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I travel a lot for work and also try to take time out to see new places with my family, who have had a few health scares of late. For example, in the last four months I’ve been to the truly mind-blowing, six-star <a target="_blank" href="https://www.wolganvalley.com/wolgan-valley/en/reservations/offers/stay-three-pay-two/?cid=EKWolganValleyGoogle1165">Wolgan Valley Resort</a> in New South Wales twice.
Wolgan Valley needs to be seen to be believed. Emirates spent about $100 million building the place in one of the most aesthetically beautiful (and world heritage-listed) parts of the state. Frankly, I never thought that you would be able to find such majesty inland of Sydney. The first two pictures of Wolgan you can see were shot from my own Blackberry.
<img src="/images/stories/wolgan1.jpg">
<img src="/images/stories/wolgan2.jpg">
It’s expensive, no doubt: the rack rate is $1,900 per night, but that includes three meals for two people, and all drinks and standard alcohol. Every “house” comes with its own heated, indoor 10-metre swimming pool plus uber-luxurious bedroom, lounge room, bathroom and sprawling indoor/outdoor veranda. And don’t get sticker fright at the price: it includes loads of extras, like horse-riding, biking, and hiking, and the impressive general manager, Joost Heymeijer, is open to negotiating significantly better deals.
A few weeks ago a member of the family had a health fright, so I thought I would dig into the possibility of going to a “wellness retreat”. I did a fair bit of due diligence on the Golden Door, Gwinganna, and Gaia. I was looking for a place that possessed world-class facilities, was serious about its health beyond a simple “spa”, and yet not draconian in imposing its vision unilaterally on guests.
After wading through many third-party reviews – there is no more useful site than Trip Advisor – Byron Bay’s <a target="_blank" href="https://www.gaiaretreat.com.au/">Gaia Retreat</a> seemed to fit the bill. If you are wondering, “Gaia” means spirit of mother earth. And it’s exclusive, to be sure. Guests have included Pink, Delta Goodrem, Erica Packer, and billionaires like Lang Walker. It is also jointly owned by singer Olivia Newton-John and three other Australian heavies: Warwick Evans, Ruth Kalnin, and the in-residence general manager, Gregg Cave.
Now I am not normally a fan of domestic resorts, and have a working hypothesis that Australia’s cultural commitment to egalitarian ideals and iconoclastic resentment of authority make really top-notch customer service hard to deliver, <a target="_blank" href="https://www.propertyobserver.com.au/leisure/the-best-private-resort-in-the-world-with-prices-that-match-the-big-name-guests/2011092951737">unlike luxury Hawaiian retreat Kukio</a>.
But Gaia seems different. Situated at the highest point in the Byron Bay hinterland on 10 pristine hectares, Gaia has 20 villas, all of which meet the standards of a good five-star hotel. The two larger “suites”, which are shortly being expanded to six, are in the six-star league. It has an amazing spa with every imaginable treatment, dedicated yoga centre with gorgeous views, swimming pool, walking trails, gymnasium, and even an in-house koala.
<img src="/images/stories/wolgan3.jpg">
<img src="/images/stories/wolgan4.jpg">
Unusually for Australia, all the staff are exceptionally well trained, educated and experienced. I literally had my personal trainer, a boxing specialist called Damien, consulting with my nutritionist, who was guiding the chefs on tailor-made meals. The clincher, as always, is tenure.
I cannot remember speaking to any staff member who had not been working at Gaia for at least two years, and most have been there for around six.
The genius behind Gaia is two-fold: it is run by its owners, who are genuinely engaged with the property, and the attention to detail is, therefore, outstanding. My suite looked like it had been rushed off the pages of an interior design magazine.
The other strength is that in contrast to more hard-core health retreats, Gaia firmly believes in free will. They don’t offer coffee, but you can have it if you ask. Alcohol is available with meals. No activity is compulsory. And Gaia’s people seem to be sincerely committed to advancing your health.
A final comment is that it is relatively well priced. Prices are all-inclusive of meals/drinks. The flight from Sydney was an easy hour to Coolangatta, which was succeeded by a super-scenic 45-minute drive along the coast to Byron. If you want to detox, get fit and recalibrate your mind, Gaia’s worth considering.
 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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chrisjoye-JYhJsTrNRC

Wolgan Valley Resort highlights Aussie luxury resorts have a place, despite our egalitarianism: Christopher Joye

