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There is an in interesting, although fairly typical, conflict between economists' RBA rate forecasts in December and the predictions of the SFE's 30-Day Interbank Futures Contract, which is the purest cash rate proxy. In short, only 27% of economists believe the RBA will cut next week, according to Bloomberg data. In contrast, the financial markets are putting a 100% probability on a cash rate reduction to 4.25%, and have been doing so for weeks (see chart).
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As discussed here before, the RBA does not normally like surprising market “expectations” with a shock decision. While the RBA is understandably quite focused on financial market expectations, it also includes economist views in this camp and, of course, is acutely aware that the two frequently diverge. 
But what expectations are most important? It is hard to say. On the one hand, it cares most about the expectations of participants in the domestic economy. A key cohort are consumers who, I suspect, are not sure what the RBA will do (i.e., closer in spirit to economists). Yet financial markets are also significant insofar as they set the long-term price of money that prevails in the economy via the yield curve. There has been huge inversion of the Aussie yield curve, which has reduced domestic interest rates (e.g., on three-year fixed-rate loans) and therefore supplied additional financial accommodation over and above what the RBA was planning to bestow via its cash rate decisions. Check out the sub-6% home loan deals you can currently get. The bottom line: the RBA can rely on whatever it wants to rationalise a decision; e.g., economist expectations or financial market pricing. This time around, it probably does not mind the conflict between the two, especially if it intends on pausing: the financial markets are already providing the "insurance" many investment bankers are begging the RBA to supply while the current inertia in economist views means that the RBA does not feel that its arm is being twisted in one direction.
What will it actually do? Frankly, I don't know – and neither does the Reserve Bank. One will not have a more confident feel for the probabilities, which hinge almost exclusively on Europe, until we have full information on the day of the decision.
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
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Economists' RBA December rate forecasts clash with financial markets

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The RBA is releasing price-sensitive info in a non-public way. I have privately mentioned this to the RBA on several occasions, but while the will to remedy the problem appears to exist, nothing has yet been done. The bottom line is that every time the governor or assistant governors give speeches, they follow up with crucial Q+A sessions. Often during these Q+A sessions they make remarks about the setting of monetary policy (e.g., Guy Debelle's comments on the level of mortgage rates this week), or the current growth pulse in the Australian economy (Glenn Stevens last night), or the magnitude of the inflation pressures we face (too many to remember).
These remarks can have immediate effects on SFE-traded government bond, bank bill, and interbank prices, and, of course, the currency. Often the market moves are dramatic if the RBA official makes an especially revealing observation. Currently, the RBA's media office releases the text of the formal speech live, but only follows up with the Q+A recording and transcript many hours, if not a day, later. This is a serious market integrity problem. It means that anyone sitting in the audience – often economists reporting back to their trading desks – has access to highly price sensitive information ahead of the rest of the market. Sometimes Bloomberg will video the speech and Q+A, but only on an ad-hoc basis. And this is only available to Bloomberg subscribers. Further, to the best of my knowledge, it is not possible to access a recording if you miss the video. Again, Dow Jones and Reuters often provide their subscribers with a headline on any significant comment, but they frequently omit crucial remarks, and supply only a truncated version of the text. The simple solution, which, I think, regulators like ASIC should force the RBA to comply with given the bank is not prepared to do so of itsown volition, is that when an official gives a speech with a scheduled Q+A session, the RBA brings its own small video camera and streams (and records) the session live over the internet. This is so easy to do it is not funny. And it is a joke that the RBA has not got a fix. It makes both the RBA and ASIC look bad. It is lazy and gives huge informational advantages to a very select group of market participants.
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 RBA is releasing price-sensitive info in a non-public way: Christopher Joye 

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With the ability to now get three-year fixed-rate home loans for 5.99%, and 6.39% variable-rate loans, there is understandably excitement brewing about the prospect of a recovery in the Aussie housing market. If the financial markets are right, and the RBA cuts rates another six to seven times by the middle of next year, we will get a very healthy rebound indeed. But in terms of actual near-term data flows, don't expect too much, too soon. 
The house price data that is heading our way is still dated before the RBA’s all-important November rate cut. The next tranche of information covers the month of October, and it will not be until the end of December (January) that we get the first, preliminary view of prices in November (December). 
While I expect housing activity to revitalise by the first quarter of 2012, this will not flow through to the price data until the end of March or April. 
We do, however, have partial, leading indicator data to work with in the interim. We will get monthly “seasonally adjusted” housing finance approvals from the ABS, which lead actual house prices by a quarter or so, and have been trending in the right direction thus far. 
The near-term auction clearance rate data will be of limited value since it is not seasonally adjusted and tends to taper off around this time of the year. 
I’d venture that the first credible indications of where the market stands will not be available until the February and March auction clearance rate results, which will coincide with the typically more liquid New Year sales season. 
On the balance of probabilities, the next three months’ worth of house price data will likely give us “more of the same”. We know from our listings, auction clearance rate, time-on-market and vendor discounting series that October – i.e., the month prior to the RBA’s cut – remained tepid. Clearance rates were low, vendor discounting wide, and there was a sizeable stock of homes on the market available for sale. 
While prices were not plummeting, they were not advancing either. The market was frozen in a weak stasis waiting for some interest rate relief. 
My current base case is, as a consequence, modest flat-to-negative house price results for the remainder of the year. Here there is a slight complication interpreting the seasonally adjusted data, which may have residual biases from the devastating January/February floods. 
In raw terms, national dwelling prices in the month of January were off only around 0.1%. Yet on a seasonally adjusted basis, they recorded a very large 1% fall. When we inspect the raw house price series, we can see a noticeable trend of slowly improving month-on-month conditions since the first quarter of 2011 (specially, slower price depreciation). On a seasonally adjusted basis, however, this disappears. It’s hard to say which series is providing the most accurate insights in light of the natural disasters in January and February. 
If you want to answer the question: what are actual house prices doing, rely on the raw index data. If, on the other hand, you want to strip out monthly seasonal influences assuming 2011 is just like any other year, check out the seasonally adjusted benchmark. 
Another key question for the housing market will be whether the RBA grants it more interest rate relief in December. According to the financial markets, this is a 100% certainty. That is, another rate cut in two weeks’ time is a bankable outcome. 
In fact, financial markets think there is a chance the RBA may pop off two rate cuts in December. I am not so sure, and will firm up my views once we have better information prior to the actual board meeting on the 6th of December. I suspect the RBA will be of a similar mind given that every day is a moving feast right now. 
There is no doubt that financial markets are completely besotted by what is happening in Europe. While the Eurozone only accounts for a small share of global economic growth, the transmission of a European crisis can have much more far-reaching consequences. 
This is a function of three things. 
First, Australian debt and equity markets still place a much higher weight on economic developments in the US and Europe than would be implied from either their direct contributions to Australian economic growth, or global growth. 
It is a habit that is proving very hard to shake, much to the frustration of the RBA. And it is borne out strikingly in financial market correlations: while the direct economic linkages between Australia and the North Atlantic economies are modest (around 70% of our exports go to Asia), our equity and debt investments are correlated very closely with daily movements in their US and European counterparts. 
Second, and partly an artifact of the first point, the wholesale funding that our banking system sources from overseas is currently being choked by the North Atlantic problems. 
If banks cannot get access to funding, they stop lending, and growth will be an immediate casualty. Fortunately, we have been through this episode before, and there are now well-established measures to protect domestic bank funding, including government guarantees of bank deposits and liabilities, and new liquidity facilities offered via the RBA. 
So, there is no reason to expect any big change in the Australian banking system’s access to funding in the near-to-medium term as long as the state remains the lender of last resort, which it will. 
The final transmission mechanism is consumer and business sentiment. It would seem that in today’s much more closely interwoven world, where financial news is telegraphed via the Internet instantly across computer screens, shocks in one part of the planet are transferred much more quickly to once far removed locations. Domestic business confidence and investment decisions appear to be more responsive to foreign events than ever before. While it is less obvious how Australian consumers will react, we can be sure that they are more sensitive to global developments than they have been in the past. 
The essential polarization between the underlying, and positive, economic growth pulse in Australia, and the snowballing turmoil in the Eurozone, was highlighted by yesterday’s construction work done data. In the third quarter this key component of GDP confounded pessimists, rising by an incredible 12.5% (the largest result on record) in comparison with market expectations of a 2.0% increase. This has the potential to increase the third quarter real GDP print by an amazing 1.7 percentage points, which would be a stunning result if the final numbers get anywhere near it. 
Since 2007-08 I have argued that Australian cash and fixed-income should be the preferred destinations for your savings. Nothing since has changed to shift my view.
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 recovery to begin in first quarter of 2012, but data headlines won’t tell us until later: Christopher Joye

