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In the <a href="https://afr.com/p/national/top_of_pops_in_bubble_brouhaha_pil1zGaAUotPW0vRoUe8WN" target="_blank">Australian Financial Review</a> today journalist Adrian Rollins revisits the debate surrounding whether the RBA should use monetary policy to resist burgeoning asset price bubbles. This is well-trodden territory that I have written about more than most, and Rollins quotes my views in his article. While he does an excellent job of outlining the broad contours of the debate, there is some missing nuance that is worthwhile clarifying.
When I first started thinking about this subject I landed in the camp of those who felt that a central bank that autocratically lifted rates to “lean against” asset price increases – in, say, equities or housing – that were being fuelled by unseemly credit growth (e.g., via leveraged buyouts or a mortgage boom) could do more harm than good.
The first problem is one of policy distraction. Central banks typically have a singular policy goal, which is “price stability”. In simple terms, that means keeping the rate of consumer price inflation within a low and ideally stable band of 2% to 3% per annum.
In recent years the RBA has subtly re-cast the standard “inflation-targeting” model by describing its own approach as a “flexible inflation-targeting” regime. (The best summary of the Antipodean differences is offered in <a href="https://www.rba.gov.au/publications/rdp/2010/2010-06" target="_blank">this RBA paper</a> authored by Paul Bloxham and colleagues.) The introduction of the word “flexible” has been used by the RBA to denote the fact that it now believes it should have the freedom to deviate, in the short term, from the settings necessitated by its through-the-cycle inflation target if “financial stability” concerns warrant such action. In this context, financial stability is being employed as a euphemism for bubble trouble.
The most oft-cited case-study is the 2003 episode, which the RBA has slyly allowed to be rewritten in history as an example of a prescient central bank staunching an incipient house price bubble from emerging via the application of tighter-than-normal interest rate policy.
When pushed, the RBA publicly acknowledges that this is, in fact, <a href="https://www.switzer.com.au/the-experts/christopher-joye/macfarlane-rba-did-not-burst-2003-house-price-bubble-with-interest-rates/" target="_blank">incorrect</a>. That is, monetary policy in 2003 would have been the same with or without rapid house price growth. It was in truth the RBA’s experiment with much more aggressive “open-mouth operations” (exercising moral suasion over punters), and some subsequent changes in APRA’s approach to managing mortgage risk (via the risk-weightings imposed on lenders), which were the tangible policy responses to the asset price innovations at the time.
The first bone fide example of asset prices directly – rather than indirectly – determining the setting of rates in this country was the RBA’s much more rapid than expected normalisation of the cash rate over 2009 and 2010, which I pointed out to Rollins (see <a href="https://www.businessspectator.com.au/bs.nsf/Article/Central-banking-esoterica-pd20100317-3LT6P?OpenDocument&amp;src=mp&amp;is=Property" target="_blank">here</a> and <a href="https://christopherjoye.blogspot.com/2010/09/should-we-expand-rbas-mandate" target="_blank">here</a> for more matter). By this juncture, the RBA had the experience of 2003 and Greenspan’s purported mistakes prior to the GFC behind it.
Within the RBA, those who advocate a more interventionist approach to influencing asset markets felt vindicated by these events. This cohort included Glenn Stevens, Phil Lowe, Tony Richards and Christopher Kent, among others. The weight of evidence (and logic), they claimed, was inexorably falling behind the “lean against the wind” school of thought – subject to the caveat that this was, of course, but a “policy of least regret”, whatever that means.
On the other side of the Australian debate stood the likes of myself, Dr <a href="https://cis.org.au/publications/policy-monographs/article/906-bubble-poppers-monetary-policy-and-the-myth-of-bubbles-in-asset-prices" target="_blank">Stephen Kirchner</a> of the Centre for Independent Studies, Dr Guy Debelle at the RBA  (see <a href="https://www.businessspectator.com.au/bs.nsf/Article/Twisting-in-the-wind-pd20090522-SA6PF?opendocument&amp;src=rss" target="_blank">his speech</a> to the Brazilian central bank) and Dr David Gruen at Treasury (see <a href="https://www.businessspectator.com.au/bs.nsf/Article/David-Gruen-spikes-the-bubble-poppers-pd20090618-T53KJ?opendocument&amp;src=rss" target="_blank">here</a>).
The alternative argument was that truly damaging asset price bubbles are hard to identify, that the interest rate changes required to resist one could exact tremendous collateral costs across the wider economy, that a “multiple objective” central bank is more likely to lose focus on its core price stability task, and thus make policy mistakes, and, finally, that there are superior “macro-prudential” tools available to regulators to more surgically cauterise such problems.
An illustration of the latter would be changes to the risk-weights and capital charges that APRA requires banks to hold against commercial and residential property loans. Other examples would be defining minimum equity (i.e., deposit) requirements for new lending (or maximum loan-to-value ratios), minimum debt-servicing standards, and/or the removal of external subsidies, such as the first-home owner’s grant, that distort the market’s functions.
After privately debating this with the likes of Tony Richards at the RBA and watching the central bank in action during 2009 and 2010, I evolved my own view, as I have explained elsewhere.
In short, I could see that a disciplined central bank could, at the margin, tilt the rate at which it adjusted policy in concert with activist jawboning (recall Glenn Stevens’ interview with David Koch reminding folks that property is not a “one-way bet”) to assist in helping the market recalibrate expectations of future capital growth, which, most sensible people acknowledge, can become inflated by decision-making biases inherent in humans.
 
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At the same time, I’ve cautioned that there remain significant risks associated with modifying the conduct of policy in this manner. The RBA has a proven policy regime that has the support of both sides of politics and has been formally documented in agreements between itself and the government.
More pointedly, I’ve argued that it is not up to a non-democratically elected RBA to unilaterally decide that it is going to fundamentally change its mandate, and rationalise this change (as some were prone to doing) by reference to extreme ambiguities in legislation enacted more than 50 years ago.
I encouraged a reluctant RBA to seek explicit support for these new measures from the government and to have this support formally documented in the “statement” executed every few years between the treasurer and the governor. I believe that the 2010 statement accommodates this aim via the insertion of large swathes of new text covering the RBA’s “financial stability” responsibilities and <a href="https://christopherjoye.blogspot.com/2010/10/rba-expands-its-policy-mandate-as-i" target="_blank">by agreeing that RBA instruments can be used to meet these goals</a>.
So today the RBA seems to have more of a mandate to pursue these aspirations. The main risk is that this complicates the challenges policymakers face and boosts the probability of a significant decision-making error. And all central banks, including the RBA, are prone to making mistakes.
RBA officials admit that they lifted interest rates too high in the late 1980s, which gave us “the recession we had to have” and 17% mortgage rates by January 1990. They <a href="https://www.businessspectator.com.au/bs.nsf/Article/Can-the-RBA-target-asset-prices-pd20091215-YQRMP!OpenDocument&amp;Src=rss&amp;Click=" target="_blank">similarly concede</a> that they reduced them too slowly in the years immediately following (the average mortgage rate between 1990 and 1992 was still a stunningly high 13.7%).
RBA officials also accept that they made nontrivial policy missteps in 2006 and 2007 that allowed core inflation in Australia to surge towards an unacceptably high 5% by mid-2008.
The concern here is that a future governor over-tightens policy in response to benign asset price appreciation and sends our interest rate-sensitive economy careening into recession. This could in turn mortally undermine the RBA’s hard-won constituency with the wider community, and its very fragile political independence.
Only time will tell whether we eventually conclude that the hazards associated with using the blunt interest rate instrument to lean against complex asset price changes are too high for policymakers to tolerate.
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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Significant risks when RBA attempts to burst any housing price bubble: Christopher Joye