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Today I want to try and add a new chapter to our understanding of Australia’s $4 trillion housing market. This is a story about massive divergence followed by convergence in state-wide housing costs. It traces the stunning rise in the price of NSW, ACT, and Victorian housing during the late 1990s and early 2000s followed by years of relative stasis. Just as housing costs across this slab of the eastern seaboard started to freeze or slow down, an even more striking boom was gathering momentum in the mining states of Western Australia, Queensland and the Northern Territory.
Most readers should now be familiar with the well-trodden explanation of what factors first drove the unusually sharp house price appreciation in Australia during the 1990s and 2000s. This is a narrative that has been regularly relayed by both the central bank and myself.
The short version goes like this: take the last 30 or so years and split them in half around the time that the RBA adopted an “inflation target”. While informally this occurred in 1993, it was officially set in stone in 1996, so let’s take 1995 as a crude line in the sane between the pre- and post- inflation targeting epochs.
Between 1980 and 1995 inflation in Australia averaged 6.6% per annum. Unsurprisingly, variable home loan rates also averaged an astonishingly – for anyone under the age of 35 – high 12.7%. And by 1995, the value of total housing debt held by families divided by their disposable incomes was only about 55%.
Average headline inflation has dropped 58% from its 1980 to 1995 level to just 2.8% per annum in the period since. As night follows day, average variable home loan rates have also plummeted to 7.5%. The 41% decline in home loan costs has, of course, enabled families to boost the amount of mortgage debt they can service for any given level of income. And so Australia’s mortgage debt-to-household income ratio started rising from its 55% level in 1995 to a peak of 156% by 2006. Importantly, it has not increased any further since this pre-GFC apogee – that is, for the last six years, housing credit has expanded at about the same rate as family incomes. Indeed, as at December 2011, it was off a touch at 149.6%, according to the RBA.
With the above insights in mind, our research team has shown that about 96% of the increase in median house prices in Australia between 1985 and today can be explained by changes in household borrowing capacity resulting from the long-term reduction in mortgage rates combined with the growth in family incomes (see first chart below). Said another way, the growth in Aussie housing costs over the last 25-30 years is entirely explicable when one references incomes and interest rates (i.e., we have not even discussed the supply-side at this stage).
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/may151.gif"><img src="/images/stories/may151thumb.gif"></a>
Yet there appears to be another story to be told. And this one relates to the time that it took for the enormous positive shock to household purchasing power (via lower rates and higher incomes) to become fully capitalised into asset prices.
In the chart above you can see that the blue purchasing power line lies above the red median dwelling price line up until about 2002-2003. This is one way of saying that households could afford to buy more expensive homes – if they assumed the changes to incomes and rates were permanent – but understandably took some time to bid up the value of housing to a level that equated with their purchasing power.
The chart also seems to suggest that, setting aside supply-side considerations, asset values did run ahead of income – and interest-rate linked fundamentals in the years after 2002-2003.
In my next exercise I want to lift the lid on the national level data to study how housing costs across states have diverged over time. In order to do so I use state-wide median dwelling prices since 1990 from NSW, Victoria, Queensland, Tasmania, Western Australia, South Australia, the ACT and the Northern Territory. The chart below illustrates the change in these raw median prices over time.
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<a title="Click to enlarge" rel="shadowbox" href="/images/stories/may152.gif"><img src="/images/stories/may152thumb.gif"></a>
While at first it is hard to make head or tail of the chart, if you look closely you can see apparent regime shifts in the state-wide capital growth rates: in particular, NSW, the ACT, and Victoria experience very robust dwelling price gains between 2000 and 2003, which, to varying degrees, stops or slows down thereafter.
House price inflation in Queensland, South Australia, and Tasmania step ups with a lag, but, importantly, continues to kick-on after 2003, recording healthy capital growth right through to end 2007.
It is in this period 2003 to 2007 that we also start to find an extraordinary acceleration in the cost of Western Australian homes, which is denoted by the aqua blue line in the chart above. Dwelling prices in the Northern Territory also accelerate alongside Western Australia, albeit at a lower rate.
Here again one sees another difference: while Queensland and Western Australia suffer house price falls during the GFC, which they claw back in 2009 and 2010, home values in the  Northern Territory appear to keep appreciating during the crisis until they finally run out of steam at the end of 2009.
To more precisely measure the time-series divergence in national housing costs I created two new benchmarks that are highlighted in the next chart. The blue line is simply the highest state median dwelling price divided by the lowest state median during any given month between 1990 and today.
The red line tackles dispersion another way: it subtracts the difference between the highest and lowest state medians and then divides this number by the national median price. Both metrics tell similar stories.
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/may153.gif"><img src="/images/stories/may153thumb.gif"></a>
Irrespective of which measure one uses, the analysis shows us that house prices across Australia underwent an enormous break in the early 2000s fuelled by NSW, Victoria and the ACT, which was only remedied in the years after 2003 by catch-up growth across the other states.
Whereas in the decade 1990 to 1999 the highest state median price was, on average, about 200% the size of the lowest, this differential soared to 321% by the end of 2002. After that climax (refer to the spike in the chart above), the coincidence of much lower capital growth in NSW, Victoria and the ACT combined with faster gains in almost every other region allowed the ratio to normalise back to its pre-boom average of 200%. And, comfortingly, it has stayed around this level since 2006.
One explanation for the phenomenon highlighted might be variations in income growth rates, and hence purchasing power, across the states. Perhaps this was just a case of the NSW, Victorian and ACT economic cycles leading the remaining states.
We can try to address this issue by deflating state house prices by state disposable incomes. Once we have done this, we can repeat the analysis above to determine whether the pattern still holds.
My final two graphs summarise the results over the period 1995 through to end 2011. The first chart shows the individual state house price-to-income ratios indexed to 100 since 1995. The second replicates my earlier analysis by dividing the highest state ratio by the lowest.
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/may154.gif"><img src="/images/stories/may154humb.gif"></a>
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/may155.gif"><img src="/images/stories/may155thumb.gif"></a>
 
The final chart demonstrates that the same dynamics in housing cost dispersion have asserted themselves even after deflating by state incomes: namely, a very large increase in the housing valuation gap from 1995 to 2002-2003, when the highest state price-to-income ratio was around 200% the size of the lowest. By December 2011 this gap had fallen back to just 130%. That is to say, housing costs had converged to their pre-boom levels.
An interesting question for researchers nevertheless remains.  If these changes in housing costs were triggered by the tremendous increase in purchasing power permitted by the decline in mortgage rates in the 1990s, which in turn drove a commensurate increase in household leverage, why did the transmission to house prices  occur at such different times in different states? One for another day, eh.
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 gap narrows as east almost meets west (and Queensland) in housing prices and costs: Christopher Joye 