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It is fascinating sitting back and watching the tug-of-war over monetary policy between the RBA staff, financial markets, vested industry lobbies, politicians and the RBA's private-sector board. Every single one of these constituencies wants lower interest rates with the exception, perhaps, of the RBA staff.
The CEOs of the two biggest banks in the country, CBA and Westpac, have both come out after the RBA's November cut calling for another one. But of course they would; they know that another reduction in rates would be a huge fillip for the housing market, which is where they have 60% of their balance sheet invested.
The industry lobbies all want lower rates and a lower currency because they are profit maximisers and know that economic growth will be higher the lower the RBA cash rate goes.
Think about the counter-factual: when was the last time you heard an industry representative, or a bank CEO, call for higher interest rates?
You can put politicians in the same camp. Intimating to (as Gillard/Swan have done), or outright calling for (the line Robb/Hockey have taken), the need for an easing in RBA policy is a no-brainer as an electoral strategy. No politician in his or her right mind is ever going to really argue for higher rates, even though there are, numerically, more net savers than net borrowers.
Finally, we have the investment banks and financial markets. For the last two decades Australia's financial and superannuation systems have been built around the performance of the domestic share market. It is vital for the revenues generated by investment banks from their stockbroking, corporate finance, and equity capital market businesses. The decline in share prices, M+A activity, and IPOs since 2007 has been devastating for the finance industry and tangential sectors, such as financial news media, that service them. The same is true of the corporate, retail, government and industry super fund domain, which has yielded members dismal returns as a consequence of being massively, and irrationally, overweight equities.
So the drums are beating from all the major retail and investment banks for the Glenn Stevens' "put". They don't even attempt to hide this in their language. Economists and finance leaders are increasingly calling for "insurance" from the RBA against something going wrong (a "put option" is a form of insurance). We need another rate cut just in case things turn out worse than the RBA is expecting. It would be the RBA's "policy of least regret" to provide a cushion for the economy.
They can smell blood: they already forced the RBA's reluctant hand after just one quarter of low inflation data, which the RBA itself argued could prove, after future revisions, to be a "noisy" anomaly. The markets are currently pricing in a near-100% probability of another cut in December, and they know, correctly, that the RBA has an institutional aversion to setting policy in striking conflict to market expectations. In the RBA's own words, it likes to "smooth volatility", which is why you are seeing its media proxies, like Alan Mitchell in the AFR, try to convince us all that a December cut is unlikely.
The RBA demonstrated with its November decision that this weight of community opinion – the tidal wave of public pressure – has a real impact. As I have noted before, the RBA is genuinely concerned about its "political independence" and about not disenfranchising popular support for its typically unpopular price stability objective (if meeting that objective ever means higher interest rates).
In the AFR this week we had a highly regarded former deputy governor of the RBA, Stephen Grenville, argue that in crises central banks sometimes have to bail-out insolvent banks (a point I have raised repeatedly, and which the RBA's Guy Debelle will tip-toe around in a speech today), accepting, as I have maintained, that "in practice it's difficult to distinguish between illiquidity and insolvency in real time." You bet it is. Amazingly, some people criticised me when I first raised this argument (see <a href="https://www.businessspectator.com.au/bs.nsf/Article/Reserve-Bank-RBA-insolvent-illiquid-Dr-Guy-Debelle-pd20110628-J98NB?OpenDocument">here</a>).
But Grenville goes further. He asserts that the US Federal Reserve's funding of the US government's budget deficit – via the process of printing money to purchase US government bonds – is sound policy. He does not see this as compromising the Fed's political independence. He also finds no fault with similar initiatives by the Bank of England (noting, however, that politicians may end up crimping the UK central bank). And he implores the ECB to go to its own policy extremes to "save" the euro.
Grenville argues that central banks acting unilaterally (i.e., without a direct electoral mandate) in such a fashion can "compensate for the dithering of the democratic process". He believes that history seems to be judging these measures relatively well and concludes that "there will be time, after the crisis, to return to the narrow task of price stability".
I hold a less sanguine view. I don't think history has judged anything yet. And I don't think central banks have been really tested. That test will come, as Grenville concedes in another article, when sovereign states likely decide that the least costly way to staunch the socio-economic problems they face is through a sustained period of inflation (remember this is more or less the explicit goal of the Fed). It will be then that we learn whether central banks have the political fortitude to raise rates again to achieve their tough price stability objectives. I reckon there's a chance we discover that the public appetite for independent central banks has well and truly waned...
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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Will the financial markets give the RBA a 'Stevens Put'?: Christopher Joye

