Perth’s new apartment market recorded its strongest quarter of sales since Q4 2021, with 412 apartments sold in Q1 2026 and a record quarterly sold value of $537 million, according to Urbis’ latest Apartment Essentials results.

Urbis said the March quarter result reflects strong, highly product‑specific demand across both ends of the market, from more attainable projects delivering at scale, through to premium stock being absorbed by equity‑rich downsizers.&nbsp;

David Cresp, Partner at Urbis, said the key story in Perth is not demand, it is the market’s ability to convert demand into delivered housing.&nbsp;

“This is the strongest sales quarter since Q4 2021, and it reinforces that demand in Perth is real and it’s local,” David Cresp said. “But the task now is delivery, turning that demand into projects that can actually be built and completed.”&nbsp;

[smartcode_project:default project_id=110291 project_image_fid=302785]

<h2>Affordable product leads, premium demand remains resilient</h2>

Sales in Q1 were led by more affordable projects, with The Boulevard (SKS Group) recording 115 sales in the quarter, the presentation noting this is only the second time a single project has surpassed 100 quarterly sales. The project was able to offer more affordable housing product right next to a train station.&nbsp;

Palmyra West (Finbar) also delivered strong results with 28 sales in Q1, following 84 sales in Q4, with an average price of under $800,000, underscoring depth of demand for well‑located, attainable new stock.&nbsp;

At the premium end, Urbis said downsizer demand is continuing, with the results highlighting Romeo (Applecross, Finbar) recording 75 sales and reaching almost 50% sold in one quarter.

Jual (Shenton Park, Celsius Property) also posted a strong quarter with 28 sales, reaching 39% sold in one quarter.

Urbis noted that Perth apartment demand is not speculative, not investor‑led, and not uniform, describing it as localised, often equity‑driven and highly product‑specific, a pattern reflected in the polarisation between strong “attainable” performers and premium downsizer product.&nbsp;

[smartcode_project:default project_id=148957 project_image_fid=364102]

<h2>Prices underpinned by costs, and the delivery risk is growing</h2>

Urbis said pricing pressure is cost not demand‑driven: construction costs and delivery risk are now a central constraint, with the results noting build costs remain elevated and volatile, and that energy, fuel and labour uncertainty weigh on feasibility.

David Cresp said a growing challenge for private Build‑to‑Sell developers is simply securing a builder in the current environment.

“Developers are really feeling the pressure from a building market that was operating at capacity and securing a builder is challenging,” David Cresp said, adding that even where a builder can be secured, “trying to get to the price that makes the development financially viable is incredibly challenging in the current market.”&nbsp;

Urbis’ broader WA commentary also notes that industry remains at or above capacity with lot and housing creation, and that many builders are limiting new sales to manage stretched workforces and fixed‑price contract pressures, conditions that flow directly into apartment feasibility and delivery timing.

[smartcode_project:default project_id=108869 project_image_fid=317905]

<h2>Supply: improving later, but still constrained, and Perth lags eastern benchmarks</h2>

While near‑term supply remains constrained, Urbis’ forecast shows completions lifting “Supply is forecast to be back above 1,500 apartments per annum for the first time since 2019”, with 1,775 completions forecast for 2026, and volumes remaining above that level over the following years.&nbsp;

Looking further ahead, completions are forecast to reach 2,500 in 2028, with the report noting 32% of that total is social/affordable, reflecting the role of government‑supported delivery in rebuilding the pipeline.&nbsp;

However, Urbis said Perth remains behind comparable markets on pipeline scale. In a national comparison of projects under construction, the report shows under construction Perth Build‑to‑Sell (BTS) at 3,446 apartments versus the Gold Coast at 7,922. Mr Cresp said “The challenge for Perth is how to we grow the delivery pipeline”.

