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Before the global financial crisis, Australia had a diverse and highly competitive financial system. The four major banks went head-to-head with the likes of St George, Bankwest, Bendigo Bank, Aussie, Adelaide Bank, RAMS, Wizard and Challenger.

Today every single one of these entities has disappeared as a genuinely independent concern, wholly or partly acquired by the majors (with competition concerns waived by the ACCC), or merged with one another.

Before the crisis, Australia's banks were not explicitly government-backed. And taxpayers had never guaranteed bank deposits before (or conceived of providing such guarantees for free as they currently do), nor had they ever guaranteed the banks' institutional debts.

The taxpayer-owned central bank, the Reserve Bank of Australia (RBA), had also never lent to the banks on the much longer-dated and more flexible terms that it offered as the financial markets meltdown started to gather momentum, and continues to offer to this day.

The reason taxpayers had not got into the business of bailing-out private banks was because of a well-founded fear of "moral hazard". That's the concern that once you start insuring away a private company's risk of failure, you remove the critical disciplining influence of free markets. And executives will, over time, start behaving less responsibly, and expose taxpayers to even greater risk of loss.

Banks have nevertheless always been different to private companies because they perform a vital social function: they take our short-term savings and transform them into long-term loans. They run this constant "mismatch" between the term of the funding they receive from depositors (e.g., mums and dads) and the length of the loans they give to businesses and households.

As a result, banks have always risked insolvency if their funders rapidly withdraw their money. In the 1890s, before the RBA existed, most of Australia's private banks failed. That's why we now have a public "central bank" that lends directly to the private banks. And it's the reason we have a banking regulator, APRA, to ensure that the banks hold enough "capital" to cover liquidity shocks.

We were compelled to write this op-ed because we're convinced that the policymaking surrounding Australia's banking system has been predicated on a flawed and risky paradigm: the frequently-referenced – by APRA and the RBA – trade-off between "competition" and "financial stability", which ends up favouring a more concentrated industry.

Today Australia's prosperity relies on four colossal banks – or "oligopolists" – worth about $50 billion each. They control 80% to 90% of all financial transactions executed across the country. Importantly, the introduction of government guarantees for the first time during the GFC bequeathed them with a unique comparative advantage.

In contrast to their smaller rivals, the four majors are now regarded by credit rating agencies and investors alike as "too big to fail". The majors get the benefit of credit ratings that have been explicitly lifted "two notches" higher than they would otherwise be because Standard &amp; Poor's thinks they alone can depend on "extraordinary government support" in a crisis.

This helps them raise money much more cheaply than their smaller peers, which in turn means it is almost impossible to compete effectively against them. Size thus begets more size.

Some recent advertising campaigns have claimed that "the banks are at war for your home loan". Both the new head of the ACCC, Rod Sims, and we disagree. A few weeks ago Sims concluded,

Normally four players in a market should lead to a lot of competitive activity. In the banking sector it seems to need more because even though there are four of them there is a lack of full and effective competition.

While they rank amongst the 30 largest banks in the world, Australian policymakers have worked surprisingly hard to have the four majors excluded from the extra capital charges that global regulators are sensibly insisting the biggest, and most "systematically important", banks hold.

For a number of years we've suggested this is misguided and symptomatic of a worrying oligarchy between Australian banks and their policymakers. Last month the IMF agreed with us, arguing that Australia's major banks should, in fact, be forced to hold extra capital as systematically important institutions. More capital means less leverage and less taxpayer risk. So why exempt the majors, particularly when they have designs on higher-risk growth strategies overseas?

An additional capital buffer for systematically important banks would also be an intelligent disincentive to becoming too big to fail. And it recognises a point we've made for some time: in many ways the catastrophic risks posed by smaller and simpler banks, like Bendigo &amp; Adelaide, Bank of Queensland, and Members Equity, are a fraction of those threatened by the majors.

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.

During the GFC, most of the smaller banks did not use the taxpayer guarantees of wholesale debts because the premium paid for the guarantee was, ironically, based on the banks' credit ratings. This made it cheapest for the major banks to use the government’s insurance, which they did in vast volumes. It was peculiar that Treasury decided to price its insurance using the same rating agencies that had missed so many of the moral hazards that triggered the crisis in the first place.
A more subtle example of how the system encourages extreme size is the terms on which the banks borrow from the RBA. When doing so, banks have to pledge an asset as collateral to get RBA funding. Included in the list of "eligible" assets the RBA will accept as collateral is any senior debt issued by an Australian bank. But historically that debt had to have a credit rating – yes, there it is again – of A- or higher, which excluded the debts issued by smaller regional banks and building societies. Since the major banks were among the few that qualified for the RBA's funding, this helped further support investor demand for their bonds, and thus lowered their cost. While this month the RBA cut the minimum rating to BBB+, this still excludes several smaller banks and building societies.
 
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A final example of the unanticipated consequences flowing from recent policy decisions is the advent of so-called "covered bonds".

In the past, the first-ranking creditor to any Australian bank has been depositors. It was illegal to issue a debt security that subordinated depositors, which precluded covered bonds. When a bank raises money from an institutional investor, it normally issues an "unsecured" loan. This means that if the bank goes belly-up, the investor must queue up behind mum and dad depositors when getting paid out.

In contrast, a "covered bond" allows banks to issue loans to investors that are secured by specific bank assets. The investors thus have a claim on these assets that ranks ahead of everybody else, including mums and dads. Securing their covered bonds with billions of dollars of home loans has allowed the four AA- rated major banks to win rare AAA ratings for their funding.

The problem for the smaller banks is that they do not have the major banks' credit ratings, which, as noted earlier, are lifted higher because the majors are regarded as too-big-to-fail. And since the smaller banks have far lower credit ratings, they would have to pledge many more assets to secure a AAA-rating for their covered bonds. The bottom line is that this makes it, in the words of one bank CFO, "non-economic" for them to do so, much like it was non-economic for them to use the government guarantees during the crisis.

In the last four months the major banks have raised about $17.5 billion of new funding via their AAA-rated covered bonds. None of their competitors has followed suit.