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Investors in housing have a range of options available to them: for example, cash; fixed-income; shares; commercial real estate; and annuities. Investment property is thus one solution competing amidst a menu of others for the “mind-share” of retail punters.
Within traditional super, residential real estate gets basically no portfolio weight at all. That is, super funds do not invest in established housing, primarily because they have not been able to efficiently do so. Residential property fares a little better in the $450 billion self-managed super sector, but still accounts for only a minority share of total assets.
Given the abysmal performance of conventional equities in recent years, share market promoters have been desperately searching out alternatives that will get traction with consumers.
One product that has been especially successful of late is the so-called “hybrid” security that purports to offer 8% to 9% per annum variable returns with low risk. This, therefore, competes smack-bang in the space targeted by investment property generating total, through-the-cycle returns in a similar ball-park.
Anyone seeking to purchase or sell real estate for investment purposes needs to understand the strengths and weaknesses of the competing alternatives. Today’s column will attempt to provide you with a primer on these attention-grabbing “hybrids”.
A month or two ago Woolworths issued $700 million worth of its highly oversubscribed hybrids, which will be officially listed on the ASX on November 25. Origin Energy is about to complete another $500 million hybrid issue, once again targeted at mums and dads, with an ASX listing slated for end December.
The principal marketing message seems to be that these hybrids offer a “premium” return over cash. While this is true, I would argue that it is quite inappropriate to compare hybrids to cash given the two wildly different risk profiles.
Indeed, it is almost as bad as saying a high-dividend-yielding stock, such as one of the big banks, is better than cash purely on the basis of a yield comparison. What about the fact that you are putting at risk a big chunk of the capital value of your investment when buying shares?
Any objective analysis finds that investors are getting a raw deal with these hybrids. In short, they are being asked to accept debt returns in exchange for significant equity risks.
The notion that this represents an unfair trade-off is confirmed when comparing them with the notably “non-hybrid” subordinated debt issues offered by other major Australian companies. These investments provide comparable, or better, floating-rate debt returns relative to the hybrids, but with substantially lower risk of loss.
When a smart investor thinks about the word “hybrid”, they normally conceive of an instrument that has debt-like downside protections with equity-style upside.
The Woolworths and Origin Energy hybrids literally turn this logic on its head: they lump investors with debt-like returns in exchange for equity risks. And this is not opinion: it is fact, as we shall see.
Given the favourable characteristics of these offers for the issuers, it is no surprise to see more and more coming to market. If you could get away with raising funding that has a debt cost of capital, but with equity risk-sharing attributes when things go badly, you would do so every day of the week!
Before we dive into the risks, one needs a bit of background.
Irrespective of whether a loan is “senior” or “first-ranking”, or “subordinated” or “second-ranking”, the normal lending rule is that the borrower must always pay their interest commitments.
The reason you invest in debt is precisely because (1) you get a secure, regular income based on guaranteed repayments by the borrower, and (2) if the borrower does not pay you that income, you usually have rights to force them to do so.
If the loan is secured by an asset, such as a home, you can take possession of it and recover your principal and interest. If the loan is unsecured, like these hybrids, you can normally force the company to take action to repay your interest or, at the limit, push it into liquidation.
Now let’s consider the unusual range of risks investors face when lending to Woolworths and Origin via the hybrids. And, remember, that’s what you are doing: you are providing funding to these companies, and are therefore a creditor to them.
The first thing to note is that both loans have super-long terms. Origin’s hybrids have a 60-year term, while Woolworths have a 25-year term.
As a lender, or investor in debt, your risk increases with the length of the loan term. Why? Because the longer the loan term, the higher the probability the borrower (Woolworths or Origin) will one day default.
Here Phil Bayley, publisher of the Debt Capital Market Review, adds, “There is a not insignificant risk that these [Origin hybrids] will become perpetual – any bond with a term to maturity of more than 50 years is effectively perpetual.”
Sure, they are listed on the ASX, so in theory you can trade in and out whenever you want. But that is during the “good times”. What happens if either company stops paying interest? You can bet liquidity will dry up quickly, and you may be stuck in the hybrids unless you are prepared to take a big mark-to-market loss.
 
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The second, and perhaps most significant, feature of these two hybrids is that both companies have a free option to not pay you interest. Yes, that’s right—they get to choose whether they service the interest on your debt or not. And not just for a few months. The two hybrids allow Woolworths and Origin to pay you zero interest for up to five years.
These “deferred” interest repayments then roll-up and start earning interest on interest. While this might sound OK, you can bet that if they ever exercise this option you will have a double-whammy: the listed value of the hybrids will fall significantly as the market starts pricing in the risk that the company can never fully meet its obligations under the hybrid.
In the case of Origin, there is another catch. If the company suffers a “ratings downgrade” to below investment grade (i.e., BB+ or lower), the company must automatically stop paying you interest until it recovers its investment grade rating.
The only cost imposed on the companies when they cease paying you your interest is that they must also stop paying dividends to shareholders. But this would be the least one would expect in any default event: the hybrids purportedly rank “above” shareholders’ equity, and so normally the company would be forced to use its dividends to repay the interest on these loans.
Yet Origin and Woolworths don't actually have to do that. That is, they can stop paying interest for five years so long as they stop paying dividends, but they don't have to use any of the money saved from the dividends to make good on the hybrids.
The third issue is that neither hybrid has been rated by the rating agencies. A rating would be helpful to give investors better information on what the agencies think about their true level of risk.
Ironically, Standard &amp; Poor’s has assessed this question on behalf of the two companies. Specifically, they have evaluated whether the hybrids qualify as “equity” rather than “debt”, so as to reduce the companies’ riskiness (obviously at the cost of the holders of the hybrids).
In short, the more equity and the less debt the company has, the safer it is considered to be. This is because “equity” shares in the upside and downside risk of any company’s future. When things go bad (or good), equity usually falls (or rises) in value.
What investors in these hybrids may not fully appreciate is that Standard &amp; Poor’s have given the Origin hybrids a 100% equity “credit” (i.e., they are as good as normal equity for Origin) and a 50% equity “credit” for the Woolies hybrid.
It would appear that these instruments have been designed expressly for this purpose: i.e., they pay investors a debt-like return, but lump them with equity-style risks.
Indeed, since the hybrids count as part or whole equity on the companies’ balance sheets, they may actually help lower the interest rates the companies pay on their normal, senior-ranking debt.
In this context, Standard &amp; Poor’s classifies hybrids with “high” equity content as those having “very strong equity-like characteristics. They include features that help ... improve the overall quality of the issuer's capitalisation. Investors in ‘high’ issues typically bear equity-like risk, and we would expect the value of such instruments to have a high correlation with the value of equity.”
Investors in the hybrids are likely subsidising the companies’ cost of funding in two ways: first, despite their equity features, the cost of the hybrid funding is below the companies’ cost of equity; and, second, the fact that the rating agencies think the hybrids increase the amount of equity funding the companies have on their balance sheets makes them a less risky concern, which can help lower interest rates on their traditional debt.
Superficially, there are some positives with these investments: they are both issued by companies that have strong competitive positions in their respective industries and solid credit ratings; they are listed on the ASX and thus offer some level of liquidity; both have small minimum investment sizes; and since retail investors are diving into them, it is possible that the hybrids’ required interest rate post-listing will be lower than their current interest rates, which means they could actually appreciate in value and deliver investors capital gains.
How do the returns the hybrids offer stack up against other alternatives?
Woolies priced at a margin of 3.25% above the 90-day bank bill rate, which implies a total return of 7.85%. In contrast, Woolworths’ shares are currently yielding 7.1%, but with the benefit of keeping all the equity upside.
Origin is proposing to price at around 4.25% over bank bills, which means a total return of about 8.85%. Origin’s shares are currently paying a dividend yield of just under 5% with the prospect of significant capital gains if its LNG investments pay off (and risks if they do not!).
The most revealing comparisons, however, are with the traditional subordinated (i.e., emphatically not “hybrid”) debt securities offered by listed Australian banks and insurers.
While these issues are unlisted and have a minimum investment size of $500,000, they actually offer comparable, or better, returns (or “trading margins”) with materially lower risks than the hybrids.
I can think of at least three companies that have issued subordinated, floating-rate bonds that are outstanding in the market today. The margins generated by these issues are between 3% and 5% above the swap rate.
None of these companies have the right to defer paying interest for five years—any failure to do so would be an event of default, against which investors could take action.
All these subordinated notes are rated “investment grade” by the rating agencies, which means that there are no hidden equity risks.
Finally, the term of these loans tends to be much shorter, which suggests you have less risk of something going wrong compared with the 25-to-60 year terms under the hybrids.
The bottom line: retail investors and their advisors should exercise considerable care when thinking about investing in complex hybrid instruments that carry equity hazards.
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.eurekareport.com.au/">Eureka Report</a>.
 