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In an interview a few weeks ago, Sky's Peter Switzer kindly introduced me as a "great friend of the RBA". In light of the many criticisms I have aired over the years, I couldn't help but laugh at this characterisation. I subsequently mentioned it to an RBA executive. Almost as amusingly, this person retorted: "yeah, 60% of the time."
Unfortunately, today may be one of those '40 percenters'. What I am going to write about you will likely never read in an Australian newspaper. The journalists in question cannot report on these issues for fear of breaching confidences given to their sources.
Because I have one foot directly in financial services and another in the media as a public commentator, I am a little different. Unlike most other RBA watchers, I never speak to the bank, its board, or its political masters about monetary policy. I don't get the benefit – or, as we shall see, suffer the costs – of receiving the all-important private telephone and in-person briefings that senior correspondents secure after important RBA statements, and before major decisions.
I do speak to the bank about abstract policy issues, such as whether they should use interest rates to lean against asset prices, or technical data matters, like how house prices movements should be measured.
I've also asked the bank to set me straight if I ever make an objective mis-step. As one example, the bank has a habit of frequently emphasising the "mid-point" of its 2% to 3% per annum inflation 'target' as its policy goal. I've previously written that this can lead one to infer that the RBA's 'implied' inflation target is actually a more specific 2.5%. Core inflation outcomes materially above or below this point estimate could, therefore, be judged as misses.
It was, however, pointed out to me that Guy Debelle and Glenn Stevens had published a paper in 1995 arguing that the RBA's monetary policy aim is a deliberately "thick point", or wide, band most accurately described as "two point something". It is not an artificially precise 2.5%.
Long story short, anywhere in the band satisfies the inflation objective because the RBA knows that it cannot over-engineer its inflation targeting outcomes – the standard errors associated with its forecasts are just too high. That, by the way, is one reason why there is nothing wrong with consistently punching out 2% per annum core inflation, as is currently the case. (Most developed world central banks consider 2% normal.)
The motivation for today's remarks derive from questions I received last Friday. A senior interest rate trader asked me what I thought the RBA's closely-read Statement on Monetary Policy might say (it was to be published that day). I felt the lethargy mount inside me before I mustered a shallow response. All I could offer was, "dovish mate – they've gotta rationalise the 50 points, ex post facto." But then I quickly added that I had not thought about it much.
After the Statement came out – which was dovish – Aussie government bond prices jumped a bit. Another experienced market participant called me and queried my views. I said I hadn't even read it aside from a quick glance at the housing section, which was in line with my priors (ie, the RBA is pushing a stabilisation meme, now couched as a deceleration in house price losses). I said I'd get back to him when I had some thoughts (I still don't).
Over the weekend I started reflecting on why I had so little interest in what is supposed to be the RBA's premier publication. It slowly dawned on me: it was more-or-less meaningless for rates. It would be part exercise in justification of a decision the RBA staff did not recommend, and part hazy and contradictory glimpses of their view of the world.
Rather than telescope in on a central set of projections that the staff actually believed in, the chastened executives would likely be obscuring any sharper messages with insurance and obligatory acknowledgements of how they had purportedly 'misread' the economy. (Yesterday's 4.9% unemployment print combined with the low core inflation over the last three quarters tells us that the RBA had, in fact, set monetary policy almost perfectly.)
As it transpired, the RBA did indeed make its views even fuzzier in this particular Statement by more-or-less giving up on forecasting. The projections the RBA delivered for year-ended GDP growth and core inflation were so wide that any real-world results at the limits of these ranges could have diametrically different consequences for policy. Beyond a year or so, the RBA has now formally embraced Glenn Stevens's 'first rule of forecasting': don't forecast; or, if you do have to forecast, hedge your bets.
My main idea before the last RBA board meeting was that no matter what happened we would learn a lot about how the Bank thinks and operates. You see, after the stunningly low first quarter inflation numbers, the RBA's 50-basis-point cut was not a surprise, per se.
Before the inflation data, I had published a 'cheat sheet' with a table claiming that if core inflation came out at 0.3-0.4% one could expect the RBA to cut by 25-50 points. I also quickly attached a 40% probability to 50 basis points after the release. And by the time the board meeting came around, the financial markets had converged to roughly this same estimate.
To be sure, 50 basis points before the CPI release was very low probability. Only one person in Australia was pulling for it: Stephen Koukoulas (or "Koukie" to friends). And with the benefit of hindsight, Koukie made a majestically timed call. The only wrinkle is that he had also called 25 and 50 basis point cuts in February and April too. So May was more about getting the medium term right, although this week's unemployment data arguably call this into question.
The surprising thing about the RBA's May meeting was that the senior staff only recommended 25 and went to considerable lengths to resist a larger cut. The surprise was that the once all-controlling RBA executive had again had their central recommendation--which would have been strategically hedged--rejected by the RBA's dovish, and increasingly powerful, board.
That's what happens when the "insiders" hold only two of the nine board seats, stakeholders with a vested interest in lower rates dominate all the others, and when the governor is an open-minded consensus builder who has hitched his legacy to enhancing governance and transparency.
On the morning of the board meeting, a very senior economics correspondent for Fairfax, Peter Martin, published the following remarks in the <a href="https://www.smh.com.au/business/former-rba-boss-calls-for-50point-rate-cut-20120430-1xv4c">Sydney Morning Herald</a>:
"The staff recommendation sent to board members on Friday is believed to recommend a cut of 25 points, arguing that the economy is not weak enough to demand anything larger and that rates can be cut again if needed."
As a seasoned journalist with impeccable RBA and Treasury contacts, Martin would never make this statement unless he believed it to be true on the basis of a primary source. The day before, David Uren, another senior and instinctively cautious senior economics correspondent with The Australian, offered <a href="https://christopherjoye.blogspot.com.au/2012/04/uren-australian-people-speculating-on">these predictions</a> on both what would happen at the meeting, and, more curiously, what specific GDP growth numbers the RBA's Statement on Monetary Policy would include:
"People speculating that the Reserve Bank may cut by 50 basis points tomorrow are hyperventilating. The downgrade in the bank's growth forecast is unlikely to be dramatic. National Australia Bank's business survey shows conditions are still in line with the long-term trend and unemployment has remained steady for about two years. The March quarter inflation report was soft, but there is nothing to suggest that the economy is entering a recession. The Reserve Bank's monetary policy statement, which will be published on Friday, will still show growth over 2012-13 of at least 3 per cent. The bank will not be badgered into repeated slashing of rates by those parts of the economy that are on the wrong side of the structural change which the high value of the Australian dollar is forcing. It is unlikely that the bank judges that its cash rate is far from where it needs to be."
Like Martin, Uren would likely never write this and, more pointedly, dismiss the prospect of a 50 basis point cut, unless he had been guided by the RBA staff to do so. While he obviously got the rate call wrong, he was, perhaps unsurprisingly, spot-on with his even more difficult-to-anticipate Statement on Monetary Policy forecasts. Of course, the RBA staff determine the numbers included in the Statement without interference from the board in contrast to the cash rate decision.
Just as the staff are inclined to advocate their positions via preferred media proxies (universally accepted as a common, if awkward, practice), it's possible that some of the seven remaining board members do so too. This may be the reason why News Limited's leading columnist, Terry McCrann, (confidently) missed the RBA's February and April decisions to pause. At both meetings, the staff evidently managed to hold the line against a board agitating for rate relief.
But in May, McCrann was uncannily on-the-money well before any other analyst, or the market, save Koukoulas. On April 25th, after the CPI report <a href="https://www.heraldsun.com.au/business/terry-mccranns-column/rba-set-to-drive-interest-rates-down/story-e6frfig6-1226337531317">but a week before the board meeting</a>, Terry called a 50 basis point cut yet went one step further to, remarkably, describe a standard cut as a "most unlikely circumstance." Terry's smart, but he's not that smart. I am guessing that the reason he could effectively rule-out 25 is because either someone on the board (likely), or someone at the bank (unlikely), told him it wasn't going to happen:
"TWO things are now absolutely beyond doubt. There will be an official interest rate cut next Tuesday, and the official rate will be cut by at least 50 points over the next five weeks. Somewhat less certain, is when the 50 points will be delivered. I suggest in one hit on Tuesday. But in the most unlikely circumstance that Tuesday turned out to be only 25 points, that would simply make a further 25 points absolutely certain at the next Reserve Bank board meeting in June."
On April 29 McCrann <a href="https://www.heraldsun.com.au/business/terry-mccranns-column/tough-budgets-will-be-the-best-medicine/story-e6frfig6-1226341633444">affirmed this projection</a>:
"ON Tuesday, the Reserve Bank will cut its official interest rate...It should start with a 50-point cut and I suggest there's a better than even chance it will."
Now just think for a moment. If it is possible for this information to leak out from the RBA's board, and from senior staff, is it conceivable that there are folks around the world who might seek to profit from it? I would venture so. Indeed, there was some rather unusual trading on the day of the RBA's last meeting.
At exactly the same time the RBA board meeting finished – at 12:30pm – through until the time the policy decision was announced at 2.30pm, the Aussie dollar commenced a slide from circa 1.0422 US cents to as low as 1.0388 cents. There was also a slightly odd spike in 3 year government bond prices, which directionally has the same meaning (Koukoulas tweeted about it), although they pulled back on low volumes just before the release. Maybe it was noise. Maybe not. I honestly don't know.
Bruce Kovner, the founder of one of the world's biggest and most successful hedge funds, Caxton Associates, has said that in the 1980s the best traders of currencies were the Russians because of the KGB's ability to pick up economic intelligence. We have many private companies with intelligence gathering capabilities, and foreign intelligence agencies, functioning in Australia today. It is well documented that soucing non-public economic intelligence, and pro-active industrial espionage, are one of the key aims of any sovereign intelligence entity, including Australia's. I am not saying anything more than that.
As a hypothetical, you've got a full two hours between the 2:30pm release date and the time when seven of the nine RBA board members drift out from its Martin Place headquarters to monitor communications and collect one solid indication of what might have happened. The RBA takes precautions, of course, including sweeping its board-room for bugs. But if you are successful, you could make tens, if not hundreds, of millions of dollars. It is hardly unimanginable. The technology certainly exists. The self-interest is a given.
With this in mind, I would note that Dow Jones's Enda Curran highlighted this ABS <a href="https://www.abs.gov.au/websitedbs/IRDB.NSF/mediareleasesbyCatalogue/EC06EFA1958DD01DCA2579F7001CC6DB?Opendocument" target="_self">media release</a> during the week revealing that the surprisingly strong, and price-sensitive, retail trade data had been leaked to six clients 20 minutes before it was communicated to the market. One assumes this was just a technical glitch.
I have regularly hammered on about the wealth-destroying biases ingrained in our saving system's asset-allocation decisions and the manifold unpriced taxpayer subsidises bequeathed to our too-big-to-fail banks. Yet remedies appear hard to implement when even the nation's political leaders argue in private that the bureaucracy is pathologically resistant to change.
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’s secrets still surprise some of us: Christopher Joye 

