<p>Property developer One Living, backed by former Macquarie banker turned investment manager Chris Green’s investment firm, has unveiled plans to bring more institutional capital into housing to help address the national supply crisis.</p>

<p>The New York-based investor has focused his firm, GreenPoint Partners, on addressing the supply shortage hitting middle market housing in Australia.</p>

<p>It is backing the new One Living business to develop more than 1000 units along the eastern seaboard. The new firm is starting with a development on Mona Vale Road, on the border of Mona Vale and Pymble, in Sydney’s Northern Beaches, with around 140 apartments planned. They are eyeing off more sites across the city.</p>

<p>With cost pressures rising in the industry, One Living’s model is to be a vertically integrated developer-builder, so it can respond directly to the housing gap by removing the cost inefficiencies embedded in traditional residential delivery.</p>

<p>“We are building a platform designed to operate at scale and starting in a market where there’s a clear need for quality, attainable housing,” One Living joint managing director Joseph Scuderi said.</p>

<p>“It’s that missing middle – it’s that attainable end of housing… that’s what most Australians invest into and what Australians can actually afford.”</p>

<p><img alt="Mona Vale" data-entity-type="file" data-entity-uuid="798dfa93-4941-4db6-a696-31e9dc18e81c" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%202.31.50%E2%80%AFPM.png?VersionId=mKBqi5C_DmeiXS.AtJkcR8LQIxqCqmFi" /></p>

<p>GreenPoint Partners brings years of experience assembling and scaling real estate operating businesses across major markets. And Green sees a big opportunity in Australia.</p>

<p>“For its size, sophistication and importance to the community, Australia’s living sector has remained largely under-institutionalised, which represents significant opportunity,” Green said. “GreenPoint identified that gap, assembled the right team, and is backing One Living to build a platform that is aligned to market needs.”</p>

<p>Green said being a builder-developer would give the company the capacity and flexibility it required to deliver reasonably-priced homes.</p>

<p>“We want it to be at that attainable level; not super high end luxury but at that attainable level,” he said.</p>

<p><img alt="Mona Vale" data-entity-type="file" data-entity-uuid="74a5344a-4b26-4d4a-ada3-056b1220be77" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%202.32.15%E2%80%AFPM.png?VersionId=vY8hXHO4reBMdO8ZXMWCNtGZJofUPQ3j" /></p>

<p>&nbsp;</p>

<p>One Living will undertake a component of affordable housing in its schemes, which it will own and operate, and it could also run build-to-rent on some sites.</p>

<p>Green praised local policy settings.</p>

<p>“The NSW government is being very supportive, strategic and pragmatic in terms of how do we generate more supply of housing,” he said. “We think it’s actually positive for development and the bit that’s been lacking at that attainable level is that it’s lots of relatively small private developers, whereas we want to create an institutional platform.”</p>

<p>One Living is also&nbsp;looking at high-density projects and could take on more institutional funding in the future.</p>

<p>“The way we will be able to achieve economies of scale is through size,” Green added.</p>


Joel Robinson

One Living enters Sydney's new apartment market with Northern Beaches site acquisition

<p>It's been several years since there's been an opportunity to buy a brand new townhome in Melbourne's coastal suburb of Mordialloc. Even apartment developments in recent times have been few and far between in the area.</p>

<p>Local developer LDS Property identified the gap in new housing, securing a site on White Street, directly opposite&nbsp;Woodlands Golf Club Mordialloc. They've recently launched&nbsp;<a href="https://www.apartments.com.au/new-townhouses/wm-residences-mordialloc-102-white-street-mordialloc-vic-3195">WM Residences</a>, just 13 townhouses which they have already started building.</p>

<p>Projects by Buxton Director Heath Thompson, who is selling WM Residences, says the townhouses x that perfect middle ground be</p>

<p data-end="683" data-start="511">"Mordialloc residents have had limited options to downsize within the suburb, often forcing them to look elsewhere despite long-standing ties to the area," Thompson says.</p>

<p data-end="882" data-start="690">"With very little comparable new supply coming to market, projects like WM Residences are well placed, particularly as buyers look to capitalise on current conditions amid constrained supply."</p>

<p data-end="882" data-start="690">[smartcode_project:default project_id=134646 project_image_fid=6109]</p>

<p>The development, designed by regarded architecture firm&nbsp;<a href="https://www.apartments.com.au/architects/ewert-leaf">Ewert Leaf</a>,&nbsp;adopts a deliberately restrained architectural approach, focusing on simplicity, durability and liveability rather than overt design gestures.</p>

<p>The boutique scale is central to the offering. With only 13 three-bedroom residences, each home is configured to prioritise functional layouts and everyday use, supported by private terraces and secure two-car garages.</p>

<p>Ewert Leaf’s design response leans into a calm, neutral material palette. Interiors are defined by oak flooring, white walls and soft finishes, creating a consistent and understated backdrop. The approach avoids trend-driven detailing in favour of longevity, with an emphasis on natural light and spatial clarity.</p>

<p>[smartcode_project:default project_id=134646 project_image_fid=6110]</p>

<p>Beyond aesthetics, the homes are designed to meet contemporary performance expectations. Each residence targets a minimum 6-star energy rating, incorporating double glazing, comprehensive insulation and all-electric Bosch appliances.</p>

<p>The project’s location supports a walkable coastal lifestyle, sitting within close proximity to Mordialloc’s foreshore, Main Street retail strip and the train station. Local cafés and dining venues, including Suburbia Deli and Hendriks Café, are within a short walk, reinforcing the area’s established neighbourhood character.</p>

<p>[smartcode_project:default project_id=134646 project_image_fid=6116]</p>

<p data-end="247" data-is-last-node="" data-is-only-node="" data-start="0">While <a href="https://www.apartments.com.au/developments/mordialloc-vic-3195">Mordialloc</a> is often defined by its beach and pier, the project taps into other areas of day to day living, offering easy access to local food, casual dining and transport, rather than positioning itself purely as a lifestyle retreat.</p>

<p>WM Residences reflects a continued trend across Melbourne’s coastal suburbs towards smaller-scale, design-led townhouse developments, particularly on infill sites where proximity to amenity is already established.</p>

<p>With construction commenced prior to its market entry, the project aligns with a growing preference among buyers for developments with visible progress and defined delivery timeframes.</p>

<p>[smartcode_project_cta:default project_id=134646]</p>


WM Residences fills gap in Mordialloc townhouse market

<p>&nbsp;</p>

<p>Developer GURNER™ Group has revealed $1.65 billion in residential sales nationally across the 12 months to December 2025, driven largely by the continued momentum of its Docklands wellness-focused precinct, Elysium Fields.</p>

<p>The sales result was generated across seven projects in Victoria and New South Wales, headlined by Elysium Fields, GURNER™’s $2.75 billion mixed-use precinct planned for Harbour Esplanade in Docklands.</p>

<p>The project has recorded more than $500 million in sales across the first three towers, equating to around 580 apartments sold.</p>

<p>The first tower, Helios, has now sold out of its 240 private residences, with GURNER™ preparing to release a premium penthouse collection comprising 15 three-bedroom penthouses in coming weeks.</p>

<p>[smartcode_project:default project_id=144441 project_image_fid=370975]</p>

<p>Elysium Fields is being developed on the long-held 20,000 sqm Docklands site at 208-226 Harbour Esplanade, which had remained undeveloped for more than two decades prior to GURNER™ taking over the project around four years ago.</p>

<p>Construction has now commenced across four towers ranging between 18 and 30 storeys, with Hamilton Marino and Maxcon appointed as builders.</p>

<p>Once complete, the precinct is expected to comprise around 1,100 residences, alongside retail, hospitality and public realm uses integrated throughout the site.</p>

<p>[smartcode_project:default project_id=144441 project_image_fid=370981]</p>

<p>Designed by Fraser &amp; Partners in collaboration with GURNER™ Design House, the project has been positioned around the developer’s broader focus on wellness-led residential living.</p>

<p>“We don’t sell apartments. We create a true luxury lifestyle that simply doesn’t exist elsewhere in the market today,” Founder and Executive Chairman Tim Gurner said.</p>

<p>“To deliver that requires an extraordinary level of detail, coordination and discipline across multiple verticals, from design and hospitality through to wellness and service.”</p>

<p>“We’ve always believed that living extends far beyond the physical residence. It’s about how you feel the moment you arrive, how you live day-to-day, and the ecosystem that supports that.”<br />
[smartcode_project:default project_id=144441 project_image_fid=370977]</p>

<p>The project’s design places a heavy focus on landscaping, wellness amenities and biophilic design principles.</p>

