbers). 
After 20 years of uninterrupted growth, many Australians have forgotten what the cost of high and volatile inflation is. Well, I can tell you: high nominal interest rates. 
The average home loan rate in <country-region><place>Australia</place></country-region> between 1980 and 1995 was a scorching 12.6%. That was before the RBA broke the back of inflation during the 1991 recession. Since 1995 the average home loan rate has declined by 42% to be just 7.3%.
The cost of price stability (or low inflation) is occasional periods of higher interest rates when the RBA strives to bring those price pressures back into its target 2% to 3% per annum band. 
Of course, it also pays to remember that inflation is a tax on hard-earned savings. That is, it punishes savers and rewards spendthrifts (i.e., those with debt). Hence the many net savers out there in the community who have loaded up on cash and fixed-income and want to see the RBA do its job properly, even if it means lower growth and higher unemployment in the short-term. 
A second major thesis we have been running for a few years now is that housing could be a solid hedge against extreme adversity. The financial markets are currently pricing an incredible six rate cuts within the next year on the basis of the belief that we are going to get a GFC Mark II (see chart).
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyeaugust83.gif"><img src="/images/stories/joyeaugust83thumb.gif"></a>
On the assumption of its “peachy” base case, the RBA has deliberately sought to crush consumption, retail spending, and the household sectors to make room for the huge amount of private investment that is starting to take place in Australia. 
Ordinarily, consumption accounts for 55 to 60% of all economic growth. Yet there is another $140 billion or so of new private investment that will be commenced in the next two years alone, which amounts to about 11 percentage points of GDP growth. Even if you take an axe to that number and halve it, it remains chunky. 
Yet if the China and India urbanisation stories blow up, and demand for Australian resources disappears, what will the RBA do? 
It will slash interest rates (as the financial markets believe it will), and invite the consumer and household sectors to step into the breach left by evaporating resources investments. 
And what is the most interest rate-sensitive sector of the economy? Housing. 
Think about what happened during the GFC. The RBA slashed home loan rates from 9.6% in August 2008 to just 5.75% by April 2009. And, unsurprisingly, Australian house prices soared by a stunning 12.1% in 2009. 
Since I believe the world will muddle through this current speed bump, which is a reflection of the profound structural adjustment taking place in the global economy, I remain of the view that interest rates are more likely to head up than down (although it is possible that a crisis will compel the RBA to spin 180 degrees). 
This will be especially true if the Australian dollar keeps falling, as this will be equivalent to rate cuts and only exacerbate the RBA’s inflation challenge. In this environment, I would keep my investments in cash and floating-rate fixed-income. 
To protect against a downside scenario whereby the RBA is forced to abandon its base case and radically reduce interest rates – let’s say to zero – the good news is that virtually all Australians have, quite uniquely compared with peers overseas, fully adjustable rate home loans. 
If the RBA reduced the cash rate to zero, we would be paying 2.5% mortgage rates. And, in this contingency, housing will likely once again be a very solid store of wealth.
Christopher Joye is a leading financial economist and works with <a style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;" href="https://www.rismark.com.au/" title="Rismark International" target="_blank">Rismark International</a>. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.
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Calm pays during chaos, as housing good hedge against adversity

Roseville is poised for a wave of new apartment development following the NSW Government's rezoning of land around Roseville Station under its Transport Oriented Development program.

The new planning controls have unlocked significant development potential within walking distance of the station, with a number of sites expected to be amalgamated and redeveloped in the coming years as developers seek to take advantage of the increased density allowances.

One of the more restrained developments in the precinct, and set among the first to be delivered having commenced well before the recent changes, is Hyecorp's Juliet. The boutique apartment project is already well under construction and remains on track to welcome residents by the end of the year, offering a markedly different proposition to many of the larger-scale developments now likely to emerge across the suburb.

[smartcode_project:default project_id=7395 project_image_fid=278194]

<a href="https://www.apartments.com.au/new-apartments/juliet-roseville-64-pacific-highway-roseville-nsw-2069">Juliet</a> will comprise just&nbsp;34 one-, two-, and three-bedroom apartments opposite Roseville Station. For Hyecorp, which has delivered projects across Sydney's Lower North Shore for more than three decades, Roseville presented a rare opportunity to address a growing gap in the market.

"<a href="https://www.apartments.com.au/developments/roseville-nsw-2069">Roseville</a> has long been one of the North Shore's most tightly held and desirable suburbs, offering a unique combination of village charm, established greenery, excellent transport connections, and proximity to some of Sydney's best schools and lifestyle amenities," Hyecorp said.

