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The Australian economy expanded by an extraordinary 1.3% in the first quarter of 2012 in seasonally adjusted terms, smashing consensus expectations of a 0.6% rise (with Goldman Sachs at just 0.2%). Only one forecaster, ANZ, got anywhere close to the number with a 1% guess. The fourth-quarter GDP results have been revised up from a weak 0.4% to a relatively more normal 0.6%.
The annual year-on-year rate of economic growth in Australia was a way above trend 4.3% in the March quarter, versus the 3.3% expected by economists. This is truly incredible. On the basis of the ABS National Accounts data, the droves of analysts who claimed Australia was growing at a "sub-trend" or "modest" pace, including the RBA, were way wrong. Despite the very high Australian dollar, the economy has been booming. Crucially, this also includes consumer spending.
One of the most important drivers of Australia's above-trend economic growth over the last year has been household consumption. In seasonally adjusted real terms, household consumption rose by a stonking 1.6% in the March quarter alone, and by 4.2% on a year-on-year basis. Household consumption is now running significantly above the 3.6% per annum long-term average since 1959.
Importantly, the GDP data reconciles with the stubbornly strong labour market data – at least as it has been reported thus far (we wait for an update tomorrow, which is expected to be weak).
The RBA has evidently cut rates three times when it did not need to. On the basis of this information, the RBA's "insurance" rate cuts in December 2011, May 2012 and June 2012 were totally unnecessary. As I have regularly argued here, the harangued Australian central bank has been doling out free "insurance" when it did not need to, and has punished hard-working Australian savers in preference to less prudent borrowers. Of course, it has been happy days if you have had a variable rate mortgage, as more than 90% of residential borrowers do!
Yesterday I wrote that if I were running the RBA I would not have cut in December, would have only cut once in May, and would not have cut in June. I have been a fairly lonely voice in arguing that there was no need to slash rates, and that RBA risks over-engineering policy. That domestic growth was not in desperate need of interest rate support as so many analysts claimed.
Expect to see boatloads of spin explaining Australia's official economic growth data. It is a profound embarrassment for the many doomsayers who have incorrectly misled us to believe that Australia was experiencing a household spending recession, that the economy was on the brink of collapse, and that only ultra-low interest rates held out hope for saving our bacon.
Perhaps most significantly, today's economic growth data, combined with the labour market data over the last 12 months, proves once and for all that the RBA's monetary policy settings over 2010 and prior to November 2011 were spot-on.
Christopher Joye is a leading financial economist and a director of <a target="_blank" href="https://www.ybr.com.au/savings/index.cfm">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
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The RBA has cut rates three times when it didn't need to: Christopher Joye

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After today's cash rate cut, the fourth in the current cycle, the GDP and unemployment data later this week will provide a clearer picture of Australia's economy.
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After fourth cash rate cut, GDP and unemployment data will indicate whether economy is below trend: Christopher Joye