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Despite much public interest in, and debate around, the major banks’ purported “gouging” and taxpayer-guaranteed status, some very fundamental questions remain, rather bizarrely, unanswered.
These include: what exactly is the major banks’ “cost of funds” that they regularly complain about; how has their overall cost of funds changed (i.e., has it been rising or falling); and if the cost of funds is so obviously important to the banks, and a key determinant of what they can and cannot do with mortgage rates, why don't they simply publish a cost of funds index that tracks any change in it over time?
Yet even a cost of funds index would be inadequate, since it is only one input into the profitability, and overall rates of return, that the major banks target. A more informative benchmark is the major banks’ “net interest margin”, which simply measures the net difference between the interest rates the banks pay on the money they borrow from their funders (e.g., depositors like you and me) and the interest rates they receive on their loans to businesses, households, and SMEs.
By looking at the change in the major banks’ net interest margins, one can get an indication of the profitability of their business activities. Realised profits will, however, be influenced by three further factors: (1) the volume of loans that they write or “credit growth”, which has been in structural decline since the GFC; (2) the extra fees and charges they levy on customers, which yield the banks profits above and beyond their net interest margin; and (3) the banks’ fixed and variable operating costs, the most significant of which is the amount they choose to pay their executives. After accounting for these variables and a few other things, one can get close to calculating the major banks’ “return on equity”, which is a measure of their shareholder earnings.
Regular readers will know that I have been critical of major bank remuneration levels for senior executives, and the banks’ proclivity for hiring former regulators (e.g., Treasury secretaries and RBA governors), which, I have argued, creates dysfunctional long-term incentives between the public and private spheres. Or, in the words of MIT professor, Simon Johnson, a financial “oligarchy”.
According to CBA’s 2011 Remuneration Report, the average total compensation of the top 15 executives was an incredible $4.5 million (the median was only slightly lower). Excluding CEO Ralph Norris, the average compensation was still $4.2 million (see table below).
<img src="/images/stories/cbachart.gif">
These numbers highlight the absurdity of attacks of the RBA governor’s comparatively paltry $1 million pay, especially given he is responsible for overseeing the entire banking system (in concert with APRA), and, more pointedly, bailing out Australian banks facing funding crises via the RBA’s liquidity facilities. And this all in addition to the RBA’s first-order monetary policy functions.
Reasonable criticisms of major bank pay can also be made on the basis that they are effectively quasi-public (i.e., non-private) institutions that implicitly and explicitly rely very heavily on taxpayer subsidies in the form of free taxpayer guarantees of bank deposits, subsidised taxpayer guarantees of bank debts, and the RBA’s many and varied forms of low-cost liquidity support. Ask yourself: what other private companies get the benefit of all this taxpayer largesse?
According to the RBA, the major banks’ average net interest margin (or NIM) was 2.4% per annum as at September 2011. But this is merely a single point estimate.  How does this margin compare with its pre-GFC levels? In the chart below I have illustrated UBS’s estimate of the major banks’ average net interest margin since the beginning of 2004.
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/jan102.gif"><img src="/images/stories/jan102thumb.gif"></a>
We can draw two insights from this analysis. The first is that the major banks’ net interest margins have been steadily increasing since the low of 2.06% reached during the first half of 2008. The second is that notwithstanding the banks’ much higher cost of funds and the introduction of a raft of taxpayer support schemes, the margins they are earning today are as good as they have been since the second half of 2004.
As noted above, net interest margins are only one part of the banks’ complex profitability picture. Several years ago I censured the RBA for focussing on this proxy to the neglect of more complete benchmarks, such as return on equity (RoE). The RBA now regularly reports and parses bank RoEs in its bi-annual Financial Stability Review.
So how has bank profitability varied over time? And has there been a decline in bank returns post-GFC in recognition of their lower risks as a function of (1) higher internal capital requirements (i.e., less leverage) and (2) the fact that as explicitly taxpayer-backed institutions there is demonstrably less of a need to produce ultra-high growth in order to raise capital?
In my final chart I have depicted UBS’s estimate of the average major bank return on equity (profit-weighted) since 1993. Remarkably, the major banks were able to maintain solid double-digit RoEs during the global credit crisis experienced in 2007-09 (and since). Today, the average RoE remains a still very high 17%, and, abstracting away from some circa 20% spikes, is not materially different to the levels observed in the 10 to 15 years before the GFC. Indeed, this crisis was evidently a good one for Australian banks, since they were able to keep their returns way above the lows observed during the 1991 recession.
Click to enlarge
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We have, therefore, yet to see a structural decline in RoEs commensurate with the much lower risk profile of these utilities. And there can be little debate about the latter claim. The world’s largest rating agency, Standard &amp; Poor’s, concluded in a review of the banks in <a href="https://www.propertyobserver.com.au/economy/major-banks-play-down-sp-ratings-downgrade/2011120252649">December that their credit rating is two notches higher, and hence their cost of funds lower</a>, because of the assumption that they are government guaranteed. Specifically, S&amp;P remarked, “Our counterparty credit rating on Commonwealth Bank is two notches higher than the [stand-alone credit rating], reflecting our view of a high likelihood of extraordinary government support in a crisis.”
A closing thought is that the major banks have ample room to absorb higher funding costs. That is, they should be prepared to deliver shareholders lower returns, and operate on the basis of somewhat thinner net interest margins, given the advent of public guarantees of their livelihood and solvency has unambiguously improved shareholders’ risk-return trade-off.
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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Lower risks mean lower bank returns: Christopher Joye

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It’s that time again.  We are all inevitably turning our minds to what may materialise over the 2012 horizon. The market for predictions is – nay, has always been – characterised by very high demand. And countless so-called "experts" seek to supply it.
Forecasting the future is, however, an exceedingly difficult game, and, in some respects, far more challenging than making money. I explained why <a href="https://www.businessspectator.com.au/bs.nsf/Article/markets-economists-traders-interest-rates-invest-pd20111117-NNVW4?OpenDocument&amp;src=sph" target="_blank">here</a>. The Reserve Bank has such little faith in its forecasting ability that it prefers to spend more time engaged in what Glenn Stevens’ recently described as "nowcasting". That is, forget the future – let’s try to work out what is actually happening in the present. I find that it’s useful to reflect on the past. Who got it right. Who got it wrong. And why… The best calls of 2011 – Anyone who anticipated the extraordinary increase in eurozone sovereign yields, the spectre of the collapse of the eurozone itself and the dire knock-on effects across global debt markets, including <country-region><place>Australia</place></country-region>’s. Judging from the dismal performance of global macro hedge funds, which recruit the best and brightest geopolitical minds but were, on average, down 3.65% in 2011, few really got this one right. – Anyone who expected the equally remarkable rise in the value of Australian government bonds to record levels as global central banks diversified away from the traditional reserve currencies – such as the US dollar, Swiss franc, and yen – in order to get access to one of the least risky, yet highest yielding, AAA credits (ie, Australia). – The four major banks, which convinced Standard &amp; Poor’s that their taxpayer-backed, ‘too big to fail’ status warranted a credit rating that was two notches higher than it would otherwise be, because they are able to rely on a ‘lender of last resort’ (ie, taxpayers) during an emergency. Fannie Mae or Freddie Mac, anyone? To<a target="_blank" href="https://christopherjoye.blogspot.com/2011/12/standard-poors-major-banks-have-lower"> quote</a> Standard &amp; Poor’s, “Our counterparty credit rating on Commonwealth Bank is two notches higher than the [stand-alone credit rating], reflecting our view of a high likelihood of extraordinary government support in a crisis. This reflects our view of CBA's high systemic importance in <country-region><place>Australia</place></country-region>, and our assessment of the Australian government as highly supportive of institutions core to the national economy.” But bad luck if you are a smaller regional bank, like the Bank of Queensland, which Standard &amp; Poor’s assumed (incorrectly in my mind) would not receive the same taxpayer support. Recent history suggests otherwise. – Fairfax’s new chief executive, Greg Hywood, who finally bit the bullet, and embraced my manifesto – published by the ABC in this<a target="_blank" href="https://www.propertyobserver.com.au/https://www.abc.net.au/unleashed/43774"> op-ed</a> – on how to revitalise the chronically underperforming Australian Financial Review. A critical part of this plan was the appointment of a new leadership team in the form of young whippersnapper, Brett Clegg, and the leviathan of the hard right, Michael Stutchbury. – Anyone who went long ‘volatility’. In December 2010 I wrote a column claiming that our ‘new normal’ would be one characterised by far less predictable monetary policy. Specifically, I<a target="_blank" href="https://christopherjoye.blogspot.com/2010/12/volatility-is-good-thing"> argued</a>, “Australia’s economic destiny over the next 10-20 years is likely to be much more uncertain and volatile than it has been in the last two decades… One consequence of Australia’s heightened uncertainty will be that the two major levers of economic management, monetary and fiscal policy, will become more complex to set, and thus more difficult for investors to anticipate. Such uncertainty also engenders opportunity. Investors will probably face a wider distribution of potential outcomes, and thus more chances to make or lose money depending on their ability to divine our economic destiny.” And so it proved true. At the start of 2011 no Australian economist was forecasting that the RBA would cut rates twice. Ironically, some of the most hawkish economists this time last year are amongst the most vocally dovish today.  – The private European banks that persuaded the ECB to give them a new three-year term funding facility at a low 1% interest rate. As soon as the facility was available, European banks immediately borrowed €489 billion from the ECB. In effect, European taxpayers are stepping into the breach left by private capital markets and directly funding their own wobbly banks via magic money (ie, the ECB’s printing press). The genius behind the ECB initiative is that it opens up a near riskless ‘carry trade’ to European banks, whereby they can borrow for up to three years at 1% and immediately reinvest that money in eurozone government bonds yielding between 2-6% per annum. This satisfies both the banks’ ‘liquid asset’ requirements under Basel III and European governments’ desire to stimulate demand for their liabilities. – Again, credit must go to Australia’s four major banks, which, having astutely retained the services of one former RBA governor and two former Treasury Secretaries (and RBA board members), managed to convince APRA, the RBA, and Treasury to lobby furiously on their behalf for exemption from holding the extra capital required of the world’s 30 largest banks, which Australia’s majors all rank amongst, under Basel III. The only explanation local regulators could offer their overseas contemporaries was that they were not systematically important global institutions because they have no significant overseas exposures (with a wink and a nudge to Mike Smith and ANZ’s pan-Asian expansion plans). – Kudos also to the four majors, for persuading APRA, the Treasury and the RBA to permit them to be exempted from the standard ‘liquid asset’ test that will apply to all other global banks under Basel III. Instead, <country-region><place>Australia</place></country-region>’s banks will have the unique benefit of a direct ‘line-of-credit’ from taxpayers, which they can tap during any emergency. Specifically, the RBA is supplying them with a new ‘Committed Liquidity Facility’ (instead of the standard Basel III requirement of holding sovereign debt), which for a tiny cost of 0.15% per annum local banks will be able draw on if they face a funding crisis. – Of course Westpac’s Bill Evans, who pulled off the forecasting coup of the year. On the July 15, Evans turned 180 degrees from projecting further RBA rate hikes to a total of four cuts, commencing in December. It is one indication of how difficult forecasting really is that while Evan’s switch is universally hailed as highly prescient, the timing and magnitude of the forecast itself were wide of the mark. (In the article <a target="_blank" href="https://www.businessspectator.com.au/bs.nsf/Article/markets-economists-traders-interest-rates-invest-pd20111117-NNVW4?OpenDocument">Fighting a false forecasting war</a>, published November 17, I explained the poorly understood differences between forecasting and investing.<a href="https://www.businessspectator.com.au/bs.nsf/Article/markets-economists-traders-interest-rates-invest-pd20111117-NNVW4?OpenDocument&amp;src=sph"></a>) Immediately after Evans’ radical change of tune, which was triggered by an overseas trip, the second quarter inflation numbers printed at a stonkingly high 0.9% (after a similarly high first quarter result). Were it not for the <country-region><place>US</place></country-region> debt ceiling crisis, the RBA would have hiked rates in August. Instead, the RBA ended up lowering rates in November and December. The first cut was rationalised by the RBA’s willingness to shift monetary policy back to ‘neutral’ on the basis of the one (anomalously low) third-quarter CPI print. The December cut, which tipped policy into stimulatory territory, was justified not by a weak domestic economy, which the RBA repeatedly claimed was tracking ‘at trend’, but rather by the desire to give financial markets some insurance against a deterioration in the European situation.  – Anyone who had the foresight to express concerns about the durability of the ‘independent’ central banking and inflation-targeting models that had prevailed for 15-20 years prior to the GFC, and, more particularly, voice apprehension about the likelihood that sovereign states would seek to politicise (or ‘fiscalise’) their central banks by compelling them to monetise government debts. The RBA is, for the time being, one of the last remaining examples of a nearly extinct species.  – Anyone who acted on Rismark's now fashionable yet long-standing portfolio construction advice of reducing exposures to listed Australian and global equities, and increasing portfolio weights to Australian government bonds and cash. Over 2011 the Australian sharemarket, including the reinvestment of dividends, declined by about 15%. In comparison, the UBS Composite Bond Index, which proxies for the broad Australian fixed-income market, rose by a stunning 11% while bank bills returned over 5%. – Those economists who held firm on their optimistic economic and household income growth forecasts in the face of numerous 2011 storms. In the second and third quarters of 2011, real GDP growth has averaged a way-above-trend 4.8% (annualised). And the flood-affected fourth quarter of 2010 has been consistently revised up, with real GDP growth now estimated to have been a trend-like 0.8% even with a 0.5% drag attributed by Treasury to natural disasters. Real per capita disposable income has been similar impressive, expanding at an 8.8% annualised pace over the six months to September. – Anyone who rejected the relentless lobbying by vested commercial interests and those pushing doomsday scenarios about the so-called ‘retail recession’ and weak consumer spending. It turns out that Australian consumer spending has been rising at a healthy rate. Based on the latest ABS national accounts data, consumer spending averaged 4.4% over the half-year to September, and 3.7% over the past 12 months. The RBA has noted that consumer spending, which is the single largest driver of economic growth, has merely substituted towards services and away from traditional retail goods. The chart below shows the quarterly pace of Australian consumer spending in real terms, which is currently expanding at a rate well-above its long-term average since the end of 1989.
<img src="/images/stories/joyeabs.gif">
– Rismark’s September 2010 forecast for ‘modest’ declines in Australian house prices if the RBA lifted rates – we got a double hike in November 2010 – combined with ‘de facto’ hikes in 2011 care of extreme consumer hawkishness (documented in numerous surveys) with the average family budgeting for two to three rate increases. Over the first 11 months of 2011, Australian capital city dwelling prices only fell by 2.8% (in actual raw terms), and by 3.7% on a seasonally-adjusted basis. The November house price data released on December 30 shows the first actual rise in both capital city and regional dwelling prices since December 2010. – The pioneering use of animated cartoons to spoof the decision-making of the RBA and <country-region><place>Australia</place></country-region>’s major bank oligopoly. To date, there have been over 5,500 unique views of these cartoons, which average over five minutes each. By far the most popular has been <a href="https://www.xtranormal.com/watch/12784379/leaked-secret-video-of-two-major-bank-ceos-chat">this skit</a> of a dialogue between Westpac’s Gail Kelly and NAB’s Cameron Clyne.
Next page: The worst calls of 2011
 
