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The low Q4 GDP number of 0.4% combined with the downward revision to Q3 will have been a negative surprise for the RBA.
We really need to see unemployment tomorrow to work out whether this is a true game changer for interest rates.
But the probability of a cut this year has now risen, to be sure.
The RBA will, however, need more confirmatory evidence...


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Christopher Joye’s video take on today's weak GDP figures

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The economy is travelling around “trend”, inflation is sitting in the middle of its target band, and market lending rates are about where they need to be. To this line of thinking, <a target="_blank" href="https://www.propertyobserver.com.au/economy/cash-rate-is-priced-to-perfection-christopher-joye/2012030553687">rates are priced to perfection</a>, or as close to perfection as one could reasonably expect to get.
The RBA made the right call by keeping rates unchanged today.
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Christopher Joye’s video take on RBA decision

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Today the RBA will likely keep its cash rate steady on the basis that it believes the economy is travelling around “trend”, inflation is sitting in the middle of its target band, and market lending rates are about where they need to be. To this line of thinking, rates are priced to perfection, or as close to perfection as one could reasonably expect to get.
And it is hard to see how Australia’s banks will undertake a second round of “out-of-cycle” hikes given that funding costs have plummeted since their spike in January. By way of illustration, CBA issued a AAA-rated covered bond at 1.75% over its benchmark rate in late January. Today the cost of that same bond is 50 basis points lower at circa 1.26% over.
As another indication, the Australian credit default swap index, which is a proxy for financial stress that measures market perceptions of the chance Australian companies will default on their loans, is today back around its July 2011 levels, and nearly 40% lower than its late 2011 highs.
Having said that, we know that the RBA’s complex board is not always unified around interest rate decisions (in striking contrast to what some media commentators have claimed). Outgoing board member Graham Kraehe revealed in The Australian newspaper several weeks ago that the seven non-RBA members of the board, which include six dovish private-sector representatives, had “regularly” rolled the governor’s (or “staff”) monetary policy recommendations:
“There have been a number of occasions when the basic recommendation from the staff hasn't been adopted… I would not suggest there has been an increase when the staff said there should be a decrease. But we (the non-RBA staff) have said, 'Let's not move, let's sit'… And that has happened reasonably regularly."
Note how Kraehe unwittingly concedes that the non-staff members of the board have never argued for higher rates and confirms their implicitly dovish bias. This week we also had the ALP-aligned economist Stephen Koukoulas inform us that there are “many” current board members who want to see lower rates:
“Whether the RBA cuts in March is not at all clear. There is no doubt it could (should) cut interest rate without fuelling a lift in inflation. This judgment is shared by many board members”
While the RBA’s meeting today should be something of a non-event for the economy, the data flows later in the week could have a decisive influence on the outlook.
The two key pieces of information we get are the fourth quarter estimate of real economic growth (or GDP) on Wednesday and the monthly unemployment rate update on Thursday. Recall that real GDP printed a “surprisingly” strong 1.4% and 1% in the second and third quarters, respectively.
The RBA has argued in its Statement on Monetary Policy that Australia’s economy was actually running slightly “above trend” in the second half of the year. In contrast, there are others, such as Koukoulas, who claim that the economy is actually much weaker than the RBA believes, and demonstrably “sub-trend”.
Tomorrow’s GDP results will help resolve this debate. The consensus economist prediction is around 0.7%, or a touch under 3% annualised. However, many analysts think that the risks are skewed to the downside. Goldman Sachs, for example, is forecasting just 0.4% growth. Merrill Lynch’s Saul Eslake is similarly minded. The guys at Goldman have even canvassed a 0% outcome, which they correctly contend would be a “game changer” for the RBA.
Of course, if real GDP prints at 0.8% or higher, and there are no fundamentally view-changing revisions to past data, the RBA’s comparatively optimistic position would be vindicated.
The GDP data could, therefore, materially alter the expected monetary policy path one way or another, which is obviously important for the highly interest rate-sensitive housing sector.
On Thursday we get another piece of the economic puzzle in the form of the monthly labour force data. In concert with recently robust GDP prints, the stubbornly low unemployment rate has frustrated those who were forecasting that the RBA would cut rates to as low as 3.5% by June this year. In the last three months Australia’s unemployment rate has fallen from 5.3% (initial estimate), to 5.2%, and, in February, to 5.1%. Yet the RBA and most economists still expect it to rise to around 5.5%.
As I have argued in these pages for months, a number of leading indicators insinuate that the labour market is healthier than many would have us believe. The much more comprehensive “unemployment benefits” (or “dole”) data fell for most of 2011. Likewise, the Department of Education, Employment and Workplace Relations’ leading indicator index (red line in the chart below) has painted a more positive picture than the ABS’s numbers.
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/march61.gif"><img src="/images/stories/march61thumb.gif"></a>
Finally, growth in ANZ’s closely followed “job ads” index has led its economists to conclude that the peak in the unemployment rate may, in fact, have already arrived (give or take the monthly volatility).
Notwithstanding this, many expect that the jobless rate will creep higher on Thursday. A surprisingly weak fourth-quarter GDP estimate packed with a significant increase in the unemployment rate could energise the RBA’s currently tenuous “easing” bias. Perversely, this would probably be good news for Australia’s housing market.
Based on RP Data-Rismark’s new daily hedonic home value index, Australian dwelling values rose 0.8% in February, but that only partly cancelled out a slightly larger fall in the seasonally weak month of January.
More encouraging are the partial housing data. Australia’s largest mortgage broker, AFG, has reported its best February month on record, processing $2.8 billion of new home loan applications. This compares with $2 billion in February 2011 and $2.2 billion in February 2010.
While some spin the ABS and RBA housing credit data by highlighting that it is at, or near, “all-time historical lows”, the truth is that new home loan growth is expanding at around the same pace as disposable household incomes. This is what one would expect, and is not a harbinger of housing Armageddon.
Finally, there are some tentative signs in RP Data’s weekly auction clearance rates that the housing market may find a more solid base in 2012. We only have six weeks’ worth of data to go on, but, as the chart below shows, February yielded the best auction results since March 2011. There is seasonality in this data, so it needs to be interpreted with care. The one thing we can say is that this is certainly much better than the counterfactual of clearly deteriorating conditions.
 
