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Are <place><country-region>Australia</country-region></place>’s banks overexposed to housing vis-à-vis business lending, as so many pundits claim? Does the regulator madly tilt the odds in favour of the former? And should banks have a softer, social objective to extend more finance to businesses as opposed to residential borrowers, since, it is argued, the latter are “unproductive”? I hope to address all these questions today.
<place><country-region>Australia</country-region></place>’s banking regulator, APRA, is regarded as being a far-sighted and prudent agency in comparison to many of its overseas peers. (I’ve previously made the case that there was as much providence as prescience in <place><country-region>Australia.</country-region></place>). It is certainly true to say that over the years APRA has placed Australian banks under tremendous pressure to adjust practices it considers to be unnecessarily hazardous.
APRA works hand-in-hand with <place><country-region>Australia</country-region></place>’s central bank, the RBA, which until 1997 also had responsibility for banking supervision. Following the findings of the Wallis Inquiry, APRA was created, and the prudential supervisory responsibility previously held by the RBA transferred to it. The idea was that the RBA had too much on its plate – too many objectives once one accounted for its central role of keeping prices stable via management of economy-wide interest rates. There is much to be said for this logic, which is actually a rather unique regulatory setup in a developed world context (most of our contemporaries have their central banks, like the US Federal Reserve, do pretty much everything).
Having said that, the RBA does, in fact, continue to exercise regulatory responsibilities in the banking domain through two chief means: first, the RBA controls the so-called “liquidity facilities” that all Australian banks and building societies have access to and tap from time to time. These facilities allow them to “put” their assets to the RBA in a liquidity crisis and obtain funding from it (i.e., the RBA lends to them against this collateral).
The second way the RBA exercises influence over the banking system is through its so-called “financial stability” remit. Inside the RBA there is a team of very highly qualified economists – led by assistant governor-in-waiting Dr Luci Ellis – who spend all their time monitoring the manifold risks that have the potential to threaten the viability of Australia’s financial system.
Since most of this system is dominated by the banks, the RBA’s team does an enormous amount of analysis on different credit risks, default rates, the exposure of banks to the housing and commercial property sectors, and so on. All of this work comes to fruition bi-annually in a detailed, 100-plus page study known as the Financial Stability Review.
Neither APRA nor the RBA get rewarded for banks making big profits. They are typically only recognised when they help us avoid some catastrophe, such as during the GFC. This tends to make both institutions exceedingly conservative.
With that background in hand, we can turn to my first question: what do APRA and the RBA consider to be riskier – housing or business lending? This is actually easy to answer through the formal “risk weights” that APRA forces banks to apply against different types of loans. The risk weights in turn determine how much capital, or money, a bank needs to hold against every dollar of residential or business credit it extends. These weights are, therefore, a proxy for the probability of loss when you get into the lending game.
For all non-major banks, business loans attract a 100% risk weight, whereas residential credit gets half this amount (i.e., a 50% risk weight). APRA applies a much lower risk weight to residential credit precisely because the proven empirical risks associated with this form of finance indicate that it has lower probabilities of loss than conventional business lending. If the opposite were true, and home loans were a more hazardous credit, then the risk weights would work the other way around.
The major banks get the benefit of even lower risk weights (and, thus, a lower cost of capital) compared to their competitors because they are permitted to use an “internally determined” risk-weighting system under what is known as the “Advanced Route”. This means that APRA allows them to set their own risk-weights subject to a range of sophisticated rules.
You can see in my first chart, which was extracted from the RBA’s latest Financial Stability Review, the various risk weights the major banks apply to different credits. On average, the risk weight on home loans is about one-quarter the risk weight on business loans to large companies. Since banks can hold less capital against a home loan, this is, in theory, a relatively more profitable activity for them to undertake. That last statement ignores, however, the impact of bank margins. Margins on business loans tend to be much higher than residential loans (as seen in higher business lending rates) in recognition of the former’s risks and the relatively greater labour intensity associated with assessing business credit risk. When all is said and done (i.e., adjusted for margins), the actual returns on the two forms of finance are likely to be similar.
 
<a href="/images/stories/Joyejune28/joyejune281.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune28/joyejune281thumb.jpg"></a>
 
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A second powerful quantification of business versus residential risk is supplied by examining bank default rates (i.e., “non-performing” loans) and associated losses (or impairments). Once again, the Financial Stability Review delivers in spades here.
The next two charts cast into sharp relief the fundamental problem bank regulators have with business lending. In the right-hand-side panel of the first chart, the RBA has broken out Australian banks’ non-performing loans by type. Non-performance (i.e., loans in arrears) is expressed as a percentage of the total loans in that category.
 
<a href="/images/stories/Joyejune28/joyejune282.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune28/joyejune282thumb.jpg"></a>
So, we can see that more than 3.5% of all business loans (blue line) are non-performing (i.e., in default). In comparison, only about 0.7% of all residential borrowers (orange line) are materially behind on their repayments. That is, default rates on home loans are a fraction of arrears on business loans.



Yet the real clincher is in the total dollar value of these non-performing loans. Today Australian banks tend to have a rough 60:40 split in favour of residential/business lending. Before the 1991 recession, the ratio was the reverse, with the majority of bank credit going to businesses. These exposures almost caused the collapse of two of the majors, ANZ and Westpac. Since that time, the majors have acknowledged the higher risks inherent in their business portfolios, and reversed course, with the encouragement of regulators. 



Even so, look what once again happened during the GFC. Compare, in particular, the first two panels of the next chart. The far left-hand-side panel shows the dollar value of impaired housing loans (the red line). It looks like impairments are a little higher than $2 billion in total, which is trivial when you consider that there are well north of $1 trillion worth of residential mortgages out there. Now contrast this against the middle panel, which shows the banks’ impaired business loans based on the latest data. Total business impairments look to be more than $22 billion, or a remarkable 10x higher than residential impairments.

 
<a href="/images/stories/Joyejune28/joyejune283.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune28/joyejune283thumb.jpg"></a>
Now ask yourself this question: would you have Australian banks ramp up their exposures to the middle column (i.e., business lending) in preference to the first column (i.e., residential lending), as folks like Steve Keen suggest would be a smart idea? I don’t think so. 



For what it is worth, exactly the same phenomenon asserted itself during the much more acute 1991 recession. My final chart shows the loss rates across CBA’s different credit portfolios in that downturn, when unemployment peaked at close to 11% while mortgage rates hit 17%. Notwithstanding the serious difficulties households were having at the time, the losses on home loans (bottom red line) were a tiny fraction of the losses CBA realised on all other forms of credit.

