<section data-scroll-anchor="false" data-testid="conversation-turn-48" data-turn="assistant" data-turn-id="request-WEB:55d7c6ac-8e6d-4881-ad49-0ed9bf66d1cc-23" dir="auto">
Melbourne’s apartment market entered 2026 with renewed momentum, but the recovery is uneven, policy-driven, and increasingly shaped by constrained supply.

According to the RPM Apartments &amp; Townhomes Market Report (April 2026), apartments have begun to outperform detached housing on key metrics,yet that performance is occurring against a backdrop of falling approvals and a tightening development pipeline.

At the end of 2025, Melbourne unit values reached a three-year high of $656,500, recording quarterly growth of two per cent. That figure edged ahead of the 1.8 per cent growth recorded in the house market over the same period, marking a notable shift in relative performance. While modest in absolute terms, the outperformance is significant given the sustained dominance of houses through much of the previous cycle.

This shift has been driven in large part by policy. The federal government’s expanded five per cent Deposit Scheme has had a disproportionate impact on apartment demand, particularly in Melbourne where the $950,000 price cap captures a large share of medium- and high-density stock.

As RPM notes, the scheme “heavily favours medium and high-density dwellings,” effectively accelerating demand in the apartment sector.

The impact is most visible in buyer activity. Victoria recorded more than 43,000 new housing loans in Q4 2025, the highest quarterly volume since mid-2022 and one of the strongest results in over a decade. This lift was broad-based across all buyer types, with first home buyers, owner-occupiers and investors all returning to the market with greater confidence.

This surge in demand has flowed directly into apartment pricing, particularly in Melbourne’s middle and outer rings. Middle-ring unit values reached approximately $757,500, a four-year high, while outer-ring units climbed to a record $650,000. Quarterly growth of 2.9 per cent and 2.5 per cent respectively significantly outpaced both the inner ring (0.8 per cent) and the broader house market.

&nbsp;

<img alt="RPM" data-entity-type="file" data-entity-uuid="4628dde5-ad63-4b03-b18e-77d0f750e2aa" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-24%20at%209.23.32%E2%80%AFAM.png?VersionId=ig6mqc7Oz7UaszRuzULrGtLPUxGf4NJC" />

&nbsp;

The divergence between apartments and houses is also being shaped by affordability. Detached housing remains out of reach for many buyers, pushing demand toward apartments as a more accessible entry point into well-located suburbs. This is particularly evident among first home buyers and downsizers, both of whom are increasingly prioritising location, amenity and lifestyle over land size.

At the same time, population growth continues to underpin demand. Victoria added more than 122,000 residents in the year to Q3 2025, with Melbourne attracting both overseas migrants and interstate movers, partly due to its relative affordability compared to other capitals.

&nbsp;

<img alt="Population" data-entity-type="file" data-entity-uuid="49e10567-a8b3-47c3-afbd-290f0bb62c49" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-24%20at%209.22.25%E2%80%AFAM.png?VersionId=.2Drmko4TPh02X55JdF3mIC1EcG0ZfGl" />

However, the most critical factor shaping the apartment market is not demand, it is supply.

Apartment approvals across Greater Melbourne have fallen sharply, signalling a constrained pipeline of future stock. In Q4 2025, just 2,339 apartments were approved, down 20 per cent on the previous quarter and 47 per cent lower than the same period a year earlier. On an annual basis, 11,066 apartment approvals were recorded, an improvement on the previous year, but still well below medium- and long-term averages.

&nbsp;

<img alt="Apartment approvals" data-entity-type="file" data-entity-uuid="12f2e7bc-fe01-40c0-80b5-9e829b279d98" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-24%20at%209.21.56%E2%80%AFAM.png?VersionId=5mnIXkXGoDgIJdAFhA0alm0cSKzEytqZ" />

This decline reflects a broader contraction cycle that has been underway since 2020. As RPM notes, “apartment approvals appear to be sliding back into a downward trend,” with developers increasingly focused on launching and completing existing projects rather than initiating new ones.

The reasons are well understood. Construction costs have risen more than 20 per cent since 2021, driven largely by labour shortages and material price escalation. At the same time, financing conditions have tightened, with lenders requiring higher contingencies and taking a more cautious approach to risk. Combined with recent interest rate rises, these factors have made feasibility more challenging, particularly for higher-density projects.

This dynamic is creating a disconnect in the market. Demand for apartments—particularly at the more affordable end—is strengthening, while the pipeline of new supply is weakening. In the short term, this may limit the number of new projects coming to market. Over the medium term, however, it is likely to support price resilience and potentially further outperformance relative to houses.

There are some signs of policy-driven supply response. The introduction of Victoria’s Mid-Rise Code, which streamlines approvals for four- to six-storey developments, is expected to improve delivery in well-serviced middle-ring locations. However, this is unlikely to materially offset the broader decline in apartment approvals in the near term.

Despite the positive momentum at the end of 2025, the outlook for 2026 has become more complex. Two interest rate rises early in the year have already impacted consumer confidence, while broader cost pressures, particularly energy and fuel, are feeding through to construction and development costs.

“Victoria’s built form market ended 2025 on a high, but early 2026 rate rises quickly reversed the momentum,” RPM notes.

The implication is that while apartments are currently outperforming houses, the trajectory of that outperformance will depend on how these competing forces evolve. Policy support and affordability are clearly working in favour of apartments, but constrained supply and rising costs are likely to shape the pace and nature of future growth.

What is increasingly clear is that apartments are playing a more central role in Melbourne’s housing market. As population growth continues and affordability pressures intensify, higher-density housing is becoming not just an alternative to detached homes, but a primary solution to the city’s housing needs.
</section>

Joel Robinson

Units lead Melbourne price growth as apartments outperform houses: RPM

Brunswick is set for some of its largest apartments ever delivered with the upcoming new development Frith &amp; Howarth, where the apartments are around 20 per cent larger than what has come before it in the sought-after suburb.

Developer Young Group focused its design on Frith &amp; Howarth around size and scale, but within a boutique building, to create a mini neighbourhood within the mid-rise development. There are just 24 apartments in the mid-rise building on Victoria Street, a short walk to Brunswick Station and the cafe and dining strip along Sydney Road.

“We spent hours comparing what’s currently on the market so we could offer genuine points of difference,” Young Group says, pointing to room sizing, storage, and functional planning as key drivers behind the design.

All of the two-bedroom apartments in the building have been snapped up, with just the large three- and four-bedroom apartments, with the biggest floorplans and best outlooks, remaining.

[smartcode_project:default project_id=134317 project_image_fid=354139]

Apartments open directly into open-plan living zones where full-height glazing draws light deep into the apartment. Sliding doors extend the space outward to terraces, many oriented toward the adjacent park or back toward the city skyline.