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<a title="Click to enlarge" rel="shadowbox" href="/images/stories/march62.gif"><img src="/images/stories/march62thumb.gif"></a>
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
 


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Cash rate is priced to perfection: Christopher Joye

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After several years of research and development, Rismark and RP Data, in conjunction with the Australian Stock Exchange (ASX), have announced this morning two global firsts in the closely followed housing space:
(1) the launch of the world’s first genuine “daily” house price index suite, which will cover all the major cities and the national market and will be quoted by the ASX as a precursor to the development of exchange-traded products, such as house price index-linked “futures”; and
(2) the launch of house price indices that track the change in the value of the overall asset class (known as the “stock”) rather than simply being limited to the 5% to 6% of all homes that transact each year (called the “flow”).
Based on their new daily hedonic home value index, RP Data-Rismark report that dwelling values across Australia’s eight capital cities rose 0.8% in the month of February, although due to a slump in the seasonally slow month of January year-to-date dwelling values are still soft-to-sideways (-0.2%).
Encouragingly, in the month of February, dwelling values rose 0.8% in Sydney, 1.8% in Melbourne, 1% in Adelaide, 2.2% in Hobart, 5% in Darwin, and 1.9% in Canberra. The only cities to record falls in home values in February were Brisbane (-0.1%) and Perth (-1.8%).
These ASX-quoted daily house price index products should improve the accuracy and timeliness of the information available on Australia’s largest investment class, residential housing, which is valued at $4 trillion in total. They will also offer us the first historical insights into what happens to house prices on an “intra-month” basis.
In the ASX’s release today, Rismark’s Ben Skilbeck said, “RP Data-Rismark’s daily index is specifically designed for ‘trading’ purposes and tracks the value of an investment in a self-financing portfolio of dwellings. The index removes biases from renovations, alterations and additions so as to examine true changes in market value. The daily indices also address the compositional biases that plague ‘median’ and ‘repeat-sales’ techniques.”
Analysts in this area will recall that most house price indices currently report on a quarterly frequency. Rismark and RP Data broke ground by publishing a low-volatility monthly “hedonic” house price index back in 2006, which has been embraced as the leading benchmark by the RBA and bank economists.
Bill Evans, chief economist of Westpac, commented, “RP Data-Rismark are the RBA’s ‘preferred data analysts’ for house prices,” while CBA’s Craig James said, “RP Data-Rismark’s index has emerged as Australia’s authoritative source on home price trends”.
But the notion of accurately tracking daily movements in Australia’s most talked-about asset class is a potential game changer. As the first chart below shows, the new daily index moves in a generally similar fashion to the old monthly version when calculated over the long run (in this case since 1995).
Click to enlarge
<a href="/images/stories/march11.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/march11thumb.gif"></a>
However, on an “intra-month” basis the daily index opens up fluctuations in house prices that frankly nobody has ever been exposed to before. This is highlighted by the second chart below, which compares the daily index with its monthly predecessor, but this time sampling daily and monthly, respectively. Observe how the monthly index looks like a smoothed version of the daily.
Click to enlarge
<a href="/images/stories/march12.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/march12thumb.gif"></a>
Throughout history researchers have been restricted to “low-frequency” house price proxies that look like the red line in the above chart. Around the world, house prices are typically reported with a one-month to four-month lag. Even in Australia, RP Data-Rismark’s old benchmark was reported with a one-month lag while the ABS publishes on a quarterly basis one month after the end of the quarter.
Going forward, we will get daily updates on movements in Australian home values. Will this open us up to the wild swings associated with the share market? The short answer is: no.
In the final chart I’ve compared daily changes in the S&amp;P/ASX 200 share market index with RP Data-Rismark’s new benchmark. This puts into striking perspective questions about the volatility of the new daily measure, which, as you can see, is substantially less variable than its listed equity equivalent.
Click to enlarge
<a href="/images/stories/march13.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/march13thumb.gif"></a>
The differences in the chart above accord with what we understand about housing as an asset class more broadly: once you diversify at the national “index” level, volatility is very low and a fraction of the riskiness of equities. Of course, it’s not very easy to invest in a house price index. That is precisely why the ASX has got involved.
ASX product development manager Brian Goodman said today that the exchange is investigating “the creation of exchange-traded products with the objective of allowing investors to replicate the performance characteristics of Australian residential property. The ability to obtain and optimise residential property exposures with an exchange-traded product will enable investors to efficiently manage exposure to this asset class.”
“The RP Data-Rismark indices overcome a number of shortfalls present in existing indices and in so doing support ASX’s longer term product development objectives” Goodman said.
One obvious question is: how did they do it? The technology underlying the new daily index is sophisticated, and, if you are really interested, you can read three different papers on it <a href="https://www.rpdata.com/research/rp_data_rismark_home_value_index_methodology">here</a>.
The daily index leverages off the fact that in Australia all homes sales are collected and reported by valuer-general’s offices – i.e., we don't have “small sample” biases like the US or UK – and RP Data’s enormous financial investment in extra data-gathering.
The simplest explanation as to how the index works is this. First, RP Data has very detailed information on 99% of all Australian homes, including the exact address, land size, property type, historical sales prices paid for the property, its distance to the local GPO, listing information for the home and like dwellings in the area, its number of bedrooms, bathrooms, and car spaces, and whether the property has things like a pool or a tennis court. In addition to this information, RP Data captures, on average, about 1,400 new home sales every day.
For the purposes of the daily index, RP Data and Rismark have taken a portfolio of around 5 million capital city homes across Australia, and all of the specific attribute information that pertains to them, and used the flow of incoming sales data to re-price the portfolio.
This is similar to the way most financial market indices work. Consider the ASX’s All Ordinaries Accumulation Index. This includes every company listed on the ASX. Each company has a weighted contribution to the index. As new sales data is received, the company’s price is updated, and the index changes accordingly.
RP Data’s Tim Lawless adds, “The daily index production is reliant on timely updates from RP Data’s core database of more than 170 million property records. It has been independently audited and is calculated every day on RP Data’s secure servers.”
Researchers will want to ask obvious questions, like: how do the returns differ over time between the two methods; is the new index more volatile than the daily index; and why don't you seasonally adjust the ASX indices?
Analysis of the new and old indices shows that both their monthly volatility and average annual returns are very similar (e.g., over the last few years, monthly volatility for the daily index has been 0.84% while the old index’s volatility was 0.83%).
This is important. As the first chart above shows, the daily index does not tell us anything especially new about the low-frequency direction of Australian home values over the last 15 years.
It will, however, give us important new insights into weekly, fortnightly and monthly changes in national home values on a daily, rather than a one-month-lagged, basis.
On the question of seasonal adjustment, RP Data and Rismark are currently undertaking a detailed review of the methods they use for controlling for seasonality in house price movements. Upon completion of the review, they will commence publishing a seasonally-adjusted ‘analytical series’, much like the ABS does with its inflation data.
However, as is the case with financial contracts traded on inflation (or any other asset for that matter), the “tradeable” index will track actual or “true” changes in home values, rather than a statistically smoothed series.
Christopher Joye is a leading financial economist who serves as a director of Yellow Brick Road Funds Management and Rismark International. Christopher was actively involved in the development of the <a href="https://www.rpdata.com/research/daily_indices">daily indices</a> during his time as an executive of Rismark.
 