 
<a href="/images/stories/Joyejune28/joyejune284.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune28/joyejune284thumb.jpg"></a>
I want to conclude with some words on the question of whether housing investments are “unproductive”. Notionally respected critics employ this argument to suggest that policymakers should discourage it by changing the negative gearing and/or capital gains tax rules. This logic is, however, flawed.
In standard economics theory, the two most basic necessities for a functioning economy and, more specifically, productive labour, are: food and shelter. We can interpret “shelter” as covering both residential property, which is the accommodation required by a functional labour force, and commercial property, which is the accommodation needed for productive businesses.
You can either be a “producer” of food and shelter by investing in, and owning, the underlying assets that supply these services/products by owning farms, homes, or commercial buildings; or, alternatively, you can just “consume” these services/products and not invest in the assets by simply buying food from the supermarket, renting a home, or leasing space in a building.
There is a final option where you can both consume and invest by living on a farm (and eating its produce), owning and occupying your home, or owning and occupying the building in which your business operates, as some companies do.
As an investor in agriculture, housing, or commercial property, you derive returns as you would with any other productive asset: via a mix of both growth in the capital value of the asset and income from the sale of the products/services (i.e., food, residential accommodation and commercial accommodation).
In addition to its innate productivity as a form of shelter for workers, academic researchers have shown that housing investments positively impact both labour and business productivity. That is, the higher the quality of housing, the more productive workers and businesses can be. The ABS has also demonstrated that investments in new housing have a very high, 2.9 times economic multiplier. This means that every dollar committed to building homes generates another 2.9 dollars of extra spending across the wider economy.
Finally, the housing market is increasingly fulfilling a new economic purpose: with the advancement of technology such as the NBN, housing supplies accommodation for businesses as more people work from home. The home is no longer an office for just the self-employed individual, or for secondary employment activity. It is increasingly the workplace of professional service employees in their primary jobs, who don’t wish to commute long hours to their labour market.
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">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. You can follow Christopher on twitter at <a target="_blank" title="Follow Christopher Joye" href="https://twitter.com/#!/cjoye" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">@cjoye</a> or read his blog.
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chrisjoye-JYhJsTrNRC

Businesses riskier than bricks and mortar when it comes to lending

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At first glance, an independent observer might think that the behavior of Australia’s housing market right now is a bit odd. Let’s reflect on the facts.
First, the unemployment rate has remained very low at around 4.9% since late last year. This is well below what we used to believe to be the so-called “non-accelerating inflation rate of unemployment” (or NAIRU), which in the 1990s was assumed to be 6% to 7%. Any falls in the unemployment rate beyond this point are typically accompanied by inflation breakouts. And while jobs growth has, to be sure, slowed considerably from its scorching 2010 pace, the leading indicators imply that the economy will continue to create new employment opportunities.
Second, wages growth is very firm, to say the least. Indeed, private-sector wages including bonuses are stomping along at a circa 4% plus pace, which, as the governor of the RBA recently observed, is above the average rate since the middle of the 1990s. If we then cast our eyes over disposable household income growth, which is reported by the ABS on a quarterly basis, we find an even rosier picture. Disposable incomes in Australia expanded at a remarkable 8.4% clip over the 12 months to March 2011 (see chart).
<a href="/images/stories/Joyejune23/joyejune231.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune23/joyejune231thumb.jpg"></a>
Source: RP Data-Rismark
Third, the cost of debt is still relatively modest. The headline mortgage rate in Australia today is 7.8%, which is only a smidgen higher than the average rate of 7.6% since the start of 1995 (see chart). Recall that in August 2008, the headline mortgage rate rose to a gut-wrenching 9.6%. Way back in January 1990 it was 17%. So, in terms of the interest rates households are paying on their loans, there is nothing really to complain about.
 
<a href="/images/stories/Joyejune23/joyejune232.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune23/joyejune232thumb.jpg"></a>
Source: RP Data-Rismark
Sure, the level of household debt held by households is much higher than it was 20 years ago. But even when we inspect debt-servicing costs, we find that things look fine. According to the RBA’s latest estimates, the median “debt servicing ratio” —that is, the share of disposable income used to service all repayments due on home loans — is just 21%. Indeed, the RBA finds that about 58% of all Australian borrowers are actually “ahead of schedule”, which means that they are paying down their debt more quickly than they have to. The chart below, which is excised from the RBA’s Financial Stability Review, shows the proportion of households that are ahead of schedule, and the median DSR, ranked by income “quintile” (which is fancy language for the five buckets of income, each representing 20% of the population, ranked from low to high).
<img src="/images/stories/Joyejune23/joyejune233.jpg">
Notwithstanding these encouraging facts, capital city and regional house prices in Australia have actually tapered in recent times. In the year to end April, capital city prices are off 1.5% while their regional counterparts are down by 1.8%, according to RP Data-Rismark.
The combination of healthy income growth and skinnier house prices has meant that Australia’s dwelling price-to-income ratio has fallen back to its lowest level since June 2003, as I previously reported <a href="https://www.propertyobserver.com.au/residential/aussie-housing-stock-is-not-too-expensive/2011060850447">here</a>.
The question remains, though, if household incomes are rising rapidly, if the labour market is comparatively tight, and if interest rates are only slightly above average, what gives with lower dwelling prices?
The answer, I believe, is not something that has really been explained before: the phantom interest rate hikes. That is, the rate hikes we never had. Jonathon Chancellor alludes to this in a news report <a href="https://www.propertyobserver.com.au/consumers-and-investors-more-hawkish-than-economists/2011062250566">yesterday</a>.
During 2011 Australian households have been very “hawkish” indeed. By hawkish we mean that they have expected a large number of interest rate hikes. We know this from a fascinating Westpac survey, which asks households every quarter where they think mortgage rates will be in a year’s time.
When Westpac carried out this survey in February, households said they were, on average, budgeting for more than three further rate increases. That suggests households were expecting to be paying 8.6% mortgage rates. Since that time, we have had no rate hikes despite a very high inflation outcome in the first quarter, which the RBA has thus far ignored, to the surprise of many.
In an update of the survey carried out in June, Westpac found that Australians remained exceedingly hawkish, forecasting more than two rate hikes in the coming year, albeit down from the three plus they anticipated in February. According to Westpac, households now, on average, believe that they will be paying an 8.4% mortgage rate by June next year.
<a href="/images/stories/Joyejune23/joyejune234.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune23/joyejune234thumb.jpg"></a>
Source: Westpac Red Book
Why are households seemingly so convinced that they are about to get whacked by the interest rate stick? Almost certainly because of the RBA’s and certain economists’ (including, notably, yours truly), sabre-rattling about the spectre of higher rates. Of course, this pain has yet to materialise, which is almost exclusively due to the impact of an unprecedented sequence of disasters.
The latter started with the east coast floods, followed by NZ’s earthquake, then the oil price shock induced by the rolling Middle Eastern political turmoil (which continues to this day), the extraordinary earthquake-cum-nuclear calamity in our second-largest trading partner, Japan, and now a resurgence of European sovereign debt woes.
The natural and man-made turbulence in 2011 has conspired to disrupt both Australian and global growth and pushed the RBA to the sidelines. Some, such as Macquarie Bank, take a harder line, and contend that the RBA is starting to sound like “the boy who cried wolf”.
For the time being, however, the RBA’s jawboning has paid off (a subtle pun in this sentence for the central bank enthusiasts). That is, its so-called “open-mouth operations” have had the effect of de facto rate hikes.
Notwithstanding robust income growth, households are saving more than they have in 25 years, and they are avoiding taking out new debt. This is reflected in another intriguing suite of statistics published by Westpac and the Melbourne Institute, which document where households believe they should be putting their hard-earned savings. The chart below tells the story. There has been a structural shift away from shares and real estate towards cash, super and paying back debt.
 