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How low could the RBA’s cash rate go? Much lower than most folks, including the financial markets, think. The global economy is schizophrenic right now. On an underlying basis, there are powerful forces shifting the centre of economic gravity away from the old world of North America and Europe towards the 2.6 billion people living in China and India.  The IMF estimates that over the next five years the eurozone will only contribute 7.7% of total global growth. In contrast, China is expected to account for around three times that amount, or 22.6%, of the world’s total expansion. The same pattern applies when one compares the major advanced economies – or the so-called “G7” – with their emerging and developing counterparts. Notwithstanding the media and financial market fixation with the G7, these nations only made up one-third of global growth between 2000 and 2011. The IMF believes that this share will fall further to just 28.6% between 2012 and 2016. By way of comparison, developing countries accounted for 49% of global growth over the last decade, with their contribution forecast to rise to more than 60% over the next five years.  While the industrialisation, urbanisation and rising middle classes of Chindia are driving "decoupling" from the North Atlantic nations, the unprecedented global interconnectedness brought about by the internet and digital communications is pulling us in the opposite direction. The 24-hour, real-time, and often sensationalist news cycle, with its bias towards the information-rich open societies in the G7, seems to be propagating even greater global synchronisation in financial market behaviour and real economic cycles.  Nothing highlights this better than the disconnect between Australia’s raw economic data and its contemporaneous financial market signals.  In May, Australia’s unemployment rate fell from 5.2% to 4.9%, blind-siding most analysts. Business investment in the first quarter also smashed consensus expectations, while plans for capital spending over the next few years were much better than pessimists anticipated. Wages and overall consumer spending are also tracking around their long-term historical trends. Finally, housing credit and, increasingly, business credit are expanding broadly in line with purchasing power.  Yet financial markets, and many asset prices, are projecting on to this ostensibly healthy picture a seemingly cataclysmic outcome. In particular, the interest rates required on Australian government bonds have plummeted to all-time historical lows. On Friday night the yield on three-year Australian government bond futures fell to below 2% for the first time ever.  This is ordinarily a very worrying portent: three-year government bond yields are now more than 175 basis points below the current RBA cash rate (technically called an "inversion" of the yield curve). That is, the market thinks the RBA will cut its official target cash rate to levels we’ve never seen before. Specifically, the futures market is now suggesting that the RBA’s cash rate will drop to as low as 2.15% by the end of this year. That’s more than six standard RBA rate cuts.  All commentators, economists, and policymakers have struggled to keep pace with this extreme global uncertainty. In June last year bank economists, including Westpac and yours truly, were forecasting further RBA rate hikes. In that month Westpac’s Bill Evans presciently swivelled 180 degrees and called for a 100 basis point reduction in the cash rate by the end of 2012. Bill got the direction right, but has now been compelled by evolving circumstances to dramatically adjust his view again; he's added four more RBA rate cuts, or 100 basis points worth in total, to his original 2012 expectation.  Last week the RBA was believed to be resistant to cutting rates in June. That’s understandable given the staff only recommended a 25 basis point cut in May and were pushed by the board to double it. Since May, the RBA has seen the currency depreciate substantially – it is now about 13% below its all-time US dollar highs – the jobless rate decline, and capital spending exceed expectations. But dismal data from overseas is now likely to force the RBA to follow May with more rate relief tomorrow.  Economists at NAB, Westpac, CBA, JP Morgan, and Market Economics, among others, have at various points changed their June calls from no move to a cut on Tuesday. Senior commentators, such as Terry McCrann on Friday night, and David Bassanese last week, both argued the central bank would exercise the option to wait in June.  But McCrann, on Sunday, and Bassanese, in today’s paper, have embraced a cut. Bassanese puts it best: “To my mind, the facts have changed. As a result, my previous base-case view that the RBA would not cut interest rates again this month also needs to change.”  The situation in Europe is telescoping towards a binary outcome: either we get fiscal integration, which will, rather ambitiously, involve regional deposit guarantees, individual nations ceding authority over budget spending, and so-called “euro-bonds” that allow countries to raise money backed by the commitment of the entire eurozone, or the currency union as we know it today will slowly disintegrate.  While each contingency has different ramifications for the Australian economy and the response of local policymakers, it is instructive to consider what might actually happen in a downside scenario. In the GFC, the RBA's cash rate dropped to 3%, which combined with the boost to the first-home owners’ grant helped house prices surge 13% in 2009. The cash rate is currently only 75 basis points higher at 3.75%. Of course, actual lending rates are much more important than the RBA's theoretical target. And they are, crucially, 125 basis points above the lows touched in April 2009.  If – and it is an almighty "if" – the global economy does indeed lurch into recession, I think the RBA will slash its official cash rate way below the levels seen in 2008 and 2009. In fact, I am thinking 1.9% or less.  Take home loan rates as a benchmark. After the double cut in May, the current discounted home loan rate in Australia is about 6.35%. The trough achieved during the last crisis was 5.1% in April 2009. At surface level, the RBA would need to slash its cash rate 125 basis points to 2.5% to get lending rates back to their crisis marks.  But the rub is that this supposes a 1:1 pass-through by the banks. In a best-case scenario, the RBA will only assume two-thirds pass-through. That means to get 125 basis points of lending rate reductions the RBA will have to cut its cash rate by an extra 65 basis points (or about 190 basis points in total). In turn, this implies a terminal cash rate of 1.9%. That might just get you a 5.1% mortgage rate.  There is, however, a second wrinkle, which was highlighted to me by a UBS strategist during a chat on Friday. Recall that a lot of bank funding comes from retail deposits that are transaction accounts. These deposits already earn zero per cent interest rates – it is tough (although not impossible, as the Swiss have proven) to shove them lower. Accordingly, the banks may pass on less and less to maintain their net interest margins. The lower pass-through would also be amplified by a blow-out in credit spreads, which would further elevate bank funding costs in the absence of taxpayer guarantees.  If you are seriously bearish on global growth prospects, as many claim, and think that the eurozone crisis is going to push the world into recession, then you should prepare yourself for a very low RBA cash rate. Forget Westpac’s 2.75%, or the 2.15% currently pencilled in by the financial markets.  Based on the analysis above, the RBA cash rate is going to have to fall to less than 1.9% merely to replicate the lending rate lows achieved in 2009. A final argument in favour of an ultra-low RBA cash rate is the fact that this time around fiscal policy will be hamstrung by concerns about a diminution in Australia’s prized AAA credit rating. Given the sharp increase in Australian government debt since 2007, it will be much more difficult for the Commonwealth to repeat its last cash splash. So most of the responsibility for supporting the local economy will fall on to Martin Place’s narrow shoulders. As the May meeting demonstrated, nobody, including the RBA governor and his staff, can know with confidence what exact decisions the RBA's board will coalesce around at 12.30pm tomorrow, or in the ensuing months. The only constant we can rely on is that heightened global uncertainty will persist for some time. And, as during the last crisis, cash will be king.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm" target="_blank">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
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RBA cash rate could go below 1.9%, with 5.1% mortgage rate possible: Christopher Joye

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Based on RP Data-Rismark’s house price data released today it appears that most of the weakness in dwelling values has been confined to the luxury sector.
Whereas homes located in the 20% of most expensive suburbs across the nation are down in value by 3% between January and April (red line in chart below), those located in the middle 60% of suburbs have not budged in value (-0.1%). And there was actually a recent improvement in dwelling values in the cheapest 20% of suburbs over the last few months (refer to the blue line below).
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This analysis is based on RP Data-Rismark’s “stratified” hedonic index calculated on a monthly as opposed to daily basis. As a consequence, the latest cut of the results runs through to end April in contrast to the more timely “daily” data that stretch through to the end of May.
The sustained correction in luxury property values is consistent with the thesis I have outlined here before of a fundamental downward adjustment in valuations in this specific sector due to the contraction of the once-lucrative financial services industry.
The disconnect between the luxury and mass markets is even clearer as we go back further in time. In the chart above the three markets are indexed to 100 as at the start of 2011. The cumulative dwelling value declines for the cheapest 20% of suburbs since January 2011 is only 1.8%. Similarly, the middle 60% of suburbs have declined by a relatively benign -2.9%. Yet in the 20% most expensive suburbs, the total loss has been 2.3 times higher at a stonking -6.8%.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm" target="_blank">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
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Luxury sector driving current fall in house prices: Christopher Joye