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 The worst calls of 2011 – Wayne Swan’s unprecedented decision to break with 20 plus years of convention and take the pay-setting powers away from the RBA’s independent board members, led by the highly-respected Jillian Broadbent, and put them under the government’s control. Prior to doing this, Broadbent wrote to Swan, <a href="https://christopherjoye.blogspot.com/2011/09/knee-capping-aussie-central-banks">arguing</a> "[C]hanging current responsibilities on remuneration would jeopardise the calibre of the Reserve Bank officers and the bank's high standing...The board believes that the current remuneration framework for the bank is crucial to the bank's continuing capacity to carry out its duties to the standards required, and would see any move to unwind it as undermining the capacity of the Bank to do so." Swan’s complaint was that Glenn Stevens gets paid too much – that is, one-fifth what the average top 12 executives at a major bank receives. – Muammar Gaddafi’s decision to knock back the opportunity to go into exile in Venezuala, Zimbabwe, Angola, Burkina Faso, Chad, or Equatorial Guinea. Likewise, the decision of Egyptian president Hosni Mubarak to resist his Arab Spring. The smarty-pants in the Middle East looks to have been <country-region>Tunisia</country-region>’s former president, Zine El Abidine Ben Ali, who simply relocated to <country-region><place>Saudi Arabia</place></country-region>. – The chorus of commentators and analysts who claimed the major banks would not be able to pass on the RBA’s December rate cut in full because of higher funding costs. – The consensus economist projection at the start of 2011, which yours truly subscribed to, that the RBA would raise rates several times over the year on the back of high core inflation. We got the high core inflation in the first six months, but a conflictingly low print in the third quarter. The RBA showed us that it finds lifting rates into restrictive territory hard work, while cutting them on the back of more mixed evidence seems to be an easier decision. This could be related to the fact that the RBA board is dominated, unusually, by six political appointees from the private sector plus a government representative in the form of the Treasury Secretary. Read about how the RBA’s decision-making process really works <a href="https://www.businessspectator.com.au/bs.nsf/Article/Dont-expect-the-unexpected-from-this-RBA-pd20111207-PAU9M?OpenDocument&amp;emcontent_spectators">here</a>. – Doomsayers who confidently claimed that the eurozone was certain to collapse. (This may yet prove true!) – News Ltd’s Terry McCrann, who called a certain hike in August 2011, and the AFR’s Alan Mitchell, who argued the RBA would not cut in December unless there was a demonstrable deterioration in European conditions. – Bill Gross’s decision to sell PIMCO’s holdings of US Treasuries on the basis that money printing by the Federal Reserve (hit) would stimulate inflation pressures (hit) and a decline in the perceived creditworthiness of the US sovereign (hit with Standard &amp; Poor’s dutifully downgrading the US to a AA rating), and the resulting surge in US yields (miss) forcing a decline in the value of US bonds (miss). Gross arguably underestimated the power of risk-aversion. – The Commonwealth Treasury’s 2011-12 budget deficit forecast, which after only six or seven months had to be revised up by another $14.5 billion (between the May budget and the November MYEFO). – Steve Keen’s mid 2010 prediction of ‘accelerating’ declines in Australian house prices, which have fallen by less than 3% and look to be decelerating based on today’s data. – The droves of sharemarket spruikers who once again forecast stunning gains for Australian equities. While they are too many in number to list here, representative examples include AMP and UBS’s calls for the ASX 200 to rise to 5,500 and 5,600 points, respectively, by end 2011 (ie, gains of circa 20% before accounting for dividends). Today the bourse is sitting near 4,000 points. – Finally, the oft-quoted interest rate futures market, which at various times during the year has predicted more than one RBA hike and five RBA cuts. Of course, we got neither. As I explained in<a href="https://christopherjoye.blogspot.com/2011/10/financial-markets-pricing-of-rba-rate" target="_blank"> this column</a>, market pricing for future RBA rate changes is both highly volatile, and biased by various influences. While economists get panned for changing their views, the truth is that market is far more temperamental.
 
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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.
This article originally appeared on <a target="_blank" href="https://www.businessspectator.com.au/">Business Spectator</a>. 
 
 
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Best and worst calls for 2011: Christopher Joye

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There is an enormous amount of time wasted debating whether Australian house prices are over- or under-valued. The vast bulk of everything that is written on this subject is, unfortunately, both factually flawed and misleading. 
Today I want to objectively eviscerate the long-standing myth that the Australian housing market is in the throes of an unsustainable bubble using two very simple charts, which you are unlikely to have seen before. 
By referencing this analysis alone one can conclude that current Australian house prices are comfortably explained by fundamental economic factors. That is, there is no evidence that domestic housing costs have overshot basic measures of fair value. We will also see that the average Australian family’s disposable income after meeting all housing costs is actually higher than it has been at any time since our analysis begins in 1985. 
The first question we address is most powerful in its simplicity. Specifically, we want to work out how much of the growth in Australian house prices since 1985 can be explained by changes in disposable household incomes and mortgage rates. 
Regular readers will recall that both the RBA and I have regularly argued that the increase in household debt-to-income ratios, which started during the early 1990s, and the coincident rise in Australia’s dwelling price-to-disposable income ratio, can be partly attributed to the circa 40% reduction in average mortgage rates between the 1980 and 1995, on the one hand, and 1995 and today, on the other. These two periods book-end the introduction of the RBA’s “inflation-targeting” regime, which helped lock-in consumer price growth of 2% to 3% per annum, and thus much lower nominal interest rates. More formally, mortgage rates averaged 12.6% between 1980 and 1995. Since that time, mortgage rates have averaged a little less than 7.5%. 
In our first chart below Rismark’s research group has put this hypothesis to the test. In particular, we take the median Australian dwelling price in June 1985 and “index” this by only two variables: (1) changes in incomes; and (2) changes in borrowing capacity enabled by variations in mortgage rates over time (assuming that the household’s loan-to-value ratio and mortgage repayments-to-disposable income ratio stay constant in 1985 terms). 
The final income- and interest rate-adjusted 1985 median dwelling price is denoted by the blue line in the chart below. The red line represents actual median prices. 
To get the best possible measure of the change in household earnings, we use the ABS’s disposable household income series, which is reported as part of the National Accounts. We have not used the gross increase in disposable household income, since this is artificially inflated by population growth. To control for the latter, we divide disposable household incomes by the number of households each quarter. This gives us disposable income on a per household basis, which expands at a lower rate than the headline disposable income series. 
If we simply index the 1985 median dwelling price by this measure of incomes, we can account for 60.1% of the total increase in Australian housing costs over the last 26 years.
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As discussed, the second variable we use to adjust the 1985 median dwelling price is the change in household borrowing capacity over time. To properly quantify this, we keep the amount of money households spend on their mortgage repayments constant. That is, we fix the 1985 mortgage repayments-to-disposable income ratio and apply this fixed ratio to the entire 1985 to 2011 time-series. 
We do not, therefore, allow households to spend any more of their earnings on meeting housing costs over time. We also assume a constant mortgage loan-to-property value ratio. Accordingly, the only variable that influences the household’s borrowing capacity is fluctuations in mortgage rates over time, which we source from the RBA. 
Adding changes in borrowing capacity to the blue line in our chart above, we can explain a further 31.9% of the increase in Australian housing costs since 1985. 
Collectively, incomes and interest rates account for 92% of the increase in median Australian dwelling prices over the period 1985 to 2011. 
Note that since the average size of Australian homes has tended to rise, it is likely that there are some “compositional biases” affecting our median measure of housing costs (i.e., the red line in the chart above). That is, it is conceivable that incomes and mortgage rates actually account for an even higher share of the time-series change in dwelling prices than our analysis suggests. 
Our second chart takes a novel look at the question of housing affordability. This analysis actually borrows from an approach first developed by Dr Tony Richards at the RBA. Specifically, it asks the question: how much real disposable do households have left over after buying the representative home and servicing all their mortgage costs? 
In order to compare the welfare of different households over time, we take the disposable income measure used in the first chart above every quarter and assume the household buys the median-priced dwelling as recorded in that same quarter. Given a fixed loan-to-value ratio, we then work out the principal and interest repayments owing on the household’s mortgage, which it meets out of its income. After adjusting for inflation we have a quarterly estimate of real disposable income per household netting out all housing costs (i.e., after buying a home and servicing the mortgage). This is represented by the blue line in the chart below.
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It turns out that in 2011 Australian households actually have more income left over after purchasing the dwelling of their dreams and meeting their principal and interest repayments than any of their predecessors since our analysis begins in June 1985. This was exactly the same result that Richards found when he first published his work in early 2008. On the basis of this benchmark, housing affordability in Australia has never been better.
In closing today’s column, I want to provide an update to our closely followed dwelling price-to-income ratio. We have recalculated this data to reflect the ABS’s September National Accounts. The key conclusion is, as we have predicted for some time, that Australia’s dwelling price-to-income ratio continues to slowly decline to around four times, which also accords with what the RBA finds.
While one can quibble about exactly what the ABS includes in its measure of disposable incomes, we are more concerned about changes in the ratio over time (rather than the specific levels). And when focussing on how the ratio has moved, we can clearly see that there is no evidence that Australian housing costs have grown more rapidly than disposable household incomes over the last seven to eight years. In fact, when we use a much more precise measure of housing costs — namely, our hedonic indices – we find that per capita incomes in Australia have actually outpaced national dwelling prices by about 15% since the end of 2003.
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In a recent report, the ratings agency Moody’s downgraded its outlook for Australia’s mortgage insurance sector almost exclusively on the basis of concerns about Australia’s housing market. On the one hand, Moody’s argued that, “elevated house prices and mortgage debt levels are arguably at unsustainable levels and remain a key vulnerability for the LMI industry.” Yet in the same report they concede that “our view is that the data on the sustainability of Australian housing prices remain ambiguous.” While these two statements are difficult to reconcile, we hope that the evidence presented above will help clarify Moody’s views.
 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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The final word on Australian house prices: Christopher Joye