Setting aside the fact that allowing the majors to issue covered bonds has provided them with another fund-raising advantage over their rivals, there has been a second, perhaps more damaging, consequence: it has significantly increased their competitors' cost of funding.

CBA and Westpac's sale of about $7 billion worth of covered bonds to Australian investors has created a new ultra-safe, domestic asset-class. By doing so, it has made every other bond, including the unsecured, more lowly rated bonds offered by smaller banks and building societies, more expensive.

The former head of capital markets at Standard and Poor's, Phil Bayley, concludes, "The bad news coming out of CBA's covered bond issue is that all other debt issues in the market will be more expensive … One of the hardest hit asset-classes will be securitised home loans, which has been a key source of funding for smaller lenders."

That, frankly, is a short-strokes summary of the policy problems we are focused on. While resolving them will require leadership, we believe that there are tractable solutions. Here are three:

1) Change the policy paradigm: It is often said in financial markets that neither APRA nor the RBA care much about banking competition, and would prefer it if there were only one bank to regulate. Policymakers have been captive to the idea that there is an unavoidable trade-off between improving competition and reducing financial system risks. They are wrong.

As a matter of pure logic, a financial system reliant on four $50 billion banks that are regarded as implicitly government-guaranteed (much like Fannie Mae and Freddie Mac were in the US) is surely less secure, and more prone to moral hazard, than one based on, say, 10 banks of $20 billion, each small enough to fail without causing widespread damage. Think of 10 pillars as opposed to four.

We learnt from the US experience with Fannie and Freddie that there is a threshold beyond which size becomes a massive "contingent liability" for taxpayers. Like the major banks, Fannie and Freddie could raise money more cheaply than their competition because investors believed they were government-backed. And they were right. Both institutions are now owned by US taxpayers.

The learning from this is that we need to remove the regulatory incentives that actively encourage size of the too-big-to-fail variety. And we should consider, at the very least, explicit breaks on banks becoming too big, and then using this size advantage to horizontally consolidate other industries, such as funds management, financial planning and insurance.

One policy option is a progressive financial taxation regime, such as that being proposed in Europe, which attempts to price the too-big-to-fail subsidy: i.e., the bigger you get, the higher the price you pay. Today the system is stacked in the opposite direction: as a bank’s size increases, all its costs decline.

2)  Guarantee the assets, not the institutions: Australia's financial system already suffers from moral hazard writ large. Taxpayers are guaranteeing billions of dollars of bank deposits for free, and the majors have artificial fund-raising advantages through their credit ratings and new devices like covered bonds.

There is, however, one solution, which we’ve advocated in the past. All these financial subsidies come back to the fact that there is a catastrophic risk that only governments can insure. That's why the government guarantees bank deposits and bank debts. That's why the government's central bank — the RBA — explicitly refers to itself as the "lender of last resort" to private banks during crises.

Moral hazard emerges when this taxpayer insurance is not properly priced. So let's allow the taxpayer to earn a fair return and iron out the dysfunctions at the same time. The simplest and most conceptually elegant way to do this would be to offer a permanent government-guarantee of bank-issued, asset-backed securities. This would allow any bank, irrespective of size, to issue asset-backed bonds that had the highest possible credit rating.

So long as the underlying asset quality met the required criteria, this would in turn mean that minnows like ME Bank and Bendigo &amp; Adelaide could raise funding at the same price as CBA or Westpac. It would immediately level the competitive playing field, and remove many of the majors' regulatory advantages. And, as the current chairman of ASIC, Greg Medcraft, leading economist Dr Nicholas Gruen, and we have argued before, there is a compelling precedent: Canada. The Canadian government offers exactly this type of insurance to its lenders. So why can't we?

3)  Back the government's banking regulator, not the rating agencies: the cost of the RBA's lender of last resort facilities, and the price of government guarantees (determined by Treasury), has been based on a bank's credit rating. This confers immediate fund-raising benefits on the majors. Yet Australia's banking regulator, APRA, is responsible for setting the banks' capital requirements, and overseeing their risk management, with powers to intervene directly with a bank if it thinks something is wrong.

Since the government licences the banks, controls their risk management, and can directly remedy any issues it identifies, the government should be willing to rely on itself when determining the price of taxpayer support. We believe that the cost of government insurance should be the active and intrusive regulation of APRA, and generally priced the same, irrespective of an institution's size. If APRA is doing its job properly, ME Bank should pose no more risk to taxpayers than CBA (and vice versa).

Australia can build both a more stable and competitive financial system. All it requires is real leadership. That is the challenge politicians and policymakers now face.

Mark Bouris is executive chairman of the ASX-listed Yellow Brick Road, which is not a bank or building society. Christopher Joye is a leading financial economist and a director of YBR Funds Management and Rismark International.
This story originally appeared on The Drum.
 
 
 
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Our banks are too big to fail, too few to be competitive: Mark Bouris and Christopher Joye