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The daily RP Data-Rismark dwelling value index released today tells some interesting stories. The charts enclosed herein all work off the “daily” (as opposed to monthly) data and give us unprecedented insights into the “intra-month” movements in house prices that we’ve never seen before.
My first chart simply portrays the daily changes in the eight capital city “all dwellings” index. We can see that Aussie home values declined by about 1% in January followed by a full recovery over February, March and part of April, as I’d previously discussed here.
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On the 15th of April – coincidentally at the same time ANZ announced an out-of-cycle, 15-basis-point hike in home loan rates – overall dwelling values commenced a steady slide again to the point where we are actually down about 2% over the year-to-date.
This begs the question as to whether there are any specific markets or seasonal factors driving the overall effect.
It is true that the months of May, June and July are seasonally very weak to the tune of about 0.3% per month or nearly 1% cumulatively. However, the May seasonal factor is only about 0.3%, and would not change the directionally downward pulse in values that we have recorded since mid April.
A big explanation for the national weakness since mid April has been a strikingly sharp fall in Melbourne dwelling values, which you can see illustrated as the red line in the next chart below.
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As at the end of May, Melbourne dwelling prices are off about 5% this year. But most of this decline has materialised since the middle of April. Specifically, home values in Melbourne have declined by 4.2% since the 15th of April.
In contrast, the Sydney housing market, which is denoted by the black line, has rebounded nearly 1% since the second week of May. In seasonally-adjusted terms, this would be an even stronger outcome. Likewise, we can see some recent stabilisation in raw Brisbane dwelling values, which are illustrated by the orange line in the chart above.
Looking through these intra-month movements, which I would reiterate we have never been privy to before, I am relatively sanguine about the outlook. With an incredibly weak supply-side and supportive monetary policy, sentiment should improve as the year passes (barring global economic disasters). We’ve already seen this in the auction clearance rate data, which has tended to be better in 2012 than what we observed in 2011.
The double RBA rate cut in May resulted in an average 37 basis point reduction in lending rates. While there is little doubt that there have been some net valuation adjustments as bidders revise down their expectations of future capital gains, these are being offset by substantially improved rental returns and a much lower cost of debt.
In the owner-occupier market, where rents are not as explicit a part of the investment equation (they are “imputed”), this total return argument may take longer to grip.
But the bottom line is that today you can get 5.83% variable rates and sub-6% three-year fixed rates. Fixed rates may come down even further given the record slump in long-term Australian interest rates. Naturally any additional easing of monetary policy will only improve bidders’ purchasing power.
Christopher Joye is a leading financial economist and a director of <a target="_blank" href="https://www.ybr.com.au/savings/index.cfm">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
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Sydney house prices start to rebound as Melbourne falls: Christopher Joye

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Most of the people reading this column will be either employees of small and large businesses, or owners of these companies.
Yesterday I gave a one-hour speech to a seminar of 500 small business owners. As you might imagine, my presentation was chock-a-block full of economic analysis. If you want to have a look at some of the charts, you can view them <a target="_blank" href="https://christopherjoye.blogspot.com.au/">here</a>.
Today I want to highlight two – rather unrelated – things I canvassed at the seminar. The first touched on the distribution of housing debt among those owners that have a mortgage. The second was about the key lessons I have learned starting disruptive businesses.
Based on the latest available data, the RBA estimates that the total value of all Australian household debt to their assets is just 19.4%. So the absolute “debt-to-assets ratio” in the household sector looks pretty low. A company with this level of leverage would not be regarded as risky.
What about the level of gearing within the housing market? The RBA’s analysis puts this figure at about 30%. That is, there is circa $1.2 trillion worth of mortgage debt held against $4.1 trillion worth of private housing. Again, this looks good: it is around half the equivalent ratio in the United States.
But Chris, I hear you say, what about the level of indebtedness for those, and only those, with a mortgage? And how does this change according to age and income?
The RBA has kindly obliged and supplied this data as well. The first chart below tells us for home owners with a mortgage (i.e., excluding those who have paid off all their debt), gearing rises to a peak of 63% for those aged 25 to 34 and then declines steadily to a nadir of just 9% for those aged 65 to 74. Importantly, the median level of gearing across all home owners with mortgage debt is just 44%.
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The second chart teaches us that the level of leverage in the housing market rises as a function of income. As you move rightwards along the x-axis you are migrating up the household income bands. The median home owner in the bottom 20% of income earners only has a debt-to-assets ratio equal to 22%. This then peaks at more than 45% for those owners in the top 40% of earners.
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The second thing I shared with yesterday’s seminar (which I gave alongside Yellow Brick Road’s Mark Bouris) were the insights I had gathered through my own experience starting businesses. Hopefully there will be some practical take-aways here for those of you who are in the midst of building a new business, and those who are considering whether to make the leap.
 