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Yesterday we read Paul Sheehan in the Sydney Morning Herald <a href="https://www.smh.com.au/opinion/politics/four-pillars-bashed-but-holding-firm-20111211-1opk5" target="_blank">arguing</a> that Australia’s major banks “look like ports in a storm”, and were prudent in hesitating to pass on the RBA’s cuts. 
Sheehan claims that “reflexive calls for our banks to pass on the Reserve Bank's interest rate cuts, in full, are now double-edged… A healthy bank is far preferable than a stressed bank. They may need their fat for harder times.” 
In case you missed it, his op-ed’s title conveyed the message even more crisply: “Our banks aren't so greedy after all." 
Sheehan was accompanied by a second SMH piece, ironically produced by an economic consultant to the banks, which <a href="https://www.smh.com.au/business/no-need-for-banks-to-pass-the-cut-20111212-1oqv4" target="_blank">posited</a> that we should, in fact, only ever expect the banks to pass on 80% of any RBA move. Again, the article’s pithy title told you all you needed to know: “No need for banks to pass the cut.” 
Sheehan’s insinuation that we should prioritise major bank profitability over competitive considerations is not novel. He is merely trotting out the very standard RBA and Australian Bankers Association (ABA) line on the purported trade-off between “financial stability” and “competition”. The two are supposedly mutually exclusive, which necessitates a more concentrated financial system. Privately, serious policy thinkers know that both the RBA and APRA would prefer fewer banks to regulate rather than more. 
To this line of logic, more competition means lower margins, which means less profitable and hence less “stable” institutions. It’s that crude. And it's wrong. 
Sheehan would have almost certainly been worded up by someone in the RBA- Treasury-ABA-major bank network to present the “other side” of the bank bashing story. 
Oh, and rest assured, this is an “insiders' network”, much like the “financial oligarchy” that MIT’s Simon Johnson famously identified as the source of so many problems in the US. 
A former head of Treasury and director of the RBA, Ted Evans, is chairman of Westpac. 
His successor as head of Treasury and a director of the RBA, Ken Henry, has just been appointed to NAB’s board. 
The governor of the RBA between 1996 and 2007, Ian MacFarlane, joined ANZ's board once his term at the RBA expired. 
David Morgan, a long-time Treasury official who rose to become 2iC, left to join Westpac, which he led as CEO during the 1990s and 2000s. 
Another former RBA official, Andrew Mohl, was until recently chief executive of AMP. 
And I fully expect the outgoing deputy governor of the RBA, who was well-known as a defender of the banking oligopoly, to end up on some bank board. 
If during your career as a (relatively) lowly paid regulator or public servant you have one eye on a lucrative banking job to secure your retirement nest egg, it’s hard to believe that this does not in some way contaminate your ability to exercise independence. 
The Washington-Wall Street-like crossover between Australian banks and the bureaucracy may be one reason why domestic regulators have been so keen to protect the majors from the reforms their peers overseas are being subject to following the GFC. 
After all, according to the local oligarchy’s narrative, luck had little role to play in Australia’s success in skirting the crisis. It had nothing to do with our leverage to Asia, extraordinary endowments of resources, high population growth, 20 years of rising real GDP, or the fact that our banks had not expanded overseas due to their focus on servicing the high growth domestic economy. 
In Sheehan’s words, “we can thank good government policy and good banking.” No sight of providence in this play!
 
This may explain why the RBA has been pushing hard to have the major banks exempted from the extra capital charge that the world’s 30 largest banks will be hit with under BASEL III, even though the majors rank among this list. 
The argument goes that Australia’s banks don’t have significant overseas exposures. But is it not the explicit corporate strategy of the CEOs of two of the four majors to expand into foreign territories? Of course it is. We’ve even had the newly appointed CEO of the Bank of Queensland claim that Australian banks should use their (taxpayer-underwritten) pricing power to buy cheap assets overseas. 
The dysfunctional regulatory-banking nexus is also possibly one reason why our banks have been exempted from holding the standard “liquid assets” that all other global banks will be required to keep. The official explanation was Australia has little government debt to satisfy this requirement. 
Yet Australia’s unique solution involved the RBA offering all banks a so-called “Committed Liquidity Facility”, which for a cost of just 0.15% per annum will give banks an immediate line of credit whenever they face funding stress. That is, they can swap illiquid assets with the RBA for cash and thus directly cauterise their solvency concerns. 
One of the reasons I have argued consistently for better pay in the public sector is so that officials feel less need to leave and seek lucrative private sector gigs. (And officials do use this explanation when asked why they are taking on such jobs.) 
The financial stability/competition trade-off that guides so much banking policy thinking in Australia is actually a sham. To demonstrate why, I put to you this idea. 
The four major banks’ combined market capitalisation is an extraordinary $250 billion (that’s about 20% of the national GDP). 
Imagine, for a moment, if we could replace the majors with, say, a larger number of smaller institutions. That is, if we took this quarter of a trillion dollars and spread it across, say, 10 smaller, safer banks – with no offshore expansion plans, with no “non-core” banking activities – worth, say, $20 billion to 30 billion each. Think of 10 different versions of Bendigo and Adelaide Bank. 
Our financial system would no longer have four “too-big-to-fail” legs, and all of the long-term moral hazard problems that these government-guaranteed institutions engender. Instead, it would have 10 smaller pins across which to apportion the economy’s risk. This is just smart diversification. 
How might one achieve this? You could begin by introducing a financial transactions tax that became much more punitive as an institution’s size – measured by its assets as a share of the system’s total assets – rose beyond a certain, unacceptably high threshold. 
You would basically be signalling that if you want to become a mega, too-big-to-fail bank, you are going to have to pay taxpayers a hefty price for the explicit and implicit catastrophe insurance. 
And if you think I am being melodramatic about taxpayers bailing out banks, I would encourage you to refer to Standard and Poor’s independent perspective. In assessing the creditworthiness of the major banks this month, Standard and Poor’s commented that their funding costs were substantially lower because of the assumption of taxpayer support. Specifically: 
 “Our counterparty credit rating on CBA is two notches higher than the [stand-alone credit rating], reflecting our view of a high likelihood of extraordinary government support in a crisis. This reflects our view of CBA's high systemic importance in Australia, and our assessment of the Australian government as highly supportive of institutions core to the national economy." 
And if you want a lighter take on everything I have argued today, have a glance at this online <a href="https://www.xtranormal.com/watch/12784379/leaked-secret-video-of-two-major-bank-ceos-chat">cartoon skit between two of the big banks CEOs</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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Bashing the banks is A-OK: Christopher Joye