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So the RBA held interest rates steady at its February meeting, which is what I expected, characterising economic growth as “close to trend” and inflation “close to target”. I had previously argued that holding in February was a no-brainer from a pure policy-setting perspective.
However, the RBA operates in a world of complex practical constraints, the biggest of which is that the RBA’s board is, unusually, dominated by six private sector individuals with a natural bias towards lower rates, and the Treasury Secretary, who ultimately represents the government of the day and is typically regarded as being “dovish”.
We know as a matter of empirical record that former treasury secretary Ken Henry had battles with RBA board members Warwick McKibbin and Glenn Stevens during the GFC trying to push the target cash rate much lower than the RBA hawks wanted (its nadir was 3%).
Accounting for these real-world limitations on the RBA given its board complexion, I stated that I slightly favoured the RBA leaving rates unchanged.
But, rest assured, this was a massive surprise for both the financial markets and most economists. The markets were pricing in an 80%-plus probability of a cut only a few days ago, and it had gone as high as 100%. Only three of 27 economists surveyed by Bloomberg picked today’s decision, which is a telling statistic.
Some, like former prime ministerial advisor Stephen Koukoulas, felt there was a near-certain probability of a 25-basis-point cut, and a real possibility that the RBA cut by twice as much.
And then we have News Ltd’s Terry McCrann, who in four separate articles in the last two weeks stated that the RBA was “almost certain” to cut its cash rate today. I speculated publicly that McCrann was being “worded up” by either a private sector board member or politicians seeking to maximise pressure on the bank to comply. 
When McCrann predicts a result with a very high degree of confidence, the financial markets ordinarily fall in behind him. The bank has stated that it does not normally like “shocking” the markets (and expectations more broadly), and will sometimes rationalise its own moves by referencing the fact that the policy change was being anticipated in the markets.
With the recent pick-up in growth in the world’s largest economy, the rebound in the US labour market (where the unemployment rate fell from over 9% to 8.3% today), a very benign soft landing in Australia’s two major trading partners, China and India, and an only so-so domestic inflation report that left underlying consumer price pressure at 2.6% over the last year, sitting on the sidelines and waiting for more information made a great deal of sense.
Indeed, there has been some more positive tinges to the domestic data flows. For example, the ANZ job ads index surged 6% on Monday to a level that UBS analysis suggests should cause unemployment to remain static around its currently very low 5.2% rate (see chart).
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We have also seen more positive housing data, with national dwelling prices grinding out a slight seasonally adjusted rise over the months of November and December (taken together).
A more worrying development for the RBA has been partial information implying a return of inflationary pressures. The monthly TD Securities-Melbourne Institute benchmark has recorded a strong increase in its core measures of Australian inflation on a three-month annualised basis, as the chart below shows.
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One interesting question is what the major banks now do. The RBA’s cash rate affects all forms of bank funding, one way or another. It directly affects the circa 60% of funding that is sourced from short-term retail deposits. It indirectly impacts the 30% of funding that is originated from the wholesale markets locally and overseas (via its influence on the yield curve). So the question is: do the banks unilaterally raise rates on the back of claims of higher funding costs? I don’t think so. Maybe ANZ nudges its rates up a tiny amount, just to make a statement.
The fact is, however, that funding costs and financial stresses more generally have plummeted in recent weeks. When CBA issued its $3.5 billion, AAA-rated covered bond in January, it paid a price of 1.75% over the swap rate. Today that same covered bond is trading 36 basis points lower at just 1.39% over the benchmark rate.
The broadest possible measure of Australian financial stresses, which is the “credit default swap index” produced by ITraxx, has declined strikingly from over 220 points in November last year to about 140 points today (see chart).
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It would be a brave bank to undertake independent margin expansion in the face of this evidence.
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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RBA's decision to leave rates on hold the right call: Christopher Joye

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There is something a little asymmetric about the RBA's response to a period of expected high inflation and one characterised by, say, target (i.e., not even low) inflation. Once the RBA lifted the cash rate to “mildly restrictive” in late 2010, it continued to forecast serious inflation problems right out to 2013. It was quickly confronted with those inflation challenges in both the first and second quarters of 2011. As previously parsed here, it got the yips and decided not to touch its rates lever (having, by its own admission, teetered on the precipice just before the August board meeting). At the end of 2010, and all through the first half of 2011, the governor of the RBA, Glenn Stevens, told parliamentary inquiries and anyone who would listen that future rate hikes would be few and far between. Words to the effect: expect long pauses between each increment higher. This is what the financial markets were pricing, and he did not want to disavow anyone of it. As it happened, we got no upward movement at all. We will only really learn in 2012 whether the bank has presided over a second major policy-setting error – the first being the 2006-2008 episode – by getting behind the curve on consumer price pressures. When the RBA is forecasting, say, trend or slightly less than trend economic growth, and inflation at or near the mid-point of its 2% to 3% target band, it has not hesitated to cut interest rates pre-emptively, not once but twice, into unequivocally stimulatory territory. After almost every economic metric it referenced when it last met in December has improved, and 2011 core inflation has remained stubbornly in the top half of its target band (not the bottom half as many hoped), a third, consecutive rate cut in February would imply a highly reactionary and pre-emptive effort to ward off slight softness in the Aussie economy. At a time when Australia's unemployment rate remains at a stunningly low 5.2%. It would suggest to me that the RBA has an asymmetric double standard when responding to inflation. It finds it hard to get rates high enough when inflation rises given community and political resistance to restrictive rates and the extremely dovish complexion of its board, which is dominated by private sector business leaders. But it finds it awfully easy to cut rates at the first sign of a deceleration in inflation – because, of course, all these vested interests naturally embrace lower rates. Cutting rates is an easy thing to do. The test of a central bank, as the Bundesbank knows, is keeping rates where they ought to be in the face on assorted community pressures. Glenn Stevens and Phil Lowe: this, my friends, is your legacy to make or break.
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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February interest rate countdown: Is the RBA weak at the knees?: Christopher Joye