Urbis’ conclusion is that Perth’s market is increasingly defined by product discipline and delivery certainty, with the research identifying “delivery certainty is key” and calling out builder risk and procurement models as core success factors, alongside “timing and staging”.&nbsp;

Joel Robinson

Perth apartment sales hit strongest pace since late 2021 as builder capacity tightens

<a href="https://www.apartments.com.au/developers/sammut-developments">Sammut Group</a> has secured development approval for its latest Brisbane apartment project, marking the Sydney developer’s next step in expanding its Queensland pipeline following the success of its debut Gold Coast development, Coast.

The approved project at <a href="https://www.apartments.com.au/new-apartments/44-glen-road-toowong-qld-4066">44 Glen Road, </a><a href="https://www.apartments.com.au/developments/toowong-qld-4066">Toowong</a> will deliver a 15-storey riverfront apartment building with 42 residences, significantly increasing the scale of the site’s previous approval for a smaller luxury scheme. Designed by Bureau^proberts, the development will comprise a mix of predominantly four-bedroom and two-bedroom apartments positioned to maximise Brisbane River and city views.

Sammut Director Julian Sammut said the group had been actively searching Brisbane for several years before identifying Toowong as the right fit.

“Brisbane was the right step for Sammut,” Sammut said.

“With the success of Coast we thought we should definitely look to do more in Queensland alone. We then pushed up to look at Brisbane. We've been looking for I'd say two to three years actually and it was hard to find the right location.”

<img alt="Sammut makes Brisbane apartment play" data-entity-type="" data-entity-uuid="" src="https://res.cloudinary.com/dz9xllyip/image/fetch/f_auto,c_limit,w_1440,q_75/https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/field/image/Screenshot%202025-12-23%20at%203.27.14%E2%80%AFPM.png?VersionId=dYAVIL7qdcGA8ojvkslSrLjczXFejSSx" />

Sammut said suburbs including New Farm and Teneriffe were considered before the group ultimately focused on Toowong due to its strong downsizer demographic and limited supply of developable riverfront land.

The site was acquired off-market after what Sammut described as a lengthy negotiation and planning process, with the developer pursuing an uplift to the original approval.

“We are DA approved now which is very exciting,” Sammut said.

“We've had our change approval come through and we've obviously doubled the height, 15 storeys plus rooftop. We've got 42 amazing apartments that are going to be coming to market soon.”

<img alt="Sammut makes Brisbane apartment play" data-entity-type="" data-entity-uuid="" src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,dpr_2.0,q_auto:good/https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202025-12-23%20at%203.27.26%E2%80%AFPM.png?VersionId=ohkRkY0dIZlqdfME2EZePsCQavRiBadE" />

Bureau^proberts said the design responds to Toowong’s evolving urban character, balancing contemporary apartment living with the area’s established residential identity.

“A place where traditional Queensland living has taken place for centuries; Toowong is seeing a shift of contemporary influence, commercial and retail hubs mixed with well-considered residential offerings – all the while maintaining its character and charm,” the architect noted in planning documents submitted to Brisbane City Council.

The architecture practice said the project’s form was shaped by its riverfront setting, flood considerations, neighbouring building scales, and view corridors.

“They said the mix of four and two-bedroom apartments capture the ‘fundamental qualities of Queenslander living,’ translated into the context of a contemporary subtropical building.”

The development sits just off Coronation Drive within walking distance of Toowong’s retail precinct and the upgraded Regatta ferry terminal, while also benefiting from proximity to the incoming green bridge connection to West End. Sammut said the accessibility and amenity offering were central to the site’s appeal.

The approval adds to growing residential activity along the Toowong riverfront, joining nearby projects including Consolidated Properties’ Monarch Residences and Spyre Group’s ARC Residences.

Sammut secures approval for debut Brisbane apartment development in Toowong

Developer Lanevick is heading back into Sydney’s apartment market after focusing more heavily on the luxury townhouse and terrace sector in recent years.

Lanevick, founded and directed by Steve Maroun, is expecting to receive approval in the coming months for a new apartment development in Gladesville, with the aim to launch it to the market later this year.