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The ABS housing finance data released today has once again reaffirmed what I have argued here for months now: Australia's housing market is stabilising, and would likely have commenced a gradual recovery in the absence of interest rate accommodation from our recently appointed major bank insurer, aka the RBA.
Today the ABS reports that in the month of October – before the November or December rate cuts, which have been passed on to borrowers mostly unperturbed – the number of new home loans approved to people buying existing dwellings had once again risen by a very healthy 0.9% month-on-month.
Indeed, the number of new home loans approved by Australian lenders for purchases in October – not “refinancings” – was higher than any other month since way back in 2009. You can see the very steady ramp-up in seasonally adjusted new home loan approvals in my chart below.
<img src="https://www.urban.com.au/images/stories/december12.gif">
Now for some reason analysts get confused when interpreting this housing finance data. In respect of the future performance of the housing market, we don't care much for purchases of newly developed homes, which are a small fraction (circa 5%) of the total, refinancings of existing loans, the share of owner-occupiers versus buyers, nor the 'value' of loans (where the latter is affected by a range of things including the value of the homes being purchased, the types of buyers in the market – e.g., first timers acquiring cheaper homes – and the policies of lenders).
The single best proxy for the demand-side of the housing market is the seasonally adjusted number of new loans approved for the purchase of existing homes, which is about 20 times the size of the “new dwellings” series.
Since April 2011, this benchmark has been growing healthily, averaging a stonking 2.2% increase each month. Let me reiterate, this was before two consecutive RBA rate cuts that have been passed on to borrowers.
We got the first glimpse of the impact the RBA's very generous policy reversal has had on the housing market via <a href="https://www.propertyobserver.com.au/mortgages/afg-mortgage-approvals-at-33-month-high-as-investors-return-to-the-market" target="_blank">AFG's data for November</a> (AFG is Australia's largest mortgage broker). This series, which leads the ABS numbers, printed at its highest level since March 2009, with investors hitting their biggest relative share in history.
Expect much more of this in 2012 as Australians seek to take advantage of sub-6% fixed-rate home loans and discounted variable rates only slightly above this level.
As I have noted too many times to count, our incredibly interest rate sensitive housing sector (which is much more so than it has been in decades past) will likely prove a very powerful hedge against adversity in the event that the RBA slashes rates. In contrast to other countries, almost all of Australia's residential borrowers are on fully adjustable-rate mortgages that typically price off the RBA's cash rate.
Why? Because circa 60% of bank funding comes from short-term retail deposits, which in turn price off the short-end of the yield curve largely controlled by the RBA. But I will leave bank funding costs for a column on another day!
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 market recovered strongly in October 

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So David Bassanese from the AFR reminded me that he called the RBA's rate cut yesterday. I don't think anyone else in media land really picked it. The market was fully pricing it – had been since the last meeting. Stephen Koukoulas (aka "Koukie") was there three or four months ago – but he was also confident about the RBA cutting 25 basis points in October and 50 basis points in November, at various times. 
Bill Evans at Westpac, Brian Redican at Macquarie, and Tim Toohey at Goldman have been brilliant at anticipating this sharp turn-around in the RBA's monetary policy stance. One question is whether they picked it for the right reasons. If you were dovish because of the domestic economy, you were right for the wrong reasons. If you were dovish because of low inflation, well, I don't know what to say. We've had two high core inflation numbers in quarter one and quarter two (after multiple revisions) and one low result in quarter three (first estimate). Nobody is much good at forecasting inflation one to two quarters ahead. Almost all economists struggle to predict core inflation the day before the release. But if you were punting on low inflation as a driver of the RBA's 180-degree turn, you surely deserve some credit. 
If, on the other hand, you were motivated by the offshore environment, and Europe and the US, in particular, well, hats off to you. Bill Evans and probably Toohey fall into this category. Koukie I suspect too. Matty Johnson at UBS is another who fingered it early, and who was quick to call a European recession. He was confident about a December cut many weeks ago. 
Bassanese's rationale derived from the "insurance" (or "put option") school of thought. That argument was an obvious one, but I was not convinced the RBA would necessarily acquiesce. I was 50:50 right up to the decision. Anyone claiming December was certain has probably got the last few months wrong. A good counterfactual is HSBC's Paul Bloxham. Blocker spent 11 years working under Stevens, Richards and Lowe in the RBA's economic analysis department. He only left there a year or so ago. Unfortunately, Paul has missed November and December. He's now switched his position and is calling a spate of cuts. 
One of the smartest and most successful rate participants I know characterised it as a coin toss a day or two ago. There was a lot of money to be made going short interest rate futures if you had conviction about the RBA keeping its finger off the trigger. Right up to 2.30pm I was trying to clear a position in my head. I could not – I had this uneasy feeling, a little like I did right before the August decision to pause. One clear thought did come into my mind: “Whatever the RBA does today we will learn more about the way board members think. And that really is the key take-away.” 
You hear a lot of baloney from media commentators and economists who talk to the RBA and tell you – even to this day – that the RBA completely controls its own board and is at one with all its decisions. Anyone who says that is trotting out the house line. Of course the RBA wants everyone to think its relationship with the board is always harmonious, and decision-making is always unanimous. But anyone who has sat on corporate boards knows that is not how they work. 
We know that some RBA board members wanted interest rates lower in the first half of 2011, and we know, again as a matter of absolute fact, that some were calling for higher rates. We obviously got neither. 
What we saw yesterday, and what we have seen in 2011, is a classic committee-based decision-making framework. I know from years of personal experience that as soon as you run a decision-making process through a committee larger than two or three people, especially within a risk-averse or bureaucratic organisation, you get lowest-common-denominator solutions. You get “easy” decisions that are straightforward to justify. 
Super funds are a classic example: do what everybody else is doing. If everyone is over-invested in equities and underweight cash and fixed-income, do the same. Pick up the pieces after the event only when everyone else is doing the same. You can never be criticised if you are one man concealed by a crowd. 
That's what we've witnessed this year. The RBA's board comprises nine relatively ordinary individuals. We have learnt that they find it, unsurprisingly, very hard to make tough decisions. Everyone who has worked with the RBA will tell you that raising rates is hard work. We saw that in the first seven months of 2011. There were at least three months when a bolder, braver and more independent decision-making framework could have hiked. Would that have been a mistake? Of course not. If you hiked once earlier in the year (e.g., in May or June when a tightening was on the table) you would be claiming credit for the low inflation print in quarter three. You would have had much more justification for easing policy in November given the disturbing developments offshore and the supposedly altered inflation outlook. 
Instead, we found the RBA could not muster the fortitude to hike. The board dithered through the first seven decisions of the year, as you would expect any nine person committee chock-a-block full of strong personalities to do. They consistently sent highly inconsistent signals to the market. 
We know that because the economists covering the RBA were saying point-blank that they were confused by its conflicting statements. The first two Statements on Monetary Policy were incredibly hawkish while the Board Statements seemed more dovish. Is that really a surprise when one is prepared by the staff and the other by a committee? Sorry guys, they are not all joined-at-the-hip. 
 
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Even the media folks speaking directly to senior members of the bank, such as Terry McCrann in late July, and, this month, Alan Mitchell, were calling it wrong. After the November meeting Mitchell was telling us in column after column that only a major deepening of the crisis in Europe would force the RBA to cut in December. 
Mitchell and his Fairfax colleague, Peter Martin, confidently declared that November was a “once-off” adjustment of the cash rate back to neutral. Don't bank on any Christmas gifts from the hard-headed RBA. Don't expect the RBA to cut rates because of the mini-budget. 
Well, nothing has really changed in Europe. In fact, bond yields plummeted right before the decision yesterday with the Sarkozy-Merkel plan afoot. The domestic data flow was fine. There are some very early indications the highly interest rate sensitive housing market could be about to bounce back strongly with Australia's largest mortgage broker, AFG, reporting its single biggest month for new home loan applications in November since March 2009. The share of investors soared to record levels. 
What we got in November was an easy decision to cut. After the low third-quarter inflation, and the RBA's preceding signal of a “decision rule” that would reward a very low print, a cut was always likely. The only fly in the ointment was that the previous downward revision to quarter two data was revised right back up! The RBA's board ignored that and the first-quarter data, and decided to hang its hat on quarter three. 
Again, it was not “hard” to cut in the sense of it being a politically or socially difficult decision. Furthermore, the markets had priced it. Consumer confidence bounced back to above-average levels in November, and the RBA was showered in praise for providing those ailing sectors of the economy with much needed relief. 
Equally, it was not “hard” to cut in December. The market was fully pricing it. The politicians were calling for it. The RBA board has now given Wayne Swan and Julia Gillard a significant victory in being able to claim that the mini-budget, and weak public demand generally, have emboldened the RBA to loosen policy (assuming the banks actually play ball and pass on the cut). Making your political masters happy is easy. Every vested interest in the country was calling for "insurance" from the bank over the summer break in case things went awry. In the short term, it costs you nothing to cut rates. So a nine-person committee dominated by private sector business interests is going to have little hesitation in giving out free insurance – to their own constituencies. 
What I have learnt is that it's a mistake to listen to Phil Lowe, Glenn Stevens, or Ric Battellino, and think that their forecasts for the future, and their personal views on the distribution of risks, the dynamics impacting the local economy, and their sterilised vision of how central banking should in theory be undertaken, will prevail through a decision-making process involving a large committee of strong-willed, politically appointed business leaders and the Treasury Secretary. 
When Ian MacFarlane controlled the RBA board with an iron fist, and, in the words one of member, actively stifled debate and dissent, things might have been different. It was easy to be a benign dictator between 1996 and 2007. The economy was cruising along with unprecedented stability. Poor old Glenn Stevens was bequeathed a huge bout of high core inflation in 2007-08, followed by the GFC, higher unemployment, a massive surge in the currency that stretched the domestic economy every which way, and now a bona fide global sovereign debt crisis. 
The RBA board dynamics of today are dramatically different to those that existed in the pre-GFC period. It was easy to be a world-beating governor (and treasurer) when you had a 15-year period of global disinflation, high productivity, robust growth, monotonically declining unemployment and uninterrupted growth. Stevens' challenges have been vastly more complex. As have Wayne Swan's, frankly.
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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Don't expect the unexpected from the RBA: Christopher Joye

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Today I am thrilled to be able to share with you a truly unique insight into the RBA board’s internal machinations. A secretly taped video of a discussion between RBA assistant governor Philip Lowe, who runs the so-called “economic group” and is an influential player at the board level, and one of the RBA’s private sector directors, has surreptitiously come into our possession. We have agreed not to reveal the identity of the individual who sourced this material. Given its sensitivity, please do not share it with anyone! Enjoy.
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<iframe border="0" frameborder="0" id="xtranormal_Leaked: secret video of two major bank CEOs chat" marginheight="0" marginwidth="0" name="xtranormal_Leaked: secret video of two major bank CEOs chat" src="https://www.xtranormal.com/xtraplayr/12784379/leaked-secret-video-of-two-major-bank-ceos-chat" style="height: 291px; width: 470px;"></iframe>
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Interest rate policy: Up to some digital mischief, Christopher  Joye imagines pre-RBA decision day internal machinations