Kitchens sit within this central space, anchored by sculptural island benches that reference the building’s faceted exterior language. Storage is integrated across multiple layers, overhead cabinetry, concealed joinery, and, in larger configurations, dedicated sculleries or butler’s pantries.

[smartcode_project:default project_id=134317 project_image_fid=354137]

The penthouse is the largest ever offered in Brunswick. The penthouse measures nearly 400 sqm all-up, with 242 sqm of internal space complimented by a further 149 sqm of terraces.

It spans the whole top floor and has four bedrooms, four bathrooms, and parking for four cars.

[smartcode_project:default project_id=134317 project_image_fid=354133]

Low maintenance resident amenity has been created in the form of a landscaped rooftop, complete with&nbsp;vegetable plots, outdoor cooking areas, and aflresco dining spaces, designed as a place for neighbours to gather outside of their homes.

“To enable connection with neighbours, generous rooftop gardens with communal spaces and outdoor cooking areas offer a chance to develop a sense of community,” says John Patrick, Principal of <a href="https://www.apartments.com.au/landscape-architect/john-patrick-landscape-architects">John Patrick Landscape Architects</a>.&nbsp;

“Private open spaces with a selection of native and exotic plantings and gorgeous city views on the rooftop create a high-end aesthetic, with a low maintenance lifestyle. The perfect balance, so that residents can enjoy a serene living space.”

[smartcode_project:default project_id=134317 project_image_fid=354134]

Sustainability is embedded at both the building and apartment level. <a href="https://www.apartments.com.au/new-apartments/frith-howarth-288-290-victoria-street-brunswick-vic-3056">Frith &amp; Howarth</a> is one of only a small number of all-electric residential developments in Brunswick, supported by solar infrastructure, EV-ready parking, and high-performance glazing. These measures sit alongside less visible systems such as rainwater reuse and high-grade insulation, reducing long-term operational costs while maintaining consistent internal conditions.

Positioned within walking distance of Brunswick Station, Route 96 trams, and established retail along Sydney Road and Barkly Square, the development balances access to transport with proximity to open space, a combination that has become increasingly difficult to secure in inner-city sites.

“These exquisite homes are nestled in a culturally diverse neighbourhood, with parklands and nature right on your doorstep,” says Young Group.

[smartcode_project_cta:default project_id=134317]

Frith & Howarth to deliver Brunswick’s largest apartments

<a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> in Brunswick is entering its final stages of construction, with the removal of the project’s last tower crane and the unveiling of the building’s full façade marking a significant milestone ahead of completion this coming spring.

The Park Street development, designed by <a href="https://www.apartments.com.au/architects/bates-smart">Bates Smart</a>&nbsp;and Mirvac Design with landscaping by <a href="https://www.apartments.com.au/landscape-architect/jack-merlo">Jack Merlo</a>, is now largely structurally complete, with internal works progressing across the 169-apartment project opposite Princes Park.

<a href="https://www.apartments.com.au/builders/mirvac-construction">Mirvac Construction</a> Project Manager Sam Payne said the latest update reflects a transition from structure to refinement.

“Since our last update, all façade panels have been installed and the scaffolding and gantry has come down, unveiling the building in its full form for the very first time,” Payne said.

“A significant milestone was reached this month with the removal of our final tower crane, signalling the completion of major structural works and a pivotal step forward in the building’s transformation.”

[smartcode_project:default project_id=4802 project_image_fid=366856]

Apartments are now well advanced internally, with joinery completed to level eight and tiling to level six, alongside the delivery of a prototype apartment used to set the benchmark for the remaining residences.

This next phase coincides with the release of a completed furnished residence, styled by MCM House, and the introduction of private buyer tours, giving purchasers a clearer understanding of the finished product ahead of settlement.

<a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> will comprise 169 one to four-bedroom apartments, with completion targeted for early spring. Interiors focus on natural materials and muted tones with two design schemes, while kitchens and bathrooms adopt a restrained palette anchored by stone, timber and textured finishes.

Bates Smart Director Jeffery Copolov said the project reflects a shared design direction centred on liveability and sustainability.

“Blending Mirvac and Bates Smart’s focus on wellness and sustainability, <a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> offers a new kind of conscious, elevated living in Melbourne’s inner north,” Copolov said.

<a href="https://www.urban.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> presents Mirvac's third parkside collaboration with&nbsp;<a href="https://www.urban.com.au/architects/bates-smart">Bates Smart</a>&nbsp;in Victoria.&nbsp;Their previous collaborations delivered two of the city’s landmark apartment buildings: The Melburnian opposite Kings Domain and The Eastbourne on Fitzroy Gardens.

[smartcode_project:default project_id=4802 project_image_fid=366857]

A key focus of the development is its landscape-led amenity offering. The central courtyard, spanning around 600 sqm, will feature established trees and planting grown off-site, alongside communal lawns and seating areas designed for everyday use.

Development Manager James Gardner said the outdoor spaces are central to the project’s lifestyle positioning.

“<a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> isn’t just a home, it’s a complete lifestyle offering, and the resident amenity is just one example of the elevated living experience the soon-to-be-complete building will be known for,” Gardner said.

The courtyard connects to a series of shared indoor and outdoor spaces, including a residents’ lounge, dining room, library and secondary west-facing garden area, designed as extensions of the apartments themselves.

Located directly opposite Princes Park and around four kilometres from the CBD, the development places residents within one of Melbourne’s most established inner-north precincts, with access to open space, transport and the retail and hospitality offerings of Brunswick and Carlton.

With façade works complete and landscaping and final finishes now underway, <a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> is moving into its most active construction phase, with permanent services and external works to be finalised in the coming months ahead of completion in spring.

[smartcode_project_cta:default project_id=4802]

Mirvac’s latest landmark, Prince & Parade Brunswick, enters final construction phase

Boutique Perth developer ADC has unveiled its latest project.

The developer, which focuses on bringing apartments to some of Perth's most premium inner-city and riverside suburbs, has launched <a href="https://www.apartments.com.au/new-apartments/mos-lane-mosman-park-46-manning-street-mosman-park-wa-6012">Mos Lane</a>, 68 luxury apartments and townhouses in the heart of <a href="https://www.apartments.com.au/developments/mosman-park-wa-6012">Mosman Park</a>.

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Alongside the one-, two-, three- and four-bedroom apartments, the development will also include five two-level townhomes and two luxe penthouses. ADC is also introducing a significant retail offering for residents through Mos Lane Village, which will feature a wellness studio, fish and chips shop, barber, and florist, adding a layer of amenity not typically found in the predominantly residential Mosman Park area.

Construction has already commenced on the project, which sits just a short walk from the Swan River, Mosman Park Bowls Club, and Mosman Park Golf Course.