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It turns out that the RBA has indeed (at least superficially) "misread" the economy, as so many commentators are keen to claim. Awkwardly, however, it seems to have materially underestimated the strength of our labour market, which its research suggests is the single most powerful predictor of future inflation. Despite both the RBA and the Treasury forecasting that Australia’s jobless rate would rise to 5.5%, and using this as a key justification for lower rates (alongside a temporary decline in the prices of internationally traded goods and services), it appears, as I had previously argued here, that the peak in the unemployment rate is behind us.  According to the official statistician, Australia’s seasonally adjusted unemployment rate fell to 4.9% in April from a downwardly revised 5.1% in March. But let’s avoid the temptation of looking at a single month of data. As the chart below clearly shows, the three month “moving average” jobless rate has been falling steadily since September 2011, ironically just before the RBA started slashing rates. It is now nearly a full percentage point below its 5.8% peak during the GFC. 
Click to enlarge
<a href="/images/stories/may10.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/may10thumb.gif"></a>
The monotonic decline in the unemployment rate since the second half of 2011 tells us a few things. First, the economy is not about to head into a protracted recession. Nor is the economy likely expanding at a rate that is significantly below trend (or capacity). In fact, the jobless rate implies that the labour market is near-fully employed. This in turn tells us that the economy is not in dire need of further interest rate relief. Having said that, the volatile and prone-to-revision GDP data could very well confuse the issue. As the RBA has noted, the National Accounts are difficult to interpret when the country is undergoing a very lumpy and capital intensive private investment boom.  The second thing the unemployment rate tells us is that the high circa 3.5% per annum domestic (or “non-tradable”) inflation consistently recorded by the ABS is likely to be a permanent presence. In contrast, the “tradables” deflation induced by the striking appreciation in Australia’s exchange rate is, as I have explained before, a temporary event. Indeed, with the Aussie dollar now down about 8% from its 2011 highs, the deflation in internationally traded products that helped pull down Australia’s core inflation rate will likely have the opposite effect going forward. You are unlikely to hear or read many of these arguments from other commentators. Most analysts are forecasting an increase in unemployment combined with a lower cash rate. Anyone with a commercial interest in the Australian equities and/or housing markets, including, importantly, almost all retail bankers, has been clamouring for rate cuts ever since the RBA appropriately tightened policy in November 2010. The Gillard government, its lobbyists and public proxies, are pinning their fragile political prospects on below-average lending rates. And the hysterical complaints of the trade-exposed industries almost always overwhelm the silent savers and retirees. It is interesting to contemplate what the RBA might have done at its May board meeting had it had the benefit of this information and the Commonwealth budget. At face value, the super-sized 50 basis point cut would have been off the table. And a single 25-basis-point reduction might have been a less than certain proposition.
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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Unemployment data shows RBA misread the economy in double rate cut: Christopher Joye 