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Did you know that homes located in 80% of <city><place>Sydney</place></city> suburbs have actually generated capital gains of around 1% over 2011? Adding in attractive rental growth, total returns have been pretty good relative to alternatives like shares. 
It is only the most expensive suburbs in <city><place>Sydney</place></city> that have suffered price declines. These areas have endured a 3.2% fall in value over the course of the year (see the red line in the chart below).
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We know this because we break up RP Data-Rismark’s patented hedonic indices by suburbs ranked by price. (Dr Tony Richards at the RBA was the first person to ask us to do this.) The chart above graphically highlights the divergence in performance between the cheap and middle-priced regions across Sydney and those more affluent areas, which have been comparatively hard hit. 
We see similar dynamics assert right across <country-region><place>Australia</place></country-region>. For example, the cheapest 20% of suburbs in <city><place>Melbourne</place></city> have recorded capital losses of only 2.3% in 2011. In contrast, <city><place>Melbourne</place></city>’s dearest markets have registered steep 7.4% price falls (see next chart).
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A portfolio of the most expensive homes across the capital cities has experienced reasonably material capital losses of 5.6% in the year-to-date. The lowest priced homes, by way of comparison, have tapered by less than half this amount, or 2.1% (refer to my third chart).
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So why do we find these differences? A bunch of reasons. The rolling global financial crises that have affected all economies in one way or another originated in the otherwise affluent financial services industry. 
Going forward, retail and investment banks are having to modify their business models, and condition shareholders to substantially lower returns. 
Since credit growth over the next cycle will track incomes, retail banking revenues will grow at appreciably lower rates. 
During the 1990s and 2000s, housing credit in <country-region><place>Australia</place></country-region> expanded at an average annual rate in excess of 12%. That is simply unsustainable. In the long run, credit growth is bounded by growth in incomes (holding all other variables constant), which, on average, advance at single-digit rates. 
To maintain their historical returns, retail banks are having to cut costs. And this is just the beginning. The downward pressure on business expenses will be unrelenting in a world in which major banks can only produce single-digit revenue growth. This in turn means lower salaries and bonuses, and fewer jobs, for some of the nation’s best paid executives. (If you want to watch a funny video skit about bank remuneration in <country-region><place>Australia</place></country-region>, <a href="https://christopherjoye.blogspot.com/2011/11/video-story-about-big-banks-and-rba">check out this</a>.) 
The same principle applies to other companies in the financial services sphere. Investment banks – and their commercial banking cousins – are generally closing down their “proprietary trading” businesses, which is where some of the biggest income earners worked. 
Another key source of investment banking profits, IPOs, has been in a secular malaise since 2007 due to the horrific performance of share markets. Once again, all the investment banks are having to revisit their cost structures with the end game being fewer employees and lower compensation. 
We now know that the financial services industry grew to become too large a part of the economy in the years preceding the crisis. In the words of the RBA governor, Glenn Stevens, it was no longer simply the “hand-maiden of industry”. Economic logic usually ends up prevailing, and the financial services sector is now undergoing a relative retrenchment that will probably continue for years to come. 
For high-end housing that basically means top-end purchasers have skinnier wallets, which is probably one reason why we are seeing expensive suburbs underperform for the time being. 
On the other hand, there will be new sectors of the economy that emerge as winners from the structural adjustment currently taking place. Anyone with an exposure to coal mines in NSW is just one example. 
As a rule, luxury property is much more illiquid and volatile than those homes located in the mass market. Contrary to popular myth, developing expensive homes does not deliver the best returns. 
Which part of the housing market do you think billionaires like Harry Triguboff make their money in? Think properties priced under $750,000 that appeal to the widest possible audience. Put another way, would you rather be the founder of IKEA, or running your local antiques store?
Christopher Joye is a leading financial economist. The above article is not investment advice.
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It's an affluent housing correction: Christopher Joye

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In the Q+A after his speech last Friday night the RBA governor Glenn Stevens claimed that central bankers are spending a lot of time these days “nowcasting”. That is, trying to figure out exactly how the economy is tracking in the present tense.
In rationalising this allocation of time, he made a statement of the obvious:  unless you know what your starting point is today, it is nigh on impossible to make a credible forecast of where you will be tomorrow.
A more impolite interpretation might be that since the RBA has little faith in its own forecasting prowess – which is why it discarded its November 2010 experiment with ‘pre-emptive monetary policy’ – its next best option is to concentrate its energies on determining how the economy is tracking right now.
That is not as easy as it seems. Even carefully collated data, such as core inflation, is subject to material errors. As regular readers will know, the RBA, media and financial markets were grossly misled by a major downward revision to the second quarter core inflation print.
This had serious ramifications for the RBA’s approach to monetary policy, which it shifted away from a tightening bias. Yet a second revision to these same numbers (which was, therefore, the third time the ABS had attempted to calculate them) increased the Q2 core inflation estimate back up to unacceptably high levels that would normally warrant policy tightening.
Unfortunately, that’s the nature of the imperfect informational beast that the RBA has to grapple with.
Today we get a batch of new data that will shed further light on how <country-region><place>Australia</place></country-region>’s economy is sailing in what is undeniably a stormy global sea. The most important stuff includes the third-quarter capital expenditure data, the ABS’s estimate of capital spending plans over 2011-12, and private credit growth for October.
We also have RP Data-Rismark’s October house price index results, which will show that capital city dwelling prices are down 2.8% in raw terms (4% seasonally adjusted) over the first 10 months of 2011. Given that the dollar value of rents is rising at nearly a 5% per annum rate, this modest 3% to 4% correction in housing costs is no big deal.
Importantly, our house price data precedes the RBA’s crucial November rate cut, which, in concert with record yield curve inversion, has forced home loan rates to plummet to as low at 5.99%.
As a quick aside on the housing market, the ABS tells us that seasonally adjusted housing finance approvals to people buying established homes have increased every month over the last seven months to the end of September.
We also know that consumer confidence in November rose to above-average levels, and, perhaps most importantly, that the previously surveyed expectation among Australian households that rates would rise two to three times in the year ahead has likely evaporated. Today the average Australian family probably expects unchanged rates and/or more cuts.
As I have pointed out before, this means that the “expectational” impact of the RBA’s November cut will be significantly larger than would otherwise be the case.
Have you ever noticed how there tends to be relentless media coverage of deteriorating housing affordability when prices rise, but next to nothing written about improving affordability when prices fall? Without a shadow of doubt, this is the biggest story in the Aussie housing market today.
RP Data-Rismark’s estimate of the national median dwelling price across all regions and dwelling types has fallen from a recent high of $420,000 to $400,000 today. So the cost of Australian housing is unambiguously lower than it was one to two years ago. Concurrently, discounted fixed and variable mortgage rates are now well below their long-term historical averages while disposable incomes per household have been expanding at a healthy 8% per annum pace, according to the ABS’s National Accounts. This has resulted in Rismark’s national dwelling price-to-income ratio falling to its lowest level since before 2003. It is little wonder that first time buyers are returning to the market.
The striking improvement in Australian housing affordability is one reason why Rismark is projecting that there will be a sustained recovery in housing activity by the end of the first quarter next year.
While I am not in the least bit concerned about <country-region>Australia</country-region>’s housing market, given the daily doses of doom and gloom that we are asked to ingest, how is the rest of <country-region><place>Australia</place></country-region>’s economy faring? One needs to address this question before we can turn to the RBA’s December dilemma.
Data flows over the past month or two have confirmed that consumer spending and housing credit are expanding at “new normal” rates that are near household income growth, as you would expect.
Notwithstanding the rhetoric about the specter of a global recession, surveyed business confidence and business conditions remain at trend-like thresholds, which helps explain why business credit growth has recovered of late.
And despite a step-down in job ads and employment growth, Australia’s unemployment rate has remained sticky at a touch above its “full-employment” level.
Beyond the ABS’s small and volatile unemployment survey, we can get further labour market insights by parsing the more comprehensive unemployment benefits data reported by the federal government. In absolute terms, the number of people on the dole has been declining consistently right through to the end of October (see first chart). Expressed as a share of a growing labour force, the decline in dole recipients would be even sharper. There are no signs here of a labour market that is “rolling over”.
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/nov301.gif"><img src="/images/stories/nov301thumb.gif"></a>
The government has created a second series that tracks the number of dole recipients who have been looking for jobs for a relatively short period of time. This is illustrated in my next chart. The main take-away is that the number of people looking for jobs has been falling, not rising, albeit at a reduced rate in 2011 compared to the steeper declines evidenced in 2010.
Click to enlarge
<a title="Click to enlarge" rel="shadowbox" href="/images/stories/nov302.gif"><img src="/images/stories/nov302thumb.gif"></a>
Finally, last week we got a major upside surprise with the ABS reporting that “construction work done” in the third quarter printed at +12.5% – its highest rate on record and way above consensus forecasts of a +2% increase. Economists believe that this variable alone has the potential to add as much as 1.5 percentage points to the critical third quarter real GDP data.
The available empirical evidence implies that <country-region><place>Australia</place></country-region>’s overall economy is advancing at a trend pace, although when you lift the bonnet there is significant cross-sectional diversity in the growth experienced by individual industries.
While we always knew that a narrow resources investment boom would make this the case, one tends to hear much more from the noisier “have nots”. This can in turn blur one’s vision in respect of the broader economy’s performance.
Telescoped sources of economic growth can also interfere with the integrity of numerical surveys (or polls) of business conditions/confidence if participants’ responses are not weighted by their contributions to overall growth.
The bottom line is that based on the hard data and the RBA’s forecasts for gradually increasing core inflation over the next few years there seems to be no prima facie case for a rate cut next week.
This view was reinforced by the RBA’s top economist, Dr Phil Lowe, who explained, for the avoidance of any doubt, that following the November rate cut domestic “interest rates now are broadly neutral. They're neither expansionary … nor contractionary for the economy.”
While most economists currently expect the RBA to stay its hand in December, the financial markets have been pricing in a 100% probability of a cut for some time.
The interest rate debate is swirling around what experts think is the RBA’s “policy of least regret.”
In this context, there is universal agreement that the chief near-term risk <country-region><place>Australia</place></country-region> faces is to the funding of our banking system, with the wholesale finance markets that supply about 40% of total bank funding temporarily closed.
The concern is that if the banks feel they cannot fund themselves, they will ration credit, and, by doing so, rather myopically kill off economic growth. Of course, we have been here before during the GFC, and know that contrary to some predictions, the banking system did not fall in a heap.
Why? Because the Government decided to lend its pristine AAA credit rating to all ADIs by providing a taxpayer guarantee of deposits, which make up 50-60% of total bank funding, and through an offer of a taxpayer guarantee of the banks’ wholesale debts. In addition to these two insurance policies, the RBA also lent directly and very cheaply to the banks to provide them with enough funds to meet their day-to-day liabilities. Had the Government and the RBA not acted in this way, many Australian banks would have ended up trading insolvent.
The good news for the banks is that the RBA is in the process of launching another, more formal, bail-out program called the Committed Liquidity Facility, which will furnish banks with a line of credit that they can tap during liquidity crises such as the current one.
The RBA is the first to admit that it does not know what is going to happen in Europe, and what, if any, adverse economic shocks might be sent Australia’s way. It has ample time to watch how things unfold.
If the “nowcasting” Glenn Stevens is increasingly fond of reveals that the economy is about to come to a grinding halt, and if unemployment starts to rise at a surprising rate, he can comfortably cut rates.
Yet dropping rates today in response to bank funding problems prior to his nowcasting telling him to do so is foolish for at least two reasons.
First, there are many much more direct policy measures that can be used to immediately cauterize these issues, such as the assorted taxpayer guarantees and RBA liquidity facilities discussed above.
A cut in interest rates, on the other hand, is likely to be almost entirely absorbed by the banks in the form of margin expansion, which they would argue they need in order to vouchsafe their profitability.
This has two adverse consequences for the RBA and taxpayers.
The first is that if the RBA cuts its cash rate, and the banks don’t pass it on, this undermines the effectiveness of the RBA’s conventional monetary policy instrument. There is a zero lower bound on how far the RBA’s cash rate can go.
If you assume that banks want to maintain, as a minimum, net interest margins of around 2.5%, it is hard to see how mortgage rates can fall below circa 3% to 3.5%. And that assumes no further margin expansion by the banks along the way, which is heroic. So the RBA probably has the ability to reduce actual lending rates by about 300 basis points, give or take.
The point is that the RBA wants to be very careful to disentangle the policy solutions to bank funding problems and those required to stop an economy heading into recession (especially when fiscal policy is purportedly out-of-action).
Confusing the two could hamper your ability to lower market lending rates and thus stimulate the wider economy. Put differently, the RBA should preserve its policy firepower for when it needs it rather than using it to subsidise bank margins.
The issue for households is that if banks absorb RBA cash rate cuts via margin expansion, the RBA is, in effect, facilitating a wealth transfer from the 5 million families with mortgages, who will not get the benefit of lower rates, to bank executives and bank shareholders.
Don't get me wrong. A sustained deterioration in global economic conditions would absolutely warrant deep cuts by the RBA. Yet unlike its peers overseas, the RBA is in the fortunate position of having most domestic debt being issued in ‘variable rate’ form. This means the RBA can make immediate and very significant changes to household cash-flows through adjustments to its policy rate. In many other countries, such as the <country-region>US</country-region> and <country-region><place>UK</place></country-region>, most household debt is fixed-rate and not, therefore, controlled as closely or immediately by the local central bank.
<country-region><place>Australia</place></country-region> does indeed have an economic insurance policy, or a “Stevens’ Put” <a target="_blank" href="https://www.propertyobserver.com.au/trends/will-the-financial-markets-give-the-rba-a-stevens-put-christopher-joye/2011112352496">as I described it in an earlier column</a>. But instead of trading some of that insurance away to vocal bankers and financial market investors, the RBA should preserve it for the maximum benefit of all Australian households.
Christopher Joye is a leading financial economist. The above article is not investment advice.
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Should the RBA bail out financial markets?: Christopher Joye