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Today’s December 2011 house price index results make for some interesting reading.
As I have flagged here before, the “flash” or preliminary estimates around December and January can be difficult to interpret due to two factors: first, the volume of sales is seasonally much lower than normal, which makes measurement immediately following the month in question trickier; and, second, some cities’ valuer-generals’ offices can be a bit tardy is transferring transaction information over the holiday season, which gives rise to more volatile numbers that are subject to material revision.
While the flash estimate of the seasonally adjusted December month dwelling value index is -0.2%, this is being heavily influenced by two outsized (negative) results for Melbourne and Perth. It just so happens that these cities’ valuer-generals are probably the worst offenders when it comes to the timely transmission of data. What makes the Melbourne and Perth numbers especially suspect is that they come on the back of solid seasonally adjusted gains in November, which have been reconfirmed with RP Data-Rismark’s latest index analysis.
I expect to see future index revisions cast a more positive light on the price action in Melbourne and Perth over December, which could kick the national result back up into positive territory (following on from the encouraging November gain).
As an aside, a flash index estimate a few days ago did precisely that with more benign numbers for Melbourne, Brisbane and Perth generating a seasonally adjusted national gain. At this stage, however, the standard errors are two large to arrive at any definitive conclusions as to where the hard-to-handle December month data will actually end up.
Notwithstanding these wrinkles, the data does tell us some interesting things.
The November result for capital city dwelling values has revised up from +0.1% (s.a.) to +0.4% (s.a.) based on additional sales information. This marks the largest month-on-month improvement in Australian home values since May 2010.
RP Data-Rismark’s “rest-of-state” index, which covers all regional markets, has also revised up in November from +0.3% to +0.5% (s.a.). This is the most significant increase in regional house values since November 2010.
Australia’s biggest city, Sydney, currently has the largest volume of reported sales in December. In seasonally adjusted terms, Sydney dwelling values increased by 0.4% in the month of December. In the December quarter, Sydney dwelling values are up a total of 0.7% (s.a.).
So it would seem that Sydneysiders are leading the recovery.
There is also some good news for property investors. Weekly rents across the capital cities were up 1% over the December quarter and are now 6.3% higher than at the same time last year. These stronger rental rates combined with the recent correction in property values have improved investors’ overall yields. The average capital city apartment is now offering a gross rental return of 5.1% after a consistent trend upwards since mid-2010.
Over the course of last year, Australian capital city dwelling values experienced a total capital loss of about 3 ½%. Regional house values fared a little better, correcting by around 3%. This compares with the 14% to 15% decline in Australian shares. Adding in rents, the gross total return realised by Australian property investors was slightly less than 1% (up) over 2011.
Finally, we know that housing affordability in Australia has experienced a striking improvement. While disposable household incomes grew by nearly 7% over the year to September 2011, Australian dwelling values have declined by a total of 3.3% since May 2010. As a result of the RBA’s generous rate cuts in November and December, borrowers can today get fixed- and variable-rate home loans as low as 5.9% and 6.14%, respectively.  The bottom line is that Australian home loan rates are stimulatory.
Rismark’s research shows that disposable incomes per household have risen about 15% further than (hedonicall -measured) capital city dwelling values since the end of 2003. This helps account for the decline in Rismark’s national dwelling price-to-income ratio, which is as low as its been since 2003.
On the outlook for the year ahead, Rismark’s Ben Skilbeck commented, “We expect that the RBA’s interest rate cuts in the final two months of 2011 will lend further momentum to housing activity as transaction volumes pick up over February and March after the seasonally slow months of December and January. If financial market pricing for substantial additional RBA rate cuts proves accurate, we could see a stronger-than-expected bounce-back in housing conditions.”
RP Data’s Tim Lawless added: “While global uncertainty and a stagnant local labour market could weigh on the consumer’s mindset, we are nevertheless observing improvements in monthly housing finance commitments. RP Data’s leading indicators on average selling times and vendor discounts are also starting to look healthier. There is no doubt that additional interest rate relief in 2012 would afford a very welcome cushion to the housing market.”
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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Sydney housing streaks ahead of national market: Christopher Joye

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The single best indication of the correct reaction to today's inflation data was in the financial market's response. In short, there was big disappointment – the market was, as I had correctly predicted, positioning for a very low number, and proved way wrong. Those economists forecasting super-low core inflation prints of around 0.2% or 0.3% – one was even angling for a negative number! – were frankly blown out of the water with the RBA's two core measures averaging 0.6% (to one decimal place). 
The Aussie dollar jumped from US$1.047 before the print to US$1.052 after. More tellingly was the reaction of Australian government bond futures. The benchmark three-year government bond contract immediately plummeted 10 points from 96.74 to 96.64 as traders priced in higher long-term interest rates. The 30-day interbank futures contract also substantially reduced the probability of a rate cut in February, although it is still pricing-in a better-than-evens chance. 
There is little doubt that today's inflation data creates more complications for the RBA. The average of the RBA's two main core measures – the trimmed mean and the weighted median – was 0.6%. The Bloomberg consensus was 0.5%, but all economists expected the risks to be skewed to the downside. (Remember also this is an inflation estimate produced using the ABS's much-improved expenditure class and seasonal-adjustment methodologies. So there are no excuses for the numbers.) 
As I had canvassed here in previous columns, more issues arose as a result of upward revisions to past data. In particular, both measures of third-quarter core inflation revised up from 0.3% to 0.4%. Crucially, this leaves Australia's 2011 calendar year core inflation rate sitting at, officially, 2.6%, which is slightly above the mid-point of the RBA's 2% to 3% target band. The risk is that the fourth quarter also gets revised up, and the numbers start looking a little ugly for Australia's central bank. 
With interest rates now substantially below where they were in 2011, and the benefits of the remarkable Aussie dollar appreciation mostly behind us, it is hard to see how the RBA is going to be confidently forecasting the much lower inflation outcomes over the next two years it requires to justify more stimulatory policy than the one it already has in operation right now (with two pre-emptive rate cuts in November and December). Sure, if the economy starts growing clearly sub-trend, it could make the case. But today it is far more difficult, unless of course this RBA finds it easier to cut rather than raise rates. 
There is, to be sure, much water to still flow under this bridge before the RBA meets again in February. But only a fool would refute the notion that a rate cut in February has become another line-ball – or in UBS's words – “close” call.
 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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Firm inflation surprises market: Christopher Joye