House Agency Directors Tom House and Lachlan McDonald say they are fielding the majority of buyer interest from local downsizers, as well as buyers with a long-standing affinity for Mosman Park.
</section>

[smartcode_project:default project_id=148957 project_image_fid=364591]

Mos Lane will comprise two buildings; Samson House and Manning House, which have been designed by&nbsp;<a href="https://www.apartments.com.au/architects/nelson-koo">Nelson + Koo</a>, an emerging design consultancy specialising in the masterplanning and design of mixed use places and spaces.

The two buildings adopt distinct architectural responses to their surroundings. Manning House references the strong roof forms of nearby homes, with floorplates oriented to maximise light and long-range views, while Samson House is organised around a central atrium designed to bring daylight deep into the building and create a greater sense of openness.

At ground level, the inclusion of five townhomes introduces a typology more commonly associated with Mosman Park’s established streets, each with private courtyards and direct frontage, offering a transition between traditional housing and apartment living.

[smartcode_project:default project_id=148957 project_image_fid=364103]

Interiors have been led by Melbourne-based Hecker Guthrie, with an emphasis on practical, long-term liveability. Residences incorporate sculpted joinery, generous storage and flexible multi-purpose rooms that can adapt to changing household needs, whether for working from home, guest accommodation or additional living space.

Material selections draw on a restrained palette of textured stone, timber and neutral tones, with options for lighter or darker schemes. Detailing such as fluted glass, full-height joinery and integrated appliances is intended to balance functionality with a more refined residential finish.

Outdoor spaces are a consistent feature across the development, with balconies and terraces designed for dining and entertaining, and larger apartments incorporating outdoor kitchens. Orientation has been considered to allow residents to choose between morning or afternoon sun, while mature street trees and landscaped communal areas contribute to a softer streetscape.

[smartcode_project:default project_id=148957 project_image_fid=364107]

Shared amenities are positioned to support both day-to-day convenience and occasional use. These include a private dining room with a caterer’s kitchen, alfresco entertaining areas, and a bookable guest suite for visiting friends and family. Additional practical features such as a resident workshop, storage facilities, car and pet wash areas, and concierge-style services for cleaning and dry-cleaning collection reflect a focus on usability.

Positioned between the Swan River and Cottesloe Beach, and within reach of schools such as Iona Presentation College and St Hilda’s Anglican School, the development is aimed at a broad buyer group, from downsizers seeking a lower-maintenance alternative to larger homes, through to local residents looking to remain in the area in a different housing format.

Mos Lane represents one of the more significant additions to Mosman Park’s limited pipeline, combining new housing supply with a village-style retail centre in a suburb where opportunities for large-scale redevelopment are relatively constrained.

[smartcode_project_cta:default project_id=148957]

Living village precinct set for Mosman Park as ADC launches Mos Lane

An entity linked to I&amp;D Group Founder Ivan Filipović has filed plans for a new residential development at 188–202 Swan Street in Cremorne, targeting a prominent site within the tightly held Swan Street activity corridor.

The proposal seeks to redevelop the consolidated Swan Street landholding into a <a href="https://www.apartments.com.au/new-apartments/188-202-swan-street-cremorne-vic-3121">high-density mixed-use project</a>, replacing a series of existing commercial buildings with a significantly scaled residential outcome. The planning submission positions the development as a response to increasing demand for housing in well-connected inner-urban locations, particularly within established activity centres.

Plans outline the construction of a 14-storey building delivering 165 apartments above a four-level basement, alongside a ground-floor retail and commercial offering designed to activate the streetscape. A key feature of the scheme is a new north–south pedestrian link connecting Swan Street to Railway Place, intended to “enhance permeability and provide an active, publicly accessible connection through the site.”

<img alt="First Look: Plans lodged for Ivan Filipović-linked Cremorne apartment project on Swan Street" data-entity-type="file" data-entity-uuid="7332a8f8-dd2b-483d-b86e-320658838c84" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/cremorne.png?VersionId=cXm8vAaRdHh.LpYVbecrRkjckgu9mtAF" />

The development will retain part of the existing built form at 198–200 Swan Street, while the remainder of the site will be cleared to accommodate the new structure. Basement levels will provide 196 car spaces and 113 bicycle spaces, with vehicle access from Railway Place. Communal amenity is distributed across the building, including a shared outdoor area on Level 1 and a rooftop terrace for residents.

Ground level uses include retail tenancies fronting Swan Street and the pedestrian link, a residential lobby, and a flexible commercial space positioned to support community-oriented uses. The planning report notes this space “could be offered as a flexible space within the development for community groups,” supporting short-term or longer-term occupancy arrangements.

<img alt="First Look: Plans lodged for Ivan Filipović-linked Cremorne apartment project on Swan Street" data-entity-type="file" data-entity-uuid="8208bf7b-cc67-485d-ad0f-1d73a74c907f" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/cremorne%20lane.png?VersionId=69ctjC0txXv0zCHy7qQUpJyGwvPAT7gw" />

The site sits within the Swan Street Major Activity Centre, surrounded by a mix of retail, hospitality, and emerging residential development, and directly opposite tram services along Swan Street. East Richmond Station is located to the south, providing strong rail connectivity, while the broader Cremorne precinct continues to evolve as a mixed-use hub.

I&amp;D Group, founded by Ivan Filipović, is regarded as one of Victoria’s largest formwork contractors, partnering with major construction firms across large-scale public and private developments. The Swan Street proposal signals a move into development-backed opportunities tied to strategic inner-city sites.