<p>Plans include around 3,700 sqm of landscaped gardens and open space throughout the precinct, alongside a retail and dining offering spanning approximately 5,000 sqm.</p>

<p>The broader public realm strategy centres around what GURNER™ describes as the “Path of Life”, an urban forest and landscaped pedestrian environment intended to connect the various buildings and wellness spaces across the precinct.</p>

<p>The apartments themselves will incorporate a range of wellness-focused inclusions, including purified air and water systems, circadian lighting, antimicrobial surfaces, and optional in-home wellness upgrades.</p>

<p>[smartcode_project:default project_id=144441 project_image_fid=370980]</p>

<p>Gurner said the company’s experience through its Saint Haven wellness clubs had directly informed the residential offering now being incorporated into Elysium Fields.</p>

<p>“We’re seeing a clear global shift toward longevity, performance and proactive health,” Gurner said.</p>

<p>“Our role is to deliver that in a way that feels seamless, highly private and beautifully resolved within the environments we create.”</p>

<p>A large component of the wellness offering is planned through the resident amenity and health facilities proposed within the precinct.</p>

<p>That includes plans for bathing and recovery facilities spread throughout the towers, incorporating mineral pools, saunas, steam rooms, flotation therapy, red light therapy and wellness lounges.</p>

<p>The developer is also seeking approvals for what it describes as a “reverse ageing medical clinic” within the precinct.</p>

<p>[smartcode_project:default project_id=144441 project_image_fid=370978]</p>

<p>According to project information released by the group, the proposed facility would include cryotherapy, IV infusion therapy, infrared and dry saunas, PEMF beds, MRIs, DEXA scans, brain scans and blood analysis services.</p>

<p>Within the first tower, Helios, residents will also have access to a dedicated amenity offering known as the Sky Private Club.</p>

<p>The upper 15 levels of the building will include private lounges, dining spaces, rooftop amenities and optional private wellness studios integrated within residences.</p>

<p>The Helios tower itself comprises 260 apartments ranging between 60 sqm and 300 sqm, including a collection of penthouses.</p>

<p>That includes a planned two-storey penthouse spanning around 600 sqm with uninterrupted bay views.</p>

<p>The Elysium Fields precinct is being delivered in partnership with Digital Harbour Holdings, a consortium that includes the Liberman family, which controls the development rights across the Docklands site.</p>

<p>[smartcode_project:default project_id=144441 project_image_fid=370979]</p>

<p>The sales result comes as GURNER™ continues expanding its national development pipeline beyond Victoria.</p>

<p>“We have a strong pipeline across Australia and are now focused on scaling into key markets including New South Wales and Queensland, while continuing to build on our Melbourne base,” Gurner said.</p>

<p>“We currently have more than $3 billion in the market, growing to over $5 billion by October, and expect to materially outperform last year in the 2026 calendar year.”</p>

<p>The result also reflects the continued strength of the upper-end apartment market in Melbourne, particularly for owner-occupier-focused product with large-scale amenity and lifestyle offerings.</p>

<p>[smartcode_project_cta:default project_id=144441]</p>


Record result anchored by the Group’s “utopian” Elysium Fields precinct – defying market headwinds in Docklands.

Elysium Fields drive Gurner to $1.65 billion in apartment sales over 2025

<p>National Australia Bank (NAB) will fund <a href="https://www.apartments.com.au/new-apartments/palmera-residences-gold-coast-18-garfield-terrace-surfers-paradise-qld-4217">Palmera</a>, a $1 billion, 52-level luxury residential tower being developed by Central Equity in one of the Gold Coast’s most tightly held coastal locations at Northcliffe.</p>

<p>The project, launched recently by <a href="https://www.apartments.com.au/developers/central-equity">Central Equity</a>, one of Victoria’s largest private residential developers, comes at a time when construction funding for large residential developments has become increasingly competitive as lenders tighten exposure to the sector.</p>

<p>Multiplex has been appointed the builder, and construction is now underway.</p>

<p>[smartcode_project:default project_id=108274 project_image_fid=365784]</p>

<p>Since its first project, Central Equity has delivered more than 85 residential developments with a combined end value exceeding $8 billion.</p>

<p>Palmera reflects Central Equity’s growing focus on the Gold Coast luxury apartment market and continues a relationship between Central Equity and NAB that dates back to the late 1980s, when the bank funded one of Melbourne’s earliest inner-city residential towers at a time when high-rise apartment living in the CBD was largely unproven.</p>

<p>“NAB’s funding of Central Equity’s $36 million CBD development in the late 1980’s to the financing of the billion-dollar tower today highlights the long-term relationship between the two organisations in delivering major residential projects” said Central Equity Founder and Chairman Eddie Kutner.</p>

<p>He said NAB’s early support was instrumental in helping establish the company’s development model.</p>

<p>“When we commenced our first residential tower in the late 1980s the concept of funding off-the-plan apartments was still largely untested in Australia,” Kutner said.</p>

<p>“NAB recognised the opportunity early and supported the project when others were uncertain. That relationship has now continued for more than 37 years across many developments.”</p>

<p>[smartcode_project:default project_id=108274 project_image_fid=365771]</p>

<p>Central Equity was established in 1987 when Melbourne’s CBD and Southbank precinct were still dominated by warehouses and commercial buildings. Fewer than 100 residents lived in Southbank at the time, and large-scale residential development in the inner city was not widely considered.</p>

<p>Recognising changing demographics and lifestyle preferences, the company began developing high-rise residential projects designed to bring permanent residents into the city centre.</p>

<p>Central Equity has provided accommodation for approximately 40,000 residents across Melbourne’s CBD and Southbank, while also incorporating supporting infrastructure including essential lifestyle facilities like retail spaces, childcare facilities and neighbourhood activity centres.</p>

<p>Central Equity has spent many years assembling the Palmera development site on the corner of Garfield Terrace and Frederick Street in Northcliffe, creating a supersite of around 3,300 sqm.</p>

<p>The developer said the Palmera apartment tower reflects its long-term view of the Gold Coast as a growing and increasingly diversified economy.</p>

<p>[smartcode_project:default project_id=108274 project_image_fid=365768]</p>

<p>Supported by infrastructure including the light rail network, major road upgrades expanded education, hospital and medical facilities and continued expansion at the Gold Coast Airport with more international and domestic flights.</p>

<p>Positioned in the tightly held Northcliffe precinct, the 52-level tower will deliver 347 apartments, targeting buyers seeking a high-end coastal lifestyle, from downsizers to interstate investors.</p>

<p>Designed by Marchese Partners with interiors by DBI, Palmera has been conceived as a next-generation residential offering, featuring a collection of oversized apartments, with premium three-bedroom residences offering sweeping northern views stretching from Surfers Paradise through to Burleigh Heads.</p>

<p>[smartcode_project_cta:default project_id=108274]</p>


NAB funds $1 billion Surfers Paradise apartment development, Palmera

<p>Two years after completing one of the newest developments in North Sydney, developer <a href="https://www.apartments.com.au/developers/aqualand-australia">Aqualand</a> is turning its attention to the rapidly evolving St Leonards apartment market.</p>

<p>The developer, which completed AURA by Aqualand on North Sydney's Walker Street, has lodged plans for a 5,918 sqm site at <a href="https://www.apartments.com.au/new-apartments/33-37-herbert-street-st-leonards-nsw-2065">33-37 Herbert Street, St Leonards,</a> seeking approval for a pair of residential towers rising above a shared podium opposite Royal North Shore Hospital.</p>

<p>The proposal forms part of the broader transformation underway across the St Leonards-Crows Nest precinct, where former industrial and commercial sites are increasingly being redeveloped into high-density mixed-use projects tied to major transport infrastructure.</p>

<p data-end="792" data-start="529"><img alt="Aqualand" data-entity-type="file" data-entity-uuid="2cc428cf-fe70-4cac-9cd5-264ad53af62c" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%209.51.56%E2%80%AFAM.png?VersionId=otKSnHtbjAvAddOnovyXQMgcAwE6DMe1" /></p>

<p data-end="1040" data-start="794">According to the planning documents, the site sits “within the St Leonards–Crows Nest Strategic Centre, identified by the NSW Government as a key area for accommodating future jobs and housing across Sydney.”</p>

<p>The proposal has been designed by fjcstudio, formerly FJMT Studio, and is being progressed through the State Significant Development pathway due to its scale and affordable housing provision.</p>

<p>The scheme would comprise 413 apartments, including 46 affordable housing units, alongside retail and commercial uses fronting Herbert Street. The project would also include communal open space, landscaping, a swimming pool, gymnasium, children’s play areas and podium-level resident amenities.</p>