<a href="/images/stories/Joyejune23/joyejune235.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/Joyejune23/joyejune235thumb.jpg"></a>
Source: Westpac-Melbourne Institute
As I predicted many years ago, this means credit growth will move in lock-step with incomes, not the double-digit rates that persisted during the 1990s and 2000s. Contrary to what the notorious doomsayer, Dr Steve Keen, would have us believe, it does not portend a cataclysmic, 40% fall in house prices, or a precipitous drop in the rate at which credit is extended.
It does, however, mean that the handful of institutions that dominate our banking sector will have to get used to much lower returns on equity, given that they have now effectively become the system, and cannot, by definition, grow faster than it (a point well-made in this <a href="https://www.joehockey.com/mediahub/speechDetail.aspx?prID=1078">landmark speech on the subject</a> late last year).
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">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. You can follow Christopher on twitter at <a target="_blank" title="Follow Christopher Joye" href="https://twitter.com/#!/cjoye" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">@cjoye</a> or read his blog.
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The interest rate hike we never had

House price indices: Making sense of the data overload

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In a speech yesterday the governor of the RBA, Glenn Stevens, has touched on the apparent paradox of falling house prices in <city>Brisbane</city> and <place><city>Perth</city></place> juxtaposed against a once-in-a-century resources boom.
According to RP Data-Rismark’s house price index, which the RBA publishes in its quarterly Statement on Monetary Policy, dwelling values in <city>Perth</city> and <city><place>Brisbane</place></city> have fallen by 7.1% and 6.8% respectively over the last 12 months.
The chart below shows the performance of <city>Sydney</city>, <city>Melbourne</city>, <city>Brisbane</city> and <city><place>Perth</place></city> dwelling values since the end of the last east coast boom in 2003 (rebased to an index level of 100 as at December 2003).
<img src="/images/stories/joyejune151.jpg">
It demonstrates that Perth and Brisbane house prices have actually outperformed their Sydney and Melbourne counterparts for most of the past seven years. It was only in the middle of 2009 that Brisbane capital growth was overtaken by Melbourne’s surging market.

Stevens argues that the striking differences in house price movements across Australia reflect the underlying demand and supply dynamics, which is a point we have also emphasised for years.

Stevens says: “It is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feedback effect on population flows. This is particularly so for Queensland.”

“Queensland has had faster population growth than the southern states, as it has seen a slightly higher natural increase, a rate of net international migration on par with other states and a very substantial net positive flow of interstate migrants. Net interstate migration to Queensland peaked around 2003 – not long after Sydney dwelling prices had reached a new high relative to other cities.

“Interstate migration at that time was contributing a full percentage point a year to Queensland's population growth. By 2008 this flow had slowed a bit, but international migration had picked up and Queensland's population growth increased, peaking at nearly 3%. Western Australia's population growth was even higher, peaking at almost 3½%” Stevens says.

In 2002, house prices in Brisbane were just over half the level of equivalent homes in Sydney and Melbourne. Many people presumably decided to move up north to capitalise on the cheaper accommodation and strong labour market.

A similar pattern asserted itself in Perth.

Since the GFC, however, population growth rates in Queensland and Western Australia have slowed while the cost of housing converged back towards Sydney and Melbourne levels.

Today the median dwelling price in Sydney is $515,000, followed by Melbourne ($485,000), Perth ($468,250) and Brisbane ($430,000).

As the next chart from the RBA shows, there has also been a spike in repossessions of homes in Western Australia and South-East Queensland following the GFC, which is presumably another part of the story explaining the resources states’ relative underperformance in house price terms.

<img src="/images/stories/joyejune16.jpg">
Another city that has clearly undergone a Perth-like structural change in housing costs is Darwin. I have added RP Data-Rismark’s Darwin dwelling value index to the first chart above, and the results are striking (see below). 

Housing costs in Darwin have grown by more than 160% over the last seven years, which is well in excess of any other major city. 

This too has been driven by a combination of soaring economic prospects, population growth, robust labour demand, and the fact that in December 2003 the median dwelling price in Darwin was just $190,000, or only 60% of the national capital city price. 

Yet by April 2011, the median price of a Darwin home had risen to $442,500 or 94.5% of the national capital city median. That is, there has been a rapid convergence in the relative cost of housing across the country.
<img src="/images/stories/joyejune162.jpg">
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. You can follow Christopher on twitter at <a style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;" target="_blank" title="Follow Christopher Joye" href="https://twitter.com/#!/cjoye">@cjoye</a> or read his blog.
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Falling population growth beats Queensland