 
 
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Hybrids attack housing - where to park your money: Christopher Joye

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While it is not currently part of the RBA’s game plan, there are some economists out there pushing hard for a December rate cut. They include independent operator Stephen Koukoulas (who puts a December cut at a near-certain 95% probability), UBS rates man Matthew Johnson, and Goldman Sachs's gun Tim Toohey.
Matthew, who has become especially dovish based on the view that Europe is heading for recession, was referenced in The Australian on the weekend arguing there is a chance of a 50-basis-point cut in December.
Perma-dove David Uren uses this as partial justification for the claim that "the Reserve Bank is under pressure to cut rates again before Christmas amid fears that Europe is dragging the global economy into a new recession".
I don't think Martin Place is under pressure to do anything at the moment. If it cuts in December, it will be because of a substantial deterioration in European conditions, or some other exogenous shock that is not currently on their radars (e.g., Israel launching military strikes against Iran). Accurate rates watcher Alan Mitchell pulled out his 12-gauge in the Weekend AFR and blew out of the sky some of this dovish sentiment:
"The RBA, on the other hand, has made it abundantly clear that another cut in the official cash rate in December is definitely not on its agenda. The minutes of the bank's November board meeting, made public on Tuesday, portray the November rate cut as a once-off adjustment. Additional cuts will follow in the near-term only if there is a change in the economic outlook."
He goes on to say that the government would have to make massive, permanent cuts in its  mini-budget of between $4 billion and $10 billion to justify the RBA considering a further reduction in its cash rate.
Will it or won’t it? While a December cut may not be the RBA’s current base case, it will not make up its mind until right before the meeting, and could even change that position on the day of the discussion. More generally, a few thoughts spring to this humble mind:
1. Any proposed cuts by the government must be contextualised against new pre-election spending and pork-barreling given the fragile coalition between the Greens and Labor, and the fact that this government may (will?) lose the next election. That is, any political commitments to austerity may need to be discounted somewhat;
2. The RBA has time on its side, and has invested significant political and reputational capital in the argument that this was a once-off adjustment in its cash rate to a neutral setting. By the end January it will have a raft of inflation, GDP and unemployment data with which to reassess its position. Just like in October, it would be potentially rash for the RBA to move policy before all this data is released save for a genuine European implosion that derails the global economy. There is greater policy elegance associated with cutting in February if the doves get the data they are pecking around for;
3. Whether the RBA goes in December or February (assuming it actually needs to) is not really going to change the price of eggs in China. One month here or one month there over the summer break is not going to make much of a difference to the Aussie economy in the scheme of things. There is certainly no domestically-driven urgency to cut rates in two weeks;
4. The extraordinary inversion in the yield curve, whereby the longer-term price of money keeps falling way below current interest rates, combined with another round of currency weakness, is already delivering de facto cuts, and possibly more than the RBA was banking on. The SFE’s 30-day interbank futures contract is currently pricing in a sub-3% RBA cash rate by the second half of next year. The three-year government bond rate is heading towards 3%. This means more falls in already below-average interest rates on fixed-rate home loans, and lower term deposit rates. That will in turn mean less consumer saving, and more spending and borrowing; and
5. Finally, in the unlikely event the RBA’s cash rate does go close to 3% (i.e., the same level it hit during the GFC), it is going to be party time again for the Aussie housing market. As in 2009-10, the market will bounce back strongly if folks start paying variable rates of 5.0% or less (cf. current rates of around 6.7%). That’s why housing is, contrary to popular myth, a good hedge against adversity.
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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Another interest rate cut - Will they or won't they in December?: Christopher Joye

Economists and traders fighting a false forecasting war: Christopher Joye

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Covered bonds are a fancy new funding instrument being promoted by the major banks – and notably only the majors – that were championed by Wayne Swan and Joe Hockey as a policy to enhance competition in the banking and finance sectors. As predicted by some, they seem to be benefiting the incumbents most. 
Covered bonds have one significant impact that arguably disadvantages all Australians with a bank account. In the past, when you put your money with the bank, you were the first person who was paid back if the bank went belly-up. And banks do go belly-up. In the 1890s, about 90% of all private Australian banks collapsed. More recently, we have seen hundreds of banks fail around the world, including in once-stable developed countries like the US and UK. Australia’s turn could come when a financial crisis eventually originates out of Asia, which it inevitably will. 
An investor in a covered bond gets a priority claim over the bank’s assets, which ranks ahead of your deposit. Specifically, the major banks will set aside individually up to $30 billion plus worth of their home loans in order to “secure” their covered bonds. That means if the bank falls over, the covered bond investors can take possession of the underlying home loans and sell them to repay what they were owed by the bank via the bond. 
Since covered bonds are being backed by residential home loans, investors are understandably turning their minds to the quality of these loans, and the integrity of Australia’s housing market more generally. Given our expertise in both these areas, we have been inundated by enquiries from institutions around the world. In fact, I am presenting to a group of global hedge funds on this subject at 12.30pm today. 
The majors have decided to “mark-to-market” the assets (or “collateral”) securing their covered bonds using house price indices. This makes a great deal of sense. If Australian house prices are falling (as they are currently), then the value of the assets underpinning a covered bond is also declining. (It is actually a little more complex than this, and perhaps best characterised as the asset having a “higher level of risk of loss” in view of the lower level of borrower equity sitting above the loan.) This creates immediate problems for investors, since the protection they have in a crisis is less than what they expected to be the case. 
Regularly revaluing the homes underlying a covered bond on a high-frequency – say monthly – basis is likely to be especially important to investors since: 
(1) house price indices are reported with a lag (up to four months in the case of the quarterly ABS index); and 
(2) in any fast-moving crisis that involves a bank failure, house prices are almost certainly likely to be falling too. You don’t want to have to wait four months to work out how much your collateral values have declined by (or by how much you risk exposures have risen)! 
I understand that most of the major banks have selected RP Data-Rismark’s monthly hedonic index as their valuation benchmark of choice for the purposes of covered bonds. 
This is not a surprise given that the Reserve Bank of Australia has made it clear that it relies on this index most heavily when assessing risks in Australia’s controversial housing market (see also <a href="https://rismark.com.au/indicies" target="_blank">here</a> for independent remarks from CommSec, Moody’s, Goldman Sachs, and Macquarie). Or, to borrow the words of Westpac’s chief economist, “RP Data-Rismark are the RBA’s “preferred data analysts' for house prices.” 
 
Another alternative would have been to use Australian Property Monitors’ (APM) “stratified median” index, which the RBA employs as a back-up to RP Data-Rismark.
A final, least desirable, option is the ABS’s stratified median house price index, which has been regularly discredited by market analysts and more subtly dismissed by the RBA. 
From a covered bond investor’s perspective, the choice of house price index is likely to have major consequences for (1) how accurately the covered bond assets are valued, (2) how frequently investors get revaluations, (3) the speed with which they can replace assets that are determined to be “impaired”, and, most importantly, (4) the pricing of the covered bond itself. 
If a home loan is in default, repaid, or if the value of the home securing the loan is less than the loan amount itself (i.e., the borrower has negative equity), covered bond investors usually require that the issuing bank replaces these “bad” loans with “good” ones. 
Since covered bonds are expected to be AAA-rated securities, this seems like a reasonable demand. 
A $1 billion covered bond will probably have about 5,000 residential dwellings underpinning it. One problem with the ABS index is that it excludes 20% to 25% of all property types in Australia. Specifically, the ABS index only includes “freestanding houses”, and ignores all apartments, units, semi-detached homes, terraces and so on. 
About one-quarter of all home loan borrowers live in these “attached” dwellings. Given the sometimes wide divergences between the gains and losses attributed to free-standing houses versus apartments, use of the ABS numbers as a mark-to-market tool is likely to generate misleading results in the context of covered bonds backed by home loans. 
In contrast, both APM and RP Data-Rismark’s indices include all dwelling types, which is why they deviate so significantly from the ABS results on occasion (the RBA prefers that we report these “all dwelling” figures). 
A second problem with the ABS index is that it is only reported at the “capital city” level. To properly mark-to-market a portfolio of 5,000 homes, one should really be using postcode or regional house price indices to minimise the substantial “basis risks” that would otherwise exist between the index and the home. For example, about 2,000 properties will, on average, be situated in NSW. But within the state of NSW there are huge differences in the rate of house price change across regions. 
One only needs to reflect on the example of southwest Sydney in the post-2003 period. This region accounted for an extraordinarily high share of all mortgage defaults across Australia (some estimates put it at over 75%), and experienced substantial house price declines. In comparison, many other areas within Sydney had low default rates and steady house price growth. Benchmarking using a capital city index would have underestimated the southwest Sydney problems. 
A third issue with the ABS index is the fact that it is reported on only quarterly basis, and then one month following the end of the subject quarter. This means that the sales data upon which it is predicated can be up to four months old.
 