<p>Planning documents show the development would consist of a part-13, part-39 storey tower form positioned above a four-storey podium.</p>

<p>“The development comprises a unified podium that activates the street interface, and two setback towers to accommodate new housing supply while maintaining an appropriate human scale at ground level,” fjcstudio noted in its Design Report.</p>

<p>The northern and southern towers have been shaped to respond to the surrounding skyline while also limiting overshadowing impacts to nearby public open space, particularly Talus Reserve.</p>

<p>The design report said the differing tower heights were intended to “contribute to a varied skyline while responding to the surrounding built form context and solar access considerations.”</p>

<p><img alt="Aqualand" data-entity-type="file" data-entity-uuid="36da62dc-ff9e-41f2-a7e3-7be38373751c" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%209.51.45%E2%80%AFAM_0.png?VersionId=Mo6Rp2r.XRLTzIfg_PEEpw8NepDH8UBs" /></p>

<p>The site sits directly opposite Royal North Shore Hospital and within walking distance of both St Leonards Station and the new Crows Nest Metro station.</p>

<p>While the site itself sits just outside the formal Crows Nest Transport Oriented Development boundary, the planning documents repeatedly reference its alignment with the broader TOD objectives reshaping the Lower North Shore.</p>

<p>“The site is located adjacent to St Leonards Station and in close proximity to Crows Nest Metro which is within the Crows Nest Transit Orientated Development Accelerated Precinct which has been identified by the NSW Government to support housing delivery,” the Design Verification Statement noted.</p>

<p>According to fjcstudio, the project has been designed to respond to the broader transition occurring across St Leonards, where increasing residential density is being concentrated around transport infrastructure and employment hubs.</p>

<p>“The broader precinct is undergoing significant change, with a mix of existing mid-rise buildings and newer high-density developments,” the report stated.</p>

<p>“Recent and approved projects indicate a consistent shift toward taller built form, typically organised as tower-and-podium typologies with more active ground levels.”</p>

<p>The proposal includes close to 6,000 sqm of retail and commercial space across the ground floor and podium levels, designed to create a more activated street edge along Herbert Street.</p>

<p>Aqualand’s plans would also introduce a landscaped podium shared between the two towers, with communal open space in the form of a podium rooftop designed to support resident interaction and improve urban greening outcomes. The scheme would also introduce pocket parks at the northern and southern ends of the site, including a landscaped area at the corner of Herbert and Ella streets designed to improve pedestrian amenity and soften the streetscape.</p>

<p>&nbsp;</p>

<p>The proposal is being progressed through the NSW Government’s Housing Delivery Authority pathway, which was introduced to accelerate housing supply across the state. The application was declared State Significant Development in April 2025 following an expression of interest process.</p>

<p><img alt="Aqualand" data-entity-type="file" data-entity-uuid="faf6d97d-2671-454f-b85a-fe1c6a7be608" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%209.51.49%E2%80%AFAM.png?VersionId=diVd28OBVr5.YV.7prrOz.uAanwwwm7a" /></p>

<p>St Leonards has been particularly active with new developments in recent weeks. Developer SP Setia’s <a href="https://www.apartments.com.au/news/nsw/first-look-sp-setia-targets-st-leonards-skyline-with-40-storey-tod-tower">plans for a new 42-storey tower</a> recently went on exhibition through the same pathway, while <a href="https://www.apartments.com.au/news/nsw/first-look-stockland-plans-52-storey-538-apartment-st-leonards-tower">Stockland’s 52-storey tower proposal</a> was also recently unveiled.</p>

<p>Aside from the St Leonards project, which is expected to take around nine months to move through the approvals process ahead of a potential 2027 launch, Aqualand is also preparing to launch Boronia, a new apartment project in Roseville comprising around 111 apartments on Larkin Street.</p>

<p>The developer also has approvals in place for the next stage of the Barangaroo precinct, which will feature new residential, retail, hospitality and community uses, alongside a new metro entry across the five-hectare site.</p>

<p>More than 50 new retail destinations are planned for Central Barangaroo, alongside a 270-metre-long boulevard connecting Hickson Park to Nawi Cove. Together with Harbour Park, more than 50 per cent of the precinct will comprise public open space and parkland.</p>


First look: Aqualand joins St Leonards apartment party

Reserve Bank

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<p>GUEST OBSERVER</p>
<p>The RBA has downwardly revised its near term growth forecasts as well as shaving a bit from their medium term projections. Inflation forecasts remain intact and both headline and core inflation are expected to gradually rise from here.</p>
<p>The RBA see the unemployment rate tracking sideways over 2017 at 5 3⁄4 percent.</p>
<p>We have the RBA cash rate on hold at 1.5 percent throughout 2017.</p>
<p>The RBA’s updated forecasts are further evidence that Governor Lowe doesn’t intend to take the cash rate lower. The Bank has essentially looked through the QIII contraction in the economy and has forecast decent growth outcomes over the next two years. In addition, headline inflation is forecast to return to target over 2017. As such, the Bank retains a neutral bias despite there being no forward guidance in today’s Statement on Monetary Policy (SMP).</p>
<p>Looking at the Bank’s through the year forecasts implies that the pace of growth picks up from 2 percent/pa mid-2017 to an above-trend 3 percent by year end. It is expected to remain above trend over the rest of the forecast period (mid-2019).</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%201.33.12%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%201.33.12%20PM.png" alt=""></p>
<p> </p>
<p>LNG production, infrastructure spend and a lift in non-mining investment are expected to push growth higher. The Australian economy would be deemed to be in good health if these outcomes can be achieved. While we think they are possible, they look a best case scenario and the risk is that growth outcomes undershoot the Bank’s forecasts. The Bank has upgraded its global growth forecasts on fiscal stimulus in the US.</p>
<p>Inflation is forecast to gradually rise. But core inflation is not expected to get back to target until 2018. The RBA sees headline inflation rising a little quicker because of price rises in fuel and tobacco. These forecasts look about right to us, but like the growth forecasts, the risks are skewed to the downside.</p>
<p>The Bank retains a temperate assessment on the labour market. Employment growth is forecast to basically run at a level that would see the unemployment rate crab sideways at 5 3⁄4 percent. Normally we would expect the unemployment rate to be falling if growth is running above trend. The GDP and unemployment rate forecasts are reconciled by the big contribution to growth that will come from LNG production which is not labour intensive and also a possible decline in underemployment.</p>
<p>The RBA has confused us a little with their assessment on non-mining business investment. In Lowe’s Statement on Tuesday, the Governor optimistically stated that, “some further pick-up in non-mining business investment is also expected.” The word “further” stood out to us because in our view we are yet to observe a meaningful lift in private non-mining investment. Today the RBA agreed with us by nothing that, “non- mining business investment has been weak for some time, despite the support provided by low interest rates and the earlier depreciation of the exchange rate. The outlook for non-mining business investment is relatively subdued in the near term”. We will await further clarity from Martin Place on this one.</p>
<p>Rate cuts look off the table for now given the strong growth in dwelling prices (largely Sydney and Melbourne) and the Bank’s relatively upbeat assessment of the economic outlook. Despite below target inflation, concerns around the further build-up of household debt and strong dwelling price growth mean that it would take a shift in the activity data for policy easing to come back onto the table. In our view, trends in the labour market are the one to watch. It would take a loss of momentum in job creation for Lowe to entertain the idea of taking the policy rate lower. We see rates on hold in 2017.</p>
<p>The risk, however, sits with easing while ever inflation is below target. </p>
<p><strong>RBA Key Views</strong></p>
<p>Terms-of-Trade. The terms of trade are expected to decline gradually over 2017, but are expected to remain above their recent trough and be higher than previously forecast.</p>
<p>Unemployment rate. Unemployment rate to basically trend sideways at 53⁄4% in 2017. But it is expected to edge lower over the forecast period.</p>
<p>World growth. Growth forecasts for 2017 and 2018 have been revised a little higher reflecting the recent better data and the prospect of more stimulatory fiscal policy in the US.</p>
<p>Inflation. Inflationary pressures to be benign. Forecasts remained unchanged from November SMP. Inflation to gradually rise. But core inflation not expected to get back to target until 2018. Headline inflation rising a little quicker because of price rises in fuel and tobacco</p>
<p>Wages. Gradual recovery in wage growth from late 2017 assumes that some of the factors that have been weighing on wages will gradually dissipate.</p>
<p>Housing construction. The large amount of work in the pipeline should continue to support a high level of dwelling investment for the foreseeable future.</p>
<p>Dwelling Prices. Conditions in the housing market in Sydney and Melbourne strengthened over the second half of 2016, but they have remained relatively subdued elsewhere. Inflation in rents has eased to multi-decade lows.</p>
<p>Australia’s GDP. The pace of growth picks up from 2%pa mid- 2017 to an above-trend 3% by year end. Its forecasts to remain above trend throughout the rest of the forecast period. .</p>
<p>Fiscal policy. Little change to the forecasts of the consolidated deficit in 2016/17 of around 3 per cent of GDP which implies a modest stimulus to growth.</p>
<p>Oil prices. Higher oil prices should oil are expected to contribute to inflationary pressures in the period ahead. .</p>
<p><strong>CBA’s View</strong></p>
<p>The terms of trade are expected to drift lower over 2017 due to a pullback in commodity prices. But we have seen the low point for the cycle.</p>
<p>The unemployment should grind a little lower over 2017. Some job losses still to come out of the resources sector as the last of the major projects finish. NSW and Vic to have the strongest labour markets.</p>
<p>Global growth to lift a little to around 3 1⁄4 percent in 2017. Advanced economies, like the US &amp; Canada, likely to have above trend growth. China growth to firm at around 6.8 percent. UK economy to slow under Brexit impact and Eurozone growth to be similar to 2016.</p>
<p>Underlying CPI to remain below the RBA target band (2-3 percent) in 2017. Headline inflation to within the target band in H1 2017. Weak wages growth is keeping a lid on domestic inflation while tradables inflation is weak due the AUD holding up in the mid-USD0.70s.</p>
<p>Wages growth remains feeble, even with firmer commodity prices. Wages growth unlikely to materially lift labour market underutilisation falls. Job security concerns remain elevated and are also keeping a lid on wages growth.</p>
<p>Building approvals have peaked for the cycle and will continue to taper off over 2017. There is a significant pipeline of dwellings yet-to- commenced and completed. Commencements to be a robust 210k in 2017, slightly down from 220k in 2016. Alterations and additions spending likely to gradually rise.</p>
<p>Dwelling price growth is expected to moderate over 2017. Varied price growth across different regions to continue. Affordability remains a significant problem for low and middle income households. An increase in supply to stem dwelling price growth.</p>
<p>We expect the economy to grow by 2.4 percent in 2016 and 2.6 percent in 2017. Net exports, public investment and household spending to lift growth. This is partly offset by a drag from business investment.</p>
<p>Fiscal pressures to remain on Federal Budget and reform is slow and elongated. Public capex to lift. S&amp;P have put Australia’s AAA credit rating on negative outlook due to budget deficits.</p>
<p>Oil prices to drift a little lower which supports consumer spending. But because Australia is a net energy exporter, lower oil prices are a negative for terms of trade. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%201.31.44%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%201.31.44%20PM.png" alt="" width="750" height="273"></p>
<p class="p1"><span class="s1"><em>Gareth Aird is economist at Commonwealth Bank and can be contacted </em><a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905"><span class="s2"><em>here</em></span></a><em>.</em></span></p>
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jchancellor-FAypfDUnLy