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For most of this year Australians have had to read asinine media articles reporting purported experts predicting catastrophically large 20%, 40% and, <a target="_blank" href="https://www.propertyobserver.com.au/residential/incredible-prediction-of-australian-property-bloodbath-excites-twitter/2012012053102">last week</a>, 60% falls in domestic house prices. 
The fact that these individuals have no experience successfully forecasting housing market conditions seems to be utterly inconsequential to the journalists desperately seeking to peddle doom and gloom. 
The best information we have today suggests that Aussie house prices will have tapered by around 3.5% over the course of 2011. That’s right: less than one-tenth the decline sensationally predicted by the closely covered doomsayers (no prizes for guessing who I am referring to here). 
Wiser readers will realise that this is history repeating itself: the same individuals expressed the same opinions during the global financial crisis only to see Aussie house prices surge over 2009 and 2010. 
And now we have mounting evidence that the housing market is staging a slow recovery, as I’ve projected in these pages for some time. The key catalyst appears to have been the RBA’s decision to swing 180 degrees from expecting to hike interest rates to cutting them in November and again in December. A low core inflation result from the ABS today would significantly increase the prospect of a third delicious rate cut for home owners at the RBA’s February board meeting. 
The first tangible signs of the recovery derived from RP Data-Rismark’s November house price index release, which reported a marginal 0.1% increase in seasonally adjusted dwelling prices. This was the first rise in capital city home values since December 2010. Importantly, even stronger capital growth was found across Australia’s “regional” (i.e., non-capital city) markets. 
A key question that will be resolved next week is whether this November data was a once-off or indicative of a more sustainable theme. More specifically, will the preliminary November month result revise up or down, and what will the index tell us about the highly seasonal month of December? 
Today a second leading house price index provider, Australian Property Monitors, has echoed these findings, reporting that nationwide house prices actually ground out a tiny gain over the December quarter (the three months inclusive of October, November and December). 
The main take-away here is not that home values are inflating again: it is, on the contrary, that they are not falling, or falling at an accelerating rate, as Steve Keen has predicted. 
In today's release, APM comments, “Median house prices have risen nationally for the first time since September 2010, indicating early tentative signs of recovery in the housing market… The rise in the national median house prices reflects activity in the Sydney and Melbourne housing markets over the December quarter.” 
APM’s chief economist, Dr Andrew Wilson, adds: “This result is significant as it shows an end to a recent trend of falling prices over the past year, with the realistic potential for a sustained turn-around in some markets.” 
The coincidence between the APM and RP Data-Rismark house price index paths is especially encouraging because they use markedly different methodologies. APM’s index is based on a “stratified median” technique pioneered by Dr Anthony Richards (and colleagues) at the RBA. RP Data-Rismark uses a more sophisticated hedonic regression approach. Over the long term, the two indices tend to move very closely together. 
The recovery in housing activity, which seems to be occurring more rapidly than perhaps even I forecast, is entirely understandable. 
Australians have benefited from a tremendous improvement in housing affordability. Capital city house prices have not increased since May 2010. In fact, they have tapered by a cumulative 4.5% (one bad day for the share market!). At the same time, disposable incomes per household have risen by about 14%. On a longer-term basis, Rismark’s analysis suggests that disposable incomes per household have outpaced capital city dwelling prices by more than 15% since the end of 2003. 
The final nail in the affordability argument is, of course, mortgage rates. The RBA’s munificence has bequeathed borrowers with home loan rates that are now well below their 15-year averages. Ubank is offering variable rates of 6.14% and fixed rates of just 5.93%. 
If the RBA cuts again in February, and further thereafter, as some analysts believe they will, expect to see the return of rapid house price appreciation. As I've said before, housing (and bank-intermediated credit growth) will be the chief beneficiary of any interest rate relief.
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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Aussie house prices could be on the rise again: Christopher Joye