 
 
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New daily index shows Aussie home values rose 0.8% in February: Christopher Joye

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Today I want to talk about our $100 million housing challenge to US fund manager Jeremy Grantham, and a new revolution in trading and risk management that is about to hit our financial markets. But first some background.
Regular readers will know that after years of research and development, Rismark designed the intellectual property that allowed it to introduce Australia’s first “hedonic”— or “quality-controlled” —house price indices with its strategic partner, RP Data, which is the nation’s largest real estate data company.
We also broke new territory by producing dependable “monthly” measures of house price movements (APM and the ABS report quarterly), and by publishing “seasonally adjusted” index numbers for the first time.
Finally, we extended our house price index coverage to include non-capital city, or “regional” markets, which while accounting for 40% of all dwellings by number, had historically been neglected by major index suppliers.
On every step of this complex journey we have consulted closely with, and often been guided by, academic, government and industry authorities, such as the RBA.
Today it is safe to say that despite a number of competitive alternatives, RP Data-Rismark’s index suite is recognized as the market leader.
There were two key reasons why we spent so much time and effort transforming Australia’s house price technology. And the first motivation led to us inevitably addressing the second.
Approximately 11 years ago I was in between jobs at Goldman Sachs and the RBA. At that time, most Australian house price indices were based on notoriously unreliable “medians”, and therefore problematically poor.
This would emerge several years later as a serious policy issue targeted by the RBA and Treasury for analytical remedy. That is, government economists pro-actively called for the development of new house price measurement tools.
Financial contracts tied to house price indices, otherwise known as derivatives, also did not exist. It was not until mid-2006 that the Chicago Mercantile Exchange would launch the world’s first house price index “futures” market based on the popular Case-Shiller indices.
This was also several years before I started working on <a href="https://mrcltd.org.au/research/home-ownership/volume_1.pdf" target="_blank">my 380-page paper</a> on housing policy for then prime minister John Howard. In that study, I noted, “while there are exceedingly sophisticated capital markets for corporate debt, equity, and exotic derivatives therein the same cannot be said for what is, in fact, a much larger asset category: owner-occupied housing”.
While wandering along the beach on a break one day in 2001 I asked myself why people couldn't hedge the biggest financial risk they faced (aside from a loss of labour income) – that is, the risk of a decline in the value of their largest asset holding, which was typically housing.
Having worked over 2000 and 2001 with Goldman Sachs and studied economics and finance at university, I was familiar with the functions of financial markets. But actively traded financial contracts tied to the $3 trillion housing asset class were not available. So I asked myself, Why not simply create futures (or derivatives) tied to a house price index to enable people to cost-effectively hedge the risk of house price rises or falls?
As I started looking into this, I discovered that the principal problem was with the prevailing house price proxies. They were far too infrequently reported, and far too inaccurate, to hope to convince investors to commit billions of dollars to exchange contracts valued, or “marked-to-market”, against them. The project would thus be put on hold until I helped found Rismark, with funding from Macquarie Bank.
A number of years later the RBA and Treasury would independently arrive at the same conclusion, but from the vantage of policymakers wanting superior information on housing risks (recall that Australia had experienced a stunning house price boom in the early 2000s that exercised the minds of regulators).
By combining a team of world-class PhDs with hundreds of millions of dollars of valuable housing data, RP Data and Rismark were able to ultimately solve the analytical problem. Using regression-based “hedonic” methods that carefully control for each property’s unique attributes – such as its location and land size, and its number of bedrooms, bathrooms, car spaces, and so on – we’ve been able to radically enhance the quality of estimates of monthly changes in capital values and rents.
It’s also well documented in the media that we’ve been actively working with regulators and exchanges to develop liquid financial markets based on our patented index technology. Due to various embargoes that will be shortly relaxed, I cannot say much more on this front other than to recommend you keep an eye out for the launch of several “global firsts” in the housing analytics space.
This brings me to GMO’s founder Jeremy Grantham, who has argued that Australia suffers from the mother of all housing bubbles. When he first aired these remarks in 2010, we at Rismark challenged him to put his money where his mouth was. Specifically, we offered to work with Grantham to help him to “short” – or bet against a fall in the value of – one of our national indices over the ensuing three-year period.
In order to do so, we would have to find a counterparty to take the other side of this transaction: i.e., some individual or institution that wanted to effectively go “long”, or lock in the future returns associated with our index.
One blogger recently claimed, incorrectly, that we intended to take the other side ourselves. Our original article demonstrates that this was not, in fact, the case:
“To be clear, Rismark would need to work proactively with Mr Grantham to construct this transaction. We believe we have counterparties that would likely be prepared to contract with him. But it may take several months to facilitate (and cannot be guaranteed). “Before we can proceed, we require a firm, contractually binding commitment from Mr Grantham that should we be able to facilitate this transaction, he will indeed act on the advice that he’s offered to the rest of the world by committing a tiny fraction – less than 1% – of his capital to his predictions.”
How would Grantham have fared had he backed his own rhetoric? The indices that RP Data and Rismark produce for trading purposes are “total return” benchmarks, much like the ASX All Ordinaries Accumulation index, which tracks changes in capital values and dividends.
Since the end of October 2010, when we first outlined this idea, RP Data-Rismark’s capital city accumulation index has risen by about 0.2%.
So using this benchmark, which is the most likely index that a counterparty would wish to trade against (given they’d be expecting the capital gains and rental income realized from Aussie housing), Grantham would be down around $200,000. Call it evens.
If, on the other hand, he wanted to use the RP Data-Rismark index that follows changes in capital values, Grantham would be up about 5% assuming we could have found a counterparty willing to ignore incomes (or rents).
Of course, the proposed transaction was over a three-year horizon, so we are only 40% of the way through it. And given that a national house price index has annual volatility of 5% to 6%, we are still within the realms of what one might expect to see. Much like those analysts who predicted six RBA rate cuts to a 3.5% cash rate by June this year, it would be highly imprudent to bank profits that have yet to be crystallised.
It is certainly true that we devised this bet at a deliberately attractive juncture for the bearish Grantham. It followed the RBA slamming the housing market with a surprise double interest rate hike in November 2010, which we forecast could put downward pressure on house prices over 2011. And that is indeed what transpired with the help of some additional RBA jaw-boning.
The good news for Grantham is that this opportunity still exists. So while he did not have the courage of his convictions when we first proposed it in late 2010, he can still put the trade on today.
Following media coverage of our idea, Grantham did personally contact my brother-in-law about it, and GMO officials requested a meeting in Sydney. Independently, I also received some email enquiries from GMO’s head office in Boston. Curiously, when I actually met with GMO’s executives face-to-face they made it clear they did not personally subscribe to Grantham’s relatively extreme positions.
Nevertheless, in the event that Grantham still believes shorting Aussie housing is one of the best investments of all time, we would love to hear from him…
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
 