Rate cuts off the table given strong growth in dwelling prices: Gareth Aird

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<p>The following charts describes what the Reserve Bank of Australia knows about Australia's economy especially GDP growth and inflation:</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/06/RBA%20CHART-1.jpg" target="_blank">Click to enlarge</a></p>
<p><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/2017/01/06/RBA%20CHART-1.jpg" alt=""></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/06/RBA%20CHART-2.jpg" target="_blank">Click to enlarge</a></p>
<p><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/2017/01/06/RBA%20CHART-2.jpg" alt=""></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/06/RBA%20CHART-3.jpg" target="_blank">Click to enlarge</a></p>
<p><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/2017/01/06/RBA%20CHART-3.jpg" alt=""></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/06/RBA%20CHART-4.jpg" target="_blank">Click to enlarge</a></p>
<p><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/2017/01/06/RBA%20CHART-4.jpg" alt=""></p>
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j.ballantyne1990-6AQqhLzZaK

RBA's January chart pack gives insight to Australian GDP growth and inflation

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<h3 class="post-title entry-title"><span style="color: #333333; font-family: Tahoma, Helvetica, Arial, sans-serif; font-size: 12px;">It's become traditional at this time of year for the media to mention all the potential gloom and risks facing the economy - the auto assembly industry shutting down is an old favourite, and resources construction declining, of course.</span></h3>
<p>Thing is, we've known about these issues for aeons now.  </p>
<p>What is rarely mentioned is that if the all of the downside events do play out the declining Aussie dollar would bear the brunt of the adjustment, quickly declining to 40 to 50 cents.</p>
<p>Given that the Reserve Bank seems unwilling to cut interest rates further, a strong increase in business investment over the next couple of years admittedly doesn't seem all that probable. </p>
<p>Regardless, nothing is all good or all bad, and here are a few possible upside risks for the economy.</p>
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<p><span style="text-decoration: underline;"><strong>1 - Manufacturing jobs increase </strong></span></p>
<p>The car industry will see some manufacturing jobs go this year. Still, manufacturing employment soared by +102,000 last year, and the PMI gauge is in positive territory too. Any more to come where this came from with the lower dollar?</p>
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<div id="post-body-153697409885239923" class="post-body entry-content"><a href="https://www.propertyobserver.com.au/images/2017/01/09/A2.jpg" target="_blank">Click to enlarge</a></div>
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<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/2017/01/09/A2.jpg" alt=""><br><span><span><br></span></span><span><span><strong><span style="text-decoration: underline;">2 - Unemployment rate drops towards 4 per cent (&amp; wages breakout)</span></strong></span></span><br><span><br></span><span>The unemployment rate has declined from 6.3 percent to 5.7 percent at the latest reading. A sharp decline towards 4 per cent isn't in anyone's base case, but it's not out of the question either according to the Reserve Bank's modelling. </span>
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<span><a href="https://www.propertyobserver.com.au/images/2017/01/09/RBA1.jpg" target="_blank">Click to enlarge</a><br></span><br><div class="separator"><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/2017/01/09/RBA1.jpg" alt=""></div>
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<div><span><strong><span style="text-decoration: underline;">3 - Mining investment bust ends</span></strong></span></div>
<div> </div>
<div>Commodity prices soared by 45 percent last year, and bulk commodities ripped higher by 145 percent, so it wouldn't be a huge surprise if the nadir is in sooner than expected, possibly before the calendar year is out.   </div>
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<div><strong><span style="text-decoration: underline;">4 - LNG price increases 50pc</span></strong></div>
<div><span> </span></div>
<div>LNG export volumes are forecast by Treasury to triple between 2015 and 2021. </div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/01/09/RBA3.jpg" target="_blank">Click to enlarge</a></div>
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<div><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/2017/01/09/RBA3.jpg" alt=""></div>
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<div>The Henry Hub natural gas spot prices is up by more than 75 percent from one year ago, and there could be more to come yet as oil prices rebound. </div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/01/09/LNG.jpg" target="_blank">Click to enlarge</a></div>
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<div><span><strong><span style="text-decoration: underline;">5 - Property prices rise 12pc in 2017, unleashing a wealth effect</span></strong></span></div>
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<div><span> </span></div>
</div>
<div>
<div>SQM Research see strong price gains nationally as possible, with prices in Sydney to rise by as much as 18 percent.</div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/01/09/unnamed.png" target="_blank">Click to enlarge</a></div>
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<div><img src="https://www.urban.com.au/images/2017/01/09/unnamed.png" alt=""></div>
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<div><span><em><span style="text-decoration: underline;">Source: SQM Research</span></em></span></div>
<div>
<div><span> </span></div>
<div>The wealth effect on household expenditure doesn't seem all that likely, but stranger things have happened, especially with household wealth passing a record $9 trillion last year.<br><br>
</div>
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<div><span><strong><span style="text-decoration: underline;">6 - Infrastructure booms</span></strong></span></div>
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<div> </div>
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<div>
<div>The NSW state government has zero net debt for the first time on record on the back of the biggest stamp duty boom in Australia's history, which should fund some serious infrastructure investment. </div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/01/09/NSW.jpg" target="_blank">Click to enlarge</a></div>
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<div><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/2017/01/09/NSW.jpg" alt=""></div>
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<div class="separator"> </div>
<div><span>Nationally, an infrastructure boom could be underway...</span></div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/01/09/BORAL2.jpg" target="_blank"><span>Click to enlarge</span></a></div>
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<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/2017/01/09/BORAL2.jpg" alt=""><br><br>
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<div><span><strong><span style="text-decoration: underline;">7 - China unleashes its capital account</span></strong></span></div>
<div><span> </span></div>
<div>
<div>China has a rapidly urbanising population of 1.4 billion. If the capital account ever gets unleashed to buy international assets in earnest... well, there are only 24 million of us...</div>
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<div class="separator"><a href="https://www.propertyobserver.com.au/images/2017/01/09/FIRB.jpg" target="_blank">Click to enlarge</a></div>
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<div class="separator"><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/2017/01/09/FIRB.jpg" alt=""></div>
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<div>
<strong><span style="text-decoration: underline;">8 - Tourism &amp; education boom</span></strong><br><strong><span style="text-decoration: underline;"><br></span></strong>Tourism and international student arrivals are already booming, and arrivals could rise 10 to 15 per cent over the next year following a streamlining of student visa rules, helping to send annual population growth back towards 450,000 per annum. Chinese visitor spend is also already exploding. <br><br><strong><span style="text-decoration: underline;">9 - Global growth accelerates, Australian GDP to above 5 percent</span></strong>
</div>
<div> </div>
<div>The Trump victory becomes a global turning point, and a combination of expansionary policy overseas and a revival of the animal spirits sees Australia's GDP growth accelerate to above 5 percent.</div>
<div class="separator"> </div>
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<div><strong><span style="text-decoration: underline;">The wrap</span></strong></div>
<div> </div>
<div>We won't see all of these unfold of course, but four or five of them could easily play out. </div>
<div> </div>
<div><em><span>PETE WARGENT </span>is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>. </em></div>
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pwargent-M4siyDbqQY