"We recognised a growing demand from local homeowners seeking to downsize without leaving the community they have built their lives around. The location presented a rare opportunity to create homes that cater specifically to that buyer profile."

[smartcode_project:default project_id=7395 project_image_fid=278196]

The six-level development has been designed by <a href="https://www.apartments.com.au/architects/pbd-architects">PBD Architects</a> as a collection of residences that feel more like homes than apartments. The brief centred generous floorplans, abundant natural light, quality finishes, and strong connections to outdoor space.

PBD Architects drew inspiration from Roseville's established garden suburb character, creating a building that sits comfortably within its surroundings rather than dominating them. The architecture incorporates natural materials, soft forms, layered landscaping, expansive balconies, and generous setbacks to strengthen the connection between residents and the suburb's leafy environment.

"The focus was on designing spacious, house-like residences for discerning owner-occupiers and downsizers who wanted to remain on the North Shore without compromising on comfort, privacy, or design," PBD said.&nbsp;

"Every apartment was to feel considered, timeless, and highly functional."

[smartcode_project:default project_id=7395 project_image_fid=278195]

Inside, residences feature engineered timber flooring, stone kitchen benchtops and splashbacks, integrated Fisher &amp; Paykel appliances, ducted air conditioning, and large outdoor entertaining areas designed to take advantage of district and treetop views.

Residents will also have access to a rooftop barbecue and lounge area, alongside practical amenities including parcel lockers, EV charging capability, bicycle storage, a dog wash bay, and a basement car wash facility.

The majority of purchasers so far have been local owner-occupiers from Roseville, Lindfield, Chatswood, Killara, and the broader Upper North Shore, many of whom are transitioning from larger family homes.

"Buyers are looking for spacious, house-like apartments that allow them to downsize without feeling like they are sacrificing comfort or functionality," Hyecorp noted.

"They value large kitchens, generous living areas, ample storage, quality finishes, secure parking, lift access, and low-maintenance living."

[smartcode_project:default project_id=7395 project_image_fid=278204]

Juliet sits directly opposite Roseville Train Station and within walking distance of Roseville Village, while Chatswood's retail and dining precinct is only minutes away. The development is also surrounded by some of Sydney's most established schools, including Roseville College, Ravenswood, Pymble Ladies' College, and Knox Grammar, as well as nearby parklands and golf courses.

Juliet is currently more than 75 per cent sold ahead of its anticipated completion in late 2026.

[smartcode_project_cta:default project_id=7395]

Joel Robinson

Juliet to sit quietly amid Roseville apartment boom

Sherpa Property Group has unveiled the third instalment of its Flourish series, securing full approval for the two-tower, $500 million Flourish Soleira development in Palm Beach.

<a href="https://www.apartments.com.au/new-apartments/flourish-soleira-1150-1154-gold-coast-highway-palm-beach-qld-4221">Flourish Soleira</a> will rise from a prominent site in the commercial heart of Palm Beach, the long-time home of Cash Converters and a range of local retailers.

The project will introduce a new retail and dining precinct at ground level, beneath 286 apartments.

[smartcode_project:default project_id=150017 project_image_fid=370959]

“We’re very committed to not only providing affordable residential offerings that are much needed in Palm Beach, but also delivering a vibrant new commercial heart that complements the extraordinary growth of the southern Gold Coast,” Sherpa Property Group founder Christie Leet said.

The development will sit under Sherpa's Flourish brand, which is aimed at providing a pathway into the beachside suburb for locals, first-home buyers and downsizers. In a move designed to assist first-home buyers entering the market, Sherpa has reserved all one and two-bedroom, one-bathroom apartments exclusively for eligible first-home buyers.

[smartcode_project:default project_id=150017 project_image_fid=370964]

“Our vision through Flourish is to create a vibrant retail and lifestyle focal point within the Palm Beach centre zone, delivering thriving communities underpinned by lifestyle-rich locations,” Leet said.

“So far, Flourish has been an incredible success, and we hope to carry this momentum as we progress the next two Flourish projects in Palm Beach.”

[smartcode_project:default project_id=150017 project_image_fid=371430]

Located across 1150-1164 Gold Coast Highway and 3 Sixth Avenue, the development will comprise two towers. The northern tower will deliver 154 apartments, while the southern tower will add a further 132 residences, helping address ongoing demand for new apartments in the tightly held coastal suburb.

Flourish Soleira will also feature the most extensive rooftop amenity offering ever delivered in Palm Beach.

The two towers will be connected by a skybridge, with residents gaining access to a rooftop recreation deck featuring a full-width swimming pool, hot and cold plunge pools, wellness spaces, a gymnasium, private dining facilities, massage treatment rooms, barbecue areas, a basketball court, golf simulator, indoor and outdoor dining spaces, sun lounges and extensive landscaping.