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Christopher Joye reignites his $100 million housing challenge to Jeremy Grantham

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Change seems to be the meme of the day. I guess by next week we could have a Gillard government, a new Rudd government, or, more improbably, an Abbott-led Liberal government. 
I think change is one of the hardest things for humans to internalise. We tend to be wired to taking all that we see around us as given and assuming that this slice of time will remain static. History teaches us that one of the few constants is, however, change. 
With this inspiration, I will try and address three questions about “change” today. 
First, has the change in interest rate expectations, and the banks’ controversial decision to raise rates, altered the outlook for Australian housing? 
Second, would it be hard to permanently change the competitive complexion of Australia’s banking system, which is subject to so much heated debate? 
And, lastly, should changes in market lending rates be tied to the RBA’s monthly meetings? 
To the detail. 
By the end of last year we had grounds for optimism about the direction of Australia’s housing market. During November and December, home values in Australia’s capital cities actually edged higher, on average, in seasonally adjusted terms. 
This was a noteworthy break from the 2011 trend of modest house price depreciation in concert with robustly rising household incomes. That is, striking improvements in affordability. 
The apparent turn in Australian housing conditions coincided with two very important interest rate reductions by Australia’s central bank, which, at the time, were fully passed onto borrowers by private sector lenders. This helped push average variable mortgage rates to levels that were clearly below their long-term averages. Fixed-rate loans are even more accommodative again. 
The final dynamic of consequence was the dramatic improvement in consumer expectations about their future finances, which I have discussed many times here before. 
Households went from budgeting for several rate hikes to banking on rate cuts. Indeed, the financial markets were forecasting a total of six RBA rate cuts by the middle of this year. I was of the view that while this was incredibly unlikely, it would almost certainly spark very sprightly house price growth if it did come to pass. 
Sitting in February 2012, things have changed. As we know, the banks have boosted mortgage rates back up by about 10 basis points. The RBA shocked most observers by not cutting rates in February. And consumers and the financial markets now no longer expect a huge amount of additional interest rate relief. 
These are the new facts we have to work with. While a central case cannot be quite as bullish as it was following the fully passed-through December cuts, it remains arguably characterised by one of stability. 
I am confident Aussie house prices will find a base at some point in the next one to two quarters. And, once they do, it is reasonable to think that the cost of housing will continue, as it has typically done in the past, to accrete broadly in line with purchasing power, and hence household incomes. 
Was there a time when the competitive contours of Australia’s housing financing market were very different to that which we are so accustomed to seeing today? 
It transpires that there was. I was recently wading through the ABS’s housing finance data when I decided to have a look at how the market share of different lenders varied through time. The chart below illustrates the results.
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<a title="Click to enlarge" rel="shadowbox" href="/images/stories/feb23.gif"><img src="/images/stories/feb23thumb.gif"></a>
In 1975, building societies and non-bank lenders accounted for about half of all the new home loans written. This situation, facilitated by tighter regulations on banks, including interest rate caps, persisted until the early to mid-1980s. 
A combination of financial market deregulation, the removal of barriers to foreign bank competition, industry consolidation, and the transformation of some building societies into banks, resulted in a structural change in the bank versus non-bank market shares from 50:50 to circa 80:20 by the late 1980s. 
After an additional rise in the banks’ share of the competitive pie to around 90% of all new flows in the early 1990s, something began to change. 
In short, the advent of a cost-effective, and arguably safer form of “matched” funding, which involved the packaging up and sale of entire parcels of home loans to third-party portfolio investors that were prepared to buy them, spurred a decade and a half of new competition with the return of non-banks, like Aussie, Wizard and RAMS, and also, importantly, empowered smaller banks and building societies, such as Adelaide Bank and CUA. 
Once again we were greeted by change, with a new industry equilibrium. Building societies and non-banks consistently attracted about one-fifth of all customers, with the banks keeping the remainder. 
One problem with the new funding medium was that it had no government support since the regulatory infrastructure was not divined with securitisation in mind. Bankers like to claim that those lenders that relied on securitisation had “flawed business models”. 
In truth, funding yourself via an arm’s-length sale of your assets is intrinsically safer than funding with an asset-liability mismatch: that is, borrowing in the short-term from retail depositors and wholesale creditors, and committing that money to long-term loans. The latter approach constantly exposes banks to the risk of insolvency, which is why they inherently need so much taxpayer support (and a liquidity provider of last resort known as the central bank). 
During the GFC, the government’s reflexive response was to protect the core of the financial system and worry about smaller competitors later. That is, it focused on so-called “system stability”. And so taxpayers guaranteed bank deposits, bank liabilities, and the central bank lent to the banks like it never had before. 
With the effluxion of time minds turned to how the increasingly uneven playing field could be levelled. This compelled the government to support the liquidity of securitisers by having a subsidiary of the Treasury invest in AAA-rated portfolios of bundled home loans. By definition, this was safer than guaranteeing more lowly rated banks. 
Nevertheless, we have today an unprecedented concentration in major bank power, with building societies and non-banks now accounting for just 7.5% of the flows. There is naturally an almost unfathomable amount of capital that has a vested interest in preserving this state of affairs. It will not, therefore, be easy for policymakers to effect any change to it. I think somebody once called this “money-power”. 
The final question I posed was whether the banks are correct in arguing that they should be able to set their lending rates independently of the RBA’s monthly meetings. 
The RBA’s former head of domestic markets, John Broadbent, notes that, “funding costs are not entirely determined by the [RBA’s] cash rate, but the major determinant is either the present level of the cash rate or expected changes in the cash rate”. 
The other main driver of costs is the margin banks pay above the government bond rate for their funding. This spread reflects, among other things, the risk of a bank defaulting on its debts. Much of the time these credit spreads are relatively stable. Every couple of decades, however, a credit crisis comes along and the markets reprice bank risk. 
Yet the highest-frequency influence on funding costs is the RBA’s monthly board meeting, which sets the overnight cash rate. The RBA’s goal is to work out whether the banks’ lending rates are at the “right” levels to keep inflation within its target band. If they are not, the RBA adjusts its cash rate. 
Millions of Australians with variable-rate loans have been conditioned to this convention. While banks are right to highlight other influences on the price of money, they are wrong to create an artificial disconnect with monetary policy.
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
 