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Tired of the drudgery of finding, buying and managing an investment property? If the Australian Stock Exchange’s plans come to fruition, you will soon be able to get exposure to Australia’s $3.5 trillion residential real-estate asset-class without buying a home, paying stamp duties and land tax, or bearing the burden of maintaining and overseeing your property. In fact, rather than investing in one home, with its many idiosyncratic risks (e.g., the local zoning, economic activity, and the specific pros and cons of the dwelling in question), you will be able to buy an exposure to an exceptionally well-diversified portfolio comprising literally millions of homes spread right across the country. And you will not own any of them. Seriously! Perhaps most interesting of all, you will be able to make this investment for as little as about, say, $10,000. That is, one-fortieth the cost of buying a median-priced property outright. Over and above professional investors, this could be very attractive to mums and dads stuck in the rental market who are worried about the costs of home ownership outpacing the interest they earn on their savings. Another benefit of these new products will be that they are likely to afford users superior “liquidity” – put differently, a better ability to enter and exit your holding – than the many months of inconvenience one can experience when disposing of a home. How will this be possible? My best guess is that within the next six to 12 months Australians will be able to invest in capital city, or even national, residential property “index funds” available through the ASX, which will offer the capital growth and net rental returns generated by houses in those cities. This will be similar to putting money in an index fund that tracks the performance of the Australian sharemarket index. The key difference is that returns will now be tied to a house price index.
The ASX’s market has been some time in the making as it gets the various approvals and the capital city and national house price indices ready before the formal launch. But it should happen relatively soon.
Index-linked portfolios have two chief advantages. First, they offer vastly greater diversification than owning an individual share or residential property, and this means that they should have lower risks, all other things being equal. When Rismark measures the risk of a typical single-family home in Australia over the last 20 years or so, we find that its returns vary by around 15 to 20% per annum. This is on par with the risk you see in the sharemarket. In contrast, a nationally diversified house price index has radically lower risk, with volatility of just 3 to 5% per annum. The second obvious advantage of index funds is that they tend to have much lower costs. For example, an active Australian equities managed fund that buys and sells a concentrated portfolio of stocks often charges its investors 1 to 2% per annum. Index-linked funds, on the other hand, have fees that are a fraction of this. I expect the same to be broadly true in the residential property space. The new index-linked products should offer investors total costs that are significantly lower than owning an investment property outright, and with much less day-to-day hassle. A final important opportunity associated with these products will be “risk management”. About 60 to 70% of all household wealth is locked up in residential housing. It is often the single largest investment many families make during their lifetimes. Yet there is currently no way to insure against the risk of major house price falls. With so much talk swirling around house price bubbles, there are presumably many households out there that might like to take out a bit of insurance against the risk that their most important investment plummets in value. This is all the more germane in a rising interest rate environment. In addition to going “long”, or investing in, the index products I have discussed above, you will also be able to take the other side of this transaction and go “short”, or benefit from a fall in the value of the index. So if, for instance, you are worried about <city>Melbourne</city> house prices declining, you will be able to sell the <city><place>Melbourne</place></city> index and thereby realise positive returns if your anxieties prove correct. Opportunities to hedge, or reduce the risks associated with house price falls, have for a long time been recognised as one of the biggest “missing markets” around the world today. This point was hammered home during the global financial crisis, when US and UK house prices declined by 30% and 15% respectively. And in the US and UK, index-linked residential property markets have been successfully established, allowing institutions to reduce the risk of house price falls.
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 Looking through the cycle, why might one choose to allocate a percentage of a portfolio (e.g., your self-managed super fund) to an index Australian residential property? As I noted above, residential property is Australia’s largest investable asset-class and about 2.5 times the value of all securities listed on the ASX. Yet investors currently have few ways to invest in it on a truly “diversified” or cost-effective basis. Round-trip transaction costs can frequently be between 12 and 13%. And while you can buy an individual home, you cannot currently get access to a portfolio of housing that has exposure to every city in <country-region><place>Australia</place></country-region>. A national index of residential property has low measured risks and has historically displayed about one-fifth the volatility of Australian shares, which has traditionally been the most popular holding in investor portfolios. On a risk-adjusted basis, residential property has, as a consequence, actually outperformed Australian shares, global shares, 10-year Australian government bonds, and listed property trusts over the past 28 years, which represents the longest period over which we can credibly compare returns. Australian housing has also proven to be a resilient performer throughout all of the major crises over the last three decades, including the 1987 stock market crash, the 1991 recession, the 1997-98 Asian and LTCM crises, the 2001 tech wreck, and the 2007-09 GFC. During <country-region><place>Australia</place></country-region>’s last severe recession in 1991, when unemployment rose from 5.6% in December 1989 to 10.9% in December 1992, an index of residential property generated solid positive capital returns (returns were higher inclusive of net rents). Since 1982, a national index of residential property’s rolling three-year capital or total returns have never entered negative territory. And during that especially turbulent episode between 2007 and 2010, a nationally diversified portfolio of housing significantly outperformed Australian shares, global shares, commercial property, hedge funds and private equity. In recent times, Australia has had among the strongest population growth in the developed world, with the Treasury projecting that our population will rise by 16% between 2010 and 2020 to 25.7 million people, and increase to 35.9 million people by 2050. Treasury and ABS forecasts indicate that Sydney and Melbourne will each have about 7 million to 8 million people living in them within four to five decades. As the population expands in metropolitan markets it is becoming increasingly difficult to bring new housing supply online, as evidenced by the flat absolute volume of housing starts over time. ANZ and Westpac estimate that <country-region><place>Australia</place></country-region>’s current underlying housing shortage is around 200,000 homes and rising. This is why independent experts, such as the National Housing Supply Council and the Commonwealth Treasury, forecast that robust housing demand coupled with continued housing supply constraints will result in a growing structural shortage in the national dwelling stock.
 
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">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. You can follow Christopher on twitter at <a target="_blank" title="Follow Christopher Joye" href="https://twitter.com/#!/cjoye" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">@cjoye</a> or read his blog.
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A safer way to invest in housing

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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.
 
One of the perennial puzzles tossed around Australian dinner tables is whether our bricks and mortar is expensively priced.
Despite the steady ascent of national dwelling prices at an inflation-plus pace over the last few decades, one has never had to look far to find an “expert” declaring that the world was about to end. Predictions of catastrophic falls in house prices have always been good for garnering a few media headlines.
And, regrettably, the media is not great at holding purported experts to account. A classic example appears in the Australian Financial Review today. AMP’s Shane Oliver is reported as claiming that <city><place>Sydney</place></city> housing is overvalued because the representative dwelling price is an unacceptably high $634,000. Shane also contends that since his home’s capital gains have outstripped his personal income growth, this is likely true of all <city><place>Sydney</place></city> housing.
Unfortunately, the facts do not fit with this fiction. Shane’s estimate is actually off by $119,000 (or 23%). According to the biggest database of home sales in <country-region>Australia</country-region>, which covers all transactions, the median dwelling price in <city><place>Sydney</place></city> is currently $515,000. Furthermore, <place><city>Sydney</city></place> dwelling prices have only risen by a compound annual growth rate of 2.7% over the last eight years. That means Sydney dwelling prices have declined in “inflation-adjusted” terms (after a very strong run-up before 2003). If we look at Sydney detached houses – as opposed to all dwellings – the compound annual growth rate falls to just 2.3%.
In income-adjusted terms, the comparison is even more stark: the ABS reports that average disposable household incomes have advanced by 6.3% per annum since March 2003. This is a massive difference. It means that while disposable household incomes across Australia have risen by 63.4%, Sydney dwelling prices have expanded by only 24.6%. That is, incomes have outpaced <city><place>Sydney</place></city> dwelling prices by an extraordinary 38.8 percentage points over the period March 2003 to March 2011.
In sympathy with the boom-bust business cycle, asset prices tend to also rise and fall.
The housing market is a little different to other asset-classes insofar as you can typically obtain more debt against a property – more than 90% in some cases – and for longer terms – up to 30 years – than alternative investments. This means that there are latent risks that can build up if credit growth is unnecessarily lubricated and used to fuel house price inflation, which can stimulate more credit creation until the Ponzi pattern is undone by a shock.
The point is that policymakers need to be attuned to these interdependencies if they are to avoid the sorts of problems we saw emerge in the <country-region><place>US</place></country-region>.
Across the $3.5 trillion worth of private housing in Australia, the amount of debt secured against it is actually quite low, at circa 29%. For those home owners with a mortgage, the value of their loan as a proportion of their home is, on average, also pretty low, at 50 to 60%. That means house prices would have to fall by about 40% before the typical person suffered “negative equity”.
Clearly, there are also folks sitting in the tails of this distribution who are more vulnerable. But they are a small percentage of the total. The RBA estimates that only 2.5% of all borrowers have a loan-to-property-value ratio equal to or greater than 90% and are paying away more than 50% of their disposable income to service their repayments. 
 