First Look: Plans lodged for Cremorne apartment project on Swan Street

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I was reading a piece this week at MacroBusiness where it was pointed out that it has been 24 years since we went through the global recession.
Then eight years later we went into the Tech Wreck, then  eight years after that we hit the Global Financial Crisis (GFC) and now  eight years on we have hit Brexit – or as Australians will soon call it Bex – it (as it will probably cause some major headaches.)
Whilst Australia continues to post some very positive data, we need to pay closer attention to the data post June 30 as we now enter a period of uncertainty. Having said that, this should also be viewed as an exciting time as it is now clear that every eight years businesses need to adapt and recalibrate in order to survive.
One statistic we can’t hide from when the GFC hit in 2007 is that debt has grown much faster than GDP in every country. Some may say that this is an economic consequence as globally cash rates have been crashing down where in Australia we sit at a record low 1.75 per cent. Furthermore, many commentators are now stating that the cash rate in Australia will come down even more as a direct result of Brexit.
Whenever an economy reaches that financial standoff, and investors hate uncertainty, we need to be overly protective of investors as they are a particular and crucial economy driver. So there needs to be closer scrutiny as to why the ALP want to change the Negative Gearing goal posts, which will definitely drive up rents, and why the NSW Government wants to drive foreign investors from our property markets with their 4 per cent surcharge plus a 0.75 per cent land tax surcharge on residential real estate only.
Makes one seriously question exactly where governments expect the new buyers to evolve from? The real estate industry is hearing foreign investors are moving away from our markets in droves. Once again we need to be mindful of Brexit and life and results after June 30. Australia is now all but guaranteed that lending will now tighten, which is a good thing, however if we cast our minds back to the GFC we kept hearing two words – “green shoots”.
The sad part about emerging “green shoots” is that governments immediately see them as a new form of taxation – this in turn will bring about market stagnation which is the last thing our economy needs.
Having said that, existing property markets, otherwise known as the established household markets, are now 60 per cent down when compared to property listings two years ago. This is good news for established houses – we are now seeing record low listings which only strengthens the markets. For example, when I go back five years for Mosman houses you will see the pattern that has emerged.
<ul>
<li>30 June 2011 – 97 houses on the market in Mosman</li>
<li>30 June 2012 – 80 houses on the market in Mosman</li>
<li>30 June 2013 – 68 houses on the market in Mosman</li>
<li>30 June 2014 – 63 houses on the market in Mosman</li>
<li>30 June 2015 – 43 houses on the market in Mosman</li>
<li>30 June 2016 – 42 houses on the market in Mosman</li>
</ul>
What this tells us, and we should point out that these results are reflective across Sydney, is that since the GFC homeowners are taking advantage of record low cash rates by paying down debt faster. On the flip side they are renovating over selling as they see no economies of scale in donating a few hundred thousand dollars to our NSW Government in the form of Stamp Duty. In other words, the Stamp Duty component is then redirected to home renovations.
The NSW Government will recognise very quickly that it has a cash flow problem when the effect of the new surcharge stamp duty and the already declining established markets see the property market transactions coming to an abrupt halt. Don’t be surprised to see a total back-flip with the foreign buyer surcharges but not the land tax.
As for the established household markets the NSW Government should look at the amount of stamp duty previously paid on the past acquisition and give that household a 33 per cent deduction from the next stamp duty so long as that household has been in that property between five and ten years.
In business you offer incentives – it’s a shame governments struggle with the concept of that word.
<h5>MOSMAN – 2088</h5>
Number of houses on the market this time last year – 36
Number of houses on the market last week – 48
Number of houses on the market this week – 42
Number of apartments on the market this time last year – 33
Number of apartments on the market last week – 41
Number of apartments on the market this week – 33
<h5>CREMORNE – 2090</h5>
Number of houses on the market this time last year – 3
Number of houses on the market last week – 11
Number of houses on the market this week – 7
Number of apartments on the market this time last year – 16
Number of apartments on the market last week – 18
Number of apartments on the market this week – 17
<h5>NEUTRAL BAY – 2089</h5>
Number of houses on the market this time last year – 2
Number of houses on the market last week – 10
Number of houses on the market this week – 10
Number of apartments on the market this time last year – 39
Number of apartments on the market last week – 22
Number of apartments on the market this week – 23
ROBERT SIMEON is a director of <a href="https://www.rwm.com.au/" target="_blank" title="RWM" rel="nofollow">Richardson Wrench Mosman and Neutral Bay</a> and has been selling residential real estate in Sydney since 1985. 
He has also been writing real estate blog <a href="https://www.rwm.com.au/news/" target="_blank" title="Virtual Realty News" rel="nofollow">Virtual Realty News</a> since 2000.
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robertsimeon-hRNTwJyXkQ