Nine upside risks to the Australian economy in 2017: Pete Wargent

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<p>Reserve Bank Governor Philip Lowe December 2016 RBA statement.</p>
<div>
<div class="rss-mr-content">
<p>At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.</p>
<p>The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year. Economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets, although headline inflation rates have increased recently. Globally, the outlook for inflation is more balanced than it has been for some time.</p>
<p>Commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income.</p>
<p>Financial markets are functioning effectively. Government bond yields have risen further with the adjustment having been orderly. Funding costs for some borrowers have also risen, but remain low. Globally, monetary policy remains remarkably accommodative.</p>
<p>In Australia, the economy is continuing its transition following the mining investment boom. Some slowing in the year-ended growth rate is likely, before it picks up again. Further increases in exports of resources are expected as completed projects come on line. The outlook for business investment remains subdued, although measures of business sentiment remain above average.</p>
<p>Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although some measures of labour underutilisation are little changed. There continues to be considerable variation in employment outcomes across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.</p>
<p>Inflation remains quite low. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels.</p>
<p>Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.</p>
<p>Conditions in the housing market have strengthened overall, although they vary considerably around the country. In some markets, prices are rising briskly, while in others they are declining. Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago. Supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.</p>
<p>Taking account of the available information, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.</p>
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po-LsXgBTHBmX

Cautious approach by lenders noted by Governor Philip Lowe December 2016 RBA statement

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<p>GUEST OBSERVER</p>
<p>Australia has a new “two-speed” economy that comprises: (i) NSW and Victoria (driven largely by Sydney and Melbourne); and (ii) the rest of Australia.</p>
<p>The size and relative strength of the NSW and Victorian economies means that economic data presented at the national level is masking weakness throughout the rest of Australia.</p>
<p>Economic activity in NSW and Victoria, along with strong dwelling price growth in Sydney and Melbourne, is likely to see the RBA sit on the sidelines. But the rest of Australia could probably do with more policy easing. </p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.22.22%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.22.22%20AM.png" alt=""></p>
<p>During the mining investment boom it was fashionable to talk about Australia’s “two- speed” economy. Surging commodity prices drove a spectacular lift in activity in the resources sector that sent the WA, QLD and NT economies into full blown growth mode.</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.23.31%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.23.31%20AM.png" alt=""></p>
<p>Meanwhile, relatively high interest rates (compared to other advanced economies) and a strong AUD weighed heavily on the rest of Australia. As such, the term “two-speed” was coined to characterise the Australian economy. </p>
<p>Fast forward some six years and Australia yet again finds itself with a “two-speed” economy. But this time it’s NSW and Victoria that are driving demand and employment growth while the rest of Australia is feeling the pinch (chart 1). In fact, it’s largely Sydney and Melbourne propping up national outcomes.</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.24.46%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.24.46%20AM.png" alt=""></p>
<p>Capacity utilisation is high in Australia’s two largest cities and demand growth is strong, courtesy of incredibly low interest rates. As a result, the NSW and Victorian economies have performed much better than the rest of Australia. </p>
<p>The big influence that NSW and Victoria have on the national figures means that pretty soft conditions throughout the rest of Australia have flown under the radar. In fact, economic outcomes in most regions of Australia are probably weaker than the national figures are suggesting unless you’re in Sydney or Melbourne. There are some exceptions, notably the ACT, but the generalisation holds for most places. </p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.25.47%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.25.47%20AM.png" alt=""></p>
<p>In this note we look at how the Australian economy is faring on the new “two-speed” basis. We slice the economy into two pieces – (i) NSW &amp; Victoria (termed VicNSW); and (ii) the rest of Australia (termed ROA). For dwelling prices that are published on a capital city basis we split the data between Sydney &amp; Melbourne (SydMel) and the remaining capital cities (ROA). Basically we are trying gauge how the rest of the Australian economy is going when you strip out NSW and Victoria (or Sydney and Melbourne). Of course, it can be argued that if you exclude the strongest parts then all you are left with is the weakest bits. But that is precisely the point. We want to better understand how the rest of the Australian economy is going outside of NSW and Victoria. </p>
<p>The numbers – setting the scene.</p>
<p>To understand what we are analysing it makes sense to briefly look at the size of our two pieces. By Gross State Product (GSP), which is effectively output, NSW is worth 32% of the national pie and Victoria 221⁄2%. So our VicNSW economy is worth 541⁄2% of the national economy which leaves the ROA comprising 451⁄2% (chart 2). By population, NSW has 32% of Australia’s residents and Victoria clocks in at 25%. This leaves 43% of people residing in the ROA. By capital city, 64% of people who live in NSW are in Sydney and 75% of Victoria’s residents are in Melbourne. For the ROA, 62% of people are in the capital cities (chart 3). So our VicNSW and ROA split </p>
<p>Population growth</p>
<p>We kick off with population growth because it heavily influences aggregate growth rates like output and employment. The latest figures show that in the year to QI 2016, population growth in VicNSW was running at 1.6% while it was growing at 1.1% for the ROA (charts 4 and 5). This is a material difference. It largely reflects two forces (i) interstate migration, in particular from WA and SA to Victoria due to a lack of job opportunities; and (ii) a significant proportion of overseas migrants settling in either Sydney or Melbourne.</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.26.53%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.26.53%20AM.png" alt=""></p>
<p>We need to keep the population growth rates of VicNSW and ROA in mind when looking at the economic data because the ROA is at a “handicap” of about 0.5%pa. Put another way, if the ROA is clocking in at 0.5%pa less than VicNSW for growth rates then performance per capita is effectively the same. We consider this to be important because differing population growth rates can give a misleading impression of economic performance. And per capita measures are a better barometer for gauging changes in living standards (see here). As our analysis shows, even accounting for the 0.5%pa difference in population growth, VicNSW is performing far better than the ROA. </p>
<p>State Final Demand</p>
<p>State Final Demand (SFD) is basically the sum of household and government expenditure and investment. It does not include exports and is therefore a better measure of demand (i.e. the total value of goods and services that are sold domestically) than GSP which includes exports.</p>
<p>The data shows that demand growth has been strong in VicNSW while it has been contracting throughout the ROA since mid-2014 (chart 6). The decline in SFD throughout the ROA reflects falling business investment and weak consumption growth. SFD has been hit particularly hard in the mining regions of WA, QLD and NT where investment in the resources sector has fallen sharply (chart 7). SFD growth has been tepid in SA and Tas leaving the ACT as the only bright spot. All up, demand growth in the ROA is consistent with very soft economies.</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.27.49%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.27.49%20AM.png" alt=""></p>
<p>Strong demand growth in VicNSW has been assisted by the positive wealth effect from rising dwelling prices. Higher asset prices have supported household consumption growth and dwelling investment in Australia’s two largest states. These two economies did not experience a downturn in mining investment and were able to benefit from both the fall in interest rates and the AUD. </p>
<p>Employment growth</p>
<p>There is plenty of evidence of our new “two-speed” economy in the labour market data. Jobs growth has slowed nationally. But the slowdown in jobs growth for the ROA has been sharp. In fact, there has been a contraction in the level of employment for the ROA through the year to October (chart 8). The number of people working in the ROA has fallen by 40k over the past year. The reality is that jobs growth in Australia has been driven by NSW and Victoria over the past year. For the ROA, the labour market is incredibly weak. In some states, conditions in the labour market are commensurate with a recession, particularly WA (chart 9). </p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.28.56%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.28.56%20AM.png" alt=""></p>
<p>Unemployment rate</p>
<p>The national unemployment rate has been trending down over the past year thanks to a decline in participation. But when we look at the economy through our “two- speed” lens it becomes apparent that the unemployment rate for the ROA has been stuck above 6% for two years (chart 10). It has basically trended sideways since mid-2015 while the unemployment rate has been falling in VicNSW. A disappointing story for the ROA which reflects a decline in the level of employment offset by a fall in participation. </p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.30.13%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.30.13%20AM.png" alt=""></p>
<p>Of course new jobs have been “created” in the jurisdictions that comprise ROA. But there have also been a lot of job losses, primarily in the mining and manufacturing sectors. To be fair to our Territories, the unemployment rate is low in the ACT and NT. But it’s well above the level associated with full employment (considered to be around 5%) in QLD, SA, WA and Tasmania (chart 11).</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.31.13%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.31.13%20AM.png" alt=""></p>
<p>In our view, the jobless rate for the ROA is likely to sit a touch above 6.0% over the next six months. It will continue to be a different story in VicNSW and we see the unemployment rate holding at around 51⁄4%. A big lift in public investment in NSW should keep the unemployment rate anchored around 5%. </p>
<p>It’s worth noting here that the unemployment rate is not proving as useful as usual to determine the amount of slack in the labour market. That’s because underemployment has bene rising while the unemployment rate has been falling due to the casualisation of the workforce (see here). As a result, wages growth has been easing.  </p>
<p>Business investment </p>
<p>Investment in VicNSW has trended up recently because of a lift in capex in NSW. But for the ROA business investment is down 17.2% through the year to QII 2016 (chart 12). The big decline has been driven by a huge fall in spending in QLD and WA because of the downturn in mining capex. There has also been a decline in capex in SA, Tas, and NT. For the ROA, only the ACT has posted a lift in business investment. This is a pretty poor result considering the stimulus that has come through from lower interest rates and a lower AUD. It should be a concern to policymakers.</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.32.13%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.32.13%20AM.png" alt=""></p>
<p>We expect business investment to continue to decline in the ROA as resource related projects are completed. The pace of the downturn, however, will start to slow as the worst of the downturn in mining capex is now behind us. The outlook for the non- mining part of the economy remains mixed. Our forecasts have non-mining capex lifting a little over 2016/17 which should see VicNSW post a further modest lift in business investment. </p>
<p>Dwelling Prices</p>
<p>National dwelling prices have risen substantially over the past 31⁄2 years. But the data shows that the lift in dwelling prices has largely been a Sydney and Melbourne story (chart 13). Demand for housing has been strong in Australia’s two largest cities, driven by a variety of factors which include: (i) interest rate cuts; (ii) a high level of investor demand; (ii) foreign investment; (iii) strong population growth; and (iv) some supply issues (particularly in Sydney).</p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.33.24%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.33.24%20AM.png" alt=""></p>
<p>For the ROA, however, dwelling price growth has been much more modest. In fact, dwelling prices have been falling for a few years in Perth (chart 14). Price rises in most of the other capital cities have been significantly lower than those in Sydney in Melbourne.</p>
<p>Commentators often make the mistake of generalising about dwelling prices in Australia and assume that the housing market is homogeneous. But the data shows that there is a significant divergence between price growth across Australia’s capital cities. </p>
<p>Building approvals</p>
<p>Strong dwelling price growth in Sydney and Melbourne has translated into a big lift in building approvals, particularly for apartments. For the ROA, however, building approvals have eased. On a rolling annual total basis dwelling approvals are down 7.1%pa for the ROA (chart 15). There is a bit of a multispeed story for approvals in the ROA. There has been a big fall in approvals in WA as vacancy rates rise and dwelling prices fall. Approvals in QLD have actually been quite strong and a big lift in apartment supply will hit the Brisbane market over the next few years. But when we look at the ROA as a collective, dwelling investment will cool. For VicNSW, however, there is still a lot of residential construction in the pipeline. The supply response is welcome given the big lift in dwelling prices. </p>
<p><a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.35.04%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.35.04%20AM.png" alt=""></p>
<p>Are there implications for monetary policy?</p>
<p>The RBA has recently shifted from an implied easing bias to a neutral tone. And market pricing for a rate cut has receded (chart 16). We think the RBA’s reluctance to ease policy further is generally related to the strength of the NSW and Victorian economies, in particular the exceptionally strong housing markets of Sydney and </p>
<p>Melbourne, and the lift in commodity prices. But the economic data suggests that the ROA could do with more policy easing.</p>
<p>Last week’s wages and employment data were weak. Normally, softness in the labour market and below-target inflation would imply that policy easing is forthcoming. A lower cash rate would, among other things, push the AUD down which would boost activity in Australia’s tradables sector. But clearly the RBA has a degree of discomfort at the strength of dwelling price growth in Sydney and Melbourne that has taken a near term rate cut off the table.</p>
<p>The lesson here is that the new “two-speed” economy means that current monetary policy settings are likely to be suboptimal for the ROA outside of Sydney and Melbourne. If the Sydney and Melbourne property markets stall or falter then policy easing will probably come back onto the agenda because the ROA could do with more stimulus. Of course that stimulus could also come via fiscal policy as we have previously argued (see here). But that’s a conversation for another day. </p>
<em><span>Gareth Aird is e</span><span>conomist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905" target="_blank">here</a>.</span></em>
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Our new two-speed economy – how does it look? CBA's Gareth Aird