<hr class="system-pagebreak">
 
As I noted earlier, investors in covered bonds are likely to be most concerned about collateral values during a crisis. Any stress imposed on Australian banks, which on average have 60% of their assets invested in residential home loans, is likely to have been either caused by, or precipitate itself, substantial house price declines. This is precisely why in APRA’s stress-testing of bank balance sheets it assumes that Australian house prices fall by about 25%. 
In such situations, investors are presumably going to demand the most timely pricing information possible so that the bank in question can remove the impaired assets from its covered bond portfolios. It is hard to see how this could be achieved with the ABS’s current reporting frequency. The monthly house price proxies made available by RP Data-Rismark, APM or even Residex are likely to be a superior alternative. 
On this note, RP Data and Rismark will be shortly launching the world’s first “daily” house price index, which has been designed especially for the Australian Stock Exchange. This index, which is based on a sophisticated statistical method known as “hedonic imputation”, will afford extremely accurate and low variability house price estimates right down to the suburb level. It will be the first time in history that all homes in a suburb have been repriced every single day using the daily flow of incoming sales data. 
How big can the differences between indices really be? In the chart below I have overlaid the ABS national capital city index against RP Data-Rismark’s equivalent measure.
Click to enlarge
<a href="/images/stories/nov15.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/nov15thumb.gif"></a>
Observe how in the global financial crisis the ABS’s crude median index reported substantially lagged house price declines that were also twice as large (-7%) as those documented by RP Data-Rismark’s regression-based benchmark (-3%). The same was true during the 2009-10 period, when the Australian housing market bounced back strongly and banks like CBA came in for criticism for having excessively large exposures to the first time buyer market. (They ended up using some of our analysis to refute this claim!) 
According to the ABS measure, house prices inflated 23% between March 2009 and December 2010. Once again, the ABS numbers were reported with a material delay. Yet the month-to-month RP Data-Rismark index only recorded 16% growth. Anyone investing in a covered bond in March 2009 would have been led to believe that they had superior collateral protection than was actually the case had they been relying on the ABS. 
The confusion that could be potentially caused by house price measurement problems in the covered bond market is graphically highlighted by a “<a href="https://www.commbank.com.au/about-us/group-funding/articles/covered-bonds-primer.pdf">Covered Bond Primer</a>” published by the CBA. 
Like every other major bank and investment bank in Australia, CBA’s economists have expressed reservations about the biases inherent in the ABS house price proxy. 
Notwithstanding this, on page 17 of CBA’s covered bond primer, the bank appears to have unwittingly presented data from both the ABS and RP Data-Rismark. I have enclosed this image below. 
The very wobbly lines in the first chart are from the ABS’s non-parametric median price index. The second chart is a replica of a similar diagram regularly reported by the RBA, and is, of course, prepared using RP Data-Rismark’s hedonic index. 
Covered bond investors are likely to be best serviced by common valuation benchmarks. In the absence of a consistent standard, investors may price at a discount covered bonds relying on less accurate house price information relative to those that are valued using the best available data. And since the major banks expect to eventually issue close to $100 billion worth of covered bonds, seemingly small differences in the rate at which house prices are expanding or contracting could perpetuate substantial dollar value variations in covered bond prices, to say nothing of all-important investor perceptions.
<img src="/images/stories/nov151.gif">
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.
 
 
 
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Stand by for world's first daily house price index: Christopher Joye

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As I have argued all year, the most interest rate-sensitive sector of the economy, Aussie housing, is a great “hedge” against adversity (or the perception of such, which, with enough spruiking, can sometimes overwhelm reality). 
In 2010 we were bearish on 2011 house prices based on our belief that the RBA would be compelled to raise rates a couple of times (we actually got most of those hikes in November once you include the bank top-ups). 
On the assumption that the global economy tracked to trend, we were not projecting a genuine rebound in housing activity until mid 2012, by which time we felt the RBA would have completed this monetary policy cycle. 
However, we have consistently said that if the “Chindia” story blew up, or if we get a GFC Mark II, the RBA will have no choice but to slash rates. It was, after all, expecting to lift them on the basis of a once-in-140-year terms of trade boom. 
And contrary to the conventional (nay simplified) wisdom that a GFC Mark II is going to be bad for “everything”, it is possibly a very good outcome for Australia’s highly interest rate-sensitive housing market. 
For several months we have seen signs that the market was starting to “base” after recording a price correction of 3% to 4%. This was confirmed with yesterday’s housing finance data for the month of September, which validated partial indicators that first-time buyers are at the vanguard of a market rebound, accounting 16.4% of all new home loans. This was the highest first-time buyer participation we have seen in over a year (or since May 2010). 
What is more interesting is the sustained recovery in housing finance volumes. In the month of September, the number of seasonally adjusted home loans approved for the purchase of established homes (which cover the vast bulk of sales) rose to its highest level since way back in the boom-time conditions of November 2009. 
Different economists have spun this and the consumer confidence data in different ways to suit their forecasts. For example, some “talk the data down” by quoting the “value” of loans approved as opposed to the actual “number”. Since values are determined by a range of factors (eg, the actual number, the type of borrower, the price of the home, and the loan-to-value ratio), they are a much less precise signal on housing activity. 
As the chart below shows, the crucial take-away is that some time before the RBA had even decided to cut interest rates, there was unambiguous evidence that housing credit, which is a critical driver of housing demand and ultimately prices, was on the way up.
Click to enlarge
<a href="/images/stories/nov10.gif" rel="shadowbox" title="Click to enlarge"><img src="/images/stories/nov10thumb.gif"></a>
There is ordinarily a multi-month lag between the housing finance flows and actual house prices. The impact of the RBA’s November rate cut, which I have argued is much more significant than most analysts appreciate, was also reflected in yesterday’s consumer sentiment data. 
The Westpac-Melbourne Institute survey reported that consumer confidence surged 6.3% in November to 103.4 points, which is officially above the long-term average of 100 points. No recession in sight as far as real Australians are concerned, I am afraid. 
The logic I have been belabouring of late is that for most of 2011 the average Australian family was budgeting on at least two to three future rate increases, according to Westpac-Melbourne Institute data. An extraordinary 25% to 30% of the population thought they would get slammed with four-plus hikes. 
On this basis, the RBA’s shift from talking up the prospect of tighter monetary policy to formally reducing rates in November is going to have a profound effect on community expectations. 
Families will now almost certainly be banking on stable rates, or rate cuts. The likelihood of the latter is increased by both financial market pricing, which is penciling in up to six more rate cuts by June 2012, and the “new normal” among most Aussie economists, who have switched from hawkishly predicting up to four or five hikes over 2011-12 to canvassing cuts. Indeed, some of the biggest hawks at the end of last year are today’s most vocal doves. How times change, eh! 
The banks have, for the moment, also done their part. You can get one-year fixed-rate loans for less than 6%. Three year fixed-rates are falling fast, with Suncorp promoting a 6.2% per annum product. And market variable rates are now clearly in historically discounted territory, with the likes of UBank offering a 6.39% per annum loan for select customers. 
This morning’s unemployment data also reinforces this central story. Contrary to many predictions of a rise, the unemployment rate fell from 5.3% to 5.2% with solid total employment growth of 10.1k persons during the month of October. Even more importantly, the previous month’s total employment result was actually revised up from an already strong 20.4k to 22.5k persons. 
Notwithstanding the hard economic facts that Australia’s economy is cruising along at what appears to be a comfortable trend rate of growth, the chorus of doomsayers, and the RBA’s desire to take some insurance out against the risk of a global catastrophe, will only help to solidify Australia’s housing market. 
We have, as a consequence, brought forward our mid-2012 expected recovery to the first few months of next year. And, to be clear, the further rates fall, the stronger that rebound is likely to be.
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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Rate cut and unemployment data point to housing recovery