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It is interesting to observe the differences between the RBA and Treasury's assumptions about future interest rate changes when making forecasts of economic growth. The RBA and Treasury have near-identical real GDP estimates for the years 2012, 2013 and 2014, although the RBA allows – wisely – for much more uncertainty in its projections. They both settle at "around 3%". They also have the same/similar peak unemployment rate forecasts of about 5.5%.
In making its forecasts, the RBA says: "The exchange rate is assumed to remain at its current level over the forecast period (A$  at US$1.03, TWI at  76), which is around 3 % lower than assumed in the February Statement [CJ: even lower today!]. The price of Tapis oil is assumed to remain at US$125 per barrel over the forecast period, similar to the assumption in February [CJ: lower again!].The cash rate is assumed to be unchanged over the forecast period at 3.75%." In contrast, Treasury adopts a different assumption – one that the RBA dropped a while back because it was simply too volatile: the financial market's expectations for future rate changes.
This seems to imply that Treasury is relying on another 50 basis points worth of RBA rate cuts (confirmed by the AFR's diligence) to hit its surplus targets.
Treasury even goes on to jaw-bone the RBA that this is appropriate monetary policy (jaw-boning the Aussie central bank seems to work, so that's not dumb either – especially when the Treasury Secretary sits on the RBA's board): "The outlook for trend growth in the economy over the next two years is consistent with the fiscal consolidation being undertaken by the Commonwealth and state governments. As is standard practice, the forecasts assume policy interest rates move broadly in line with market expectations at the time that the forecasts are finalised, with the market expectation at that time being that policy interest rates would be lower over the coming year. The planned fiscal consolidation should continue to provide scope for monetary policy to be eased, if appropriate, without generating price and wage pressures. The impact of the fiscal consolidation, particularly in 2012?13, should be more than offset by growth in private demand, particularly from the resources sector, with the aggregate economy growing around trend."
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 RBA assumes the cash rate will stay at 3.75%, but Treasury forecasts another 50-basis-point cut: Christopher Joye

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The RBA helpfully published the latest major bank net interest margins (NIMs) in its Statement of Monetary Policy, which, I should note, I have only glanced at reluctantly (more on this later). What stands out is that ANZ has the widest margin between the cost of its funding and the price of its products. This is not news in and of itself – it has been the case for several years.
So what will ANZ do when it makes its now controversial independent interest rate decision on the second Friday of the month? On the two previous occasions it unilaterally jacked up rates (in February and April), and ANZ only increased them by six basis points. Following the April increase, its standard variable rate loan was actually on par with CBA's, but higher than NAB's.
We know ANZ’s overall NIMs are much wider than Commonwealth Bank’s (see the chart below), although this probably reflects more corporate lending and relatively greater offshore banking exposures. Thus the wider NIM also compensates it for taking on higher risk.
<img src="/images/stories/may7.gif">
ANZ has copped flak for its attempts to decouple from the RBA, and by waiting until this Friday it will likely be the last bank not to pass on the full 50-basis-point cut. There is a subtle margin play here. By not announcing its rate decisions until the second Friday of the month, and then delaying, typically, the actual change in its rates another week (i.e., the change does not normally take effect for another seven days), ANZ can benefit from lower short-term funding costs while waiting as long as possible to reduce its product prices. That is, it can lock in wider margins for longer.
If I were ANZ I would want to win back some PR points after the beatings I have copped following the February and April announcements. So I would pass on more than any other major bank, probably around 41 to 43 basis points if I had to pick a number. A 42-basis-point pass-through would give me a one basis point lower SVR loan than CBA, which enables me to argue that I am the second cheapest major.
Because it has passed on more of the RBA's cut than any other major, this should, in principle, be positive for the brand. And it will be the last bank to report doing so. The beauty for ANZ is that it can then chisel back a few basis points of margin if it needs to over the coming months based on its independent pricing model. Assuming unchanged RBA rates, I would make these variations so small as to not warrant material media attention (i.e., a basis point or two here and there). But, collectively, they mean a great deal to ANZ's bottom line.
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 wisdom behind ANZ's rate cut delay: Christopher Joye