The 51-apartment project, designed by Studio Johnston, will comprise a mix of one-, two-, and three-bedroom apartments positioned toward the Hunters Hill downsizer market.

“Traditionally it’s been difficult for people in that market to downsize because there just hasn’t been the right product available,” Maroun said.

“We’re targeting buyers who might have 30 to 40 per cent of their house value sitting in the bank after downsizing.

“They still want good spacious entertaining areas, they still want quality design, but they also want flexibility and the ability to enjoy life a bit more after working hard for a long time.”

The project sits near Boronia Park and within close proximity to the Parramatta River foreshore, an area Maroun says offers more of a Hunters Hill lifestyle than a traditional apartment precinct.

“From a lifestyle perspective, it’s really more Hunters Hill than Gladesville,” Maroun said. “You’re close to the foreshore, close to parklands, and still connected back into the village precinct.”

From level four and above, apartments will capture water views&nbsp;toward Sydney Harbour. Communal amenity will include rooftop entertaining areas, wellness spaces, and a gym tailored toward owner-occupier buyers.

“We’ve really designed these apartments around that buyer coming from the Hunters Hill LGA and what they’re actually looking for in their next chapter.”

The proposed development has also been designed to respond to the changing character of the broader Gladesville town centre, where a growing number of mixed-use and residential proposals are expected to emerge over the coming years.

“Gladesville presented a rare opportunity to deliver a genuinely design-led residential project within an evolving lifestyle precinct, just moments from the growing Gladesville town centre, and we’ve approached the project with a strong focus on architecture, liveability and long-term community value,” Maroun said.

Maroun said Lanevick saw a first-mover advantage within the precinct as planning controls continue to evolve to accommodate greater housing density.

“We think there’s a real opportunity there that hasn’t really been serviced properly yet,” he said.

“There’s going to be a broader evolution of the whole Gladesville village precinct over time, particularly with more activation and mixed-use outcomes.”

The Venus Street proposal will include a commercial and retail component at ground level designed to contribute to that evolving streetscape activation.

“A big part of the thinking was how do you activate that area properly and create more vibrancy and amenity, which is what Hunters Hill has been looking for,” Maroun said.

Lanevick’s focus since 2020 has largely been on smaller-scale luxury townhouse and terrace developments. The developer recently completed Royale Randwick, also designed by Studio Johnston, where prices reached $3.65 million. The project was featured in the UDIA NSW 2026 Professional Development Prospectus and was also named a finalist for Development of the Year.

&nbsp;

Lanevick to cater for Hunters Hill downsizers with new Gladesville apartment development

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.

The New York-based investor has focused his firm, GreenPoint Partners, on addressing the supply shortage hitting middle market housing in Australia.

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.

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.

“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.

“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.”

<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" />

GreenPoint Partners brings years of experience assembling and scaling real estate operating businesses across major markets. And Green sees a big opportunity in Australia.

“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.”

Green said being a builder-developer would give the company the capacity and flexibility it required to deliver reasonably-priced homes.

“We want it to be at that attainable level; not super high end luxury but at that attainable level,” he said.

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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.

Green praised local policy settings.

“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.”

One Living is also&nbsp;looking at high-density projects and could take on more institutional funding in the future.

“The way we will be able to achieve economies of scale is through size,” Green added.

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

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.

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.

Projects by Buxton Director Heath Thompson, who is selling WM Residences, says the townhouses x that perfect middle ground be

"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.

"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."

[smartcode_project:default project_id=134646 project_image_fid=6109]

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.

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.

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.

[smartcode_project:default project_id=134646 project_image_fid=6110]

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.

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.

[smartcode_project:default project_id=134646 project_image_fid=6116]

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.

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.

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.