 
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The first observation was that simple business models are often the best. Put another way, you need to “risk-adjust” the returns you expect to get from investing in a new company. Reinventing the wheel is great if you want to become the next Mark Zuckerberg. But for every winner there are many more losers. Unfortunately, we only see the “survivors”, which creates a downward bias in our perception of the execution difficulty. It is harder than you think!
Creating new products that have never been conceived of before can bequeath tremendous rewards, as Apple’s journey has demonstrated. At the same time, there is only one Apple, and innumerable skeletons that have been left in her corporate wake.
My own view is that innovation can be incredibly gratifying. But it is also bloody hard work. So when you start a new business, consider whether you want to grab the low-hanging fruit and execute a safe strategy, or whether you have the financial resources to weather the long, hard road to building a truly “disruptive” enterprise that is going to reshape the world in which we live.
A second learning was that “corporate structure” counts. It sounds boring, but most new businesses take quite a while to get to cashflow breakeven. You will, therefore, be accumulating tax losses along the way. Your ability to harness these losses in future years will be impacted by both the corporate structure you choose at inception, and how this changes over time.
Your corporate structure will also affect your ability to capitalise on the attractive research and development subsidies the government offers through the tax system. These can be invaluable financial oxygen for new businesses engaged in genuinely inventive activities.
A third insight was that almost all “personal partnerships” fail. If you do a study of the history of personal partnerships you will see that they have an astonishingly high attrition rate. Corporate partnerships, on the other hand, are different. A company has a much better ability to transcend personalities and the idiosyncrasies of individual relationships. While corporate partnerships can also be taxing, they are, in my experience, easier to manage. And they can be more lucrative over the long run.
When entering into partnerships, you need to always assume the worst. You should have comprehensive shareholders or partnership agreements drafted by specialist lawyers that deal with every possible adverse scenario. This is no easy task: a decent shareholders agreement can be more than 50 pages in length. But it will save you trouble down the track.
A fourth learning has been that intellectual property (IP) is a highly undervalued asset. Vigilantly protecting your IP through trademarks and patents can be an exceptionally important source of competitive advantage and commercial leverage. Again, you need sound counsel. Here I would avoid lawyers and start with an experienced patent attorney, which are usually cheap.
My penultimate observation was that human ingenuity can usually overcome even the most intractable problems. I cannot count the number of times I used to say to myself “we’re cactus”, only to sit in a room with a bright bunch of guys and come up with durable solutions. There are intelligent and executable answers to almost all commercial issues. Yet most people are intrinsically problem-oriented and find the search for solutions innately challenging. My message: be positive and condition yourself to always focusing on identifying answers.
My final lesson was not to let mediocrity pollute a high-performance personality. We all have different endowments of commitment, skill, patience, empathy and intuition. When I started out I used to torture myself about personal conflicts. Over time I have learned to, first, maniacally divorce my emotions and sense of self from all commercial decision-making, and, second, to recognise that most people are uncomfortable with this approach.
If you look at anyone who has accomplished something significant in private enterprise — and I don't mean migrating inexorably up a major bank hierarchy — you will find that they have had to overcome countless personal conflicts in the process. They say the softest thing about Frank Lowy is his teeth.
The key to the best decision-making is surprisingly tautological: you need to select the best option irrespective of what the consensus view may be. When making any decision, you will inevitably have to conflict with some section of the participants involved in the process. Few decisions make everybody happy. Those that do are almost always sub-optimal. And many of the best decisions will upset the majority.
To my mind, progress is about breaking down the barriers erected by institutional inertia. And when you smash down walls, you often break noses. Don't be afraid to do so.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm" target="_blank">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
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Higher-income households with mortgages have the highest level of debt: Christopher Joye

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What are your two biggest challenges when saving? Arguably capital preservation and generating long-term, “after inflation” returns in the order of 3% to 5% per annum. What is inflation? Simply, the periodic increase in the cost of the goods and services that you buy. If inflation rises faster than your income (and/or your investment returns), your purchasing power is not keeping pace with your cost of living. Are your living expenses different to the official inflation rate calculated by the national statistician? You bet, which makes evaluating your actual purchasing power more complicated. 
In my first chart below I have compared the official inflation rate with four “cost of living indices” published by the Australian Bureau of Statistics. These indices cover, respectively, “employees”, “aged pensioners”, “other government benefit recipients”, and “self-funded retirees”. The black dotted line is the inflation rate.
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As you can see, our cost of living has generally appreciated more rapidly than the headline inflation numbers (observe how three of the four cost of living indices are above the black dotted line). While the inflation rate since 1998, which is when the cost of living measures start, has averaged about 3% per annum, employees, pensioners and other welfare beneficiaries have seen their living expenses accrete by between 3.3% and 3.4% per annum. Over time, this wedge compounds up into significant differences. Only self-funded retirees have had their living costs track inflation. It is worthwhile adding here that the 3% annual inflation rate recorded over the 1998 to 2012 period is hardly comforting (underlying inflation estimates are similar): in particular, it is way above what most OECD nations regard as acceptable. 
The key thing to take away from this analysis is that you need to punch out consistent returns of 3-4% per annum from your savings just to keep pace with the rise in the price of the goods and services you need to buy to survive. 
The bad news is that doing so in the current environment, which is characterised by global “deleveraging” (i.e., higher savings and, where possible, reduced indebtedness) is bloody hard. Central banks around the world have cut interest rates to near-zero, which means that in the UK, North America, and Europe savers are going backwards on their cash accounts once they account for inflation. 
In Australia the situation is only a little better. In my next chart I have illustrated both the “average” bank deposit rate, which is the red line that refers to the right-hand-side axis, and the return you get on the average bank deposit after paying living expenses (the yellow bars that relate to the left-hand-side axis). Here I’ve assumed that you are an “employee”, as defined by the ABS.
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As you can see from the yellow bars, the “real” return you get on the average bank deposit has been very low since the start of 2011. While you can currently get a 1% annual return above the cost of living, this is being driven by the decline in inflation recorded in the second half of last year and the first quarter of 2012. That reduction was in turn an artefact of the sharp appreciation in the Aussie dollar, which is now being reversed. The likelihood of higher cost of living rates in future quarters (compared to the recent past) combined with declining returns on bank deposits means that real interest rates are likely to once again converge towards zero, and possibly turn negative. 
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What about those “special rates” you can get with the banks? In my third chart I have repeated the analysis above using the RBA’s “special” bank rate series. After living costs, real special deposit rates are currently a little higher at circa 2% per annum. But they were much lower in 2011 and the risk is, as I just noted, that they fall towards zero again.
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So if we can only earn at best 1-2% per annum above living costs via the banks, what other options do we have? Today I want to have a think about equities and property.
As you probably know, the share market has been horrifically volatile in recent times, and has delivered negative total returns – before subtracting cost of living increases – over the last one to two years. 
Nevertheless, equities do have an important role to play in any long-term savings plan. The emphasis here is on “long term”, because even the most diversified equities portfolio can have its value halved in the short term. 
What should our return expectations for equities be? It’s a hard question to answer. Let’s start off by thinking about what we mean by “equities”. A well-diversified equities portfolio simply gives you an ownership stake in a large chunk of corporate Australia. Of course, there are also many private companies and small businesses that are not listed on the ASX, and which you will not, therefore, have exposure to. 
The “enterprise value” of any company is the sum of its debt (i.e., loans from the bank and bonds it issues) and equity (i.e., the amount you invest to own part of it). If economic growth, or GDP, is defined as the market value of all economic output, it is hard to imagine how the enterprise value of corporate Australia can grow much faster than nominal GDP.
Trend “real” economic growth is thought to be around 3% to 3.25% per annum. Long-term inflation averages about 3% per annum. So a long-term nominal economic growth forecast might be circa 6% per annum. Should your expected total return for Aussie shares be the same? No, because if companies are funded using debt and equity, the equity returns should be higher than the sum of the debt plus equity (or the company’s total enterprise value). 
Over the last 30 years, Aussie shares have given total returns of about 11-12% per annum, which has been significantly higher than economic growth. But remember that these high returns come with high risk (i.e., the probability of loss). Think 40-50% falls in the value of Aussie shares in 1987 and 2008.
What about residential property? There is much overlooked nuance associated with investing in housing. Let’s repeat the first principles approach I used for shares. 
It is hard to see how the overall value of housing can increase more quickly than household purchasing power, all things being equal. So a good benchmark for capital gains is probably disposable household incomes. For a bunch of reasons, these will probably grow at about 4% to 5% per annum over the next decade. But this does not sound especially exciting; i.e., house price growth a tad above inflation. 
Then, of course, we have rental income in the same way we get dividends from shares. The current gross yield on Australian capital city apartments is about 5% per annum (and rising). So your total gross expected return from investment property might be 9% per annum over the next decade.
Despite the baloney about housing being a tax-advantaged asset-class, the taxes and transaction costs associated with buying and selling housing in Australia are heinously expensive: the IMF figures about 12% round-trip. Amortised over your average seven- or eight-year holding period this is going to knock 1.5% per annum off your total returns. So maybe you get, on average, 7.5% per annum net, over the cycle. Not a bad real return assuming inflation runs at 3%. 
Now here is the rub. Your actual “equity” returns are usually much higher than this. Like most companies, homes are funded by debt and equity. The average initial gearing on a home is about 80%, while the average gearing on an existing Aussie home with debt outstanding is about 45%. (Think about it: when you buy a $500,000 home with a $100,000 deposit you are geared 80%.) 
There are three attractive things about housing leverage: first, you can get much higher leverage than almost any other asset-class (i.e., the bank will lend you up to 95%); second, residential home loans are the cheapest form of debt you will find (cf. small business loans, corporate loans, or personal loans); and, third, the term of the debt – up to 30 years – is longer than the gearing available to other investments.
A final wrinkle with residential real estate is that the risk of investing in an individual home is far greater than most people realise. In fact, Rismark estimates that the volatility of a single family home is akin to the volatility of the share market. 
Accordingly, the best possible residential property investment would be a product that allows you to invest in a portfolio of thousands of individual homes to give you the diversification you need to reduce risk. A nationally diversified residential property index has very low volatility of about 5% to 6% per annum (compared with the 15% to 20% per annum of the ASX All Ordinaries Accumulation Index). Leveraging up against this would be safe: gearing against an individual home is a far more hazardous exercise.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm" target="_blank">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
 