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Hysterical housing doomsayers got very excited by the delay of Genworth Australia’s IPO on the back of a modest first-quarter loss. It was said by some that this might be the “canary in the coalmine” and presage deep gloom for Australia’s much-maligned housing market.
To compound matters, Moody’s Australia, which has occasionally expressed reservations about local housing valuations, promptly placed the company on “ratings watch negative”.
Unfortunately for those salivating at the prospect of an Aussie housing blow up, Genworth’s first-quarter results merely reveal a company prudently building internal reserves and cleaning up a backlog of claims. They show that the share of Genworth’s bad loans actually declined between December 2011 and March 2012. I will say that again: delinquencies fel l— they did not rise — after a spike following the first quarter east coast floods (and a double-hike in lending rates at the end of the preceding year).
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The results highlight that this is an Australian business with virtually no debt and significant capital above and beyond that which is required by its regulator, APRA. In recognition of this, Standard &amp; Poor’s yesterday announced that it was actually “affirming our financial strength and issuer credit ratings on Genworth Australia at 'AA-'” with a “stable” outlook.
Moody’s move nevertheless has broader ramifications for Australia’s financial system. As Sydney University’s Dr Elvis Jarnecic explained in a thoughtful column earlier in the week, the two duopoly lenders mortgage loss insurers (LMIs) in Australia, QBE LMI and Genworth Australia, are, relatively speaking, better capitalized than the major banks. They have stand-alone S&amp;P ratings of “AA-“ in comparison to the majors’ single “A” stand-alone ratings, and possess arguably significantly lower catastrophic risk. (Recall that the four majors alone amongst all banks get a “two notch” ratings upgrade to “AA-“ because S&amp;P assume they will get a taxpayer bailout in a crisis.) And in contrast to the majors, they have one business, focused on one relatively easy-to-understand industry: housing.
More importantly in the case of Genworth Australia, it effectively has no leverage, with incredibly low circa 4% gearing that has been mostly generated by APRA requirements that Genworth Australia issue bonds. In a recent report, S&amp;P assessed that Genworth Australia had about $3.3 billion of total capital excluding its bonds, and tier one capital well in excess of what is mandated by APRA. The only real link to Genworth Australia’s struggling parent is through reinsurance contracts that cover excess losses. However, in giving Genworth its coveted AA- rating, S&amp;P assumes the parent’s reinsurance is of zero value. And the parent only provides a minority of Genworth Australia’s reinsurance with at least 13 other reinsurers used. After reviewing the March quarter results, S&amp;P concluded:
“As at March 31, 2012, the company's A$2 billion of total shareholders’ equity translated to a very strong risk-based Standard &amp; Poor's capital model score at the 'AA' category level, and a regulatory multiple of 1.53x. We expect low credit growth in the Australian mortgage market to allow the company to build up excess capital over the year to maintain its very strong capital metrics and increase capacity to issue dividends to shareholders.”
Now contrast this with a major bank. The banks are typically geared 15 to 20 times their shareholders’ equity. They face the risk of retail depositors withdrawing their money via a “bank run”. They deal with the periodic hazard of wholesale funders not “rolling over” their institutional bonds.
So they confront two tremendous funding risks that are simply not problems for the Aussie LMIs. Yet to make the banks’ business models even more precarious, they run large “asset-liability mismatches”, which basically means that the average life of their funding (i.e., retail deposits and wholesale bonds) is significantly less than the average life of the loans they make (e.g., home loans). Unless they can guarantee access to future liquidity, they risk trading insolvent. This is exactly why the RBA lends to the banks, and has developed a generous “committed liquidity facility” to assist them comply with the new global banking regulations known as “BASEL III”.
Beyond these structural funding vulnerabilities, the major banks also take on a much more diverse (yet correlated) array of credit risks. Whereas the LMIs only supply insurance for the purposes of protecting defaults against secured, full recourse home loans, the major banks also lend to unsecured individuals, small businesses, corporate borrowers, and commercial real estate owners. These four categories of credit have historically had much higher default rates than fully secured, residential home loans, as the banks themselves have been keen to point out.
Some argue that this gives a bank the benefit of more “diversified” earnings. This is true during the “good times”. But the only reason diversification is regarded as being valuable from a risk perspective is because it is assumed to afford protection during the “bad times”.
Contextualised against Australia’s two LMIs, the major banks’ exposures to personal, corporate, and commercial property credits have historically generated much more pro-cyclical and volatile earnings, and amplified the risk of catastrophic loss.
This assessment was clearly borne out during the 1991 recession and the more recent GFC where the vast bulk of major bank losses crystallized in their non-housing credit portfolios.
So what did Genworth Australia’s first-quarter financial results actually reveal? Was it a harbinger of housing Armageddon? As it turned out, the 90-day default rate across its 1.4 million insured home loans actually declined slightly from an already low 0.55% to 0.54% between the December and March quarters. This compares to the Australia-wide 90 day default rate of 0.6% documented by the RBA at the end of December 2011.
As a general observation, Genworth Australia’s lower-than-industry-average default rate is somewhat surprising giving LMI is normally only applied to borrowers with loan-to-value ratios greater than 80%. Having said that, Genworth Australia’s average LVR is only around 63%, in part because one of its main insurance activities is covering entire loan portfolios that comprise many lower LVR borrowers.
The modest first-quarter loss of -$21 million was primarily driven by a very conservative increase in reserves (+$53 million) in anticipation of faster foreclosures by banks cleaning up a backlog of aged arrears. This was reflected by a doubling in paid claims in Q1 to $69 million from $32 million in Q4 despite the fact that delinquencies declined over this period. S&amp;P comments:
“Genworth Australia reported a loss ratio of 154% for the first quarter of 2012--significantly exceeding the prior quarter's loss ratio of 46%...The company cited reserve strengthening...for the spike in the loss ratio, driven by actions by lenders--in partnership with Genworth Australia--accelerating claims to address aged arrears in late 2011. This resulted in an above-average volume of claims processed in the first quarter of 2012, which was compounded by continued pressure from regions and sub-segments of the book that we previously highlighted as weaknesses. Many of the aged arrears were concentrated in tourism-reliant parts of Queensland…that have been negatively affected by the strong Australian dollar. In addition, Genworth Australia cited ongoing stress from sub-segments of the 2007 and 2008 books--small business owners and self-employed borrowers--which were written at the peak of the origination and property cycles. The impact of the significant reserve strengthening on bottom line results was largely offset by strong investment earnings.”
Looking ahead, we believe this should be a cyclically favourable environment for the two Australian LMIs: stabilising house prices, a large decline in interest rates and, therefore, material improvements in affordability, historically low unemployment, and (likely) declining default rates.
On this note, a blogger for the Sydney Morning Herald dismissed the RBA’s recent report of a 0.1% decline in Australia’s 90 day default rate in the final quarter of 2011, which, incidentally, was also confirmed by Genworth’s data. He seemed confused by the seemingly small 0.1% number. In isolation, this self-evidently sounds tiny. But relative to the previous level of 0.7%, this actually represents a 14% decline in delinquencies.
We believe housing conditions will continue to improve as the year passes, and 2012 will be another very profitable one for Australia’s LMIs. Moody’s may downgrade Genworth, but if it does so one would think it will also be downgrading QBE LMI and the major banks.
 
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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Genworth no canary in the coalmine despite $21 million first-quarter loss: Christopher Joye

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First, a hearty congratulations to those who picked what was a very difficult RBA meeting: namely, Stephen Koukoulas, Citigroup, Terry McCrann, Alan Kohler and one of the strategists at UBS. Almost all other analysts missed it.
I personally felt the May meeting was very much like the RBA’s December caucus and hard to call. I had a 40% probability on 50 and favoured a more conservative 25 basis points. My strongest view was that we would learn a lot about the RBA based on its decision today. And indeed we have.
The SMH has reported that the RBA staff recommended only a 25 basis point cut to the board, but obviously not with a lot of conviction. I had said to folks privately that the outcome today would be about whether the more dovish non-staff members of the RBA board wanted to assert themselves. They did, and quite emphatically.
The banks should pass on around 40 of the 50 basis points, so this will deliver a very substantial reduction in lending rates. And frankly at a perfect time.
In the RBA’s best assessment, the housing market had “shown some signs of stabilising recently”, but only just. The first-quarter house price data was flat in raw terms, and softer if you seasonally adjusted it. The month of April had been very mixed and <a target="_blank" href="https://www.propertyobserver.com.au/residential/anz-rate-rise-may-be-behind-rp-data-rismark-april-house-price-easing-christopher-joye/2012050154492">was arguably disrupted by ANZ’s decision to raise rates.</a>
At the time of writing the Aussie dollar is at 103.34 US cents, and this is actually good news for the RBA. The resilience of the currency and the absence of any sudden depreciation, rules out the risk of a surge in tradable goods inflation for the time being. That would be a key risk the RBA would be mindful of in the event it reduced rates hard, which it has now done.
At the margin, I cannot help but think that today’s house price data would have been influential on the RBA’s decision-making. Staff were telling media that they were angling for only a standard move. But the ABS data for the first quarter combined with RP Data-Rismark’s weak April made it clear that any recovery in the housing market was hesitant, especially following the big banks’ efforts to claw back the RBA’s December rate cut.
The RBA has not given any indications that there are further cuts in the pipeline. My best guess is that the unemployment data will be most influential in determining additional moves. The stability of the unemployment rate at around 5.25% has been the most persuasive argument for being cautious with cuts. But that could change if, as the RBA forecast in January, the labour market weakens further. While leading indicator data suggest it will not, it is ultimately an empirical question.
In summary, today’s decision by the RBA is terrific news for Australia’s housing market, and will assist in firming up the consolidation that is currently taking place.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm">Yellow Brick Road Funds Management</a> and Rismark. The above article is not investment advice.
 