Time for governments to roll out incentives: Robert Simeon

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EXPERT OBSERVER
The Australian economy is tepid, with consumer spending the weakest in ten years, business investment shrinking, and economic growth too weak to cover population growth.
Were it not for very strong growth in export income and the biggest surge in government spending in 15 years, the economy would have shrunk.
The Treasury believes the Australian economy is capable of growing at a sustained annual pace of <a href="https://www.smh.com.au/business/the-economy/myefo-treasury-downgrades-its-budget-projections-20151124-gl6mfd" target="_blank">2.75%</a>. The growth rate in the past financial year of <a href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0" target="_blank">1.4%</a> reported on Wednesday is only half that.
Not since September 2009 has the gap between what the Australian economy is capable of and what it has been delivering been so wide. 2009 was the year of the global financial crisis.
Real GDP growth
<a href="https://images.theconversation.com/files/290848/original/file-20190904-175710-w8sxqs.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/290848/original/file-20190904-175710-w8sxqs.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a> Commonwealth Treasury
<hr>
Economic growth has rarely been as low as 1.4% outside of a recession.
When account is taken of population growth, income and production per citizen went backwards. The last time that happened was during the financial crisis. The last time before that was during the early 1990s recession.
Household spending, which accounts for more than half of total spending, also failed to keep pace with population growth. The inflation-adjusted growth rate of 1.4% was also the lowest since the financial crisis.
<hr>
Growth in household consumption
<a href="https://images.theconversation.com/files/290854/original/file-20190904-175682-1td1jy.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/290854/original/file-20190904-175682-1td1jy.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a> Commonwealth Treasury
<hr>
Other figures released on Tuesday show retail spending dipped a further 0.1% in July.
Hardest hit in the 2018-19 financial year was spending on cars. Updated figures released at the same time as the national accounts show sales of new cars down 10% over the year to August.
Treasurer Josh Frydenberg said he preferred to think that households were delaying rather than abandoning purchases of cars, waiting until the economic outlook was clearer.
<hr>
Growth in consumption by category
<a href="https://images.theconversation.com/files/290863/original/file-20190904-175710-1vl9blt.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/290863/original/file-20190904-175710-1vl9blt.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a> June quarter 2019. Note: Discretionary consumption is as classified by Treasury. Commonwealth Treasury
<hr>
Weighing on consumers is an extended period of unusually low wage growth that the national accounts show has brought the share of national income paid out as wages down to just about its lowest point since 1964.
Although the wage and superannuation bill increased, climbing 5% over the year as employment grew, the share of national income paid out as wages and super fell to 52% – the lowest since the global financial crisis, and before that the lowest since the <a href="https://www.smh.com.au/entertainment/the-beatles-let-it-be-in-australia-1964-20140606-zrvui" target="_blank">Beatles toured Australia</a> and Donald Horne published <a href="https://www.penguin.com.au/books/the-lucky-country-9781742531571" target="_blank">The Lucky Country</a>.
<hr>
<a href="https://images.theconversation.com/files/290879/original/file-20190904-175705-mnrpnw.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/290879/original/file-20190904-175705-mnrpnw.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a> <a class="source" href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Jun%202019?OpenDocument">ABS 5206.0, Table 35</a>
<hr>
Also weighing on consumers has been housing. Investment in housing (including alterations and additions) was down 9.1% over the year. Business investment fell 10%.
Company profits grew 12.8%, but leaving aside mining companies, whose profits grew strongly on the back of higher prices and export volumes, other profits grew only weakly, climbing 1.8%.
Mining income pushed up nominal GDP (the raw dollars unadjusted for prices that drive nominal incomes) up a healthy 5.4%, probably delivering the government a budget surplus one year earlier than promised, in 2018-19. Frydenberg said he already knew the result and would unveil it in a fortnight. His smiles suggested it’s one he likes.
<hr>
Nominal GDP growth
<a href="https://images.theconversation.com/files/290883/original/file-20190904-175678-1e6pzpc.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/290883/original/file-20190904-175678-1e6pzpc.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a> Commonwealth Treasury
<hr>
Mining income also pushed up what the Reserve Bank regards as the best measure of actual living standards, which (perhaps surprisingly) is not GDP per capita, which is going backwards, but a lesser known and purpose-designed measure known as “real net disposable income per capita”. It grew a healthy 2.65% over the year and a very healthy 1% over the quarter.
It is true that much of it was paid out in mining profits, but it is also true that it isn’t necessarily right to latch on to the cruder measure of GDP per capita and say that living standards are going backwards.
Helping maintain living standards was a very healthy growth in government spending, the highest for some time – not government infrastructure spending, that actually fell over the year as some state projects wound up, but day-to-day spending on things such as the National Disability Insurance Scheme.
<hr>
<img src="https://images.theconversation.com/files/290908/original/file-20190904-175686-un189b.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""><a class="source" href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5625.0Jun%202019?OpenDocument" target="_blank">ABS 5625.0, Table 2</a>
<hr>
Oddly, because of the way the national accounts work, economic growth was also helped by a slump in imports, down 2.8% over the year due largely to a slump in imports of consumer goods.
The economy is in a bad way. Aside from mining and government spending, the only real bright spot is employment growth, and as the Reserve Bank often points out, employment growth doesn’t tell us much about what’s going to happen.
It tends to lag everything else in the economy, by <a href="https://www.rba.gov.au/publications/smp/2019/may/pdf/domestic-economic-conditions.pdf" target="_blank">up to nine months</a>. By the time it turns down, other things already have.
<h2>Few clear ways out</h2>
Frydenberg doesn’t seem too worried. For now he is banking on the tax cuts and the interest rate cuts in June and July to lift investment and spending.
The treasurer has two Plan Bs. One is an aggressive investment allowance for business. He <a href="https://theconversation.com/back-yourself-treasurer-frydenberg-tells-business-but-its-not-that-simple-122397" target="_blank">spoke about introducing one</a> last week, but on Wednesday he indicated that he wasn’t planning to do so until next year’s May budget. If needed, he could bring the date forward.
The other is another Reserve Bank rate cut, most likely at the board’s meeting on Melbourne Cup Day, by which time it will have before it an updated set of inflation figures.
Frydenberg revealed on Wednesday that he is taking a close look at the government’s contract with the Reserve Bank, a <a href="https://rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19" target="_blank">formal written agreement</a> which is renewed after each election.
He has asked the Treasury to look at it to see whether it needs to be tightened to make the bank more responsive to the state of the economy. This would mean more boldly cutting or pushing up rates.
In Britain, if inflation is 1 percentage point above or below the Bank of England’s target, it has to write to the government to explain why.<img src="https://counter.theconversation.com/content/122942/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
<a href="https://theconversation.com/profiles/peter-martin-682709" target="_blank">Peter Martin.</a>, Visiting Fellow, <a href="http://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292" target="_blank">Crawford School of Public Policy, Australian National University</a>
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/why-weve-the-weakest-economy-since-the-global-financial-crisis-with-few-clear-ways-out-122942" target="_blank">original article</a>.
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jrobinson-rf4aSBido9

Why we’ve the weakest economy since the global financial crisis, with few clear ways out