 
 
 
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With a low cash rate, equities and property are important for any long-term savings plan: Christopher Joye

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A couple of weeks ago the deputy governor of the RBA, Dr Phil Lowe, <a href="https://www.rba.gov.au/speeches/2012/sp-dg-140512">revealed</a> that the “biggest surprise” for the central bank in 2011 had been the very low level of “home building.” I laughed when I read this because I had debated exactly this issue with the RBA in 2009 and 2010. It was entirely predictable. 
Pondering how the RBA had misjudged the level of new building activity over 2011, Lowe said he thought that “a lowering of expected capital gains on housing … has made developers, financiers and households less willing to commit to new construction despite rising rental yields, lower prices relative to income and ongoing growth in population.” 
In 2009 and early 2010 I publicly and privately expressed anxiety that high-profile “jaw-boning” of house price rises by Glenn Stevens, Phil Lowe, and Tony Richards would exacerbate the supply-side problems that these same individuals claimed they were concerned about. I also warned economist buddies of mine that there was no way building approvals would recover to the levels they forecast while the RBA left the community with the impression there was a house price bubble. Here’s what happened to building approvals after the RBA’s “open-mouth operations”.
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<a href="/images/stories/may251.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/may251thumb.gif"></a>
On the one hand, the bank has frequently argued via its bi-annual <a href="https://www.rba.gov.au/publications/fsr/index" target="_blank">Financial Stability Review</a> that the housing market’s fundamentals are solid, with an inelastic supply-side (something I had highlighted back in 2003), internationally low default rates, healthy population growth, a reasonable price-to-income ratio, and low vacancy rates. The bank has also regularly said it would welcome more developer activity. 
On the other hand, the bank was worried that the rapid house price appreciation in 2009-10 could lead to future financial stability complications. It was a forward-looking critique: if asset price growth continued it could feed back into credit growth, which is something the bank wanted to avoid. In March 2010 the governor, Glenn Stevens, famously gave an unprecedented, and widely covered, interview to Sunrise’s David Koch warning home buyers that house prices were not a one-way bet. 
Several months earlier, the RBA’s Tony Richards had offered the argument, which also got wide media airtime, that “[A]s a nation, we are not really any richer when the price of housing rises, but the more vulnerable tend to be hurt.”
The net result of the RBA’s posturing was that many commentators reported that the central bank thought Aussie housing was expensive. In truth, the RBA was trying to deliver more nuanced messages. One of these was that we should not expect to see a repeat of the 7-8% capital gains home owners realised over the last 30 years. A second was a reminder that house prices can go up and down. 
In abstract, this was wise advice. Indeed, I had myself regularly argued that the risk of an individual family home was much higher than many people understood.  <a href="https://www.businessspectator.com.au/bs.nsf/article/rba-house-prices-lending-pd20100519-5l248?opendocument&amp;src=blb&amp;" target="_blank">In this May 2010 column</a>, I revealed research by Rismark that had, for the first time in Australian history, quantified precisely how risky an individual home is. 
Before diving further into this issue, it is useful to get some context. After three years of relatively low house price growth in 2004, 2005, and 2006, capital gains accelerated by 13% in 2007. The coincidence of rising variable mortgage rates, which peaked at a scorching 9.6% in August 2008, and the onset of the GFC saw prices drop by about 4% that year (see chart below).
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Yet the unwinding of the RBA’s tight monetary policy in 2008 together with fiscal stimulus from the government helped the market recover quickly in 2009. That year prices rose 13.7%. 
In October 2009 the RBA started to normalise monetary policy again with four quick rate hikes. The bank was keen to do so in part because of worries it had about the effects of leaving rates too low for too long. 
It was clear to Rismark in the first half of 2010 that there was no risk of a repeat of the previous year’s boom. In fact, we forecast zero capital growth in the second half of 2010, and started warning prices could fall if the RBA kept on pushing rates into restrictive territory. In November 2010 the RBA complied with a de facto double rate hike, which was amplified by a barrage of RBA rhetoric in the first half of the following year implying more hikes were coming. Unsurprisingly, prices fell by 3-4% in 2011. 
Since the end of 2007 Australian house prices have risen by 2.5% per annum. That is, they have tracked the RBA’s inflation target. Notwithstanding two years in which house prices deflated, they are still around 8-10% higher than their early 2008 peak. 
This is awkward news for the University of Western Sydney assistant professor Steve Keen. Many will recall that Keen sensationally predicted a 40% drop in Aussie house prices. As my next chart shows, the gap between Keen’s 2008 prediction and current house price levels is over 80%.
Click to enlarge
<a href="/images/stories/may253.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/may253thumb.gif"></a>
 