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One of the reasons banks have been prepared to lend so much for so long is the fact that borrowers have historically been vigilant in paying off these loans. Today there are slightly more than 30,000 borrowers who are more than three months behind on their home loan repayments, juxtaposed against a total pool of roughly 4 million to 5 million borrowers. That is, Australia’s “mortgage default rate” is a paltry 0.7%, despite our internationally high lending rates. This is less than one-10th and one-quarter the equivalent US and UK default rates respectively.
With more than 60% of all household wealth accounted for by housing, discussions around its valuation understandably attract attention.
There are, of course, many ways to “value” an asset. One school of thought is that the best possible measure is the price at which willing buyers and sellers are prepared to transact. That is, today’s prices. This is known as the “efficient markets” view of the world.
Others like to point to the underlying demand- and supply-side fundamentals while abstracting away from prices, incomes and the cost of debt. These drivers are, among other things, the rate at which new households are formed, which is determined by population growth and the number of people willing to share their homes, and the rate of construction of new dwellings (i.e., supply).
The RBA, Treasury and the Government’s own National Housing Supply Council have all concluded that underlying housing demand in Australia looks to be running well ahead of supply.
An alternative benchmark that gets regularly referenced in the media is how house prices compare with incomes over time.
Although the calculation of a “house price-to-income ratio” is tricky, if you can lay your hands on a timely (i.e., regularly updated) proxy for dwelling prices, and contrast this with an equally frequent measure of household incomes, you can make some valuable comparisons of the change in normalised housing costs over time.
Rismark produces <country-region><place>Australia</place></country-region>’s most comprehensive and timely dwelling price-to-income ratio, which is released on a quarterly basis following the publication of the ABS’s National Accounts. It covers all homes sales across <country-region><place>Australia</place></country-region> and uses the ABS’s measure of disposable household incomes, which is the only official estimate available on a quarterly horizon.
In encouraging news for home buyers, <country-region><place>Australia</place></country-region>’s dwelling price-to-disposable income ratio is now back around its June 2003 level, based on Rismark’s latest analysis.
We found that Australia’s average dwelling price-to-average disposable household income ratio has fallen to just 4.2 times in March 2011 from its recent peak of 4.7 times in December 2009. (While one can quibble about the exact levels, the change in incomes and prices is more difficult to dispute.)
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyejune91.jpg"><img src="/images/stories/joyejune91humb.jpg"></a>
Assuming that the RBA hikes interest rates another 0.5 percentage points over the next six to 12 months, we believe that the gap in the growth rates attributable to incomes and prices will widen.
While it is unlikely that that Australian dwelling prices will rise much as long as the RBA wages its war against inflation, investors will continue to benefit from robust rental returns given our historically low vacancy rates. And although we will hear complaints about the multi-speed economy, solid overall wages growth of more than 4% per annum in concert with the income flowing from the capex boom should yield reasonable increases in household earnings.
The RBA will be pleased with these developments, since it is hoping that the retail and housing sectors will make room for the unprecedented volumes of private investment already baked into the capex pipeline.
Rismark’s central case is that the RBA will commence normalising interest rates at some point during 2012-13, which should drive a powerful affordability dividend. This will stimulate higher capital growth rates and the price signals necessary for builders and developers to start committing scarce capital to the production of new housing supply. Indeed, the recovery, when it eventually materialises, could give rise to significant capital gains. Through the cycle, however, we believe that the cost of housing will track disposable household earnings, as it has done in the past.
Contrary to popular myth, <country-region><place>Australia</place></country-region>’s house prices have actually grown more slowly than household incomes since the end of the last boom in 2003. According to the ABS’s National Accounts data, disposable incomes on a per household basis have realised a compound annual growth rate of 6.3% since March 2003. In contrast, RP Data-Rismark’s hedonic index suggests capital city dwelling values have risen by a more modest 5.7% per annum. On this basis, disposable incomes in <country-region><place>Australia</place></country-region> have advanced 7.5% further than capital city dwelling prices over the last eight years.
Unlike other estimates, Ri<personname>sma</personname>rk’s national dwelling price-to-disposable household income ratio includes:
<ul>
<li>Dwellings across all Australian regions (not just capital cities); </li>
<li>All property types (not just detached houses); and </li>
<li>The ABS’s quarterly National Accounts measure of average disposable household incomes (not just average weekly earnings), which captures income earned from all areas (e.g., labour and investment income) and reflects the fact that there is typically more than one income earner per household.</li>
</ul>
Our preferred ratio also compares average dwelling prices with average disposable incomes on a per household basis.
It is important to note that the income measure Rismark uses is the quarterly ABS National Accounts disposable household income proxy before interest payments and excluding unincorporated enterprises, which is then divided by the HIA’s estimate of the total number of households. It represents the total disposable wage and investment income generated by all members of the household and should not be confused with simpler estimates of average wages or median incomes.
On an annual basis, one can examine the impact of excluding the “net imputed owner-occupied rents” that the ABS includes in its National Accounts numbers. The chart below shows that this results in a small increase in the dwelling price-to-income ratio.
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyejune92.jpg"><img src="/images/stories/joyejune92thumb.jpg"></a>
Christopher Joye is a leading financial economist and works with <a href="https://www.rismark.com.au/" title="Rismark International" target="_blank" style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;">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. You can follow Christopher on twitter at <a target="_blank" title="Follow Christopher Joye" href="https://twitter.com/#!/cjoye">@cjoye</a> or read his blog.
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Aussie housing stock is not too expensive