 
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Big change in bank vs non-bank home loan market share since 1975: Christopher Joye

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Following the RBA’s “surprise” decision to hold rates steady in February, financial market pricing has changed quite strikingly.  My first chart below compares the financial market’s best estimate of the RBA’s cash rate in June this year with the RBA’s actual cash rate over the last 12 months.
The implied or predicted cash rate, which is represented by the blue line, is derived from the Sydney Futures Exchange’s 30-day interbank futures contract for the month of June 2012, which cash settles on the average cash rate in June. It is, therefore, the best proxy of investors’ future beliefs apropos the actual cash rate in June that we have available to us.
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The chart vividly illustrates how fickle financial market beliefs can be: they swung from pricing in more than two rate hikes back in February 2011 – and that was from a far higher base cash rate of 4.75% (it’s 4.25% today) – to an incredible six-plus rate cuts in late November last year when the doomsayers really had their way. 
The convergence of the blue line towards the red one, which denotes the RBA’s prevailing cash rate, shows us how investors have drastically pared back their expectations for monetary policy accommodation. 
Today the “market” is forecasting that we will only get one more RBA rate cut by June notwithstanding the major banks’ efforts to protect their oligopoly profits via out-of-cycle hikes. Another rate reduction following the two in November and December last year would push the RBA’s target down to a rather stimulatory 4%. 
One take-away from this analysis is that investors are not especially good at predicting rates. Having said that, they would appear to be better than economists. In a recent study, RBS’s Kieran Davies and Felicity Emmett empirically assessed the predictive powers of economists compared with a range of financial market benchmarks. In their own words: 
“We tested the accuracy of futures market pricing of the outright level of the [RBA’s] cash rate in a year’s time versus economist forecasts. Our analysis shows that the futures market comes out best on various measures of forecast accuracy, for both the long term and recent history, although neither approach is particularly good. The futures market beats the economists’ forecast 60% of the time, although both approaches persistently overestimate the cash rate and both have large average absolute forecast errors (1.1pp for the futures market versus 1.2pp for the economists). Worryingly, both approaches often point in the wrong direction to where the cash rate ends up – this happens 36% of the time for futures pricing versus 41% of the time for the economists.” 
Davies and Emmett’s finding that financial market expectations can end up wildly divorced from reality is reinforced by the chart above. In the first six months of 2011, the market’s estimate of the June 2012 cash rate was directionally way wrong. At one stage in February last year investors’ best guess at the June 2012 cash rate was 5.4%, which is nearly five standard RBA hikes above its present-day level. 
Yet investors are not stupid. They were being guided by the RBA’s communications, which at that time were pointing to higher rates given the vigorous core inflation pulse that was expected by the bank in the years ahead. 
Then, of course, the world changed. We had a rolling series of natural, political and economic disasters in Japan, the Middle East, Europe and the US. And so by July interest rate expectations started to swing from hikes to pricing in cuts by June 2012. Importantly, the market managed to manoeuvre its “base case” well in advance of the stickier views of economists, who, with a few notable exceptions, took longer to buy into the emerging offshore downside. 
Based on the best available information today, it would appear that the financial markets – and, frankly, some very dovish economists – overreacted. In late November 2011 the market was pricing in an incredibly low 2.9% cash rate by June, which is about the same level it reached during the worst days of the GFC. While no credible economist got quite this negative, there were certainly some forecasting cash rates as low as 3.5%, which would mean another three cuts from the current threshold. 
Of course, what actually transpires in the future cannot be known with confidence, and there is a state of nature in which these worst-case possibilities could still be fulfilled. 
The RBA’s striking policy shift in late 2011 has had a profound impact on consumer expectations. According to the latest Westpac-Melbourne Institute Consumer Sentiment survey, the average Australian has gone from budgeting on two to three rate hikes in mid-2011 to thinking that rates will remain unchanged over the next year (having already pocketed two cuts). 
The RBA’s decision to leave rates unchanged in February had a similar effect on consumers to that which has been observed in financial markets. Prior to the last RBA board meeting, 41% of Australians expected even lower interest rates over the next year, with only 31% banking on rises. After the RBA’s “shock” February call, the share of “doves” slumped to 30% while those expecting higher rates (i.e., “hawks”) soared to 48% (see chart below).
Click to enlarge
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Today’s final chart shows Westpac’s analysis of variations in consumer rate expectations over time, expressed in the form of forward variable mortgage rates. And it emphasises a point I have belaboured here, which has significant consequences for housing market dynamics: specifically, the change in consumer interest rate beliefs has been far larger than the actual adjustments to the RBA’s cash rate.
Click to enlarge
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In June 2011, the average Australian thought the RBA would lift mortgage rates to a very restrictive 8.6%. Today average Aussies believe that home loan rates will be basically unaltered at around 7.4%. 
I’ve argued here that with unemployment sitting close to its “full employment” level, underlying inflation bubbling along inside the RBA’s target 2% to 3% band, and the economy more broadly expanding at an unequivocally “trend” pace, a period of interest rate stability would probably be a good thing. 
The RBA knows it is fallible and does not want to over-engineer the price of money. So, unless we get some new data that decisively shifts the RBA’s base case, there is a persuasive argument in favour of it not interfering further with the economy.
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
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Consumers expect no change in interest rates: Christopher Joye