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<p>GUEST OBSERVER</p>
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<p>The six month annualised growth rate in the Westpac- Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from +0.63 percent in September to +0.43 percent in October. </p>
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<p>The October reading is the third consecutive above trend result and follows fifteen months of persistent below trend reads. Although the growth rate has slowed a little, it is still a clear positive signal for the near term economic outlook. That signal is broadly consistent with Westpac’s forecast for growth to hold around a 3 percent pace over the course of this year and to lift to 3.3 percent in 2017.</p>
<p><span>Westpac has recently lifted its growth forecast for 2017 from 3 percent to 3.3 percent. That reflects the recent improvement in the terms of trade following the sustained boost in bulk commodity prices; a more confident assessment of the sustainability of the residential construction cycle and continuing evidence </span>of a strong outlook for growth in both resource and services exports.</p>
<p><span>The Leading Index growth rate has lifted over the last six months from a 0.34 percent below trend reading in May to the current 0.43% above trend result. </span></p>
<p><span>Offshore factors continue to dominate the sources of improvement in the Index. Of the net 77 basis points in improvement over the last six months, three of the four externally driven components contributed 90 basis points – commodity prices (45 basis points); US industrial production (25 basis points); and a steepening yield curve (25 basis points). The other component of the Index which is heavily influenced by global forces (ASX 200) actually subtracted 8 basis points from the overall movement over the six months. Of course we can expect another story in November following the post-election boom in the share market.</span></p>
<p><a href="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%2010.42.39%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p>Contributions from the domestic components of the Index were mixed over the six month period. Aggregate hours worked have improved, contributing 31 basis points to the lift. However, confidence measures have weighed on the Index. The Westpac-MI Consumer Expectations Index subtracted 14 basis points and the Westpac-MI Unemployment Expectations Index subtracted 13 basis points. A slowdown in dwelling approvals has also seen this component subtract 13 basis points.</p>
<p><span>The Reserve Bank Board next meets on December 6. There is virtually no chance of a policy move coming from that meeting. </span></p>
<p><span>The minutes from the November meeting signalled that the Bank is in a ‘wait and see’ mode. There was an air of uncertainty around both the housing market and the labour market. Considerable time will be required before the picture around both becomes clearer. From our perspective we expect stability in the housing market and some gradual pick-up in labour market conditions as stronger overall growth lifts it out of the current ‘slow patch’. </span></p>
<p><span>Consequently, we expect that a central bank, which must be questioning the effectiveness of yet more monetary stimulus, will be unlikely to see the need to adjust policy throughout the entire run of 2017. </span></p>
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<p><span><span><em>BILL EVANS</em></span><em> is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.</em></span></p>
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No chance of a policy move from RBA in December: Westpac's Bill Evans