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Rismark reports today that <country-region><place>Australia</place></country-region>’s average dwelling price-to-disposable household income ratio fell from its peak of 4.7 times in December 2009 to just 4.2 times in the March quarter of 2011.
In encouraging news for home buyers, <place><country-region>Australia</country-region></place>’s dwelling price-to-disposable income ratio is now back around its June 2003 level.
 With the exception of the GFC, this is the longest correction in <place><country-region>Australia</country-region></place>’s housing market valuation since Rismark’s analysis began in 1993 and confirms its projections last year. 1
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/joyejune8.jpg"><img src="/images/stories/joyejune8thumb.gif"></a>
This follows news yesterday that the RBA could keep its finger off the interest rate trigger until after the second-quarter 2011 inflation results are released in late July.
The headline mortgage rate is currently 7.8%, which is slightly higher than the average rate of circa 7.3% since the RBA adopted its “inflation-targeting” regime in the early to mid 1990s.
Rismark joint managing director Ben Skilbeck says: “We expect the national dwelling price-to-income ratio to continue to trend down over the next year or so as wages and disposable household incomes outpace capital growth. We are forecasting robust rental returns during this period, which should furnish owners with better total returns.”
“Contrary to popular myth, disposable household incomes in Australia have outpaced Australian capital city dwelling prices by a 7.5% margin over the last eight years based on RP Data-Rismark’s hedonic index.”
On the topic of when the RBA will next hike rates, ICAP’s Adam Carr says: “Having kept rates steady this month at 4.75% when there was a clear cut case to hike, the natural question is: what additional information could they possibly need to see to hike?
“My initial thoughts are that if they are going to wait till July, then waiting till August is no biggie. They are already behind the curve, so it makes little difference. I’d also note that there is no urgency in this [RBA] statement to hike in July – no clear signal. So until we see the board minutes, I think July and August are fairly even bets,” Carr says.
Terry McCrann of News Ltd and Fairfax’s Alan Mitchell are, however, today insinuating that an August move is more probable conditional on the second quarter inflation numbers supplying Australia’s central bank with a case to go. This brings them in line with UBS’s chief economist, Scott Haslem, who has long forecast an August hike.
If the inflation data do turn out to be benign, the RBA may be on hold until later in the year, consistent with Goldman Sachs’s Tim Toohey’s November forecast.
McCrann, who is known as the RBA’s “Shadow Governor” in financial markets, now believes that the RBA will need to be presented with an empirical catalyst to hike rates in July before receiving the next tranche of inflation data.
Tomorrow’s unemployment figures therefore loom large as a major monetary policy event. If the unemployment rate falls significantly below its current 4.85% level, which is widely regarded as consistent with a “fully employed” labour market, the RBA may feel it has sufficient justification to undertake another rate increase.
There has been widespread speculation that the RBA’s executive is at loggerheads with its more “dovish” board, which contains five representatives of corporate Australia, including businesses that are adversely affected by higher interest rates and an elevated currency. These include a current director and former CEO of the large retailer Woolworths.
McCrann has rejected this critique, and declares today that the RBA Board is “unified” around its comparatively dovish position, which has thus far ignored Australia’s very high first quarter inflation results.
Another swing variable is the departure of the notoriously “hawkish” Professor Warwick McKibbin from the RBA Board. July will be Professor McKibbin’s last board meeting.
Australia’s central bank has missed its 2.5% per annum through-the-cycle inflation target over the last decade, with underlying or “core” inflation averaging a substantially higher 3.0 per cent.
Alongside <country-region>Norway</country-region>, <place><country-region>Australia</country-region></place> has the highest inflation target in the developed world.
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Housing more affordable in March quarter

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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.
 
In my first official article for Property Observer (you can see my archives here ), I thought it might be helpful to go back to basics and bust a few housing “myths”. I hope this will be a useful guide for anyone who is thinking about investing in property and who has stumbled across the many sensationalist allegations that exist out there in the ether. In the weeks and months ahead, I will try and explore these issues in more detail.
The first housing myth is that it is easy to understand. Almost all people writing about housing know very little about the facts of the subject. Since 70% of households own a home, they feel like they are instant experts. This gives rise to an “anchoring bias”, which I will come back to another time. In brief, we tend to extrapolate out from our immediate housing experience and assume the rest of the asset-class behaves the same way. This is why, for instance, many successful people have a visceral certainty that house prices collapsed during the 1991 recession when they did nothing of the sort. 1
It is true that house prices in affluent areas (e.g., the Point Pipers and Tooraks of the world) suffered substantial price falls. But across the eight to nine million homes that exist nationally, house prices barely budged, as the chart below shows.
<a href="/images/stories/JoyeJune6/joye1.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye1thumb.jpg"></a>
A similar dynamic reasserted itself during the GFC, wherein national dwelling values retraced by a modest 3 to 4% on a peak-to-trough basis. The $1 million plus market, on the other hand, fell by 10 to 20%. But, in contrast to what you might be led to believe when reading newspapers, homes worth more than $1 million actually only account for about 5% of all transactions. That is, this segment is irrelevant to 95% of home owners.
The truth is that housing is much more complex than the popular media would have us believe. The “we-are-all-property-experts” syndrome is likely one reason why there are so many misconceptions that abound about the asset-class.
A second, all-too-common myth is that Aussie housing benefits from unusually generous tax breaks. As this Reserve Bank of <country-region>Australia</country-region> study <a href="https://www.rba.gov.au/publications/rdp/2006/pdf/rdp2006-12.pdf">shows</a>, the tax arrangements in <country-region><place>Australia</place></country-region> are not remarkable by international standards. CGT exemptions, negative gearing, investor depreciation allowances, and the like are found in many other countries around the world (see table below).
<a href="/images/stories/JoyeJune6/joye2.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye2thumb.jpg"></a>
 
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The tax-break proponents are especially fond of “cherry-picking” their claims. They will tell you that it’s a travesty the family home is exempted from capital gains tax, for instance. Or that negatively gearing is a phenomenon unique to our country (the table above illustrates otherwise).
What they neglect to mention is that, firstly, there is a substantial cost, or trade-off, associated with the CGT exemption: any mortgage debt held against the family home is emphatically not tax-deductible, in contrast to all other forms of debt (including investment property debt). This makes owner-occupied home loans very expensive, and encourages Australians to use more equity and pay back whatever debt they have quickly, which is obviously a good thing.
Indeed, the exception here is, ironically, the <country-region><place>US</place></country-region>, which does levy capital gains tax on the owner-occupied home in exchange for allowing mortgage debt to be tax-deductible. The result has been, unsurprisingly, higher levels of gearing (or debt) held against <country-region><place>US</place></country-region> housing, and vastly higher mortgage default rates (refer to the next two charts below). In the <country-region><place>US</place></country-region>, households have had every incentive to take on significantly more debt because it is tax-effective to do so. Those willing the Gillard Government to levy CGT on the family home should be wary of what they wish for: the likely outcome will be the <country-region><place>US</place></country-region> approach, and all of the risks that this entails.
<a href="/images/stories/JoyeJune6/joye3.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye3thumb.jpg"></a>
 
<a href="/images/stories/JoyeJune6/joye4.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye4thumb.jpg"></a>
 