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Today's unemployment data has shocked financial markets and those economic pundits who have hogged the output of innumerable power stations publishing silly predictions of labour market gloom and economic Armageddon for Australia. Against almost all expectations – with the exception of this correspondent – Australia's unemployment rate has fallen to 5.1% for the second month running on the back of very strong total jobs growth of 46,300 persons and, importantly, an unchanged participation rate. UBS's Scott Haslem comments, "The unemployment rate unexpectedly fell 0.14 percentage points to 5.1%, after several months at 5.2%, and down from a recent peak of 5.3% in Aug/Sep last year... Overall, this was an undeniably strong print for the month...the unemployment rate now more clearly looks to be edging back down from its modest rise to 5.3% (from a recent low of 4.9% in April last year)... This is clearly a positive for consumer confidence... Further, with the RBA remaining on hold in February and given their expectation of a rise in the unemployment rate to 5.5% by mid-year, it seems unlikely they would ease rates from here unless unemployment jumps sharply over coming months or late April's Q1 CPI surprises to the downside." This data once again reiterates the core resilience and strength of Australia's labour market in contrast to countless hysterical claims to the contrary. It has also well and truly vindicated the RBA's decision to stay rates in February, which this author predicted. For the last six months I have sought to highlight the far healthier narrative conveyed by the government's more comprehensive “dole” data, with both the number of unemployment benefit recipients and the number of job seekers on the dole falling in absolute terms throughout the course of 2011 (and by even more expressed as a share of the total labour market). A slight uptick in the volatile labour force survey compelled almost the entire economics community to buy into the case for substantial RBA rate cuts. Today's data will cause mayhem for many economists, who will be forced to once again revise their rate projections, and, to a lesser extent, the RBA, which was banking on a gradual increase – rather than a decrease – in the unemployment rate. It is also significant that this data coincides with a ream of other positive domestic and offshore newsflow, including healthy local business conditions and business and consumer confidence, combined with better-than-anticipated data out of China, India, the US and Europe. Those hawks inside the RBA must be scratching their heads wondering – as I have many times here – whether its knee-jerk December rate cut was, in fact, a major policy error pushed by an increasingly dovish RBA board. The newest member of the ostensibly inflation-targeting RBA board, Heather Ridout, curiously told Bloomberg that she was a "dove" and would prefer to foster economic growth over price stability, which is the RBA's explicit priority. The probabilities of a rate cut in March have now fallen materially. As I have noted here before, it is not totally inconceivable that the next move in interest rates could be up rather than down, although I would emphasise that the RBA will likely remain on hold for some time before it countenances correcting the cash rate.
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
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Unemployment figures make Aussie economy doomsayers humiliated again: Christopher Joye