 
 
 
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The 50-basis-point rate cut a bold RBA move: Christopher Joye

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So we have a bunch of house price data out today. The ABS’s quarterly median detached house price index, which was published at 11.30am this morning, claims that capital city prices across Australia fell 1.1% in the March quarter. Confusingly, Australian Property Monitors (APM) reported a 0.9% increase in detached house prices over same period (but with a notably smaller +0.1% rise in the price of units). And APM and the ABS apparently use similar “stratified median” index methodologies.
In contrast, RP Data-Rismark have recently launched a radically different, and much more sophisticated, “hedonic” house price index technique that tracks changes in the value of the overall housing “stock” rather than simply the transactional sales “flows”. Only about 5% to 6% of the housing stock turns over each year, and these transactions can be an imperfect representation of the 95% of homes that do not trade.
RP Data-Rismark’s eight capital city “all dwellings” index, which includes both houses and units, registered a flat (actually up slightly) result over the first three months of 2012. Yet when we look at the detached house sub-series values declined by 0.1% over this period (units were up 0.9%).
Aggregating across the three major indices—with one up, one down, and one flat—one might reasonably conclude that home values were mostly unchanged during the quarter. This makes sense given that the RBA’s two rate cuts in November and December arguably helped galvanise an improvement in housing conditions over the first quarter of 2012.
A crucial rider to this is the fact that the banks have over February and April taken 50% to 60% of the December rate cut back. Beyond reducing the stimulus that the RBA’s rate relief would have otherwise injected into the economy, these independent pricing decisions by the banks—justified or not—have undoubtedly created substantial confusion in the minds of consumers in respect of the future level and direction of lending rates.
Today RP Data-Rismark also reported their results for the month of April. On a month-on-month raw basis, dwelling values across Australia’s eight capital cities declined by 0.8%. This movement is highlighted in the first chart below, which shows the daily index changes over the month of April. The second chart stretches this data back to the start of 2011 using a one-week moving average.
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<a href="/images/stories/may12.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/may12thumb.gif"></a>
What is especially interesting is that 100% of the decline experienced in April occurred in the second half of the month. Whereas over the first 14 days of April Aussie home values followed on from the trend set in February and March, yielding a small capital gain based on RP Data-Rismark’s method, they slumped by 0.85% in the second half of the month. What could have caused this dramatic intra-month change?
One possible explanation is the intervention of Easter, which caused a sharp decline in auction and private treaty sales activity over the period April 6 through 9, inclusive. This does not, however, shed light on the adverse price action that really began on April 16.
A likely more powerful explanation is the fact that one of Australia’s largest banks, ANZ, lifted all of its variable mortgage rates by six basis points on Friday, the 13th of April, which triggered a tsunami of negative media coverage and speculation that other banks would follow suit. This coincides perfectly with the inception of the price falls on Monday, April 16.
There are two other factors that probably contributed to the malaise in the last few weeks of April. The first is the fact that the RBA had said for months that it would not cut rates unless it received a “benign” inflation print when the first quarter inflation data were published on the April 24.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm">Yellow Brick Road Funds Management</a> and Rismark. The above article is not investment advice.
 
 
 
 
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ANZ rate rise may be behind RP-Data Rismark April house price easing: Christopher Joye