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The rules that apply to banking are changing radically, and these shifting sands will impact the way the banks deal with you. Indeed, the changes are already starting to percolate through to the banks’ products, in the way they are designed, how they are advertised, and the specific customer categories to which they are targeted. 



Did you know that banks can now permanently lock you into term deposits? Or that many “bonus” savings accounts offer a lower return over 12 months than an equivalent term deposit? Or that banks are deliberately trying to capture small, unsophisticated and sticky retail clients?



Today I will try and lift the lid on some of the banking world’s Byzantine secrets to help you better understand the thinking that drives their product and marketing strategies.



As with most puzzles, it is useful to start from first principles. So we need to ask ourselves the question, “Why are the rules that govern the business of banking changing?” 



The most obvious answer is because so many private banks failed in recent years, or required injections of taxpayer money and/or government guarantees to survive. Even in <country-region w:st="on"><place w:st="on">Australia</place></country-region> this was true: all banks benefited from unprecedented taxpayer guarantees of their borrowings (be they deposits or institutional debts).



Another motivation for revisiting the rules of the banking game was the consensus among policymakers that private retail banks and their investment banking offshoots were at the very heart of the crisis that pushed the global economy into recession, and which has caused millions of job losses around the world. 



In fact, the public policy response to this crisis, which necessitated government “bailouts” of numerous big businesses and resulted in massive taxpayer-funded “cash splashes” to stimulate  local economies, has perversely imperiled entire sovereign states, such as the US, UK, Greece, Ireland, Spain, Portugal and Italy. Some believe that it is possible that the Eurozone and its common Euro currency could collapse as a consequence.



OK, so that’s the context. How then have governments started to shift the banking goal posts, and what does this practically mean for you? Notwithstanding the affinity bankers and bureaucrats have with the use of impenetrable verbiage, these changes are not hard to get a grip on.



First, banks are going to need to hold more “equity” (or “cash”) and less “debt” (i.e., loans). That’s a simple enough concept. It is exactly the same as a bank manager requiring you to have a larger deposit when purchasing a property. The higher your deposit, the more cash (or equity) you have in your home, and the less debt you need. And if you are reducing your debt, that, by definition, means you are less likely to default on your mortgage. All told, you have lower risk – for both yourself and the bank.



So the boffins that provide the best-practice guidelines are saying that all institutions should have minimum levels of equity, much like a lender insisting you have a minimum, say, 10% deposit against your home. The policymakers take this one step further by also saying that the bigger and more complex banks, especially those with substantial offshore operations, should hold another extra layer of cash again.



To fathom the second suite of rule changes, you need to understand what banks do. At the crudest level, banks borrow money from people who want to earn a safe return (e.g., mum and pop savers and corporations that need to park cash) and lend that money back out at higher rates of interest to people that want to borrow to build or buy stuff (e.g., home owners and businesses). A bank sits in the middle and takes the “spread” between the rate of interest it pays to savers, who are actually lenders to the bank, and the return it gets from people that borrow from it. 



In this way, the bank is the ultimate “middle man”, inducing people to save and borrow while clipping tickets along the way. Don't get me wrong: we need them, as the conversion of savings into loans is the lifeblood of any economy.



The fundamental problem with banks is that there is typically an enormous mismatch between the respective terms (or maturity dates) of their “sources” and “uses” of funding. When we put our money into a bank account we like to have the flexibility to withdraw that cash at any time. But the wrinkle here is that the bank then uses that money to make 30-year home loans. Blind Freddy can see that if everyone demands their cash back at the same time the bank is going to be in strife.



The objective of the second batch of banking rule changes is, unsurprisingly, to try and more closely match the terms associated with the banks’ different sources of funding. That is, to better align the life of a bank’s assets with the life of its liabilities. More simply stated, the regulators are saying to banks: we want you to reduce your reliance on short-term borrowings if you are going to continue to make long-term loans.



While, ironically, the shortest term of all funding sources is an “at-call” retail deposit, regulators take the view that this money can be dependable if: (1) the customer has an established transactional relationship with the bank; (2) the customer is relatively small and unsophisticated (more sophisticated investors are more likely to run during a crisis); and (3) if there is some form of government insurance or guarantee protecting depositors. That is, of course, a simplified summary.



Under the new rules, banks have to show they have enough immediately accessible, or “liquid”, cash available to cover a “bank run” over a 30-day period. So if a bunch of people demand their money back from the bank, the bank can actually pay them out. 



Take our biggest bank, CBA. It gets about 60% of its funding from depositors, who are lenders to it. CBA will now have to show the bank regulator in Australia that if a significant share of its short-term funding flees because of some unforeseen financial mess-up, it has enough cash on hand to meet these repayments.



In boffin-speak this test is formally known as the “Liquidity Coverage Ratio” (or LCR).  To meet the LCR, banks in overseas countries will be forced to hold – rather ironically – a certain sum of government debt securities. 



The target LCR is 100%: that is, banks have to demonstrate that they can sell their liquid assets and meet 100% of the redemptions projected during a 30-day crisis. (Expect to see banks offer products with 30-day notice periods for withdrawals to cutely circumvent this rule.)



Since <country-region w:st="on"><place w:st="on">Australia</place></country-region> does not have much government debt, our banks will be treated differently. Specifically, they will be able to borrow from taxpayers via the RBA in order to pay their creditors. We will, of course, charge them a fee for this service.



A second major test will require banks to show that they have a minimum amount of “stable” funding to match the longer-term loans they make using that money. Roughly speaking, these two variables will have to (sensibly) match each other one-for-one. 



Once again, if a retail depositor is small, unsophisticated, and has a long-term transactional relationship with the bank, it may be regarded as a stable source of funding under the new regulations.



By understanding these new rules, you can start to work out what kinds of product changes the banks will want to make. For instance, we will likely see banks trying to attract lots of small retail depositors whom they can convert into long-term transactional clients. They will also be seeking to subtly lock customers into lending money to the bank for longer periods of time, even if these lock-ups are non-obvious.



There are already a few practical examples emerging in the market. One is the “teaser” rates that you increasingly see the likes of ING Direct, UBank, and Rabo Direct advertise. These are the opposite of the “honeymoon” rates some lenders attach to their home loans. 



Teasers are all about cheaply acquiring low-tech customers who will be incented to stay in transactional accounts for at least four months. Such folks have a good chance of eventually falling into the bank’s all-important “stable” funding basket.