[smartcode_project_cta:default project_id=134646]

WM Residences fills gap in Mordialloc townhouse market

Shane Oliver

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EXPERT OBSERVER
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For a long time, we have been bearish on the Australian dollar,  seeing a fall into the high $US0.60s and revising this to around $US0.65 in May. In early October it fell to a low of $US0.6671.
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While negatives remain significant for the $A there is good reason to believe that we are close to the low or may have already seen it. This note looks at the main issues. 
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The negatives for the $A are well known 
The big negative for the Australian dollar is that growth is  weaker in Australia and spare capacity is much higher than in the US.
For example, labour market underutilisation is 13.8% in Australia versus just 7% in the US, on the latest available data real growth in Australia is running at 1.4% year on year compared to 2% in the US and that translates to per capita GDP growth of -0.2% in Australia compared to 1.4% in the US.
And the drag on growth from the housing downturn, weak consumer spending and the drought is likely to keep growth relatively weak in Australia for the next six months or so.
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This will keep inflation lower in Australia than in the US. Ideally more fiscal stimulus is required, and the Government has brought forward infrastructure spending. But combined with extra drought assistance this only amounts to an extra 0.1% of GDP of fiscal stimulus over the next 18 months which is not enough to make a significant difference to the growth outlook. 
So in the absence of more significant fiscal stimulus soon, the RBA is likely to cut the cash rate further to 0.25% and undertake some quantitative easing (ie using printed money to boost growth). By contrast the Fed is at or close to the low in US rates and is unlikely to return to quantitative easing. 
This will continue to make it relatively less attractive to park money in Australia. 
As can be seen in the next chart, periods of a low and falling interest rate differential between Australia and the US usually see a low and falling $A.
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So the higher probability of further monetary easing in Australia points to more downside for the Australian dollar. 
Of course, a shift in the policy focus away from monetary easing and towards greater fiscal stimulus would be more positive for the Australian dollar but this looks unlikely in the short term with the Government more focussed on delivering a budget surplus.
Five positives for the $A
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However, it’s no longer an easy (in hindsight) one way bet for the $A. There are basically five positives. First, the $A has already had a big fall. To its recent low it’s fallen nearly 40% from a multi-decade high of $US1.11 in 2011 &amp; it’s had a fall of 18% from a high in January last year of $US0.81.
Second, this decline has taken it to just below fair value. This contrasts to the situation back in 2011 when it was well above long-term fair value. The best guide to this is what is called purchasing power parity according to which exchange rates should equilibrate the price of a basket of goods and services across countries. Consistent with this the $A tends to move in line with relative price differentials over the long term.
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And right now, it’s just below fair value. Of course, as can be seen in the last chart, the $A could fall sharply below fair value as it tends to swing from one extreme to another. But this depends on the cyclical outlook for global growth and commodity prices. Which brings us to the next positive.
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Third, the global economic and commodity price cycle is likely to turn up next year in response to global monetary easing, a bottoming in the global inventory and manufacturing cycle and a 4 pause in President Trump’s trade wars as he refocusses on winning the presidential election.
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Based on historical experience, this should work against the US dollar as the US economy is less exposed to cyclical sectors than the rest of the world (which tends to see capital flow out of the US when global growth picks up and into the US when it slows). A weaker US dollar would in turn be positive for commodity prices &amp; the $A, which is a “risk on” currency given its greater exposure to cyclical industries like raw materials.
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Fourth, this comes at a time when global sentiment towards the $A remains very negative as reflected in short or underweight positions in the $A being at extremes – see the next chart. In other words, many of those who want to sell the $A have already done so and this leaves it vulnerable to a rally if there is good news.
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Finally, the current account has returned to surplus in Australia. The high iron ore price has helped, but so too have strong resource export volumes, services exports and a rising net equity position in Australia’s favour on the back of rising superannuation assets offshore. So the improved current account may be a permanent feature. This means less dependence on foreign capital inflows which is $A positive.
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So where to from here?
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The prospects for weaker growth and more monetary easing in Australia relative to the US suggests short-term downside pressure for the $A remains. But with the $A having already had a big fall to just below long term fair value, the global growth outlook likely to improve, short $A positions running high and the current account in surplus it’s likely that the $A may be close to, or may have already seen, its low. 
Our base remains for it to fall to around $US0.65 as the RBA continues to ease but at the end of 2020 it’s likely to be stuck around $US0.65-70 (or I’ll be honest &amp; admit I don’t have a strong view either way!).
Of course, if the US/China trade war escalates badly again and the global economy falls apart, causing a surge in unemployment in Australia as export demand and confidence collapses and another big leg down in house prices the Aussie will fall a lot more...but that’s looking less likely.
What does it mean for investors and the RBA?
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With the risks skewed towards the $A bottoming soon the case to maintain a large exposure to offshore assets that are not hedged back to Australian dollars has weakened. 
Of course, maintaining a position in foreign exchange for Australian-based investors against the $A provides some protection should things go wrong globally (say in relation to trade) or in Australia (say in relation to household debt).
For the RBA a shift in global forces towards being more supportive of the Australian dollar over the year ahead would complicate the RBA’s desire to boost Australian economic growth. 
Stronger demand for Australian exports would be positive, but upwards pressure on the $A would suggest that further monetary easing may be needed to help keep it down.
Key points
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In the absence of significant fiscal stimulus soon, further RBA monetary easing both in the form of rate cuts and quantitative easing point to more downside for the $A.
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However, there is good reason to believe we may be close to the low in the $A (or have already seen it): it has already had a large fall; it is just below fair value; the global economic cycle is likely to turn up next year; sentiment towards the $A is very negative; and the current account is in surplus.
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Our base case remains for the $A to fall to $US0.65 in the months ahead as the RBA eases further, but at the end of 2020 it’s likely to be stuck around $US0.65-70.
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SHANE OLIVER is Head of Investment Strategy and Chief Economist at AMP Capital.
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Five reasons why the $A may be close to the bottom: Shane Oliver