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Today I am going to dive into two controversial issues: whether the RBA “should” cut rates by 25 or 50 basis points next week, and what I call the “great RBA counter-factual”. That is, what Australia’s inflation rate would have looked like had the RBA not made its many purported policy “errors”.
Let’s deal with the second issue first. You have to pity our inflation-targeting central bank. You get consistently high underlying inflation, and you get slammed. You do the job you were given, lift interest rates, and allow the currency to appreciate (as you expected), and you get some low inflation. Just what you were shooting for.
And, by the way, “low inflation” is not something Australians are used to seeing. It’s not even really that low – still above the bottom of the RBA’s target 2% to 3% per annum band – and when you strip out “internationally traded” good and services, you find that Australia’s “domestic” inflation looks pretty ugly. But you still get slammed again. According to Alan Kohler today, you will be a “bedraggled, hangdog group of economists who shuffle” into your board meeting next week.
Apparently you made a huge mistake delivering what you were supposed to: much lower tradeables inflation, which is the only reason overall Australian inflation has been wrenched back down towards the bottom of your mandated zone.
Yep, because of the RBA’s decisions, Australia’s economic station looks horrific: we’ve had the first mining boom in recorded history without a major inflation outbreak, 5.2% unemployment, interest rates around their long-term averages, business surveys that suggest growth is near trend (as does the unemployment rate), and underlying consumer inflation of 2.2% per annum, which is still above the targets of most other central banks.
There is an enormous amount of circularity in the current debate about Australian inflation and interest rates. Contrary to popular myth, the latest inflation results are not a disaster. They are the very pleasing and expected result of the RBA’s considered policy actions.
Let me put prove this point graphically. If you compare inflation in "domestic" goods and services (called "non-tradeables"), which also happen to be things that we tend to buy more frequently (and are associated with “cost of living” perceptions) with inflation in so-called "tradeables", which are those goods and services that the ABS defines as having their prices determined in global markets, you will see that almost all the reduction in Australian inflation has been driven by these global consumer prices. And the reason these prices have been falling is because of the appreciation in Australia’s trade-weighted exchange rate, which is one of the RBA’s two key policy tools.
This is illustrated strikingly by the blue line in the chart. Overall inflation is a combination of the blue and red lines. What you can see is that inflation in non-tradeables (i.e., domestic items) remains way above the RBA's target, and is in line with its average 3.7% per annum rate since December 2001.
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So this is where the debate about interest rates and inflation becomes circular. Those arguing for much lower interest rates, and a much lower currency, are, by definition, comfortable with higher tradeables inflation. A big decline in the currency would reverse-out a lot of the deflationary benefits yielded by the blue line slumping in the chart above. And without this tradeables deflation we would likely have an overall inflation problem, given domestic consumer prices have been expanding at 3.5% per annum.
One of the reasons "tradeables" inflation has averaged only 1.7% per annum since 2001 is because our main trading partners, such as China, were flooding our markets with cheap imports – that is, exporting deflation. This dynamic has slowed due to rising wage costs and inflation in China and India. As the RBA has observed (and I’ve argued here for years), China is now a source of inflation rather than disinflation. That means that in the future, tradeables inflation will likely be higher than it was during the 2000s.
A related question is whether core inflation of 2.2% per annum, or lower, is such a bad thing. What has happened to core inflation in Australia since the RBA began targeting it in 1993? Is there any evidence we’ve had a structural inflation problem?
And, on a more nuanced level, what does the distribution of inflation outcomes since 1993 look like? That is, does the RBA struggle to keep core inflation around the mid-point of its already high and wide (by international standards) 2% to 3% per annum target band? Do we have a bias in Australia towards high rather than low core inflation outcomes?
To try and answer these questions I have started with a chart that illustrates Australia’s core inflation rate on a three-year and five-year moving average basis since 1993. This suggests that during the 1990s and 2000s there did indeed seem to be an upward drift in underlying Australian inflation. The RBA has acknowledged as much, conceding that it finds it hard to forecast high core inflation events. (The same phenomenon was also found in consumer inflation expectations, which is arguably more worrying.)
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<img src="/images/stories/april262thumb.gif">
A possibly more interesting analysis is to measure the amount of time Australia’s core inflation rate is above or below the mid-point of the RBA’s target zone. I’ve done this for two periods: since 1993 and since December 2001 (i.e., after the introduction of the GST) in my final charts.
The results are remarkable. Over the last decade plus, core inflation in Australia has been above the mid-point of the RBA’s target 2% to 3% band an extraordinary 92.9% of the time. It has been above 3% per annum an equally amazing 33.3% of the time. It has been below the mid-point only 7.1% of the time. And since 2001 it has never been less than 2% per annum (year-on-year rolling quarterly). That will hopefully change next quarter.
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<a href="/images/stories/april263.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/april263thumb.gif"></a>
If we examine the RBA’s track record over the full inflation-targeting period of March 1993 to March 2012 we find similar results: core inflation has been less than 2.5% per annum only 35.1% of the time, but above the mid-point 61% of the time (there have been three quarters in which year-on-year inflation was exactly 2.5%).
This strong asymmetry in Australian inflation, whereby it tends to overshoot rather than undershoot the target, is also evident when we look at the top and bottom of the band. Whereas core inflation has been above 3% per annum around 20% of the time over the last 19 years, it has been below 2% per annum only 8% of the time.
Inflation is a tax on your purchasing power and savings. That’s precisely why the central bank’s job is to keep it low and steady. Having a core inflation rate of around 2% per annum when it is being driven almost entirely by tradeables deflation, is a good policy outcome whilst non-tradeables inflation is running at 3.5% per annum.
With that explanation behind us, let’s think about the RBA’s May meeting. The arguments in favour of a 50-basis-point cut are obvious and simple: the RBA’s made a terrible policy error, is now behind the inflation curve, and it needs to slash rates, and pull the currency down, to save trade-affected industries.
Another argument is that the RBA will not want to cut after the budget for fear of being seen to be endorsing the government’s decisions.
The arguments against 50 basis points, and in favour of a one quarter of a percentage point cut, are more nuanced (and accurate). The first is that a 50 basis point move signals the RBA has made a mistake, and undermines its credibility.
A second is that if the RBA wants to genuinely stimulate the economy, it will get more bang for its buck by spreading the cuts out over multiple months and maximising the “jaw-boning” effect.
I’ve talked a lot in the past about the virtual rate hikes we had in 2011 care of the RBA regularly beating the inflation drum, which everyone seemed to accept. The same is true in reverse, but most commentators appear to have forgotten. The media can get the community all excited about interest rate relief in May and June, rather than just in May alone. It’s smart psychology.
A third reason to go 25 rather than 50 is a very poorly understood problem that a big cut creates for the banks. I was speaking to the treasurer of a bank about this issue on Friday. He said to me, “God, I hope the RBA goes 25 and not 50.” I was a little surprised, and asked him why.
He explained that because all the banks have so much retail money tied up in term deposits these days, and because their variable-rate “wholesale funding” prices off the three month bank bill rate, a sudden cut in rates actually damages bank profitability. That’s because the banks cannot immediately reduce all the retail deposit and wholesale funding rates for existing funders.
So, perversely, by cutting 50 you are actually going to encourage the banks to pass on even less to borrowers to save their margins because they cannot immediately reduce their funding costs by the same amount as the RBA’s cash rate change. This bank treasurer argued that all Australian banks will have the same problem.
A final obvious reason to go 25 and not 50 is that you get the benefit of much more information. You get to evaluate the budget, see the next round of unemployment and labour cost data, watch the reaction of the currency, and then re-calibrate your growth and inflation forecasts. And a one month delay is not going to make a material difference to the economy.
Of course, exactly what the RBA does on Tuesday is harder to call. The six business executives on the board will probably opt for the simpler story that says the RBA has to slash rates by 50 to save the economy from low inflation. They would be wrong.
Christopher Joye is a leading financial economist and a director of <a href="https://www.ybr.com.au/savings/index.cfm">Yellow Brick Road Funds Management</a> and Rismark. The above article is not investment advice.
 
 
 
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A 50-basis-point interest rate cut would undermine the RBA’s credibility: 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. 
&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] 
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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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