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Perhaps most importantly, those arguing that Aussie housing gets atypical tax subsidies typically forget to account for the fact that it is burdened with a raft of additional levies, such as huge stamp duties, which can amount to more than 5% of the value of a property, land taxes, and local government duties, which sum to a de facto land tax equal to 1% or more per annum.
Indeed, the OECD estimates that the round-trip transaction costs associated with buying a home in Australia are the fourth highest in the developed world, and equal an extraordinary 13% of the value of home (see chart below). By way of comparison, the cost of buying and selling a home in the <country-region><place>UK</place></country-region> is less than half this princely sum.
If we look at just vendor costs, <country-region><place>Australia</place></country-region> has the highest housing expenses in the OECD. Contrast this, for example, with shares where the round-trip costs are less than 1%.
<a href="/images/stories/JoyeJune6/joye5.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye5thumb.jpg"></a>
A third myth is the popular claim that luxury, or more expensive, properties outperform cheaper ones. This is just not supported by the empirical data. Analysis produced by Rismark proves that mid-priced homes have actually delivered stronger capital growth than their dearer counterparts. And this also comes with considerably lower risk.
The luxury end of the market is “illiquid” – that is to say, it only attracts, by definition, a small number of buyers and sellers – and is afflicted by far greater risk or volatility. This is highlighted by RP Data-Rismark’s luxury property index, which is denoted by the red line in the chart below. Observe how during 2009 and 2010 the most expensive homes outperformed the broader market. Yet during the recent soft-landing, it has been this same cohort that has tanked, relatively speaking.
<a href="/images/stories/JoyeJune6/joye6.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye6thumb.jpg"></a>
 
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My fourth favourite myth is the “safe as houses” aphorism. As with most matters, the truth is more complicated. First, house prices do fall, as we recently witnessed. Second, the individual home is actually a risky holding.
Rismark was the first Australian group to disclose empirical research that quantified precisely how risky a home is. We found that the capital gains generated by a single family home vary markedly over time, and exhibit annual volatility of around 15 to 18%, assuming that you hold on to it for a typical six- to seven-year period. That means that your home has similar risk to the overall sharemarket. In contrast, if you could invest in an “index” of housing, which represented, say, the national housing market (or about $3.5 trillion worth of homes), your annual risk would fall to just 3 to 5%. This is about half the risk of Australian government bonds, and about a quarter the risk of Australian shares.
 The difference between the volatility of an individual home compared with a nationally diversified portfolio of housing is similar to contrasting the risk of a micro-cap listed on the ASX with the volatility of the ASX All Ordinaries Index, which includes every company listed on the exchange. As Miguel de Cervantes’ saying goes, it makes sense to try and ensure that all your eggs are not in the one basket!
<a href="/images/stories/JoyeJune6/joye7.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye7thumb.jpg"></a>
The good news is that there will shortly be new investment products available that allow you to take insurance out against the risk of house prices falling, or to invest in a nationally diversified index. More on that another time.
 
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A fifth myth is that because houses trade only irregularly, there is sparse data on the subject, and we cannot, therefore, truly know what is happening to prices. In actual fact, RP Data captures about 40,000 to 50,000 homes sales every month (or more than 1,000 per day), which means that we have a wealth of information on price movements. This allows us to create very sophisticated measures of house price changes, which directly control for the fact that we are observing different types of homes transacting over time. You can read more about RP Data-Rismark’s index methods <a href="https://www.rpdata.com/property_indices/overview_of_the_rp_data_rismark_home_value_index">here</a>.
My sixth myth is that Australian house prices are massively overvalued and set to fall by 20 to 40%. You may recall that my regular sparring partner, associate professor Steve Keen, famously predicted in 2008 that Aussie house prices were “going to fall by 40% or so in the next few years.” Well, he could not have been more wrong. Dwelling prices in <country-region><place>Australia</place></country-region>’s capital cities are currently 30% higher than their March 2008 peak, just prior to the GFC hitting our shores.
Put differently, dwelling prices are nearly 70% higher than where Dr Keen expected them to be. My other mate, the economist Rory Robertson, challenged Dr Keen to a bet on this note, which the latter lost. As a result, Dr Keen ended up walking from Canberra to Mount Kosciuszko wearing a T-shirt exclaiming “I was hopelessly wrong on house prices” (or something to that effect).
Related to this myth is the claim that national “median” prices of $500,000 to $600,000 are seven to eight times national disposable household incomes, and hence way above where they “should” be.
 Based on RP Data’s sales database, I can tell you that the national median dwelling price across all regions is today only $418,000. Median dwelling prices in the capital cities and non-capital city areas (where the latter account for about 40% of the population) are $468,000 and $325,000, respectively.
Rismark produces a quarterly average dwelling price-to-average disposable household income series. This analysis uses the ABS’s National Accounts measure of disposable incomes, which is the most timely series available. If we strip out a few non-cash items from these data, we find that <country-region><place>Australia</place></country-region>’s dwelling price-to-income ratio is 4.5 to five times. This is clearly far removed from the hysterical claims that dwelling prices are seven or eight times incomes (see chart below).
<a href="/images/stories/JoyeJune6/joye8.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye8thumb.jpg"></a>
 
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What the doomsayers ignore is the profound structural change that took place in the Australian economy over the 1980s and 1990s. Although many may have forgotten, inflation in <country-region><place>Australia</place></country-region> used to be much higher than the 2 to 3% pace that we have gotten used to seeing. 
Inflation averaged around 6% per annum between 1980 and the middle of the 1990s. Since 1995, inflation has averaged slightly less than 3% per annum. This is in large part attributable to the good work done by the RBA. 
It has also had deep ramifications for the housing market. In particular, the stability of inflation around the RBA’s 2 to 3% per annum band has permitted a structural downward shift in mortgage rates. This is illustrated in the next chart below. Observe how between 1980 and 1995 mortgage rates averaged 12.6%. Yet since that time they have averaged only 7.3%. If the cost of debt falls through the floor on a permanent basis, how do you think households react? They gear up, which is exactly what happened, with a structural upward shift in both household debt levels, and <country-region><place>Australia</place></country-region>’s house price-to-income ratio over the late 1990s and early 2000s. The key point to note is that this was a once-off event, and will not likely occur again.
<a href="/images/stories/JoyeJune6/joye9.jpg" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/joye9thumb.jpg"></a>
A final myth is that housing is not a productive investment. Now this is just complete crap. 
In standard economics theory, the two most basic necessities for a functioning economy and, more precisely, productive labour, are: food and shelter. We can interpret “shelter” as covering both residential property, which is the accommodation required by a functional labour force, and commercial property, which is the accommodation needed for productive businesses.
You can either be a “producer” of food and shelter by investing in, and owning, the underlying assets that supply these services/products by owning farms, homes, or commercial buildings; or, alternatively, you can just “consume” these services/products and not invest in the assets by simply buying food from the supermarket, renting a home, or leasing space in a building.
There is a final option where you can both consume and invest by living on a farm (and eating its produce), owning and occupying your home, or owning and occupying the building in which your business operates, as some companies do.
As an investor in agriculture, housing or commercial property, you derive returns as you would with any other productive asset: via a mix of both growth in the capital value of the asset and income from the sale of the products/services (i.e., food, residential accommodation, and commercial accommodation).
The bottom line is that new or established housing is just as productive in the services that it furnishes to the wider economy as farms, factories or commercial property. More on that topic another time!
<div>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.</div>
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Busting big housing myths