What have we learnt since the financial crisis? RBA's John Simon

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EXPERT OBSERVER
Wayne Swan and Kevin Rudd spent big and spent bold, and it almost certainly kept us out of recession. <a href="https://theconversation.com/profiles/richard-holden-118107"> </a>
A little more than a decade on from the the collapse of Lehman Brothers, the largest bankruptcy in history, many of the world’s advanced economies are only now beginning to recover fully.
I was on the faculty at the University of Chicago at the time and, like many, followed the events of the 2008 US summer with a combination of interest and outright fear.
It is hard to describe how scary the two months around the Lehman bankruptcy were. Two anecdotes convey some of that fear, however.
The first was when I spoke to an economics official in the Obama administration who said: “Go get cash and bottled water. Automatic teller machines might not be working two days from now.”
The second reflects just how severely money markets froze up. Goldman Sachs – Wall Street’s most venerable firm – was largely on the good side of trades on credit default swaps, the instruments behind much of the crisis. Yet its stock price was utterly hammered. It wasn’t until legendary investor Warren Buffett sank US$5 billion into Goldman that confidence was restored.
On one day Goldman stock was down by a staggering nearly 50% in intra-day trading. It very nearly went the way of Lehman – all because of what amounted to a modern-day bank run.
<img src="https://images.theconversation.com/files/236990/original/file-20180918-158246-1o295vy.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="">Goldman &amp; Sachs stock price.
<hr>
The Obama administration responded with spending (including on tax rebates for households and firms), big interest rate cuts and measures to ensure banks had access to funds. Combined, these helped avoid a repeat of the Great Depression.
When Australia splashed cash
Australia, too, spent big: A$10 billion in October 2008 and a further A$42 billion in February 2009. More than half of the second sum, $A26 billion, went on infrastructure. Another $12.7 billion was spent on cash bonuses, including $900 for every Australian on less than $80,000.
And we cut interest rates, massively, and guaranteed bank deposits.
The International Monetary Fund, the Organisation for Economic Cooperation and Development, and most good economists think what we did was essential to ensure Australia avoided a severe downturn.
Prime Minister Kevin Rudd and his treasurer, Wayne Swan, deserve a lot of credit.
Yet there are those on the conservative side of politics who claim the stimulus spending was wasteful, not that helpful, and locked in an era of higher government spending.
Wasteful? Not really
As prime minister in 2016, Malcolm Turnbull encapsulated the view that the spending was a waste when he <a href="https://www.propertyobserver.com.au/http://www.abc.net.au/7.30/interview:-prime-minister-malcolm-turnbull/7542756" target="_blank">told the ABC’s Leigh Sales</a>: “I think what shepherded Australia through the GFC successfully was the Chinese stimulus and the large amount of cash that John Howard left in the bank.”
Here’s what I think.
The Chinese stimulus helped, but China didn’t do it to help Australia. It did it to help itself, with a happy byproduct being continued demand for Australian resources.
Does Mr Turnbull really think the Chinese government was either mistaken (because stimulus spending doesn’t help) or benevolent (because it wanted to help Australia)? These are not terms normally associated with Beijing.
The “large amount of cash” left by the Howard government was indeed very important. It allowed the Rudd government to spend big without running up huge government debt. As the noted UC Berkeley economists Christina and David Romer <a href="https://eml.berkeley.edu/%7Ecromer/Reprints/Crises%20and%20Policy/Romer&amp;RomerCrisesandPolicy.pdf" target="_blank">have pointed out</a>, using evidence from 24 advanced economies, fiscal and monetary policy “space” is important in ensuring the stimulus programs work.
So, yes, Howard’s debt-free budget was important, but only because it gave the government room to spend.
There is an important point here. Namely, that prudent fiscal management through ordinary times is essential in order to build up the firepower to respond in extraordinary times.
Australia still enjoys government debt to GDP that is low by OECD standards, but its growth has been very rapid even in post-crisis years because of the structural gap between government revenues and expenditures. Both sides of politics say they are committed to narrowing it. We shall see.
Space matters
“Space” to act with monetary policy (official interest rates) is also important.
It’s the basis for much of the talk about a “new monetary policy framework” that would lift interest rates from their present lows in Australia and overseas to around 5%. It’s a goal articulately and <a href="https://www.brookings.edu/research/why-the-fed-needs-a-new-monetary-policy-framework/" target="_blank">forcefully argued for by former US Treasury Secretary Larry Summers</a>. Getting there would give central banks the firepower they might need.
These lessons have been learned to varying degrees, but are now thankfully at least part of the mainstream debate.
And regulation
One thing that everyone should have learned from the financial crisis in general, and Lehman in particular, is the need for effective regulation of financial institutions.
The combination of massive leverage, opaque financial instruments and radical interconnectedness of financial firms in the US was a disaster waiting to happen.
In many ways it still could be.
Republicans in the US want to dramatically roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced by President Obama in response to the financial crisis.
Although far from perfect, it helped de-risk the US financial system.
In Australia the failings of financial regulators play out every day at the Hayne Royal Commission, in excruciating detail.
It entitles us to ask if Australian regulators can’t prevent outright theft by financial institutions, how equipped are they to prevent more complicated transactions that might put the financial system at risk?
The answer is: not very.
We’ve learned some things
A decade after Lehman it’s fair to say we have learned lessons.
We know how to use big and bold fiscal (spending) policy and monetary (interest rate) policy to create a virtuous circle of beliefs that can pull us out of a downturn.
And we know that we need to reload both fiscal and monetary policy in the good times so we are ready for the bad times.
But on financial regulation the US might be about to go backwards, and we never really went forwards.<img src="https://counter.theconversation.com/content/103514/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
Richard Holden is a Professor of Economics and PLuS Alliance Fellow, UNSW
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. 
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rh-YsoTT2xMuQ

The GFC and me, ten years on, what have we learned? Richard Holden

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Martin North says 60 Minutes took the worst case from his four scenarios as the basis of the alarming segment which went to air last night on Channel 9.
"It is not my central scenario, rated only a 20 percent chance, as I made clear when interviewed," he said noting this caveat did not make it to the final cut.
North suggested a fall of 45 percent in home prices would be over three years or so, and require the US financial markets to react to rising US Fed rates.
Click here <a href="https://www.propertyobserver.com.au/images/2018/9/17/north-forecast.jpg" target="_blank">to enlarge.</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/9/17/north-forecast.jpg" alt="">
"This creates a GFC 2.0." North, a finance sector analyst and principal Digital Finance Analytics, suggested.
The 60 Minutes reporter Tom Steinfort advised "several of the experts we interviewed for this story estimate it could be as much as 40 percent in Melbourne and Sydney, while even the most optimistic property analysts concede there will be a drop of at least 10-15 percent."
Steinfort says he's been spooked by the downturn, holding off his desired property purchase with fiancee Claudia Jukic.
His 60 Minutes report kicked off with a serious inaccuracy.
"For as long as most of us care to remember, or perhaps only as long as we want to remember, property prices in Australia have only gone in one direction, at least in our big cities," Steinfort claimed.
CoreLogic's Cameron Kusher recently wrote <a href="/expert-insights/buying/2018-housing-declines-hit-melbournes-inner-east-and-sydneys-hills-district-hardest-corelogic">a detailed research analysis tracking the current downturn</a> with three downturns since 2003.
North said the figures used in the program did not reflect his “central scenario” and that Channel Nine “chose not to cover” the more likely alternatives.
“My best call would be [property value falls] in the region of 15-20 per cent from top, over two to three years,” he said.
You can read North's full analysis <a href="http://digitalfinanceanalytics.com/blog/updated-finance-and-property-scenarios-summary-findings/" target="_blank">here</a>. 
 
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jchancellor-FAypfDUnLy

45 percent housing price collapse was least likely scenario: Martin North's 60 Minutes postscript