LPS Group is expected to start construction later this year.

Sherpa is already well advanced on construction of its debut Flourish project, Flourish Amargo, located just around the corner from Soleira. Meanwhile, Flourish Oasis, positioned opposite Amargo, recently commenced construction and has nearly sold out its collection of 47 apartments.

[smartcode_project_cta:default project_id=150017]

Sherpa unveils $500m mixed-use Palm Beach precinct, Flourish Soleira

Are mortgage holders set to get a reprieve from the RBA in 2026?

Big Four bank NAB believes so. They are now expecting the next move from the RBA to be a cut, rather than a hike, which they had pencilled in for August. They are unsure of the timing of the cut however, they note in their latest&nbsp;NAB Economics RBA Watch.

NAB Chief Economist, Dr Sally Auld, said recent data suggests the economy has lost momentum and the outlook for rates has shifted, noting that the broader economic backdrop has changed since earlier in the year.

“The next move in the cash rate is likely to be down, but the timing is uncertain," Dr Auld said.

"In February, growth was above trend, the economy was operating above capacity and there was uncertainty over the restrictiveness of rates. None of these conditions exist today,” she outlined.

Dr Auld said recent data pointed to softer momentum across the economy while acknowledging that at the same time, uncertainty remains a key feature of the outlook.

“Both Q1 GDP data and the NAB business survey suggest momentum in the economy has slowed, meaning that growth has likely peaked for the cycle. That said, we are cognisant there is still considerable uncertainty around the outlook, both with respect to activity and inflation.”

Dr Auld said inflation risks and labour market outcomes would be important to watch.

“On the prices side, we are still forecasting above target core inflation through to mid-2027. Margins will compress and weaker labour market outcomes are a risk.”

She said tighter financial conditions are expected to weigh on housing and activity.

“Tighter financial conditions will be reflected in a slowing in house price growth and housing credit growth. In summary, we have greater conviction that the next move in rates is down, but less conviction on the timing.”

Mortgage relief? NAB forecasts RBA rate cut, not hike, after softer economic conditions

A local downsizer has splashed $6.5 million on a penthouse in Perifa's Alex &amp; Willow development in Crows Nest. 
&nbsp; 
The purchaser sold their long-held family home in the area before embarking on a six-month search for the right apartment. After inspecting a range of options across the Lower North Shore, the buyer returned to <a href="https://www.apartments.com.au/new-apartments/alex-willow-crows-nest-82-90-alexander-street-crows-nest-nsw-2065">Alex &amp; Willow</a>. 
&nbsp; 
The buyer profile reflects the project’s broader purchaser mix. <a>Alex &amp; Willow</a> has attracted predominantly local downsizers looking to transition from larger homes without compromising on space or quality, alongside a smaller cohort of upsizers and investors drawn to the project’s location and design credentials. 
&nbsp; 
The milestone sale comes as the project, developed by&nbsp;<a href="https://www.apartments.com.au/developers/perifa">Perifa</a>&nbsp;and delivered by <a href="https://www.apartments.com.au/builders/versatile-made-construction">Versatile Construction</a>, both part of Versatile Group, reaches 60 per cent sold.

[smartcode_project:default project_id=6680 project_image_fid=371325] 
&nbsp; 
Eddie Mansour, Managing Partner of <a href="https://www.apartments.com.au/project-marketer/ray-white-projects">Ray White Projects</a>, said the result demonstrates not only a headline price but also depth of demand. 
&nbsp; 
“This is an exceptional outcome and a clear reflection of sustained buyer demand for premium, well-located downsizer product,” Mansour said.

“We’re seeing a consistent pattern of local homeowners selling family residences and reinvesting into high-quality apartments that allow them to remain within their community. Alex &amp; Willow has resonated strongly with this group because it offers genuine scale, thoughtful design and immediate proximity to the village.” 
&nbsp; 
The sale reflects a broader and consistent trend of local downsizers actively seeking high-quality, low-maintenance residences close to established village centres. Agents report that demand for this product type has remained resilient, particularly where developments offer a rare combination of scale, design quality and walkable amenity. 
&nbsp;&nbsp; 
Fabrizio Perilli, Managing Director of Perifa and Versatile Group, said the sale marks a defining moment for the project. 
&nbsp; 
“The penthouse sale is a strong endorsement of the quality we have delivered, alongside our partners, and the clear demand from local downsizers for premium, boutique residences in this location,” Perilli said.&nbsp; 
&nbsp; 
“Most importantly, we’re proud to see the Alex &amp; Willow community beginning to take shape. As we move closer to completion, we’re looking forward to welcoming residents and seeing the project come to life.”&nbsp;

[smartcode_project:default project_id=6680 project_image_fid=338516] 
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Designed by <a href="https://www.apartments.com.au/architects/nettletontribe">Nettleton Tribe</a> with interiors by <a href="https://www.apartments.com.au/interior-designers/richards-stanisich">Richards Stanisich</a>, Alex &amp; Willow is a boutique collection of generously sized two- and three-bedroom residences in the heart of Crows Nest village.&nbsp;

Completion is slated for early 2027.