Buyers considering a residence at boutique Gordon townhouse development <a href="https://www.apartments.com.au/new-townhouses/lume-gordon-43-47-dumaresq-street-gordon-nsw-2072">Lume</a>&nbsp;now have another reason to bring forward their decision.

For a limited time, purchasers of a residence at Lume will receive a BMW iX3 50 electric SUV, valued at more than $120,000, as part of their purchase. The offer is designed to add value for buyers while complementing the lifestyle envisioned for the architecturally designed Upper North Shore development.

Scott Timmins, Development Manager at <a href="https://www.apartments.com.au/developers/winim">WINIM</a>, said the partnership was created to provide buyers with a compelling reason to act.

"In today's market, buyers need a compelling reason to act now, and the BMW partnership was designed to create that catalyst. We wanted to add genuine value for our future purchasers. Choosing the all-electric BMW iX3 50 also reflects the values behind LUME, forward-thinking design, innovation and a more sustainable way of living. It's a premium incentive that complements the lifestyle our buyers aspire to and rewards those who commit early."

[smartcode_project:default project_id=7354 project_image_fid=374893]

Delivered by WINIM in partnership with Burtonwood Investment Partners, Lume comprises 14 architecturally designed two, three and four-bedroom townhomes created for families seeking the space of a freestanding house with the ease of modern, low-maintenance living.

The three-storey residences, designed by award-winning architecture practice <a href="https://www.apartments.com.au/architects/rothelowman">Rothelowman</a>, have been tailored for families and multi-generational living, featuring private internal lifts, flexible lower-level spaces, generous open-plan living and entertaining areas, media rooms, and landscaped outdoor spaces with custom outdoor kitchens.&nbsp;

Inside, engineered oak flooring, bespoke dining joinery with integrated wine fridges and backlit bars, sculptural porcelain bathrooms, Parisi freestanding baths and Astra Walker tapware create interiors that balance functionality with refined finishes.

Each townhome has been designed to combine generous internal spaces with sustainability initiatives such as EV charging infrastructure, while <a href="https://www.apartments.com.au/landscape-architect/arcadia-landscape-architecture">Arcadia</a>'s landscaped communal areas, centred around a restored creek line and native planting, encourage residents to connect with nature and spend more time outdoors.

[smartcode_project:default project_id=7354 project_image_fid=269527]

Rothelowman's Gary Tsui said the architecture was conceived to respond carefully to its Upper North Shore setting.

"Our vision was to create elegant, uplifting homes that draw on and positively contribute to the local character through meticulously considered design and an interaction with the surroundings."

The communal landscape has been designed as more than an open space between homes. Arcadia's Ben Newell and Kate Phillips said the adjoining reserve provided an opportunity to create a distinctive natural retreat for residents.

"Just as waterways carve their way through Ku-ring-gai's landscape, a raised boardwalk weaves through the reserve, connecting the homes to this tranquil oasis."

[smartcode_project:default project_id=7354 project_image_fid=374892]

Located just 300 metres from <a href="https://www.apartments.com.au/developments/gordon-nsw-2072">Gordon</a> Village and Gordon railway station, Lume offers convenient access to Sydney's CBD while placing residents close to some of the North Shore's leading schools, including Ravenswood, Pymble Ladies' College and Knox Grammar. Lane Cove National Park, Gordon Golf Club and a range of cafés and restaurants further reinforce the family-focused lifestyle on offer, with the BMW iX3 50 complementing everything from local trips around Gordon to weekend drives and city commutes.

Construction is underway with completion expected in mid-2027.

[smartcode_project_cta:default project_id=7354]

Joel Robinson

Boutique Gordon townhomes now come with a BMW iX3 50

Two apartments have sold for more than $10 million at EADE Byron Bay, setting some of the highest apartment prices ever achieved in the coastal town and underlining the growing appetite for luxury beachfront apartments in Australia's most popular coastal locations.

The $210 million project by Vitale Property Group has now secured more than $70 million in sales, led by residences that changed hands for $12.75 million and $11.75 million.

The record-breaking transactions reinforce the shift occurring in Byron Bay's premium property market, where affluent downsizers and lifestyle buyers are increasingly opting for high-end apartments over large beachfront homes.

<a href="https://www.apartments.com.au/new-apartments/eade-byron-bay-29-shirley-street-byron-bay-nsw-2481">EADE Byron Bay</a> occupies a rare 6,000 sqm absolute beachfront site on the corner of Shirley and Milton Streets overlooking Main Beach and The Wreck surf break, just 350 metres from Byron Bay's town centre.

The 25-residence development is the first beachfront apartment project approved in Byron Bay in more than a decade and is currently under construction, with completion expected in May 2027.

[smartcode_project:default project_id=145590 project_image_fid=359521]

The project has attracted a mix of local Byron Shire residents downsizing from larger homes, alongside interstate buyers from Sydney, Melbourne and Brisbane seeking a permanent coastal lifestyle without compromising on space.

Designed by <a href="https://www.apartments.com.au/architects/hayball">Hayball</a> and with interiors by <a href="https://www.apartments.com.au/interior-designers/alexander-co">Alexander &amp; Co</a>, EADE comprises&nbsp;10 garden apartments ranging from 284 sqm to 622 sqm, nine with private pools, five full-floor apartments and 10 rooftop residences with private plunge pools, expansive outdoor entertaining areas and uninterrupted ocean views.

[smartcode_project:default project_id=145590 project_image_fid=359527]

<a href="https://www.apartments.com.au/developers/vitale-property-group">Vitale Property Group</a> Managing Partner Chris Vitale said the project's combination of scale, location and limited future supply was driving buyer demand.

"There isn't another beachfront holding in Byron Bay of this size and position that could be developed again," Vitale said.

"Buyers are responding to the scarcity and the irreplaceability of a site of this calibre and to floorplans they can't find elsewhere in the market.

"We are seeing buyers place significant value on quality, space, design, resort-style amenities and the rarity of the location. The sales achieved to date demonstrate that discerning purchasers recognise the long-term significance of what is being created at EADE Byron Bay.