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GUET OBSERVER
It seems momentous things happen in years ending in seven.
Well, at least in the last 50 years starting with the “summer of love” in 1967 and the introduction of the Chevrolet Camaro.
But after that, it was downhill with Elvis leaving the building in 1977, the 1987 share market crash, the Asian crisis of 1997 and the GFC that started in 2007.
While Lehman Brothers didn’t go bankrupt until September 2008, the GFC’s initial tremors occurred in 2007.
Financial markets really started to take notice in August of that year, with shares taking a big hit before rebounding to new highs for US and Australian shares in October/November 2007 ahead of a roughly 55% decline into March 2009.
This note looks at the main lessons for investors from the GFC and whether it can happen again.
But first some history.
The GFC was the worst global financial crisis since the Great Depression.
It saw the freezing up of lending between banks, multiple financial institutions needing to be rescued, 50% plus share market falls and the worst post-war global economic contraction.
At the core of the GFC was something very basic.
In an environment of low interest rates (with often initially low “teaser” rates) too many loans were made to US homebuyers that set off a housing boom that went bust when interest rates rose and supply surged.
So no big deal – it happens all the time!
But it was what went on around it that ultimately saw it turn into a global crisis.
A massive proportion of the loans (40% or so) went to people who had no ability to service them – sub-prime and low doc borrowers.
Remember NINJA loans – loans to people who had no income, no job and no assets!
And many were non-recourse loans – so borrowers could just hand over the house if its value fell below the debt owed on it and that was the end of their liability.
Recall – jingle mail!
This was encouraged by public policy aimed at boosting home ownership and ending discrimination in lending.
It was made possible by a massive easing in lending standards facilitated by financial innovation that packaged up the sub-prime loans into securities, which were then given AAA ratings on the basis that while a small proportion of loans may default the risk will be offset by the broad exposure.
These securities were then leveraged up and sold all over the world with fancy names like Collateralised Debt Obligations (CDOs) that found willing buyers looking for decent low risk (remember AAA rated!) yield at a time of low interest rates.
Hedge funds investing in such products even got awards like “yield manager of the year”.
But the trouble was that with the sub-prime loans moved out of the banks, there was no “bank manager” looking after them.
This all came as banks globally were sourcing an increasing amount of the money they were lending from global money markets – which had freed them up from relying on expensive bank deposits via bricks and mortar branches.
The music stopped in 2006 when poor affordability, an oversupply of homes and 17 interest rates hikes from the Fed over two years saw US house prices peak and then start to slide.
This made it harder for sub-prime borrowers to refinance their loans at their initial “teaser” rates.
As a result, more and more borrowers defaulted causing investors in the fancy products that invested in sub-prime loans (like CDOs) to start suffering losses.
The problem really caught the attention of global investors in August 2007 after BNP froze redemptions from three of its funds because it couldn’t value the CDOs within them, which in turn set in train a credit crunch with sharp rises in the cost of funding for banks and a reduction in its availability triggering sharp falls in share markets.
Shares rebounded but only to peak in late October/November 2007 before commencing roughly 55% falls as the credit crunch worsened, the global economy fell into recession, mortgage defaults escalated and multiple banks failed.
The crisis went global as: losses mounted; these were magnified by gearing, which forced investment banks and hedge funds to liquidate sound positions to meet redemptions thereby spreading the crisis to other assets; the distribution of securities investing in US sub-prime debt globally led to a wide range of exposed investors and hence greater worries about who was at risk; this all led to a freezing up of lending between banks.
All of which affected confidence and economic activity.
Fault lay with home borrowers, the US Government, lenders, ratings agencies, regulators, and investors and financial organisations for taking on too much risk.
It came to an end in 2009 after significant monetary easing and fiscal stimulus helped restore the normal operation of money markets, confidence and growth.
That said, aftershocks continued with sub-par global growth and very low inflation.
The GFC highlighted several lessons for investors:
· The economic and investment cycle is alive and well. Talk of a “great moderation” was all the rage prior to the GFC but the GFC reminded us yet again that periods of great returns are invariably followed by a fall back. If returns are too good to be true they probably are.
· High returns come with higher risk. While risk is often dormant for years, it usually returns with a vengeance as was apparent in the GFC. Backward-looking measures of volatility are no better than attempting to drive focussed only on the rear view mirror.
· While each boom bust cycle is different, markets are pushed to extremes of valuation and sentiment. The low in 2009 was characterised by ultra cheap shares and credit investments with investors highly pessimistic.
· Be sceptical of financial engineering or hard-to-understand products. The biggest losses for investors in the GFC were generally in products that relied heavily on financial engineering purporting to turn junk into AAA investments that were impossible to understand.
· Avoid too much gearing or gearing of the wrong sort. Gearing is fine when all is going well. But it will magnify losses when things reverse and can force the closure of positions at a big loss when the lenders lose their confidence and refuse to roll over maturing debt or when a margin call occurs forcing an investor to sell their position just at the time they should be adding to it.
· The importance of true diversification. While listed property trusts and hedge funds were popular alternatives to low-yielding government bonds prior to the GFC, through the crisis they ran into big trouble (in fact Australian Real Estate Investment Trusts (REITs) fell 79%), whereas government bonds were the star performers. REITs have cut their gearing and returned to their knitting. But “in a crisis correlations go to one – except for true safe havens”.
· Fiscal and monetary policy work. There is a role for government in putting free market economies back on track when they get into a downward spiral. While some have argued that easy money just benefitted the rich (who invest in shares), doing nothing would have likely ended with 20% plus unemployment and worse inequality.
· The return to normal from major financial crises can take time, as the blow to confidence depresses lending and borrowing and hence consumer spending and investment for years afterwards. This muscle memory eventually fades but the impact can be seen for a decade or so.
· The importance of asset allocation. The GFC provided an extreme reminder that what really matters for your investment performance is your asset mix – ie your allocation to shares, bonds, cash, property, etc. Exposure to individual shares or fund managers is second order.
· Finally, “stuff happens”. While after each economic crisis there is a desire to “make sure it never happens again”, history tells us that manias, panics and crashes are part and parcel of the process of “creative destruction” that has led to an exponential increase in material prosperity in capitalist countries. The trick is to ensure that the regulation of financial markets minimises the economic fallout that can occur when free markets go astray but doesn’t stop the dynamism necessary for economic prosperity.
Of course there will be another boom and bust...but as Mark Twain is thought to have said “history doesn’t repeat, but it rhymes” so the specifics will be different next time.
History is replete with bubbles and crashes and tells us it’s inevitable that they will happen again as each generation forgets and must relearn the lessons of the past.
Often the seeds for each new bubble are sown in the ashes of the former.
Fortunately, in the post-GFC environment seen so far there has been an absence of broad-based bubbles on the scale of the tech boom or US housing/credit boom.
E-commerce stocks like Facebook and Amazon are a candidate but they have seen nowhere near the gains or infinite PEs seen in the late 1990s tech boom.
Click to enlarge
On the global debt front, a concern is that after a post-GFC pull back, it has grown to an all-time high relative to global GDP.
Click to enlarge
However, just because global debt has grown to a new high doesn’t mean a crisis is upon us.
It has been trending up for decades, much of the growth in debt in developed countries post the GFC has been in public debt and debt interest burdens are low thanks to low interest rates in contrast to the pre-GFC period.
Furthermore, the other signs of signs of excess that normally set the scene for recessions and associated deep bear markets in shares like that seen in the GFC are not present on a widespread basis just now.
Inflation is low, monetary policy globally has barely tightened, there has been no widespread overinvestment in technology (as preceded the tech wreck) or housing (as preceded the GFC in the US) and bank lending standards have not been relaxed to the same degree as seen prior to the GFC.
Moreover, financial regulations have tightened significantly with banks required to have higher capital ratios and source a greater proportion of funds from their depositors.
So another boom bust cycle is inevitable at some point, but it will likely be very different to the GFC.
And many of the signs of excess that normally precede deep bear markets are still absent.
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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soliver-smf6LQXgW9