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Tomorrow’s fourth-quarter inflation data is typically a key milestone for Australians focused on the future course of interest rates (i.e., savers and borrowers). Yet recent ructions in credit markets make the RBA’s decision-making process vastly more complex.
On the one hand, the RBA may throw caution to the wind and cut rates further and faster in order to have its desired effect. Alternatively, Australia’s central bank could conclude that its two cuts in November and December, which have been passed on by the banks, have supplied sufficient relief for the time being, and it can wait to gather better information. There is, after all, something to be said for stability. And there is little doubt that a rate cut that was not passed on by the banks could prove damaging and destabilising to community confidence.
But more on these nuances later. I want to begin by dealing with tomorrow’s data. The first chart below shows the path of core inflation in Australia since the middle of 2010 using the RBA’s published estimates. What you can see is that for five consecutive quarters core inflation was heading in one direction. The RBA ignored the two very high core inflation prints over the first half of 2011 (having pre-emptively raised rates in November 2010), and then cut rates twice in November and December partly on the basis of the very low 0.3% result in the third quarter.
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The RBA targets keeping core inflation between 2% and 3% per annum “over the cycle”. Since Glenn Stevens was appointed governor in September 2006, quarterly core inflation has, based on the RBA’s data, averaged 0.8%, or circa 3.2% per annum. Any credible judge would concede that the RBA would be uncomfortable with this track record.
Most analysts think the RBA will cut rates in February if the average of the two core inflation numbers prints at or below 0.6% tomorrow. Assuming no further revisions to the first three quarters of 2011, which is a critical rider, a 0.6% result would mean annual core inflation is sitting around 2.5%.
Ordinarily, the RBA would have to see core inflation falling towards, or below, the lower bound of its target band to justify cutting rates into stimulatory territory. If the core number comes out at, say, 0.5% or 0.6%, the RBA can argue that the six monthly pace of inflation is in the lower half of its band, and, further, that it is forecasting weak outcomes over 2012 and 2013.
Since Treasury estimates that the “natural rate” of unemployment is around 5% and the latest ABS estimate is 5.2%, which is around where it has been for the last 12 months, it is not necessarily the case that the labour market provides the RBA with the smoking gun it needs.
As the two question marks in the chart above highlight, the curve ball for the RBA will be if the third-quarter inflation numbers revise up materially, which is not something it would want to see, and the fourth quarter prints at 0.7% or higher. This would both put core inflation in the top half of the RBA’s target band, and perhaps more worryingly, suggest that the low third-quarter result was an anomaly that did not supply grounds for subsequent rate cuts.
No economists are forecasting core inflation greater than 0.7% tomorrow, so this would be a big surprise. Indeed, almost all economists believe that the risks are skewed to the downside, with the possibility of a very low, say, sub-0.3% outcome.
One issue is that the quarterly standard deviation in core inflation since 2000 has averaged about 0.2 percentage points. It is, as a consequence, plausible that we get a result that is well below, or well above, the “consensus view”.
As someone with a substantial home loan, I would instinctively like to see mortgage rates fall further. Let’s nevertheless suppose that it evolves into a line-ball decision for the central bank. There are some additional wrinkles that make this situation especially challenging.
The first relates to financial market stresses. When the RBA cut rates in November, it argued via its media voice-pieces that this was to be a once-off, technical adjustment to the cash rate to get it back to “neutral”. It pointed to the very low third-quarter inflation data as justification for this striking change in its position.
When the RBA then resolved to follow this cut up with another in December, it claimed that this was both a 50:50 call, and, further, not warranted by domestic economic conditions, which it stated were cruising along “at trend”. Its main focus was Europe, and the need to provide the financial system with insurance against adverse outcomes over the New Year period, especially since it was not planning on holding a board meeting in January.
One of the real-time measures of Australian financial market stress that the RBA says it watches closely is the “ITraxx credit default swap index”. Simply put, this gives an indication of investors’ daily estimates of the likelihood of Australian banks and companies defaulting on their loans. My next chart below illustrates the changes in the ITraxx index since the RBA’s November board meeting.
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<img src="/images/stories/jan242thumb.gif">
The good news is that the index has plummeted 17% since December 6th (when the RBA last met), and is 12% below its level at the time of the November meeting.
From a pure financial stability perspective, the RBA’s worst fears have not borne out. The eurozone has not collapsed, and the cost of government debt for most European nations has recently declined given the success of the ECB’s long-term funding operations. As a final helpful point, the run of data out of big trading partners, like China, India and the US, has been much better than most forecasters expected.
There is, however, a flipside to this slippery subject. While the credit default index has fallen strikingly, the new year has brought with it a dislocation in Australian bank funding markets.
Whereas the major banks were previously raising five year, AA- rated senior, unsecured funding at about 1.5 percentage points above the benchmark swap rate, that has now risen closer to two percentage points. This is primarily because of the <a href="https://www.propertyobserver.com.au/economy/stand-by-for-world-s-first-daily-house-price-index-christopher-joye/2011111552360">introduction of “covered bonds”</a>, which have forced a repricing of the cost of all Australian corporate debt in the last week or two.
In contrast to other bank debts, covered bonds are “secured” (as opposed to “unsecured”), and rated AAA rather than AA- (in the case of the four majors). They are, therefore, far safer than anything the banks have issued in the past with the exception of securitised home loans (known as residential mortgage-backed securities or RMBS, which also attract a coveted AAA rating).
Covered bonds have several advantages over RMBS, including: (1) they give investors recourse to both the bank and the assets (whereas RMBS only offers recourse to the assets); (2) the banks “overcollateralise” the bonds, which means investors are given security over assets worth more than the value of their capital commitment; and (3) investors can compel the banks to replace impaired assets with good ones (whereas in an RMBS issue you are stuck with the assets you get).
The problem for the banks is that even with all these advantages, AAA-rated covered bonds are pricing at about 1.7 percentage points over the benchmark swap rate, which means that everything else – which has lower ratings and higher risk – must price higher again. So we have seen, and could continue to see, a secular increase in the cost of corporate debt since the introduction of CBA’s covered bond into the domestic market last week.
The biggest casualties of this new dynamic are the non-major banks, which will not issue covered bonds because they are too expensive to do so. The short explanation as to why is that the non-major banks start with much lower credit ratings than their bigger cousins (because the latter are regarded as “too big to fail”), and in order to lift one of their covered bonds to a AAA rating, they would have to provide substantially more security (i.e., pledge more assets). In the words of one smaller bank CFO, it is simply “non-economic” for them to do so.
The bad news is that the cost of all the non-majors’ unsecured debt is now soaring, because it is regarded as so much riskier than the majors’ covered bonds. This will likely force many smaller banks to boost their deposit rates and focus on raising funds in the retail market, which is not a bad outcome for savers.
This is but a simple sketch of what is going on in bank funding land. It means that if the banks want to preserve their historic net interest margins, they would currently struggle to pass on a standard RBA rate cut of 0.25 percentage points. That in turn creates uncertainty for the RBA.
How much should they cut by if they want to do so, and how much community angst will this process create if they cut by, say, two standard moves (or 0.5 percentage points), and the banks only pass on one? Does a double rate cut send confusing signals to Australians about the prospects for the local economy (i.e., exacerbating the doom and gloom peddled by popular media)? And should monetary policy be used as tool to support bank margins, or are there more surgical solutions (such as public insurance)?
This is also complex for the banks, since the dislocation created by the advent of covered bonds creates extreme uncertainty for the major and, particularly, non-major banks as to what their “steady-state” cost of funds will ultimately be. The bottom line is that nobody knows.
If core inflation settles at around the mid-point of the RBA’s target band and the European imbroglio looks to be sorting itself out, there is a case for the RBA remaining on the sidelines until it gets better information on the effectiveness of its own policy. If, on the other hand, core inflation surprises on the downside, we should get more rate relief one way or another, which would be a welcome boon for borrowers and the housing market.
The ramifications of a high fourth-quarter inflation number and upward revisions to the low third-quarter print are possibly quite calamitous for our independent central bank.
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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Inflation milestone: The RBA is in uncharted territory in deciding next rate movement: Christopher Joye