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Stability is an underrated virtue. Or, put a little more eloquently, exercising the “option to wait” is often underprized or overlooked completely. Human nature means that we tend to be in perpetual mental motion during our waking hours. Sitting, listening and patiently observing does not come easily to us (and this author is the worst offender).
For a taxpayer-owned bank like the RBA, which tries to control the market price of money, there is always a risk of doing too much, of over-tooling its tremendously powerful policy instrument. Weighed against this is the RBA’s odd board composition, which in addition to the Treasurer’s proxy includes six highly conflicted private sector representatives. A new addition to this cabal is the manufacturing industry lobbyist Heather Ridout. Committees are natural breaks on action.
In one of her first post-appointment statements Ridout unwittingly came out and undermined the RBA’s contemporary policy mandate, as stipulated in the <a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-5-30092010" target="_blank">five agreements</a> signed by the RBA and the Treasurer of the day since the inaugural “Statement on the Conduct of Monetary Policy” in 2006.
In an interview with Bloomberg, Ridout described herself as a “growth girl”. And “asked if she was a so-called dove, the word used to describe a policy maker who leans toward economic growth over fighting inflation, Ridout agreed she is,” Bloomberg controversially reported.
The RBA and successive Liberal and Labor governments have gone to great lengths to make it clear that the RBA is an “inflation-targeting” central bank. Price stability is its main goal. Other objectives embedded in its original 1959 legislation, such as full employment and the long-term prosperity and welfare of the nation, flow as natural consequences, in the RBA’s view, from it first-order priority of delivering “price stability”.
Indeed, there is a well-known short-term conflict between maintaining low inflation and fostering growth. Over the long-run, however, no such trade-off exists. In the words of the RBA, “price stability is a crucial precondition [emphasis added] for sustained growth in economic activity and employment”. One begets the other. This is endorsed by academic research, which arrives at the obvious conclusion: the most successful central banks focus on a single policy goal, rather than two or three.
Talk of a “dual mandate” among some economists, egged on by oblique public relations-style references by the governor to the full employment objective in the RBA’s 1959 Act, are – or at least for the past 20 years, have been – a furphy.
It’s quite simple: if Australia has a serious inflation problem, the RBA will use interest rates to staunch those price pressures without consideration for the short-term employment costs. If and only if core inflation is within the RBA’s 2% 3% target band, or expected to fall back into the band, will the bank then contemplate reducing rates to foster more rapid employment growth. It’s an open question whether Heather Ridout appreciates the nuances associated with this distinction.
Returning to my opening remark, there is much to be said for the RBA having an extended pause until the weight of credible economic evidence pushes it in one direction or another. This could involve continued appreciation of the currency (and the trade-weighted index). It could mean a marked deterioration in the labour market signalled by a sustained rise in the unemployment rate. It might involve withering shocks from overseas.
As I’ve argued for years, today’s world is a far more complex, and information-rich, place than it ever has been before. I believe financial markets are getting more volatile (or noisy) as the speed with which information is transmitted has accelerated. There is also a serious question as to how the human brain, having had centuries of conditioning to steady information collection and processing, is currently coping with our new world order in which it is constantly bombarded with conflicting, high-velocity data, much of which is of dubious, unedited quality.
You only need to look at the online headlines run by some of our major newspapers to visualise the problem. These are deliberately designed to shock and awe, and are often misleading. Journalists who consistently peddle the end of the world prosper by grabbing the most eyeballs, which partly explains Steve Keen’s popularity.
I have no hard opinion as yet on what the RBA will do next month. Neither does the bank. Our probabilities shift every day as we learn more about the state of the world. If you want a “point estimate”, I can tell you that the financial markets think the RBA will cut rates in March. My only other contribution at this juncture is that in the absence of new view-changing data, interest rate stability would be a good thing.
In the RBA’s latest Statement on Monetary Policy, the bank has helpfully summarised the current level of lending rates. What we learn is that prior to the circa nine basis point out-of-cycle hike in rates this week, the cost of home loans was slightly below their average since the mid-1990s. The cost of small business and corporate loans was about bang-on average (see the two charts below). This is contextualised against an economy growing “at trend”.
<img style="display: block; margin-left: auto; margin-right: auto;" src="/images/stories/joyerba1.jpg">
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Maybe the bank could do a bit of fine-tuning and chisel rates one notch further. Its cut in December is increasingly looking like a misstep – in the sense that it was not really needed, and may have been better squirreled away for another rainy day. That said, one rate move does not normally change the price of eggs in China. And the out-of-cycle increases by the banks this week actually get the RBA to where it reportedly wanted to be back in December, having (incorrectly) assumed that the banks would only pass on about half the cut. And if we further suppose that the global economy in February is in slightly better shape than the RBA expected in December, rates are possibly a little ahead of where they need to be.
What I will say is that the attempt by ANZ to try and set lending rates independently from the RBA is not overly helpful. Doubtless it helps if you are a bank looking to always maximise your margins unilaterally in order to exceed shareholder return expectations. I have no beef with that.
However, as Steve Muchenberg, the head of the Australian Bankers Association, a little surprisingly notes in the AFR today (in response to <a href="https://www.propertyobserver.com.au/finance/our-banks-are-too-big-to-fail-too-few-to-be-competitive-mark-bouris-and-christopher-joye/2012020853307" target="_blank">Mark Bouris and my op-ed</a>), banks need government support to survive. They are not run-of-the-mill private companies.
With this in mind, Bouris made a comment yesterday that resonated with me. He said, “It’s bad enough that 2 ½ million home owners hold their breath on the first Tuesday of every month in anticipation of the RBA’s rate decision. Now with all of the major banks hitting customers with out-of-cycle rate hikes, mortgage holders are feeling more confused and nervous than ever before.”
Initially, I thought this was just rhetoric. Reflecting a bit further, Bouris’s argument stimulated an insight that I don’t think has been tendered before.
When banks talk about funding cost pressures, they are usually referencing the price of money they borrow from institutional investors. When banks borrow from retail depositors, we give them our money without really thinking about, or charging, a “credit spread” or “risk premium”. We don't say to ourselves, “Gee whiz, ANZ is riskier than Westpac, so I am going to ask for a higher savings rate from ANZ”. Institutional investors, on the other hand, do exactly this.
Yet if we assume that credit spreads are generally stable – that is, there are not large daily swings in the market’s perception of Australian bank risk (given their government guarantees) – then changes in the cost of money that banks borrow should, in fact, be most frequently determined by the RBA’s cash rate, and expected future changes in that rate (as captured by changes in the yield curve). This, after all, is the underlying benchmark rate upon which the banks’ borrowing are priced.
This tells us that most of the time the RBA should control changes in lending rates. But not all of the time. The banking ructions of the past few years have been the exception to this rule. Setting aside the all-important question of what returns government-guaranteed banks need to deliver to their shareholders (likely lower than those the majors currently target), the banks are justified in adjusting their own product costs for changes in funding costs.
But should they try and price their products completely independently of the main driver of that price: the RBA’s monetary policy settings? I don't think so.
Years ago I argued that these out-of-cycle bank moves would make the RBA’s job more difficult and harder to predict. Some dismissed this, claiming that the RBA always determines lending rates and would simply adjust the cash rate until it gets the lending rates it desires.
There is, of course, a delicious contradiction here: on the one hand, we are told that the RBA ultimately sets lending rates; on the other, we are informed that the RBA’s cash rate only influences a minority of bank funding costs. Go figure.
Even with stable bank credit spreads, we have no assurance the oligarchs will comply. With four institutions controlling 80% to 90% of the market, they can simply continue expanding margins. In practice, public pressure will likely prevent this from occurring.
The issue I am more interested in is the RBA’s policy path. It is now undeniable that Australia’s central bank has a much pricklier challenge on its hands with the quasi-private major banks setting lending rates independently of its cash rate.
Ironically, this only serves to underscore the power of the oligopoly. I think it would be smarter public policy and commercial strategy for the banks to embrace Bouris’s suggestion and set rates in lock-step with the RBA with a get-out-of-jail card. If funding costs change to the point where they cannot hit reasonable shareholder return expectations, then they can make their unilateral adjustments.
This, I think, is the way it should be. It would afford much more certainty to the millions of Australian families and business borrowers who are looking over their shoulders right now scared about when the next hike really will arrive. As far as they are concerned, the banks can slam them at any time.
More give, less take, guys…
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
 
 
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Banks’ out-of-cycle rate rises exception, rather than rule: Christopher Joye