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<div class="column">The past 10 years have seen pretty good returns for well- diversified investors.</div>
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<div class="column">The median balanced growth superannuation fund returned 7.3% pa over the five years to July and 8.2% pa over 10 years and that’s after fees and taxes. This is impressive given that inflation has been around 2%.</div>
<div class="column"> </div>
<div class="column">
<a href="https://www.propertyobserver.com.au/images/2019/9/25/medium%20term%20returns%201%20.jpg" target="_blank">Click here</a> to enlarge: </div>
<div class="column"><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/2019/9/25/medium%20term%20returns%201%20.jpg" alt=""></div>
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Shares and growth assets have literally climbed a wall of worry this decade with a revolving door list of worries around public debt, the Eurozone, deflation, inflation, rate hikes, Trump, North Korea, China, trade wars, growth, house prices, etc. 
But returns benefitted from the recovery after the GFC and a search for yield as interest rates have collapsed depressing yields on most assets. But – while it sounds like a broken record – the decline in yields points to eventually more constrained returns ahead.
Declining yields = falling medium-term return potential
Investment returns have two components: yield (or income flow) and capital growth. 
Looking at both of these components points to lower average investment returns over the next five years compared to the last five years.
 It’s basic to investing that the price of an asset moves inversely to its yield all other things being equal. Suppose an asset pays $10 a year in income and suppose its price is $100, which means an income flow or yield of 10%. 
If interest rates are cut resulting in increased demand for the asset, as investors search for a higher yield, such that its price rises to $120 given the $10 annual income flow its yield will have fallen to 8.3% (ie $10 divided by $120) as its price has gone up by 20%. So, yield moves inversely to price. But as yields decline it means a lower return potential going forward.
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<div class="column">
Since the early 1980s investment yields have collapsed. Back then the RBA's "cash rate" was around 14%, 1-year bank term deposit rates were nearly 14%, 10-year bond yields were around 13.5%, commercial and residential property yields were around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. 
This meant that investments were already providing very high income so only modest capital growth was needed for growth assets to generate good returns. 
So, most assets had very strong returns and balanced growth super fund returns averaged 14.1% in nominal terms and 9.4% in real terms between 1982 and 1999 (after taxes and fees).
Over the last four decades, investment yields have mostly fallen quite sharply. See the next chart.
<a href="https://www.propertyobserver.com.au/images/2019/9/25/medium%20term%20returns%202.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/9/25/medium%20term%20returns%202.jpg" alt="">
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</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
<div class="page" title="Page 1">
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Today the cash rate is 1%, 1-year bank term deposit rates are 1.5%, 10-year bond yields are 0.9%, gross residential property yields are around 3%, commercial property yields are just below 5%, dividend yields are still around 5.5% for Australian shares (with franking credits) but they are 2.5% for global shares. 
This points to a lower return potential for a diversified mix of assets.
What’s more, the capital growth potential from growth assets is likely to be constrained relative to the past reflecting more constrained nominal economic growth. Several megatrends are likely to impact growth over the medium term. These include:
<ul>
<li>
Continued slower growth in household debt.
</li>
<li>
An ongoing retreat from globalisation, deregulation and small government in favour of populist, less market friendly policies.
</li>
<li>
A shift in corporate focus from profit to “balanced scorecards”.
</li>
<li>
Rising geopolitical tensions – notably as the US attempts to constrain the rising power of China as evident in the trade war.
</li>
<li>
Aging and slowing populations – resulting in slowing labour force growth and rising pressure on public sector budgets.
</li>
<li>
Technological innovation and automation.
</li>
</ul>
</div>
</div>
</div>
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column">
<ul>
<li>
Continuing rapid growth in Asia and China’s middle class.
</li>
<li>
Pressure to slow emissions &amp; the impact of global warning.
</li>
<li>
A large shift to sustainable energy as its cost continues to fall. Most of these will constrain economic growth &amp; hence returns.
</li>
</ul>
</div>
</div>
</div>
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column">
Medium-term return projections
Our approach to get a handle on medium-term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth reflecting the above-mentioned megatrends. We also prefer to avoid forecasting and like to keep the analysis simple.
</div>
</div>
</div>
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<div class="column">
<ul>
<li>For bonds, the best predictor of future medium-term returns is current bond yields as can be seen historically in the next chart. If a 10-year bond yield is held to maturity its initial yield (0.93% right now in Australia) will be its return over 10 years (ie 0.93%). We use 5-year bond yields as they more closely match the maturity of bond indexes.</li>