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In late 2009 Rismark repeatedly forecast that the double-digit house price growth registered over that year would fall back to single-digit levels in 2010 in line with expected disposable household income growth of 3% to 5% (see <a target="_blank" href="https://christopherjoye.blogspot.com/2011/05/benchmarking-our-historical-house-price">here </a>for the records). As it turned out, house prices rose by about 5% last year. In September 2010, a couple of months before the RBA’s de facto double rate hike, I commented, “Since 1993 there have been five instances when the RBA has lifted the cash rate sharply. On every single occasion national capital city dwelling prices have flat-lined or declined. If the RBA aggressively raises rates, there is no reason to expect 2010-11 to be any different.” Two months later, I further warned that, “Our central case is that there will be little to no nominal dwelling price growth over 2011, with a chance of small nominal declines.”  In the first two charts below, I have illustrated how Rismark’s “out-of-sample” (i.e., blind) forecasts for Australia’s two biggest cities have stacked up against actual house price movements over the last few years.
<img src="/images/stories/JoyeJune1/joye1.jpg">
<img src="/images/stories/JoyeJune1/joye2.jpg">
RP Data-Rismark’s <a target="_blank" title="RP Data April results" href="https://www.propertyobserver.com.au/news/prices-tumble-in-top-end-of-town/2011053150353">April index results</a> very much confirm our 2010 projections. In short, the RBA’s “double-tap” in November has started to bite, with the luxury end of the market leading the way.
Raw house prices have retracted by 0.7% over the first four months of 2010. To put that in perspective, that’s similar to the daily movements one sees in the Australian sharemarket index. In seasonally adjusted terms, which allows one to strip out the periodic, intra-year seasonal shifts in house prices, dwelling values are down a far more noticeable 2.5%.  The difference between these two results reflects the fact that the housing market normally realises above-trend growth at the start of each year.  As I have explained <a target="_blank" title="Chris Joye's blog" href="https://christopherjoye.blogspot.com/2011/05/silly-housing-data-debates-mk-v">here</a>, the RBA explicitly asked us to report seasonally adjusted index results in addition to the raw numbers, which is what economists and statisticians also prefer. There are two interesting insights to be drawn from RP Data-Rismark’s latest release. First, the rather unexciting overall market conditions conceal some more striking cross-sectional dynamics. The chart below shows the movements in home values over the 12 months to end April.
<img src="/images/stories/JoyeJune1/joye3.jpg">
 
Observe the circa 7% corrections in the value of housing in Perth and Brisbane, which contrasts with the rest of the nation, where house prices range from being up 1.2% to down 2.9%. This is consistent with the ramp-up in repossessions that the RBA has documented in Queensland and Western Australia since the GFC, although repos seem to be declining again (see <a href="https://christopherjoye.blogspot.com/2011/05/so-where-are-all-those-housing-repos">here</a> for the RBA's repo data). Notwithstanding the absence of capital gains, rents have been growing relatively quickly, with apartments now yielding 4.9% gross. We saw that in the first quarter of 2011 the ABS also reported that rents rose by 1.3%, significantly outpacing core inflation. The second finding of interest is the rapid deceleration in the luxury home segment.  Following a request by the RBA, RP Data and Rismark divided our capital city house price index into three sub-indices: the bottom 20% of suburbs ranked by price, the middle 60%, and the top 20%. Over the year to end April, dwellings in the most expensive capital city suburbs recorded a 5.4% loss (see next chart). In contrast, home values in the middle 60% of suburbs were down by only 0.9%. Dwellings located in the cheapest 20% of suburbs were the best performers (down just 0.5%).
<img src="/images/stories/JoyeJune1/joye4.jpg">
The uber-luxury segment is risky and highly illiquid, and has had the rug whipped from under it via a combination of the soaring Aussie dollar and the enormous destruction of wealth in Australia’s volatile sharemarket.  A final fly in the ointment is the much lower growth – and pay packets – expected in the financial services industry. Luxury homes in areas like Sydney’s eastern suburbs will continue to face valuation headwinds as banks deal with the new normal of subdued credit growth.
 
<div>
Christopher Joye is a leading financial economist, and works with <a target="_blank" title="Rismark International" href="https://www.rismarkinternational.com">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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Luxury home market getting slammed, as predicted

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A lot of fuss is being made about house prices doing nothing. For the record, this is the outcome we have correctly predicted since early 2010. Year-on-year, Aussie dwelling prices have not budged (off -0.6%). In the first quarter of this year, they have not moved at all either in raw or actual value terms (-0.4%). Seasonally adjusted, the first quarter has been weaker, down about 2%. But the seasonally adjusted data is simply a relativity, adjusted to reflect conditions that normally prevail at this time. Actual house prices are not down 2%. Having said that. I would not be in the least bit concerned if they were. If the doomsayers on the domestic economy are right, rates are not going anywhere (I obviously don't agree with them). In this case, we will get mild nominal house price growth over 2011, which will likely underperform inflation (i.e., real declines, as we have seen for the past year).  If rates do rise a few times this year (as I expect), nominal dwelling prices will go nowhere or retrench modestly (e.g., 0-5% year-on-year), depending on the number of hikes. That's not a bad thing at all. The underlying demand/supply fundamentals are very strong. The dwelling price-to-income ratio and rent-to-price ratios will keep on improving, which is a great thing for future buyers. The labour market is fully employed, and household income growth is robust. The only thing that will change any of this is something the RBA controls: interest rates. No growth in asset prices, or some small declines, is a handy reminder that no asset class is a one-way bet, as Glenn Stevens presciently pointed out at the start of last year. To be sure, anyone defaulting on a home loan with say, a 7.6% mortgage rate (i.e., another 50bps on top of the current 7.1% discounted rate) should not have a home loan in the first place.  The fundamentals will likely continue to solidify as household formation-driven demand escalates via better-than-expected population growth combined with weak new supply coming online. This would be our base-case.  When interest rates do eventually fall, as they will, there will be an enormous affordability dividend dropped on the housing market, which will likely trigger strong upward movements in prices (in late 2012-14) as the market signals to builders that they need to get their arses into gear and start constructing more housing. In the interim, the RBA is going to be left to deal with significant rent inflation (chart via Citi).  And if worst comes to worst, and the Chindia story implodes, or the global economy has a repeat of 2007-08, the RBA will slash interest rates, with the chief beneficiary being the housing sector, just as it was during the GFC. Nothing happening here, people.
<img src="/images/stories/rentscpi2.jpg">
 
<div>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. </div>
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Relax, a flat market is not so bad

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] 
&nbsp; 
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>

&nbsp;

&nbsp;

&nbsp;

Christopher Joye

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