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<p>GUEST OBSERVER</p>
<p>The ANZ/Roy Morgan consumer confidence rating rose by 0.3 percent to a 7-week high of 118.2 in the week to November 13.</p>
<p>Confidence remains above the average of 113.0 since 2014.</p>
<p><span>The minutes from the November 1 Board meeting shows that the Reserve Bank has become more alert to inflation risks. </span></p>
<p><span>The consumer confidence figures have implications for finance providers, retailers, and companies dependent on consumer and business spending. The Reserve Bank Board minutes provides guidance on interest rate settings. </span></p>
<p><span>What does it all mean?</span></p>
<p>Aussie consumers are unfazed by the US election result. Consumer confidence edged to 7-week highs in the latest week, no doubt boosted by strong gains on the Australian sharemarket late in the week. Interestingly respondents believe that the economic outlook over the medium term has improved.</p>
<p>There is a clear change in the Reserve Bank’s attitude to inflation. The latest Board minutes highlight the recent lift in commodity prices as well as perceptions that economic growth for advanced nations could exceed “potential growth”. As such the Reserve Bank concludes that “risks to the global inflation outlook were more balanced than they had been for some time.” Similarly Board members believe that Australian underlying inflation is “expected to return to more normal levels over time.”</p>
<p>Admittedly the Reserve Bank isn’t flashing warning signs on growth and inflation. But it should also be noted that in the period since the Reserve Bank Board meeting there has been the election of a new US President with growth-focussed economic policies. Metal and mining prices and bond yields have soared.</p>
<p><a href="/images/2016/11/15/Screen%20Shot%202016-11-15%20at%2012.51.52%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/15/Screen%20Shot%202016-11-15%20at%2012.51.52%20PM.png" alt=""></p>
<p>Simply interest rate settings are likely to remain stable until well into 2017.</p>
<p>What do the figures show?</p>
<p>Consumer confidence</p>
<p><span></span><span>The </span><span>ANZ/Roy Morgan consumer confidence rating </span><span>rose by 0.3 percent to 118.2 in the week to November 13.</span></p>
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<p><span>Confidence is up 2.0 percent over the year and above the average of 113.0 since 2014. </span></p>
<p><span>Two of five components of the index rose in the latest week.</span></p>
<ul>
<li> The estimate of family finances compared with a year ago was down from +11 to +10; </li>
<li> The estimate of family finances over the next year was down from +28 to +27;</li>
<li> Economic conditions over the next 12 months was up from +5 to+6;</li>
<li> Economic conditions over the next 5 years was up from +10 to +13;</li>
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<p><span></span><span>The measure of whether it was a good time to buy a major household item was </span><span>steady </span><span>at +35. </span><span></span><span>In addition the inflation expectation 2 years ahead rose from 3.8 percent to 3.9 percent.</span></p>
<p><span>Reserve Bank Board minutes:</span></p>
<p>“Members noted that assessing conditions in the housing market had become more complicated. While overall conditions had eased relative to 2015, some indicators had strengthened over the previous few months. In particular, housing price growth had picked up noticeably in Sydney and Melbourne. However, housing turnover and growth in housing credit both remained lower than a year earlier, consistent with the supervisory measures that had been taken to tighten lending standards and the more cautious attitude to lending in certain segments. In addition, a considerable supply of apartments is scheduled to come on stream over the next few years, particularly in the eastern capital cities, and growth in rents in the September quarter was the slowest for some decades.”</p>
<p>“Considerable uncertainty remained about the strength of labour market conditions and the implications for labour cost growth.”</p>
<p> “Members observed that some indicators of domestic inflation cost pressures, such as growth in the wage price index, had stabilised, albeit at low levels, and that underlying inflation was expected to return to more normal levels over time. The overall assessment was that the risks around the inflation forecast were broadly balanced.”</p>
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<div class="column">“Higher commodity prices and expectations that growth in the major advanced economies would exceed potential growth suggested that the risks to the global inflation outlook were more balanced than they had been for some time.”</div>
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<div class="column">“Members commenced their discussion of the domestic economy by considering how outcomes over recent years had differed from earlier forecasts, noting that the differences for key variables, including inflation, the unemployment rate and GDP growth, had been modest by historical standards.”</div>
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<div class="column">“Members noted that there was significant uncertainty about the outlook for consumption growth given uncertainty about households' expectations of their income growth and the influence of these expectations on their spending and saving decisions. This was particularly pronounced for households with significant debt.”</div>
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<div class="column">What is the importance of the economic data?</div>
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<div class="column">The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.<br><p>The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.</p>
<p>What are the implications for interest rates and investors?</p>
CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period.</div>
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<div class="column">Could the next move in interest rates be a rate hike rather than a rate cut? It’s important not to get too far ahead of ourselves. Inflation is still historically low. And while there is speculation of growth-focussed policies in the US, they haven’t been fleshed out. However you get a sense that inflation has reached an inflexion point. </div>
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<div class="column"><em>Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.</em></div>
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Happy Aussies, Reserve Bank on inflation watch: CommSec's Craig James

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<p>GUEST OBSERVER</p>
<p>The Westpac Melbourne Institute Index of Consumer Sentiment fell by 1.1 percent in November from 102.4 in October to 101.3 in November.</p>
<p>The Index continues to hold in a very tight band. Over the last six months the Index has held within the range of 99.1 to 102.4.</p>
<p>However if you compare the average level during this period with the average over the comparable six month period in 2015 there has been a clear lift in the Index of 4.7 percent.</p>
<p>Most of that improvement has been in the components of the Index that measure expectations which are up by an average of 7.3 percent on last year, whereas the components which measure current conditions have increased by only 1.2 percent.</p>
<p>Developments of note over the month have included weakness in the share market as investors dealt with the uncertainties around the US election (ASX down by 4.4 percent since the October survey); a spectacular surge in coking coal prices (spot prices are up around 150 percent since August); a disappointing jobs report (annual employment growth slowing to 1.4 percent); and an unchanged rate decision from the Reserve Bank.</p>
<p>Markets had been giving a decent chance to a November rate cut in earlier months so the fall in confidence amongst respondents holding a mortgage of 3.1 percent was somewhat understandable.</p>
<p>Although down 3.4 percent in the latest month the lift in confidence in Queensland – the ‘Sunshine and Coal’ state – over the year has been spectacular. The Queensland index has lifted by 15.9 percent since last November compared to falls in the other major states – NSW (–2.6 percent); Victoria (–5.4 percent) and WA (–7.2 percent).</p>
<p>Disappointment in the jobs market has been signalled in the Westpac Melbourne Institute Index of Unemployment Expectations. The Index rose by 1.4 percent from 138.2 to 140.2. It is now up by 2.9 percent over the last six months and slightly above the level a year ago. Recall that higher reads mean more consumers expect unemployment to rise over the next 12 months and hence mark a deterioration.</p>
<p>Four of the five components of the Index fell slightly in the month. Both measures of family finances were down a little – the sub- index tracking views on ‘family finances compared to year ago’ fell by 1.3 percent while the sub-index tracking expectations for finances over the next 12 months fell by 0.8 percent. ‘Economic conditions over the next 12 months’ increased by 0.6 percent but ‘economic conditions over the next 5 years’ fell by 1.4 percent.</p>
<p>In a slight disappointment for the outlook for Xmas spending there was a 2.4 percent fall in the ‘time to buy a major household item’ sub-index. </p>
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<p><span>In November we traditionally gauge respondents’ Christmas spending intentions. The question is “Do you think that you will spend less, about the same, or more on Christmas gifts compared to last year?” Last year we recorded a net balance – the proportion expecting to spend more minus the proportion expecting to spend less – of minus 13 percent. This year the net balance has declined to minus 20.1 percent. That is around the average since we started asking the question in 2009. That is a disappointing result given the promising improvement in spending plans in 2015. </span></p>
<p><span>Confidence in housing has also deteriorated. The ‘time to buy a dwelling’ index fell by 5.1 percent from 105.7 in October to 100.3 in November. We saw significant falls in NSW; Victoria; and Queensland. </span></p>
<p><span>Despite confidence in housing deteriorating house price expectations continue to rise. The Westpac Melbourne Institute Index of House Price Expectations increased by 1.3 percent to be up 23 percent on a year ago and reach its highest level since July 2015. </span></p>
<p><span>The Reserve Bank Board next meets on December 6. There is little chance of any change in rates at this meeting. The key issue is whether the Bank decides to further cut rates in 2017. Whereas lower than expected inflation was the driver of the two cuts in 2016 the decisions in 2017 will be determined </span>by developments in housing and labour markets.</p>
<p>Westpac is expecting economic growth and employment growth to lift in 2017 boosted by higher commodity prices; ongoing strong residential construction; and booming exports. While the pace of house price appreciation can be expected to slow the case for lower rates under those circumstances does not seem to be strong.</p>
<p><span>We expect rates to remain on hold in 2017. </span></p>
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<p><img src="/images/2016/11/09/Screen%20Shot%202016-11-09%20at%2010.44.56%20AM.png" alt="" width="745" height="259"></p>
<p><em>BILL EVANS</em><em> is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.</em></p>
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Consumer sentiment dips a little, Christmas spending plans disappoint: Westpac's Bill Evans