</ul>
<a href="https://www.propertyobserver.com.au/images/2019/9/25/medium%20term%20returns%203.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/9/25/medium%20term%20returns%203.jpg" alt="">
<ul>
<li>
For equities, current dividend yields plus trend nominal GDP growth (a proxy for capital growth) does a good job of predicting medium-term returns.1
</li>
<li>
For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.
</li>
<li>
For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.
</li>
<li>
In the case of cash, the current rate is of no value in assessing its medium-term return. So we allow for some rise in cash rates over time.
</li>
</ul>
</div>
</div>
</div>
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column">Our latest return projections are shown in the next table.</div>
<div class="column"> </div>
<div class="column">
<a href="https://www.propertyobserver.com.au/images/2019/9/25/medium%20term%20returns%204.jpg" target="_blank">Click here</a> to enlarge: </div>
<div class="column"><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/2019/9/25/medium%20term%20returns%204.jpg" alt=""></div>
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The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. Note that:
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<div class="layoutArea">
<div class="column">
<ul>
<li>We assume inflation averages around or just below central bank targets.</li>
</ul>
<ul>
<li>For Australia we have adopted a relatively conservative growth assumption reflecting slower productivity growth.</li>
</ul>
<ul>
<li>We allow for forward points in the return projections for global assets based around current market pricing. </li>
</ul>
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Key observations
Several things are worth noting from these projections. 
</div>
</div>
</div>
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column">
<ul>
<li>The medium-term return potential has continued to fall due largely to the rally in most assets and fall in investment yields. Projected returns using this approach for a diversified growth mix of assets have fallen from 10.3% pa at the low point of the GFC in March 2009, to 8.6% five years ago, to 6.2% a year ago and to now just 5.6%.</li>
</ul>
<a href="https://www.propertyobserver.com.au/images/2019/9/25/medium%20term%20returns%205.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/9/25/medium%20term%20returns%205.jpg" alt="">
<ul>
<li>Government bonds offer low returns due to ultra-low yields. Yes, bond returns have been strong lately as yields have collapsed pushing up bond prices. But this is no guide to future returns, particularly if bond yields stop falling.</li>
</ul>
<ul>
<li>Unlisted commercial property and infrastructure continue to come out relatively well, reflecting their higher yields.</li>
</ul>
<ul>
<li>Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian/emerging shares for growth potential.</li>
</ul>
<ul>
<li>The downside risks to our medium-term return projections are that: the world plunges into a recession driving another major bear market in shares or that investment yields are pushed up to more normal levels as inflation rebounds causing large capital losses. Just allow that drawdowns in returns tend to be infrequent but concentrated and it’s been a while since the last big one. See the first chart.</li>
</ul>
<ul>
<li>The upside risks are (always) less obvious but could occur if we see improving global growth but inflation remaining low.</li>
</ul>
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Implications for investors
<ul>
<li>
First, have reasonable return expectations. Low yields &amp; constrained GDP growth indicate it’s not reasonable to expect sustained double-digit or even high single digit returns. In fact, the trend decline in the rolling 10-year average of both nominal and real super fund returns since the 1990s indicates we have been in a lower-return world for many years – it’s just that it only becomes clear every so often with bear markets and then strong returns in between.
</li>
<li>
Second, remember that responding to a lower return potential from major asset classes by allocating more to growth assets does mean taking on more risk.
</li>
<li>
Third, bear markets are painful, but they do push up the medium-term return potential of investment markets to higher levels and so provide opportunities for investors.
</li>
<li>
Fourth, some of the decline in return potential reflects very low inflation – real returns haven’t fallen as much.
</li>
<li>
Finally, focus on assets with decent sustainable income flow as they provide confidence regarding future returns.
</li>
</ul>
</div>
</div>
</div>
</div>
</div>
</div>
<div class="page" title="Page 2"> Key points </div>
<div class="page" title="Page 2">
<div class="page" title="Page 1">
<div class="layoutArea">
<div class="column">
<ul>
<li>
The ongoing slide in investment yields across major asset classes points to a more constrained medium- term return outlook. For a diversified mix of assets, this has now fallen to around 5.6% pa on our projections.
</li>
<li>
The key for investors is to have realistic return expectations; allow that inflation is also low so real returns aren’t down as much; and focus on assets with decent and sustainable income.
</li>
</ul>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
 DR SHANE OLIVER Head of Investment Strategy and Chief Economist AMP Capital
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Investment returns have been good, but likely to slow over the next five years: Shane Oliver 