With the 2009-10 rate hikes neutralising the relief bequeathed by the RBA during the GFC, I thought the high-profile jaw-boning of prices by RBA officials was fraught with danger. Specifically, I warned that these actions could end up stifling the supply-side. I <a href="https://christopherjoye.blogspot.com.au/2010/04/economists-confused-and-kirchner" target="_blank">outlined this thinking in April 2010</a>: 
“Back in 2008 and 2009 we had the RBA enthusiastically defending the integrity of housing market conditions and casting doubt on the many predictions for steep price falls. What is problematic here is that Stevens and Lowe's statements [about the cost of housing] are only going to seriously spook lenders. Rightly or wrongly every credit officer in the country thinks the RBA believes Australia is suffering from an unproductive house price bubble. (We even had NAB’s chairman criticising CBA and Westpac for ramping up mortgage finance.) The headlines on the front pages of newspapers conveyed the story this week: "RBA worried about bubble risks".
The RBA’s jaw-boning is going to exacerbate the supply-side problems. Ironically, rising prices are the best possible thing to stimulate investment in new supply. This is, after all, what free markets are there to do: signal where scarce economic resources should be allocated via the price mechanism.  It also pays to remember that property "investors" provide rental accommodation for lower income families. According to the RBA, rental vacancy rates are currently very tight. So surely we want to be encouraging, not discouraging, investment in new rental shelter?  Finally, if people are going to argue that fundamentals-based house price rises are bad for society, they also have to explain to us why rising share prices are bad too. Rising house prices simply reflect an increase in the value of productive assets that supply 10.9 million Australian workers with shelter. It is usually the market signaling that we need more investment in shelter. Likewise, the rise in the value of, say, farms that produce food for us to consume (food and shelter are the two essential inputs for a functioning economy) reflects an increase in the market value of its assets. For clarity's sake, I am a big opponent of individual consumers gearing heavily into residential property or shares, which, contrary to popular opinion, have similar levels of risk at the individual asset level. It makes little economic sense. And I have argued longer and harder than anyone that we need to deleverage household balance-sheets [via greater use of “equity” as opposed to “debt” finance] and elastify the supply-side.”
In addition to jaw-boning house prices in 2009 and 2010, the RBA regularly signaled via its media proxies that it was prepared to put a brake on housing returns if it deemed them to be problematic from a financial stability viewpoint. 
Given these interventions, one wonders whether it really was that “surprising” that investors have downgraded their return expectations with direct ramifications for the amount of capital being committed to producing new housing supply.
 
 Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm" target="_blank">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
 
 
 
 
 
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The decline in home building was entirely predictable, despite what the RBA says: Christopher Joye