Along these lines, ING Direct promotes a “6.35% per annum” savings account. To be clear, you can never earn a 6.35% interest rate over any 12-month period with this product (taking as given no change to the RBA’s rate). This is because you only get the high 6.35% rate for the first four months, after which it drops down to a much lower 5% rate. 



Accordingly, if you hold the account for a year, you are actually getting a circa 5.45% per annum rate, which is substantially less than ING Direct’s one-year term deposit rate of 5.7%. You are also restricted to investing a maximum of $250,000.



Rabo Direct offers a similar product. You can only invest $200,000 and get a high “bonus” interest rate for the first four months, following which it reverts to the lower standard rate. 



UBank runs a slightly different “special” that gives you an extra 0.5% per annum over its basic variable rate as long as you keep adding $200 to the account every month (thereby demonstrating your long-term “commitment” to it), and on the proviso that you invest no more than $200,000.



Perhaps the most subtle product catches I have seen come with term deposits (TDs). I only discovered these traps by reading the very fine print in the terms and conditions. You see, I and most other people presume that with a TD you can take your money out at any time subject to an interest rate penalty. That is, you don’t get the higher TD rate if you pull out. 



As it happens, this assumption is incorrect. In the two TDs I checked – one offered by a major bank and another supplied by a smaller one – the bank, and only the bank, has exclusive “discretion” as to whether it “allows you” to take your money out of the TD before maturity. 



I had a sneaking suspicion there would be a catch like this because the banks need to show that TDs are long-term sources of funding, and that depositors cannot simply exit en masse.



In the major bank’s fine print, it says, “you may apply to the bank…to request the withdrawal or all or part of your funds prior to the maturity date. The Bank may, in its discretion, approve a request for early withdrawal”, in which case you are also charged a prepayment penalty and a fee. 



This is carefully worded legalese that means the bank can, in its sole judgment, reject your application to withdraw your money (it is just not stated that way). 



How big are the penalties the banks charge you if they “allow you” to withdraw your money from a TD? With this major bank, if you wanted to take out your money 20% of the way into the TD’s term, you would lose 90% of all your interest. If you withdraw 40% into the term, you lose 80%, and so on. These are very big penalties, and have a termination fee added on top.



An example of similar language is found in the terms and conditions of a TD offered by a smaller bank. They say, “We may, at your request, allow you to break your Term Deposit before maturity… You must pay a termination fee if we allow you to terminate your Term Deposit prior to its maturity.” 



If this bank “allows you” to break the TD, it is then permitted to charge potentially substantial “break costs” much like the early repayment fees associated with a fixed-rate home loan. Specifically, it says:



“Break costs reflect future cash flow losses incurred by us as a result of interest rate differentials that exist between wholesale market rates applicable to the existing term deposit and current wholesale market rates applicable for the remaining period of the term deposit, adjusted to reflect a net present value. Break costs increase in line with increases in the following: interest rates, the amount withdrawn and the market margin.”



The sleight-of-hand extends to the marketing strategies used to promote TDs. Take this “screen shot” from Rabo Direct’s webpage (see below). Now what number leaps out at you? Why, a stunning 6.4% per annum interest rate? Notice that there is no asterisk next to this rate, but just the lightly shaded words in the top left-hand corner of the bold blue box. Yes, the words that attach the caveat “Up to”. Hard to see, isn’t it?
<img src="/images/stories/nov8.jpg">
As it turns out, this super-duper 6.4% per annum interest rate only applies to Rabo’s five-year term deposit. So what is the much more popular one year TD rate? A substantially lower 5.5% per annum.




The bottom line is that banks are having to evolve their businesses. The policy objective is to make them safer and less prone to failure. This is a good thing. Just be aware that your money may be part of the solution. And all investments, even term deposits, carry risks. Accordingly, do your homework before you enter into one.

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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Busting big bank secrets: Insights on avoiding bank fee traps

Roseville is poised for a wave of new apartment development following the NSW Government's rezoning of land around Roseville Station under its Transport Oriented Development program.

The new planning controls have unlocked significant development potential within walking distance of the station, with a number of sites expected to be amalgamated and redeveloped in the coming years as developers seek to take advantage of the increased density allowances.

One of the more restrained developments in the precinct, and set among the first to be delivered having commenced well before the recent changes, is Hyecorp's Juliet. The boutique apartment project is already well under construction and remains on track to welcome residents by the end of the year, offering a markedly different proposition to many of the larger-scale developments now likely to emerge across the suburb.

[smartcode_project:default project_id=7395 project_image_fid=278194]

<a href="https://www.apartments.com.au/new-apartments/juliet-roseville-64-pacific-highway-roseville-nsw-2069">Juliet</a> will comprise just&nbsp;34 one-, two-, and three-bedroom apartments opposite Roseville Station. For Hyecorp, which has delivered projects across Sydney's Lower North Shore for more than three decades, Roseville presented a rare opportunity to address a growing gap in the market.

"<a href="https://www.apartments.com.au/developments/roseville-nsw-2069">Roseville</a> has long been one of the North Shore's most tightly held and desirable suburbs, offering a unique combination of village charm, established greenery, excellent transport connections, and proximity to some of Sydney's best schools and lifestyle amenities," Hyecorp said.

"We recognised a growing demand from local homeowners seeking to downsize without leaving the community they have built their lives around. The location presented a rare opportunity to create homes that cater specifically to that buyer profile."

[smartcode_project:default project_id=7395 project_image_fid=278196]

The six-level development has been designed by <a href="https://www.apartments.com.au/architects/pbd-architects">PBD Architects</a> as a collection of residences that feel more like homes than apartments. The brief centred generous floorplans, abundant natural light, quality finishes, and strong connections to outdoor space.

PBD Architects drew inspiration from Roseville's established garden suburb character, creating a building that sits comfortably within its surroundings rather than dominating them. The architecture incorporates natural materials, soft forms, layered landscaping, expansive balconies, and generous setbacks to strengthen the connection between residents and the suburb's leafy environment.

"The focus was on designing spacious, house-like residences for discerning owner-occupiers and downsizers who wanted to remain on the North Shore without compromising on comfort, privacy, or design," PBD said.&nbsp;

"Every apartment was to feel considered, timeless, and highly functional."

[smartcode_project:default project_id=7395 project_image_fid=278195]

Inside, residences feature engineered timber flooring, stone kitchen benchtops and splashbacks, integrated Fisher &amp; Paykel appliances, ducted air conditioning, and large outdoor entertaining areas designed to take advantage of district and treetop views.

Residents will also have access to a rooftop barbecue and lounge area, alongside practical amenities including parcel lockers, EV charging capability, bicycle storage, a dog wash bay, and a basement car wash facility.

The majority of purchasers so far have been local owner-occupiers from Roseville, Lindfield, Chatswood, Killara, and the broader Upper North Shore, many of whom are transitioning from larger family homes.

"Buyers are looking for spacious, house-like apartments that allow them to downsize without feeling like they are sacrificing comfort or functionality," Hyecorp noted.

"They value large kitchens, generous living areas, ample storage, quality finishes, secure parking, lift access, and low-maintenance living."

[smartcode_project:default project_id=7395 project_image_fid=278204]

Juliet sits directly opposite Roseville Train Station and within walking distance of Roseville Village, while Chatswood's retail and dining precinct is only minutes away. The development is also surrounded by some of Sydney's most established schools, including Roseville College, Ravenswood, Pymble Ladies' College, and Knox Grammar, as well as nearby parklands and golf courses.