"Many are coming from larger homes in the Byron region, or from Sydney, Melbourne and Brisbane, and are after the space, security and convenience, without the upkeep of a house."

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[smartcode_project:default project_id=145590 project_image_fid=359523]

The Byron Bay project follows Vitale Property Group's delivery of the Mondrian Hotel and Private Residences at Burleigh Heads, with EADE continuing the developer's focus on luxury coastal developments.

Residents will have access to a resort-style swimming pool, gymnasium, sauna, cold plunge pool, concierge services and dedicated workspaces, while the project is targeting an 8-Star Green Star rating.

EADE Byron Bay is being exclusively marketed by Projx Australia in conjunction with WHITEFOX Projects.

WHITEFOX National Projects Director Phillip Rand said demand had been driven predominantly by owner-occupiers.

"We are seeing buyers at EADE place significant value on quality, space, design, resort-style amenities and the rarity of this location," Rand says.

"The sales achieved to date demonstrate that purchasers at this level recognise the long-term significance of what is being created at EADE Byron Bay."

Residences at EADE Byron Bay are currently priced between $4.75 million and $15.95 million.

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[smartcode_project_cta:default project_id=145590]

Vitale breaks Byron Bay records with EADE sales flurry 

When buying an apartment, most people compare the big-ticket items first. Floorplans. Kitchens. Balcony size. Natural light. The view.

But there's one everyday consideration that often doesn't come up until after moving in: how parcels are delivered.

As online shopping has become part of everyday life, parcel deliveries have shifted from an occasional event to a regular occurrence. Australians spent a record $82.6 billion shopping online in 2025, with almost one in every four retail dollars now spent digitally.

For apartment residents, that can present a challenge.

If nobody is home to accept a delivery, parcels may be redirected to a nearby Post Office, left in a building lobby or common area, or require building management to step in. In higher-density buildings, where dozens or even hundreds of residents may receive deliveries each day, parcel management has become an increasingly important part of everyday living.

That can create a range of frustrations. A missed delivery often means making time to collect a parcel elsewhere, while packages left unattended in foyers or mail areas can create clutter and increase the risk of theft. What seems like a minor inconvenience can quickly become a recurring issue for residents who shop online regularly.

It's one of those details that rarely features in a display suite but can have a noticeable impact once residents move in.

As a result, buyers are beginning to look beyond traditional apartment features and consider how a building supports day-to-day convenience, including whether there are secure options for receiving deliveries.

Australia Post's Parcel Lockers provide one solution.

<iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/CkF2oKmlACg?si=C50sDaoUUn2nuLmq" title="YouTube video player" width="560"></iframe>

Rather than having a parcel delivered directly to an apartment, eligible deliveries can be sent to a nominated Parcel Locker. Once the parcel arrives, residents receive a notification through the AusPost app or SMS and can collect it using a QR code or one-time PIN at a time that suits them.

The Parcel Locker network now includes more than 1,500 locations nationwide, with installations at Post Offices, shopping centres, transport hubs and an increasing number of residential developments. By providing a secure collection point, Parcel Lockers help reduce missed deliveries and avoid parcels being left unattended in common areas.

For developers, parcel infrastructure is becoming another way to improve the resident experience. Rather than relying on concierge staff or leaving parcels in communal spaces, secure collection points help streamline deliveries while preserving the presentation and functionality of shared areas.

For buyers, it's a reminder that the best apartment features aren't always the most obvious.

A generous floorplan or quality finishes might help narrow the shortlist, but the conveniences that simplify everyday life, whether that's EV charging, secure bike storage or reliable parcel delivery, often become the features residents appreciate most once they're living there.

The apartment feature many buyers don't think about, until their first missed delivery

<a href="https://www.apartments.com.au/developers/hg-developments">HG Developments</a> is doubling down on Maud Street in Newstead, filing plans for a new apartment tower just a few doors down from its under-construction Aire Newstead development.

Recently submitted to Brisbane City Council, the proposal is for an 18-storey building designed by bureau^proberts, which has drawn heavily on Brisbane's subtropical design principles while referencing the suburb's industrial heritage.

A total of 64 apartments are planned for the amalgamated 1,518 sqm site at <a href="https://www.apartments.com.au/new-apartments/17-21-maud-street-newstead-qld-4006">17–21 Maud Street</a>, a short walk from the Brisbane River and Newstead Riverwalk.

<img alt="First look: HG Developments plans 18-storey subtropical apartment tower for Newstead" data-entity-type="file" data-entity-uuid="a400c7fd-bd15-48f8-a63b-10ede92efe00" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Maud%20st%20bldg.png?VersionId=.0vPmjpbC7CNP7kqGWa6L7rGIwsNExaw" />

"The building is defined by a series of vaulted motifs that reinterpret the arches, colonnades and layered facades evident throughout Newstead's historic built fabric," the Urban Design Report states.

"Combined with recessed glazing and generous balconies, these elements create a layered building envelope that provides shade, weather protection and opportunities for natural ventilation whilst establishing a distinctive architectural identity."

The proposal comprises 64 two, three and four-bedroom apartments across 18 residential levels, positioning it alongside a growing number of taller residential projects transforming Newstead's northern precinct. The tower incorporates extensive subtropical landscaping, with cascading planter boxes, deep planting at street level and a landscaped rooftop recreation area.

<img alt="First look: HG Developments plans 18-storey subtropical apartment tower for Newstead" data-entity-type="file" data-entity-uuid="1d8140f4-8b98-45cd-b1b8-1efe8c8e266b" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Maud%20st%20podium.png?VersionId=VAZtbCoD44YCJ57N99fQCAKeSJx7ldZs" />

Bureau Proberts has prioritised passive environmental design throughout the project, with generous balconies, recessed glazing and operable façades helping reduce solar heat gain while maximising natural ventilation. River views become available from the upper levels, while the building has been orientated to capture prevailing breezes from both the Brisbane River and the west.

The architects say landscape is intended to be integral to the building rather than an applied element.

"Vertical greenery, cascading planter boxes and elevated gardens are woven throughout the architecture, softening the built form and strengthening the connection between residents and the subtropical environment."

"Through the integration of landscape, high-quality materials and passive design principles, the development delivers a refined residential address that celebrates Newstead's heritage character while contributing positively to Brisbane's evolving subtropical identity."

Newstead has remained one of Brisbane's most active apartment markets in recent years, with a number of developers continuing to back the inner-city suburb.

HG Developments is currently delivering the 40-apartment Aire Newstead at 25 Maud Street. Fortis recently launched the 65-apartment <a href="https://www.apartments.com.au/new-apartments/crest-walker-newstead-12-kyabra-street-newstead-qld-4006">Crest &amp; Walker</a> on Kyabra Street, while builder-developer BPG and Don O'Rorke's Consolidated Properties are both expected to launch their respective Newstead projects before the end of the year.

HG Developments doubles down in Newstead with second Maud Street apartment development

Walk past a new apartment development promoting its sustainability credentials and it's easy to picture rooftop gardens, mature trees, landscaped courtyards and residents surrounded by nature.

But in many cases, that's not actually what those sustainability ratings guarantee.

Australia's leading environmental rating tools have played a significant role in improving the energy efficiency and environmental performance of buildings. Yet despite their focus on reducing emissions, many don't require developers to include trees, biodiversity or meaningful green space.

In other words, a building can achieve one of the country's highest sustainability ratings while containing little more than concrete, glass and hard landscaping.

That disconnect has led to the emergence of a new movement across Australia's property industry: nature-based cities.

The concept goes beyond designing buildings that consume less energy. Instead, it encourages developers to treat nature as essential infrastructure, integrating biodiversity, tree canopy, living landscapes and green spaces into projects from the earliest stages of planning.

Research has consistently linked access to nature with better physical and mental health, cooler neighbourhoods, improved biodiversity, stronger climate resilience and more connected communities. As Australia's cities continue to become denser, advocates say those outcomes should be considered just as important as energy efficiency.

Nature Based Cities (NBC) was established in 2022 to help accelerate that shift.

Founded by Hamton Executive Chairman Paul Hameister OAM, the not-for-profit was created after research highlighted a significant gap in Australia's sustainability framework. While existing environmental rating tools rewarded energy performance and emissions reductions, they placed little emphasis on the inclusion of living landscapes.

"We've always wanted to do more, and we know other developers who want to do more, but the ESD rating tools just aren't there," Hameister says.

"In Australia, you can have a five-green-star rated building that's concrete and glass with not a blade of grass.

"The focus is on reducing emissions, which is laudable, but there hasn't been enough attention paid to protecting and re-establishing nature. We need both for the health of the environment and for communities."

Since its launch, NBC has developed independent design guidelines and accreditation frameworks that encourage developers to prioritise ecology, biodiversity, tree canopy, walkability and living landscapes alongside traditional sustainability measures. The organisation first focused on medium and high-density residential developments before recently expanding into precinct-scale communities and masterplanned neighbourhoods.

Jan Talacko, founder of sustainability consultancy Ark Resources and a member of the Nature Based Cities Advisory Council, says the initiative addresses an area that has largely been overlooked by the property industry.

"Throughout my 25 years of working collaboratively with all stakeholders in the property sector, I've always favoured a pragmatic approach to sustainable design which encourages initiatives that not only meet environmental expectations but also improve amenity," Talacko says.

"Whilst we are making steady progress in relation to energy and carbon emissions from buildings, there has been much less emphasis on encouraging biodiversity and tackling the urban heat island effect.

"The Nature Based Cities initiative responds to a gap in the suite of tools currently used by the property development sector, which don't provide sufficient incentive, or recognition, for the integration of landscaping and greenery."

For apartment buyers, the shift is also changing the questions worth asking.

Rather than assuming a sustainable building will naturally include abundant green space, buyers are increasingly being encouraged to look beyond environmental ratings and ask what nature is actually being delivered. How much tree canopy will the development create? Has biodiversity been considered? Are landscaped spaces designed for people as well as appearance?

As Australia's cities continue to grow upwards and outwards, the next generation of sustainability may not simply be measured by lower emissions, but by how successfully developments bring nature back into everyday urban life.

Christopher Joye

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