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The good news is that most of the problems we come across have multiple solutions. The question becomes how any solution goes about staunching or eliminating the problem. That is, what actions the solutions involve, and the costs incurred when undertaking them. 
By nature and long-time conditioning, I am a fairly solutions-oriented person. I've spent much of my life engaged in practical and research-based problem-solving, and complex, protracted, multi-party commercial negotiations involving large amounts of capital. 
Through iterative trial and error, I've learnt a lot doing so. There is, frankly, no substitute for experience. Practical intelligence is a much experiential as it is innate. You need both. But most know that. 
One of my reflex responses to the new "crises", "catastrophes", and "end-of-world" scenarios that are canvassed all too often is that there is almost certainly a solution out there in the ether. The solution might be easy, or it might be hard. But there is normally one, if not more than one, answer. It is a matter of methodically going through the rigmarole of identifying what they are, securing the support you need to implement the optimal one, and then vigorously executing it. 
Accordingly, I tend not to get too worked up by new problems. I do get anxious thinking about risk, because I can see a lot of prospective risk. But I find it hard buying-into extreme, end-of-days negativity that ignores the answers. 
So I regularly scratch my head when I watch the wild gyrations in financial markets oscillating from extreme optimism to pessimism as one new global challenge emerges after another. I frequently see the same swings in the views of the people paid to talk about these markets. One minute the Aussie dollar is going to 120 US cents, the next it should be falling like a stone. Another day the resources boom is a locked-in certainty for years to come with inflationary consequences, the next it is all over, red rover. 
Don't get me wrong: I am believer in changing your mind when hard data comes to hand if it is view-altering. But my sense is that many people echo and amplify the schizophrenia, or multiple personalities, projected by financial markets. A concern is, as George Soros wisely noted, that this "reflexivity" can itself influence real-world outcomes. 
I think one reason financial markets tend to "overshoot" so often is because capital at the margin can overweight the observed challenges relative to the expected solutions. This is probably tied to our so-called "asymmetric value functions", for which psychologist Daniel Kahneman was awarded the Nobel Prize in Economics. His work showed us that when making decisions, people seem to weight expected losses more than gains. One might extend this framework to perceived problems (losses) and their remedies (gains). 
In obsessing over problems, I’d argue people neglect the next logical link in the chain: the public-political “reaction function”. That is, our response. By its construction, any democracy is highly geared to searching out solutions to imminent threats (the wrinkle, of course, being that many supposed threats are, in fact, non-threats). The risk is that democracies focus too much on short-term, as opposed to long-term, salves. Nonetheless, this maniacal focus on eliminating problems that are perceived to afflict the majority of people may be a dynamic key to the longevity of democracy as an organising model for societies. 
For years I've argued that we should expect higher volatility in financial markets because of the profound impact the Internet and globalisation are having on investor decision-making. There is a connection to this and Soros's theory of reflexivity, which I have highlighted before. In particular, I believe we are seeing much more reflexivity between the opinions of participants, security prices, and real economies as a function of the Internet. I'd also argue that policymakers sometimes get trapped into compounding this reflexivity. This is why I’ve encouraged the RBA not to over-engineer monetary policy. The RBA should think slowly: it meets monthly and the passage of time is its friend insofar as it yields more information. 
I do wonder how well equipped humanity is to deal with the tight linkages we’ve created between individual economies via the digitalisation of information and its real-time transmission through the internet. Speaking to a senior commentator last week, I said, "It's like the world has contracted a case of attention deficit disorder. Too much low-quality, uncensored information influencing actions too much of the time. Our brains were not built for rationally and instantaneously processing the quantum of data we are given nowadays. We need more time to evolve." 
Right now, I think we need to slow down, dispassionately contemplate our conditions, and work out the best roads to take. Humanity is not facing an existential threat. Life will continue much as it has done in the past. The great thing about the future is that it builds on thousands of years of human progress. Given this, and the commitment of many to further “innovation”, it is likely that our quality of life will continue to improve, albeit on a scale of decades rather than days. 
This brings me to what must now be described as the third chapter in the great European sovereign debt crisis. The only thing I am confident about is that nobody really knows what will happen because there are simply too many complicated and interwoven future paths for the eurozone. I personally find it hard to wrap my mind around. I would be sceptical of anyone expressing a strong opinion on what will occur. A few observations I think are, however, worth reflecting on. 
First, according to reports, 80% of Greeks actually want to remain part of the currency union. This is important: the democratic impetus will be geared towards a non-disruptive compromise. 
Second, an orderly (as opposed to disorderly) Greek exit from the eurozone would likely be disastrous for the currency union and significantly increase the probability of other nations leaving. If you think this through, the likes of the ECB, EC, Germany and France have every incentive to: (1) reach a sustainable solution that allows fiscal transfers/subsidies between nations in order to assist the adjustment process for indebted countries; and (2) in the event Greece does decide to exit, make the costs of departure seem extremely high for the Greeks so as to try and salvage the perceived value of remaining in the eurozone. 
Third, if you assume that you can overcome the intrinsic problems of consensus-based decision-making (a nightmare I have regularly broached here) in the EU, there appear to be practical solutions to a lot of the problems individual nations face. These include the development of a shadow Greek Euro currency, which Deutsche Bank's Torsten Slok calls the "Geuro", Eurobonds and/or eurozone-backed "project bonds" (likely to be announced on Wednesday), an EU-wide bank deposit guarantee, nations agreeing to cede partial authority over fiscal policy, or pay penalties, if they default on commitments, and others smart people have proposed. On the notion of a "Geuro", Deutsche's Slok argues: 
Greece is unlikely to formally leave the euro, nor are the other euro area countries likely to abandon Greece entirely. The path of least resistance could be the stop of financial assistance to the Greek government and the continuation of payments for debt service and the stabilization of the Greek banks in a European “Bad Bank”. In this case, a Greek parallel currency to the euro (which we dub the “Geuro”) could emerge when the government issues IoUs to meet current payment obligations. This would also allow Greece to engineer an exchange rate devaluation without formally exiting EMU. 
My parting thought is that the political will to implement solutions will not galvanise until individual societies fully grasp the costs of a eurozone break up. So prepare yourself for more abseiling. Life is unlikely to get any less volatile.
Christopher Joye is a leading financial economist and a director of <a target="_blank" href="https://www.ybr.com.au/savings/index.cfm">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
 
 
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The eurozone crisis will bring more volatile times ahead, but it’s not the end of the world: Christopher Joye