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Will they or won’t they? They did. Today ANZ lifted its lending rates even though the RBA has left its underlying benchmark rate, known as its “target cash rate”, unchanged. 
Roughly 60% of all bank funding comes from retail deposits, which price off the RBA’s cash rate. This pricing is almost 1:1 when it comes to at-call deposits, and a little less than 1:1 as it relates to term deposits (I will explain why in a second). 
The great thing about retail deposits, which are the major banks’ primary source of funding, is that mums and dads don't charge the banks a “credit” or “risk premium” like more sophisticated wholesale investors do. This risk premium refers to the extra return required by investors in recognition of the very small chance that a bank could go belly-up. Critically, this low probability risk of failure changes every day. 
About 30% of the banks’ funding comes from local and offshore “wholesale” or institutional investors (with the rest originated from shareholders that take equity risk). 
The price of wholesale funding has three key components, and one is the underlying “benchmark”, or “swap”, rate over the same term that the bank secures the funding (or loan). So if CBA is issuing a three-year loan to an institutional investor, the underlying benchmark rate will be three year interest rates. These rates are basically the market’s best guess as to the average cash rate over the next three years. 
This is exactly why the RBA’s former head of domestic markets, John Broadbent, recently “scoffed at statements by ANZ Australia boss Philip Chronican that the overnight cash rate influenced only about 20% of funding costs. “That’s fundamentally bollocks,” Broadbent said, according to the Australian Financial Review. Broadbent continued, “Banks’ funding costs are not entirely determined by the [RBA’s] cash rate, but the major determinant is either the present level of the cash rate or expected changes in the cash rate.” Very true. 
There are nevertheless two other factors at play. These are the abovementioned credit or risk premiums that investors add on top of their expectation of the RBA’s future cash rate. Both relate to bank risk. One is a proxy for generic bank risk, and the second is issuer (or bank) specific (or, more particular, the risk the bank defaults on its obligations). 
All you really need to understand is that CBA pays a premium interest rate above the underlying benchmark rate, which is set to compensate investors in CBA loans for the risk of CBA defaulting. 
As an example, when CBA issued its $3.5 billion covered bond to Australian wholesale investors in January, it paid 1.75% per annum over the standard benchmark rate. Since that time, wholesale bank funding costs have fallen, and the same covered bond only costs about 1.35% per annum over the benchmark rate. That represents a significant 0.4 percentage point decline in bank funding costs. 
Of course, you can have an increase in the banks’ risk premiums combined with a decline in the underlying benchmark rate that actually reduces overall funding costs. We saw this occur in 2011 with long-term interest rates in Australia hitting record lows while the banks’ risk premiums were rising.
The real question for both the major banks and the public is whether the banks should “eat” or absorb any funding cost increases, or whether they should have the ability to force mums and dads (and their corporate customers) to absorb them. 
In an <a href="https://www.propertyobserver.com.au/finance/our-banks-are-too-big-to-fail-too-few-to-be-competitive-mark-bouris-and-christopher-joye/2012020853307" target="_blank">op-ed this week</a>, Mark Bouris and I noted that there was a curious puzzle that characterised Australia’s highly concentrated banking system. Specifically:
“In all properly functioning financial markets there is an inexorable trade-off between risk and return. The higher the risks you take, the higher the returns you generate. But in Australia this maxim has been turned on its head: in Australia, the supposedly lowest risks banks with the highest credit ratings — the majors — are somehow able to yield the highest shareholder returns. In contrast, the smallest banks, with the lowest credit ratings, produce much lower returns on equity. This complete reversal of the inverse relation between risk and return is the purest possible illustration that taxpayer subsidies are being used for the benefit of the banking oligarchy to the detriment of meritocratic democracy.” 
Contrary to a lot of incorrect media commentary, it would be easy for the major banks to say, You know what, we will absorb any funding cost increases and simply deliver our shareholders lower returns given that we are now government guaranteed, and thus carry far lower risks. In risk-adjusted terms, their shareholders would be just as well off as they were before the GFC. 
In this context, the SMH’s Jessica Irvine points out today that the major banks’ returns on equity are way beyond what similar ASX-listed utilities yield their shareholders. So this begs the question: why are the major banks different? 
After complaining so loudly about higher funding costs and ignoring the alternative option that they merely deliver shareholders lower returns commensurate with their risks, ANZ would have looked a little silly today if it had not hiked its lending rates somewhat. The ensuing question is then what the rest of the oligopoly does. The best answer I have seen thus far is in <a href="https://christopherjoye.blogspot.com.au/2012/02/does-this-video-tell-us-what-other" target="_blank">this video skit of two major bank CEOs</a> discussing their response to the ANZ’s decision. 
The truth is that the major banks have no competitors because of their unique too-big-to-fail status. Since they have credit ratings that are lifted higher than their smaller rivals on the basis they – and not their peers – will be beneficiaries of taxpayer bailouts, they can raise money more cheaply than any other lender in Australia. That is, the majors have a fundamental comparative advantage – a materially lower cost of funds – that is effectively impossible to compete with. Only government policy can remedy that.
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
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Banks could absorb increased funding costs without hurting shareholders: 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] 
&nbsp; 
Eddie Mansour, Managing Partner of <a href="https://www.apartments.com.au/project-marketer/ray-white-projects">Ray White Projects</a>, said the result demonstrates not only a headline price but also depth of demand. 
&nbsp; 
“This is an exceptional outcome and a clear reflection of sustained buyer demand for premium, well-located downsizer product,” Mansour said.

“We’re seeing a consistent pattern of local homeowners selling family residences and reinvesting into high-quality apartments that allow them to remain within their community. Alex &amp; Willow has resonated strongly with this group because it offers genuine scale, thoughtful design and immediate proximity to the village.” 
&nbsp; 
The sale reflects a broader and consistent trend of local downsizers actively seeking high-quality, low-maintenance residences close to established village centres. Agents report that demand for this product type has remained resilient, particularly where developments offer a rare combination of scale, design quality and walkable amenity. 
&nbsp;&nbsp; 
Fabrizio Perilli, Managing Director of Perifa and Versatile Group, said the sale marks a defining moment for the project. 
&nbsp; 
“The penthouse sale is a strong endorsement of the quality we have delivered, alongside our partners, and the clear demand from local downsizers for premium, boutique residences in this location,” Perilli said.&nbsp; 
&nbsp; 
“Most importantly, we’re proud to see the Alex &amp; Willow community beginning to take shape. As we move closer to completion, we’re looking forward to welcoming residents and seeing the project come to life.”&nbsp;

[smartcode_project:default project_id=6680 project_image_fid=338516] 
&nbsp; 
Designed by <a href="https://www.apartments.com.au/architects/nettletontribe">Nettleton Tribe</a> with interiors by <a href="https://www.apartments.com.au/interior-designers/richards-stanisich">Richards Stanisich</a>, Alex &amp; Willow is a boutique collection of generously sized two- and three-bedroom residences in the heart of Crows Nest village.&nbsp;

Completion is slated for early 2027.

[smartcode_project_cta:default project_id=6680]

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

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

Christopher Joye

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