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<p>GUEST OBSERVER</p>
<p>Readers will appreciate the strong link between inflation (the Consumer Price Index), Reserve Bank interest rate policy, and the Australian dollar.</p>
<p>Inflation has been stubbornly low. The RBA has a 2-3 percent target, but they have been missing that on the low side for an extended period. Wednesday’s release saw a 0.7 percent rise for the September quarter, still only an annual rate of 1.3-1.5 percent (depending on which volatile components get stripped out).</p>
<p>Nonetheless, that was roughly in line with expectations and certainly not as bad as it could have been. Markets reacted accordingly, sending the Aussie dollar roughly half a cent higher. That means a Melbourne Cup day rate cut by the RBA looks less likely.</p>
<p>But the interesting wrinkle is that a higher dollar puts downward pressure on deflation. Plus, the RBA has been quite explicit about being concerned about too high a dollar for export competitiveness. So it might actually suggest a cut early next year. Welcome to the weird world of modern macroeconomics.</p>
<p>Housing supply is also top of mind, with September new home sales to be released this week. </p>
<p>Showing concern about affordability and supply, NSW Finance Minister Dominic Perrottet floated a plan to move away from stamp duty to a land-tax-based system. </p>
<p>Stamp duties are an economic nightmare of a tax. They distort the balance between supply and demand – meaning people often don’t move when they otherwise would. Nothing ruins an economist’s day more than a misallocation of resource caused by a stupid policy. Land taxes, by contrast, are far more efficient: creating far less distortion for the same amount of revenue generated.</p>
<p>More needs to happen on the supply side to help solve the housing affordability crisis. My McKell Institute plan would gradually phase out negative gearing other than for new properties – and would make for a nice complement to stamp duty reform.</p>
<h2>All eyes on the US… election</h2>
<p>In the US, consumer confidence figures released this week with the Conference Board’s index dropping to 98.6 in October, down sharply from 103.5 in September.</p>
<p>The reason that this is so consequential is that consumer spending accounts for more than two-thirds of US demand. Weaker consumer confidence means the prospect of lower economic growth. That in turn could affect the Fed’s decision-making.</p>
<p>Right now there is some difference of opinion among members of the Federal Open Market Committee (FOMC) that sets monetary policy. That may be in part due to some people campaigning for jobs in a Clinton White House – but it also partly reflects the genuinely complicated set of circumstances faced by advanced economies around the world.</p>
<p>Of course, the biggest news of all will come from the US Presidential election on November 8. Hillary Clinton appears almost certain to win – bookies are already paying out bets. There is also a strong possibility of Democrats winning back control of the Senate (the Upshot folks at the New York Times have it at 64% at the time of this writing).</p>
<p>That would be hugely consequential for the appointment of the next Supreme Court Justice. I will write more about this another time, but in a recent academic paper with Michaele Keane (from UNSW and Oxford) and Matthew Lilley (from Harvard) we showed that the ideological position and voting direction of a justice affects those of other justices. To give you a rough idea, we estimate that replacing the late Justice Scalia with Judge Merrick Garland (President Obama’s nominee) would make each other justice 5.1% more likely to vote liberal on a given case.</p>
<p>The US Presidential race is very important, but the Senate outcome matters, too.</p>
<p><em><span class="fn author-name">Richard Holden is p</span>rofessor of economics and PLuS Alliance Fellow, UNSW Australia and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">here</a>.</em></p>
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Melbourne Cup day rate cut less likely

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<p>GUEST OBSERVER</p>
<p>The Reserve Bank of Australia (RBA) sees housing finance as a smaller danger than in the past, judging by its latest Financial Stability Review, but we aren’t back to happy days just yet.</p>
<p>A number of economic indicators still show there’s cause for concern in the property market. </p>
<p>The review does acknowledge some problems in the apartment markets in Brisbane and Melbourne, but it sees major threats to the resilience of the Australian financial system overseas: examples are the rising debt levels in China, the low performance of European banks, the Brexit, and the impact of low milk prices on New Zealand farmers (with a possible feedback effect to Australian banks).</p>
<p>The review highlights Australian banks’ stronger capital buffers and compliance with toughened prudential standards from the Australian Prudential Regulation Authority (APRA). Because house price growth has moderated and mortgage borrowers are substantially ahead of their scheduled payments, the risk from mortgage lending is somewhat lower. </p>
<p>However, it’s surprising that the review doesn’t stress some aspects that are obvious.</p>
<p>What the RBA didn’t say</p>
<p>Although Australia hasn’t experienced the type of shock to the economy the United States did, due to the sub-prime mortgage crisis, there is substantial risk due to a large portion of mortgage loans being subject to interest-only periods of typically five years. Research for US home equity lines of credit finds the risk that people won’t be able to pay mortgage expenses increases substantially towards the end of flexible repayment terms, in particular during times of increasing lending standards.</p>
<p>Mortgage borrowers often have the expectation that they are able to refinance at the end of the interest-only term into a similar loan with a new interest-only period. However, this rollover is not possible in economic downturns when banks suddenly tighten their lending standards and and are likely to cut refinancing. </p>
<p>The RBA’s review shows that Australian banks have tightened their lending standards and have room for further tightening, but currently we do not see larger impacts on delinquencies. Current rates of people not being able to make their mortgage payments are low but may quickly change in an economic downturn. It’s also difficult to forecast whether this will change judging by medium- to long-term trends. </p>
<p>There might be other reasons why people might struggle to make their mortgage repayments. We have seen central banks following the European and US central banks in lowering interest rates and markets are expecting a reversal in the future. As most mortgage loans in Australia are at a floating rate this would imply that the largest relative payment increase will be to interest-only loans, should the RBA follow these leads. </p>
<p>In addition to this, Australia continues to enjoy low unemployment rates. This may change and lower the average income levels, putting more stress on people’s ability to pay mortgage loans.</p>
<p>Other risk factors at play in the property market</p>
<p>House prices continue to grow at annualised rates of approximately 10.2% and 9% in the largest cities Sydney and Melbourne. Housing price growth has slowed down, but prices are still increasing and new mortgages are underwritten based on house prices that are disengaged with national income levels. The growth rate continues to be above the historic averages and other developed economies that have experienced similar rate cuts.</p>
<p>Banks have relatively reduced interest only loans and high loan to valuation ratio (LVR) style loans. However, it is also clear that origins of high risk mortgages continue at relative high levels. </p>
<p>Australian Prudential Regulation, new mortgage loans for ADIs with greater than $1 bn of term loans</p>
<p>The fraction of interest-only loans has come down from 44% in December 2014 to 36% in March 2016. While this is a noticable decrease, more than a third of loans continue to be interest-only.</p>
<p>The RBA’s review argues that Australian mortgage borrowers are on average approximately two and a half years ahead of the scheduled payments. This argument does not take interest-only loans into account. </p>
<p>Prepayments are generally made into offset accounts which include a redraw facility and are generally used when new properties are used. In other words, these prepayments may be quickly depleted to increase leverage but also in situations when borrowers have difficulties making payments. </p>
<p>Dominance of housing loans on bank books</p>
<p>The largest problem of Australian banks remains the dominance of housing loans on bank books. Approximately 60% of total loans are for residential properties, and 36% of loans are business loans dominated by commercial real estate loans and loans to small and medium sized companies, which are often backed by the real estate of the business owner. </p>
<p>This over-concentration is the Achilles’ heel of the Australian banking system and hard to protect against. It’s a reflection of demand for bank loans in Australia and alternatives to bank lending available to large firms. </p>
<p>International financial markets may provide a solution, allowing banks to diversify and risk transfer via asset risk swaps. Unfortunately, these solutions have not been explored much in the past . The reluctance to do this is mostly based on the poor performance of overseas assets during the global financial crisis.</p>
<p>The RBA’s review further discusses the achievements under the Basel Committee on Banking Supervision to limit the systemic risk of financial institutions via increased regulation and higher capital buffers. The review further notes that no Australian bank is of global systemic importance. </p>
<p>However this is not a reason for complacency as the failure of one of the largest Australian banks would lead to a great shock to the Australian economy. A further concentration in the banking industry would make bank products more expensive than they would be in a competitive system.</p>
<p><em><span class="fn author-name"><span style="color: #333333;">Harry Scheule is a</span></span>ssociate professor, Finance, UTS Business School, University of Technology Sydney and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/harry-scheule-3573" target="_blank">here</a>.</em></p>
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