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EXPERT OBSERVER
As widely expected the Fed cut the Fed’s rate by another 0.25% taking it to a range of 1.75-2%, for the second cut this year.
While the Fed remains optimistic on the outlook for the US economy and made no significant changes to its economic forecasts, as with the July cut its basically taking out insurance given ongoing threats to the US outlook from the trade war and slower global growth at the same time that inflation is still running just below target. 
The current easing cycle remains a bit like the Fed easings of 1987 after the share market crash and in 1998 after the LTCM hedge fund crisis – that saw the Fed cut despite solid growth in order take out insurance in case there was a negative flow on to the economy.
The Fed was a bit less dovish than expected and this was highlighted by the so-called “dot plot” of Fed officials interest rate expectations not falling as much as expected relative to the June “dot plot” and the median dot showing no more rate cuts. Specifically seven officials see another cut by December, five are on hold and five see a hike.
<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/2019/9/19/Global%20interest%20rates.jpg" alt=""> 
However, it’s likely that the seven who see a cut include the Fed leadership of Powell, Clarida and Williams and are mostly voting members whereas there is a likely a lot of non-voters in the five who see no change and the five who see a hike. So the dot plot is likely more dovish than it looks. 
Our assessment remains that another 0.25% easing is likely, probably in October or if not then in December. The risks to the growth outlook – particularly on trade - won’t go away quickly and that the Fed appears to have taken the decision that it’s easier to control a rise in inflation than a further slide or deflation.
Fed Chair Powell did not seem too concerned about liquidity stresses in the US money market (which look related to corporate tax payments, higher budget deficits and the impact of quantitative tightening) but he did indicated that the Fed may need to resume allowing its balance sheet to grow with the economy. This is not quite QE and its much smaller but it would ease liquidity stresses. In the meantime the New York Fed is continuing to address the issue by injecting funds into the money market (via repurchase operations). 
Interestingly Fed Chair Powell said that if the Fed Funds rate does have to go back to zero, that would be the lower bound. In other words the Fed would not take rates negative.
The directional relationship between US and Australian interest rates weakened long ago. The RBA started raising rates in 2009 when the Fed held at zero, it was easing in 2016 when the Fed was hiking and this year it started cutting ahead of the Fed. See the next chart.
<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/2019/9/19/Fed%20market%20expectations.jpg" alt=""> 
So just because the Fed moves doesn’t mean the RBA will too. On the one hand the Fed’s easing along with stimulus elsewhere globally should help support global growth which is good for Australia. But it’s probably not enough to change the outlook for the RBA and its perception that global risks have increased. . Our view remains that it’s on track to cut the cash rate to 0.5% in the months ahead in two 0.25% moves and to some degree the Fed cutting and the ECB easing last week reinforces that to the extent that the RBA would like to keep the Australian dollar down. 
Falling interest rates are generally positive for shares, unless there is a global recession. While the risk of recession has gone up thanks to the trade war and conflict in the Middle East we remain of the view that it will be avoided.
DR SHANE OLIVER is Head of Investment Strategy and Chief Economist AMP Capital.
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Fed eases again - but they are still just insurance cuts: Shane Oliver