Lessons learned a decade from the GFC: Shane Oliver

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GUEST OBSERVER
A new report by JLL says it is time to review pre - Global Financial Crisis yardsticks to judge future investment performance for commercial real estate.  Instead, investors need to look more broadly at the long-term structural changes to the market that have been underway, behind the scenes.
And don’t wait for ‘normal’ market conditions to return, as traditional real estate benchmarks may not be reliable indicators in the future.  Some metrics, such as workspace ratios and retail turnover ratios, may no longer even be relevant in the shifting world of workplace mobility and IT connectivity.
The Report - ‘Real Estate Conundrums - Just another cycle – or a whole new ball game?’ was presented at a JLL Research event in Sydney.
Technology and urbanisation have been gathering pace for decades.  But while the cyclical nature of real estate has not been abolished, investors in real estate face a range of conundrums relating to yields, cross border investment, technology and urbanisation that can have long-term impacts for commercial real estate.
<a href="/images/2016/06/16/Screen%20Shot%202016-06-16%20at%208.26.15%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/16/Screen%20Shot%202016-06-16%20at%208.26.15%20AM.png" alt="">
The GFC has been a convenient scapegoat for the breakdown in previously trusted rules of thumb when investing in commercial real estate.  While for some the benchmarks of the years 2007-2008 do seem to mark a clear break from the patterns of the past, many trends have been evident for far longer than that.  Not everything is a GFC-driven event. For instance, real and nominal interest rates have been declining for 30 years.
The challenge for investors right now is that numerous structural and cyclical shifts are emerging, converging and interacting with each other.
Structural shifts for Australian commercial real estate:
<ul>
<li>Real estate markets are globalising – tenants, investors, developers</li>
<li>
Yields: Low growth, low inflation, low yields are also here to stay</li>
<li>
Cross Border Investment: Offshore capital is here to stay</li>
<li>Fundamental mismatch between capital and available assets</li>
</ul>
Market cycles have not been abolished:
<ul>
<li>Yields will cycle around lower benchmark levels</li>
<li>
Demography a key driver of all real estate asset classes</li>
<li>Financial markets move faster than physical markets</li>
<li>Don’t wait for ‘normal’ conditions to return</li>
</ul>
Structural Shifts – Yields and Cross Border Investment:
Implicit in JLL Research forecasts is a downward structural shift in interest rates and real estate yields – in other words, the ‘lower for longer’ theory is correct.  This does not mean that cycles have been abolished.  But average yields are likely to be lower than in the past.
<a href="/images/2016/06/16/Screen%20Shot%202016-06-16%20at%208.28.57%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/16/Screen%20Shot%202016-06-16%20at%208.28.57%20AM.png" alt="">
Supported by growth in global pools of capital and a search for yield, JLL calculates that global cross border investment will continue to grow over the medium term.  In Australia, cross border investors accounted for 42 percent of all commercial property transactions in 2015.
While the impact of technology has been massive, the impact on real estate has been less than was anticipated 20 years ago; CBD’s remain magnets for office and retail tenants, despite rising travel and congestion costs, and inner-city residential demand (which was not foreseen) has increased substantially.
Perhaps though the falling cost of technology, the advent of wireless capabilities, combined with the rising cost and scarcity of skilled labour and rising wages (that puts a premium on commuting travel times) will now lead to a more substantial impact on real estate investment returns and a re-ranking of market values in CBD and non-CBD locations? 
If location premiums erode, non-CBD and suburban locations could be rewarding for investors.
Demography (and urbanization): – is it destiny?
Are we under-estimating the impact of the changing population age profile?  Baby-boomers and first home buyers are important – but over time there are many other impacts on real estate to consider – childcare, student housing, retirement living as well as the age profile within the working age population. 
While population will grow across all age categories in Australia, some age groups will grow much faster than others – therefore requiring specific real estate solutions – right across the spectrum from childcare, student accommodation, first home buyers, upgraders, empty nesters and retirement villages.
 
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David Rees is regional director, head of research, JLL Australasia and can be contacted <a href="https://www.jll.com.au/australia/en-au/people/113/david-rees" target="_blank">here.</a>
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Time to review pre-GFC yardsticks to judge future performance of commercial real estate: JLL's David Rees

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
"We’ve had 25 years of continuous economic growth, the only country in the world with a period of growth that long. – Trade minister Steven Ciobo, speaking on Q&amp;A, May 31, 2016."
Economic management is shaping up as a key election battleground, and the Coalition has been especially keen to keep the focus on the economy.
Trade minister Steven Ciobo told Q&amp;A viewers that Australia has had 25 years of continuous economic growth, and is the only country in the world with a period of growth that long.
Is that right?
<h2>Checking the source</h2>
A spokesman for Steven Ciobo told The Conversation that Ciobo misspoke on Q&amp;A. The spokesman said by email that:
Mr Ciobo omitted the world developed, he meant to say “developed country”.
That clarification does improve the accuracy of his statement quite considerably. Let’s test his two statements separately.
<h2>25 years of continuous economic growth?</h2>
Australia entered a period of low and sometimes negative economic growth in 1989. The last period where growth was negative was June 1991 (for the quarter-over-quarter growth), and December 1991 (for the year-over-year growth).
I would argue that the weak growth through 1991 means that you can’t say that the economy recovered and was growing until 1992.
So on that definition, we have had about 24.5 continuous growth – which is close enough to the Ciobo’s figure of 25 years.
It is true we are in our 25th year of consecutive economic growth. That’s how it was phrased in Austrade’s 2016 Why Australia Benchmark Report, which noted that:
Australia is not only entering its 25th year of consecutive growth, the country is expected to realise annual real GDP growth of 2.9% between 2016 and 2020 – the fastest of any major advanced economy in the world.
<h2>The only country in the world?</h2>
As the minister’s spokesman said, Ciobo accidentally omitted the word “developed” from his statement.
It is true that all of the other 33 member countries in the Organisation for Economic Co-operation and Development (OECD) have had a period of negative GDP growth since 1991, with most going into recession during the Global Financial Crisis.
It is notable that the dip in growth during the GFC was smaller for the Group of 20 (G20) major economies than for the OECD, and the reason for this is that many emerging markets did not go into recession.
It is not true to say, as the minister accidentally did, that Australia is the only country in the world with a period of growth that long. The chart below shows Australia’s growth next to the G20, OECD, India and China.
<a href="/images/2016/06/06/image-20160531-13810-hgnto5.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/06/image-20160531-13810-hgnto5.png" alt="">
<h4>Author provided. Source: OECD Main Economic Indicators and Emerging Markets database in DX database.</h4>
The chart shows that China and India, the two most important emerging economies, also have had positive growth in GDP in the past 25 years. It is now more than 25 years since both countries began their economic reform programs, and both countries have enjoyed very strong economic growth over this period.
<h2>Verdict</h2>
The statement that Australia has had 25 years of continuous economic growth is mostly correct.
The statement that Australia is the only country in the world to have had such a period of unbroken growth is incorrect. But it’s true Australia is the only one out of 34 OECD member countries to have had positive economic growth since 1991.  
Mark Crosby is associate professor of Economics, Melbourne Business School and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/mark-crosby-444" target="_blank">here</a>.
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