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NAB’s highly regarded interest rate strategist, Peter Jolly, thinks that an RBA rate cut in February is only a 50:50 bet. I agree. Frankly, I see no need to cut rates at all. I don't buy the global recession line. And I am still worried about global (and thus Australian) inflationary pressures, especially in the medium term. 
As one portent, US core inflation has started bubbling up again: during the 2011 calendar year, headline inflation in the US rose by 3% while core increased 2.2% – both above the US Federal Reserve’s implied target. 
I certainly don't agree with Professor John Quiggin, who yesterday published an op-ed arguing that the RBA should drop its singular inflation target and instead focus on targeting economic growth (or nominal GDP). Central banks should concentrate, laser-like, on two things only: price stability (viz., inflation) and financial stability. Leave the rest to fiscal policy and the politicians. But forgetting what I think, because, in case you had not noticed, I am not the RBA, my best guess at this stage is, like December, February is a very “line ball” call for an eager-to-please, financial markets-enraptured central bank (it shouldn't be, but it is). Anyone claiming it's a “done deal” has not eaten their Weet-Bix for brekkie. One key wrinkle is this: if you believe that the four major banks – they are the financial system these days and really all that counts – are entitled to maintain their current world-beating returns on equity and should not have to eat any of the current funding cost increases (or heaven forbid, cut staff salaries), then an RBA rate cut in February will be all about major bank margin preservation. (And do you get the irony? Remember bank profits have nothing to do with the RBA's cash rate, or so we were told!)
All the hoopla around the major banks shedding a few staff is simply a PR campaign to explain to the public that times are very tough. It is the first salvo in a renewed attempt to maintain or expand major bank net interest margins, which are getting squeezed by higher funding costs. As I have pointed out too many times to count, there is another alternative: our government-guaranteed banks could simply target lower returns, lower profits and lower margins in recognition of their substantially lower risks (as a function of explicit taxpayer guarantees, new RBA liquidity facilities and lower leverage).
If the RBA cuts, it is entirely possible the banks pass on less than half, if any. So why cut in the first place? We've had two in succession already, which have yet to have a material impact – in fact, rate changes typically take two years to have their full effect. And the RBA is the first to admit it cannot forecast the future. December was a “weak-at-the-knees, let's dole out some insurance for our banking and financial market buddies” moment. The RBA has time on its side. The one real rider to this is inflation. And it is a D-Day of sorts for the February meeting. If core inflation prints super-low – say 0.3% or less again for the fourth quarter – and the third-quarter numbers don't revise up, then I would agree with the many newly minted-doves (wink, nudge, HSBC’s Paul Bloxham!) that the evidence is growing that the RBA can afford to furnish the economy with more rate relief. I still wouldn't cut myself, but that's just me. I care about savers as well as borrowers. Anyway, here is what NAB's Peter Jolly has to say: "The RBA’s Feb 7 decision…remains a close-call. [Yesterday’s] labour force report didn’t give us any fresh leads, as while employment growth is weak – exactly zero jobs were created in 2011 compared to 365k in 2010 – a bit surprisingly the unemployment rate has remained steady around 5.2% for the past six months. So downward pressure on wages and inflation remains modest. Data to watch will be Wednesday’s Q4 CPI (NAB economists expect a benign increase of +0.5%qoq/+2.4%yoy) and then December’s NAB Business Survey Tuesday week…All up, a Feb 7 rate cut remains close to a 50:50 call at this stage. Market pricing little changed over the week @84%."
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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RBA February rate cut still a 50-50 call: Christopher Joye

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If you trawl through CBA's covered bond promo materials there is some fascinating new data that confirms points about the housing market I've made here in the past. It also serves to highlight the quite misleading dissembling of the housing '”desctructionistas” (i.e., the Steve Keens of the world). 
The first extract of interest compares the default rates of CBA's first-time buyers with its overall portfolio. You can see from the chart below that until 2010 first timers actually had lower default rates than your average borrower. Recall the hyperbole that folks like Keen were pushing during the GFC, when he claimed that the major banks lending to first timers, combined with the government's-first time buyers' boost, would result in a mass of delinquencies? Sorry, that was just another mistruth.
<img src="/images/stories/jan181.gif">
<img src="/images/stories/jan182.gif">
In some respects, the parsimony of first timers makes intuitive sense: they are typically investing a larger share of their net worth and income in buying a home and servicing the repayments than older and wealthier buyers. While this brings with it some extra risk (e.g., via lower equity), it also tells us that many first timers on lower incomes are committing higher shares of their labour earnings to keeping a roof over their heads than older buyers. For some borrowers, this creates a better alignment of interests. For others, it may heighten the risk they default. What we can see from CBA's data is that first-time buyers don't seem to have a fundamentally higher probability of default than other borrowers, although there has been convergence since 2010. 
There are other explanations for this, of course: as I've argued before, our banks are very cautious in setting their lending criteria. It is possible that CBA is even more rigorous in its credit assessment when looking at first timers versus the rest of the borrowing population, which in turn helps to reduce credit risk. 
The second CBA chart looks at the losses realised on CBA's home loan portfolio in comparison with all non-home loan assets between 1983 and 2011. It portrays a familiar story: historically, the real  risk for Australian banks lies not in lending to people buying homes (as many pundits claim), but rather in <a target="_blank" href="https://www.propertyobserver.com.au/commercial/commercial-not-residential-property-in-a-price-bubble-christopher-joye/2011092851714">business borrowings and commercial property </a>(especially the latter). 
This is why, quite rationally, APRA makes it more expensive for banks to lend to businesses – via higher “risk-weightings” – than to people acquiring established homes. In short, the historical risk of doing so has been demonstrably higher, so APRA makes you hold more capital against these loans. 
Interestingly, we now have two clear case studies – the 1991 recession and the 2007-09 GFC – where residential lending has proven its vastly superior resilience relative to business credits. 
This is also why some major bankers' calls for APRA to change the risk-weightings to favour business lending would appear to be either ignorant or subversive.
<img src="/images/stories/jan183.gif">
As a final aside, it is gratifying to see that my good friends over at the CBA are using our “house price-to-income ratio” analysis in their covered bond promo materials, although I note that this is incorrectly labelled: this data comes from Rismark, not RP Data (see below). 
A related observation would be that using the ABS's free-standing, established house price index, which ignores the circa 25% of all homes that are apartments, semi-detached, and terraces (especially in metro areas) to mark-to-market a covered bond portfolio, is hazardous, to say the least. It opens CBA up to the criticism that it is not properly assessing the collateral values of the circa 80% of all assets that are being used to secure the covered bond. For example, what happens if the higher priced detached house market is outperforming the apartment, semi and terrace sectors, and thereby giving artificially positive marks to the CBA portfolio? There is no need for these valuation errors since there are freely available indices that cover all property types – and which more accurately measure price changes (according to the RBA) – that are currently being used by CBA's competitors, and indeed promoted by CBA's economists. A very odd oversight.
<img src="/images/stories/jan184.gif">
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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Housing crash talk due to envisaged first-home delinquencies just hyperbole: Christopher Joye