[smartcode_project_cta:default project_id=6680]

Alex & Willow, Crows Nest penthouse sells off the plan for $6.5 million

Fresh from launching the first stage of its Wollongong precinct, <a href="https://www.apartments.com.au/new-apartments/keira-place-wollongong-120-122-smith-street-wollongong-nsw-2500">Keira Place</a>, builder-developer Urban Property Group has unveiled plans for the next phase of the masterplanned community.

Now on public exhibition through the NSW Government's Housing Delivery Authority pathway is a State Significant Development Application for a further 657 homes on the prominent gateway site opposite Beaton Park.

The proposal comprises three buildings, including two build-to-sell towers rising 25 and 30 storeys, delivering 391 apartments, alongside a 12-storey co-living building with 266 residences, making it one of the largest co-living proposals currently planned in regional New South Wales.

Of the apartments proposed in the build-to-sell towers, the majority, 310, are two-bedroom dwellings. The balance comprises 44 one-bedroom apartments and 37 three-bedroom residences. Apartment sizes range from around 50 sqm for one-bedroom homes to approximately 90 sqm for three-bedroom apartments.

<img alt="Smith St" data-entity-type="file" data-entity-uuid="19347059-1612-41a0-9c74-b86a657237f8" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-06-10%20at%2010.02.18%E2%80%AFAM.png?VersionId=sWXnaCcA.cIC6N8YT1dg5pJ2e1V3Z6z7" />

The submission says the proposal has evolved significantly from its original Housing Delivery Authority application following extensive consultation with the State Design Review Panel and Wollongong City Council.

The final scheme has been designed to align with the emerging vision for the Flinders Street Precinct, an area identified by Council as a future high-density mixed-use neighbourhood capable of accommodating substantial housing growth close to transport, employment and community infrastructure.

According to the design report prepared by COX Architecture, the development aims to "deliver a built outcome consistent with the future character of the Wollongong CBD while responding to the site's unique constraints and opportunities."

"Our vision for the next phase of the site evolution in Wollongong is grounded in three design pillars that guide the design response: place, natural environment and celebration," COX said.

"Inspired by its surroundings and grounded in the stories of place on Wodi Wodi Country, the design proposal acknowledges the established character of its setting while creating a unique and timeless identity that sits harmoniously within it.

"The design proposal responds to its specific site conditions, acknowledging the vegetation, climate, wind conditions and solar access of the site."

The architecture responds directly to the site's position between Wollongong's urban core and its natural landscape setting.

COX identified views towards Mount Keira and the Illawarra Escarpment as defining features of the site, while the upper levels of the towers will also capture expansive views across the city and out to the Pacific Ocean.

The design team has positioned the tallest buildings closer to the rail corridor, where overshadowing impacts can be better managed while establishing a landmark built form on the northern approach into the city.

<img alt="Smith St" data-entity-type="file" data-entity-uuid="79580d5b-500c-4ebf-9629-797146a4a694" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-06-10%20at%209.51.59%E2%80%AFAM.png?VersionId=WbTB1EKSG.KDfsfz0F3wp1QVa2oCMGR5" />

Urban Property Group secured the 11,000 sqm Smith Street site in 2022 and has since progressed plans for the broader Keira Place precinct.

Construction recently commenced on the first stage of Keira Place, which will deliver 150 apartments across two residential buildings, including 27 affordable housing apartments and 18 specialist disability accommodation dwellings, alongside activated ground-floor retail and commercial space.

Urban Co-CEO Patrick Elias said the commencement of construction marked a significant milestone for Wollongong and reflected the developer's long-term commitment to regional cities.

"Today's groundbreaking is about turning approvals into homes and moving quickly to deliver much-needed housing in Wollongong's city centre," Elias said.

"Keira Place will provide a diverse mix of homes close to jobs, transport and services, while setting a high benchmark for quality, durability and consumer protection."

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/groundbreaking-marks-start-of-construction-at-keira-place-in-wollongong-cbd">Groundbreaking marks start of construction at Keira Place in Wollongong CBD</a>

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Christopher Joye

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