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Today I want to put to you an idea that the prevailing attitude to, and analysis of, Australia’s banking system is profoundly misguided.
The forever-recycled, conventional wisdom is that the Australian banks’ reliance on “wholesale funding” – that is, credit supplied to banks via domestic and international institutions investing in bank “bonds” – is a tremendous source of weakness and instability. One frequently sees analysts, strategists, hedge fund managers, and even bodies like the OECD, quote Australia’s woefully high “loan-to-deposit ratio”.
With the misplaced preference (post-GFC) for retail deposits, Australia’s banks have managed to reduce their loan-to-deposit ratios from a high of circa 180% in 2008 to closer to 140% 150% today.
This simply tells us that, on average, the total value of bank loans is roughly 1.4 to 1.5 times the value of their deposits. Another way of saying the same thing is that retail deposits only make up about 60% the value of loans. The missing 40% is provided by wholesale funding and shareholder cash.
Whereas in numerous research reports and media articles the low level of “more stable” retail deposit funding is the basis of claims that Australian banks suffer from inherent financial flaws, I would contend the opposite. So long as a bank can secure committed, long-dated wholesale funding (typically “bonds” that are like tradeable term deposits) with diverse maturities, and ideally from a balanced mix of domestic and offshore investors, it is actually higher levels of short-term retail deposits, which have an average duration of less than six months, that expose Australian banks and taxpayers to systemic risk.
I would further argue that the logic around bank funding has got so twisted that taxpayers have had to provide a Band-Aid and underwrite the dependability of short-term retail money via the government’s deposit guarantee. Crucially, the banks pay nothing for this insurance, which Glenn Stevens recently told parliament would be worth hundreds of millions of dollars annually (as I have long suggested).
By compelling banks to bulk up on short-term retail deposits and reducing their reliance on committed wholesale funding of far longer maturities, regulators are actually shifting more and more of the catastrophe risk onto taxpayers. The fact is more retail deposits mean more deposit insurance doled out by government. And more taxpayer insurance means more moral hazard (i.e., incentives for bankers to take silly risks). This thinking is seriously messed up.
One of the most important lessons from the GFC is that taxpayers should insist that banks minimise the normally acute mismatches between the committed life of their liabilities (i.e., the savings individuals and institutions entrust to them via bank deposits and bonds) and the life of their assets (such as the home loans they create with that money). 
You can see how the domestic banking regulator, APRA, seems to have fallen for the lazy logic that says retail deposits are good and wholesale funding bad in one of its responses to the new banking rules. In particular, APRA has decided to “exempt ADIs with simple, retail based business models” from the two new “liquidity shock” tests that global banking regulators have developed under what is known as “BASEL III”.
This is both perverse and ironic because the banks with the most acute asset-liability mismatches are precisely those that rely mostly on retail deposit funding. And we had proof positive of this during the GFC: the stealth bank runs that threatened Australian institutions were found not in the major banks, but in smaller deposit-takers like Bank of Queensland.
If you are wholly reliant on retail deposits and your depositors decide to withdraw that money, you risk trading insolvent. If, on the other hand, you were funded, at an illustrative extreme, with 90% long-term wholesale loans over maturities ranging from three to 10 years, you are in a demonstrably superior position to withstand a liquidity and solvency crisis.
A related point is that in a genuine catastrophe, it is asinine and irresponsible to assume that the retail deposits supplied by mums and dads will somehow be more sticky and reliable than a diverse mix of term wholesale funding. If any cohort of bank creditor is likely to be skittish and susceptible to herd-like behaviour, it is mums and dads. Retail deposits are, to be sure, stable during the good times, but, as the history of banking over the last two centuries shows, they are awfully unreliable when confidence in a bank’s solvency evaporates.
If we were building a bank from scratch, we would want it to have access to funding with a weighted-average life of, say, at least five to 10 years, to get as close as possible to the average duration of the loans the bank was making with that money (noting that 60% of Australian bank loans are 25- to 30-year residential home loans).
The good news is that the new BASEL III banking rules are very much focused on maximising a bank’s “liquidity”. These rules work out the worst-case outflows of funding a bank may suffer during a crisis. In order to meet this flight of funding, and thus not trade insolvent, banks are being forced to hold more “liquid assets”. Although that is not exactly true here in Australia.
The RBA and APRA have decided that because Australia has little government debt (and, accordingly, few truly liquid domestic assets), it would be better to give all banks a “tab” or “line-of-credit” from the RBA that they can draw-on if they get into strife.
It literally works like this: the bank figures out how much retail deposit funding – notably not committed wholesale funding – will likely fly out the door if its creditors think there is a risk the bank won’t repay them.
The bank then rocks over to the RBA and says, “We will need to borrow this many billions of dollars from you in a run on our deposits”. When they borrow from the RBA, they pledge assets as security for the loan. The RBA then gives them very cheap cash to repay their creditors. While the line-of-credit is undrawn, Aussie banks will pay a fairly trivial fee of 0.15% per annum to have it accessible. Of course, the more short-term retail deposits a bank has, the more money that can run out the door in a shock. And so the larger the line-of-credit they require from the RBA. And thus the bigger the taxpayer subsidy becomes. 
By the end of this article, some smarty pants will be saying, “But our banks cannot access enough term wholesale funding.” This is partly true.
So, as I argued many years ago, the solution to both bank funding and improving bank competition comes back to the $1.4 trillion of savings locked-up in superannuation. More specifically, the solution is about fixing the parlous asset-allocation decisions made by Australian super funds, which I have been harping on about here since 2008.
Despite repeated requests for them to engage, the asset-allocation problems in super have been wilfully neglected by APRA and its boss Treasury, and were mostly ignored by the Cooper Review.
If you want to understand the magnitude of the issue today, have a think about this. One of the nation’s most well-known super funds, Australian Super, which manages over $42 billion, structures is standard “balanced fund” option as follows.
Just 2% of the portfolio is invested in cash. Only 9% is allocated to bonds. An incredible 50% is invested in extraordinarily volatile Australian and global shares. A further 11% is allocated to risky commercial property equity. And another 18% goes into the equity of infrastructure assets and private companies.
All up, Australian Super’s balanced fund has about 80% of its money in equity risk while only 11% is allocated to cash and bonds. And yet Aussie government bonds have outperformed global shares for the last 30 years while cash is your single best inflation hedge (with an inflation-targeting central bank). Is it any surprise that Aussie Super has given members just a 1.71% per annum return over the last three years?
 
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm" target="_blank">Yellow Brick Road Funds Management</a> and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
 
 
 
 
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Rethinking Australian bank business models: Christopher Joye

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. 
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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] 
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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>

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Christopher Joye

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