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Today I want to give you a snappy summary of my (interlinked) thoughts on both the outlook for Aussie interest rates and our much-maligned, misunderstood yet economically meaningful housing market.
Yesterday’s housing finance data from the ABS confirmed what I’ve been arguing here for months. After the flood-induced downdraft in prices at the start of the year, which was given an equally serious kick-along by the RBA’s de facto double hike in November 2010 (lifting mortgage rates to historically high levels), the number of loans approved to buyers of existing homes has been rising steadily since March.
As I’ve explained before, one wants to focus on the number of seasonally adjusted loans approved for purchasing established dwellings (the red line in the chart below) in preference to the “value” of housing finance series (as this is distorted by house prices) or anything relating to newly built dwellings, which make up a tiny fraction of the established dwellings series.
We are, to be sure, interested in things like finance for construction purposes, which gives us insights into the rate at which new homes are being built. But even the most fervent housing destructionists concede that Australian building approvals have been running at or below the demand-side, or household formation, implied needs for years now. Coupled with low rental vacancy rates, only a dissembling imbecile would have us believe that Australia’s housing market is characterised by significant excess supply.
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What we can see from the chart above is that since May 2011 the three-month moving average growth rate for the number of loans approved for purchases of existing dwellings (refer to the blue bars) has been around 1.5%. That means that new home loan approvals have actually been rising at a double-digit pace since March 2011, which is good news for the banks that rely on credit growth to generate profits, and anyone concerned about the quality of the collateral (i.e., home loans) sitting on their balance-sheets (e.g., covered bond investors or hedge funds shorting their stock).
Critically, this demand-side momentum started to materialise well before the RBA bequeathed its interest rate munificence on the market with not one, but two fully passed-through mortgage rate cuts in November and December. They don’t call him Santa Claus Stevens for nothing! And all home owners will be crossing their fingers that Stevens passes out the interest rate presents over and over again, with the financial markets currently pricing in another four to five cuts. If we get that much RBA relief, and the banks pass most of the reductions on, Australia will almost certainly see the return of rapid house price appreciation, much like we did in 2009.
We now know that housing participants responded to the sharp turnaround in home loan affordability almost immediately: in November, RP Data-Rismark reported the first increase in seasonally adjusted dwelling values since December 2010. Observe also in the next chart that one very useful bellwether of the housing market cycle – the share of first-time buyers as a proportion of all loans approved – has surged back to 20%, which is its highest level since February 2010.
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So all analytical eyes will be focusing on the December house price index results, which are released at the end of this month. Another seasonally adjusted gain in dwelling values will confirm that genuine stabilisation is afoot and excoriate the notion that November was merely statistical noise. I personally expect a surprise on the upside, but only time will tell.
Now to Australia’s central bank. While I will write more on this subject in the days preceding the RBA’s February meeting, it is perhaps most instructive to consider the options available to the bank.
<a href="https://www.propertyobserver.com.au/economy/february-rate-cut-tipped-to-boost-australian-housing-market/2012011253030" target="_blank">Anyone who tells you that an interest rate cut in February is a “done deal”</a> is a fool. Frankly, nobody knows with certainty, including the RBA, what the outcome of that meeting will be. It hinges most heavily on three pieces of information that we will get over coming weeks:
First, the fourth-quarter inflation data, and any revisions to the second- and third-quarter numbers. This will give the RBA a good feel for the nature of the inflationary pressures bubbling across the economy and whether it was justified cutting rates in November on the basis of one low third-quarter print. The consensus view is that inflation will be very benign in the fourth quarter, which will help the push for a rate cut in February (one economist thinks it will be negative!).
On the other hand, a high print, perhaps combined with some upward revisions to past data, would call into question the RBA’s recent decisions, and significantly reduce the chance the central bank doles out more ‘insurance’ to financial markets. A high quarterly number would be anything clearly in the top half of the RBA’s target 2-3% band (annualised), or, god forbid, beyond.
The second key tranche of data is the December month unemployment results. While the overall tone of Australia’s real economic data has been positive, and, as the RBA has repeatedly observed, insinuates that the economy was tracking at or above trend during 2011 (abstracting away from the floods), there have still been some conflicting signals.
First, there was the very modest step-back in house prices, which look like they will finish the year off around 3% lower. Then there has been some soft retail data based on the narrow monthly surveys, which have been refuted by the ABS’s much more comprehensive consumer spending data contained in the quarterly National Accounts. This tells us that overall consumption spending has been tracking at or above trend over the six months to September.
And finally we have the labour market. While the number of people on the dole has been declining consistently and the number of job seekers receiving unemployment benefits has also been shrinking, the monthly ABS labour force survey has offered a more sketchy story: the closely followed unemployment rate has been bobbing around 5% for the best part of a year, with a marked drop-off in absolute employment growth.
Any spike in the December unemployment data will lend credence to the analysts who have swung around to forecasting a steady increase in Australia’s jobless rate from 5.3% today to over 5.5% during 2012 and, combined with anodyne inflation data, would give the doves on the RBA’s board enough ammunition to lock in another interest rate reduction.
Our final consideration is, as always, the pulse of the global economy, and eurozone conditions specifically. Although Europe itself only contributes a relatively small fraction of global economic growth, which is why the US, India and China have managed to weather its headwinds relatively well, the RBA seems increasingly prone to bowing to pressure from the banks and financial markets to dole out scarce monetary policy insurance to protect these constituents against “tail risks”.
As you can tell, I don’t think this is an especially astute strategy, and would have exercised the “option to wait”, rather than boxing at manufactured shadows. Nevertheless, one curve ball is bank funding costs.
If, hypothetically, the eurozone crisis gets much worse, and the wholesale price of money that banks have to pay – which accounts for about 30% of their total funding – continues to rise (no one seriously disputes that it’s been increasing), the RBA might be convinced that to preserve current lending rates it needs to further lower its target cash rate.
This, crucially, assumes that the banks and their shareholders cannot absorb the higher funding costs themselves via lower net interest margins, lower profits, and lower returns on equity, which, at this stage, remain very high for government-guaranteed utilities.
Fortunately for borrowers, but not savers, none of the above contingencies countenances rate hikes. There is, by definition, some small probability that the next move in interest rates is not actually down.
If you believed the average or “consensus” economist view 12 months ago, you were budgeting on another three to four rate hikes. If you believe the average or “consensus” economist today, you are banking on another one to two cuts. The truth is nobody knows, and the RBA will be guided by what actually happens in the real world.
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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Economists' rate cut consensus outcomes await real-world momentum: 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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