Juliet is currently more than 75 per cent sold ahead of its anticipated completion in late 2026.

[smartcode_project_cta:default project_id=7395]

Joel Robinson

Juliet to sit quietly amid Roseville apartment boom

Sherpa Property Group has unveiled the third instalment of its Flourish series, securing full approval for the two-tower, $500 million Flourish Soleira development in Palm Beach.

<a href="https://www.apartments.com.au/new-apartments/flourish-soleira-1150-1154-gold-coast-highway-palm-beach-qld-4221">Flourish Soleira</a> will rise from a prominent site in the commercial heart of Palm Beach, the long-time home of Cash Converters and a range of local retailers.

The project will introduce a new retail and dining precinct at ground level, beneath 286 apartments.

[smartcode_project:default project_id=150017 project_image_fid=370959]

“We’re very committed to not only providing affordable residential offerings that are much needed in Palm Beach, but also delivering a vibrant new commercial heart that complements the extraordinary growth of the southern Gold Coast,” Sherpa Property Group founder Christie Leet said.

The development will sit under Sherpa's Flourish brand, which is aimed at providing a pathway into the beachside suburb for locals, first-home buyers and downsizers. In a move designed to assist first-home buyers entering the market, Sherpa has reserved all one and two-bedroom, one-bathroom apartments exclusively for eligible first-home buyers.

[smartcode_project:default project_id=150017 project_image_fid=370964]

“Our vision through Flourish is to create a vibrant retail and lifestyle focal point within the Palm Beach centre zone, delivering thriving communities underpinned by lifestyle-rich locations,” Leet said.

“So far, Flourish has been an incredible success, and we hope to carry this momentum as we progress the next two Flourish projects in Palm Beach.”

[smartcode_project:default project_id=150017 project_image_fid=371430]

Located across 1150-1164 Gold Coast Highway and 3 Sixth Avenue, the development will comprise two towers. The northern tower will deliver 154 apartments, while the southern tower will add a further 132 residences, helping address ongoing demand for new apartments in the tightly held coastal suburb.

Flourish Soleira will also feature the most extensive rooftop amenity offering ever delivered in Palm Beach.

The two towers will be connected by a skybridge, with residents gaining access to a rooftop recreation deck featuring a full-width swimming pool, hot and cold plunge pools, wellness spaces, a gymnasium, private dining facilities, massage treatment rooms, barbecue areas, a basketball court, golf simulator, indoor and outdoor dining spaces, sun lounges and extensive landscaping.

LPS Group is expected to start construction later this year.

Sherpa is already well advanced on construction of its debut Flourish project, Flourish Amargo, located just around the corner from Soleira. Meanwhile, Flourish Oasis, positioned opposite Amargo, recently commenced construction and has nearly sold out its collection of 47 apartments.

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Sherpa unveils $500m mixed-use Palm Beach precinct, Flourish Soleira

Are mortgage holders set to get a reprieve from the RBA in 2026?

Big Four bank NAB believes so. They are now expecting the next move from the RBA to be a cut, rather than a hike, which they had pencilled in for August. They are unsure of the timing of the cut however, they note in their latest&nbsp;NAB Economics RBA Watch.

NAB Chief Economist, Dr Sally Auld, said recent data suggests the economy has lost momentum and the outlook for rates has shifted, noting that the broader economic backdrop has changed since earlier in the year.

“The next move in the cash rate is likely to be down, but the timing is uncertain," Dr Auld said.

"In February, growth was above trend, the economy was operating above capacity and there was uncertainty over the restrictiveness of rates. None of these conditions exist today,” she outlined.

Dr Auld said recent data pointed to softer momentum across the economy while acknowledging that at the same time, uncertainty remains a key feature of the outlook.

“Both Q1 GDP data and the NAB business survey suggest momentum in the economy has slowed, meaning that growth has likely peaked for the cycle. That said, we are cognisant there is still considerable uncertainty around the outlook, both with respect to activity and inflation.”

Dr Auld said inflation risks and labour market outcomes would be important to watch.

“On the prices side, we are still forecasting above target core inflation through to mid-2027. Margins will compress and weaker labour market outcomes are a risk.”

She said tighter financial conditions are expected to weigh on housing and activity.

“Tighter financial conditions will be reflected in a slowing in house price growth and housing credit growth. In summary, we have greater conviction that the next move in rates is down, but less conviction on the timing.”

Mortgage relief? NAB forecasts RBA rate cut, not hike, after softer economic conditions

A local downsizer has splashed $6.5 million on a penthouse in Perifa's Alex &amp; Willow development in Crows Nest. 
&nbsp; 
The purchaser sold their long-held family home in the area before embarking on a six-month search for the right apartment. After inspecting a range of options across the Lower North Shore, the buyer returned to <a href="https://www.apartments.com.au/new-apartments/alex-willow-crows-nest-82-90-alexander-street-crows-nest-nsw-2065">Alex &amp; Willow</a>. 
&nbsp; 
The buyer profile reflects the project’s broader purchaser mix. <a>Alex &amp; Willow</a> has attracted predominantly local downsizers looking to transition from larger homes without compromising on space or quality, alongside a smaller cohort of upsizers and investors drawn to the project’s location and design credentials. 
&nbsp; 
The milestone sale comes as the project, developed by&nbsp;<a href="https://www.apartments.com.au/developers/perifa">Perifa</a>&nbsp;and delivered by <a href="https://www.apartments.com.au/builders/versatile-made-construction">Versatile Construction</a>, both part of Versatile Group, reaches 60 per cent sold.

[smartcode_project:default project_id=6680 project_image_fid=371325] 
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Eddie Mansour, Managing Partner of <a href="https://www.apartments.com.au/project-marketer/ray-white-projects">Ray White Projects</a>, said the result demonstrates not only a headline price but also depth of demand. 
&nbsp; 
“This is an exceptional outcome and a clear reflection of sustained buyer demand for premium, well-located downsizer product,” Mansour said.

“We’re seeing a consistent pattern of local homeowners selling family residences and reinvesting into high-quality apartments that allow them to remain within their community. Alex &amp; Willow has resonated strongly with this group because it offers genuine scale, thoughtful design and immediate proximity to the village.” 
&nbsp; 
The sale reflects a broader and consistent trend of local downsizers actively seeking high-quality, low-maintenance residences close to established village centres. Agents report that demand for this product type has remained resilient, particularly where developments offer a rare combination of scale, design quality and walkable amenity. 
&nbsp;&nbsp; 
Fabrizio Perilli, Managing Director of Perifa and Versatile Group, said the sale marks a defining moment for the project. 
&nbsp; 
“The penthouse sale is a strong endorsement of the quality we have delivered, alongside our partners, and the clear demand from local downsizers for premium, boutique residences in this location,” Perilli said.&nbsp; 
&nbsp; 
“Most importantly, we’re proud to see the Alex &amp; Willow community beginning to take shape. As we move closer to completion, we’re looking forward to welcoming residents and seeing the project come to life.”&nbsp;

[smartcode_project:default project_id=6680 project_image_fid=338516] 
&nbsp; 
Designed by <a href="https://www.apartments.com.au/architects/nettletontribe">Nettleton Tribe</a> with interiors by <a href="https://www.apartments.com.au/interior-designers/richards-stanisich">Richards Stanisich</a>, Alex &amp; Willow is a boutique collection of generously sized two- and three-bedroom residences in the heart of Crows Nest village.&nbsp;

Completion is slated for early 2027.

[smartcode_project_cta:default project_id=6680]

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

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

Christopher Joye

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