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EXPERT OBSERVATION
After the biggest fall in at least 40 years – with a 10.2% top to bottom fall between September 2017 and June this year - average capital city home prices have turned up again.
I thought prices would fall further with a 15% top to bottom fall led by around 25% falls in Sydney and Melbourne. But the facts changed from May – with the election removing the threat to negative gearing &amp; the capital gains tax discount, earlier than expected interest rate cuts &amp; a relaxation of APRA’s 7% interest rate test all pushing prices up again. So, where to from here?
Extreme property views
There are basically two extreme views amongst “property experts”. On the one hand, some real estate spruikers still wheel out the old “property will double every seven years” line. On the other hand, property doomsters say it’s hugely overvalued and over-indebted with massive mortgage stress and so a 40% or so crash is inevitable.
The trouble with the former is that implies home price growth of 10.3% pa, so even if wages growth picks up to 3.5% (a big ask!) it implies that the average price to income ratio of Australian housing will rise to around nine times over the next seven years from around six times now and in 14 years’ time it will be 14 times!
The trouble with the doomsters is that they’ve been saying that for 15 years and we’re still waiting for the crash.
In between, first home buyers are wondering why it’s so hard to do what my and my parent’s generation took for granted: be part of the Aussie dream with a quarter acre block.
The reality is it’s far more complicated than these extremes. Here’s seven stylised “facts” regarding Australian property.
First – it’s expensive
This has been the case since early last decade and remains so despite the recent correction in prices:
<ul>
<li>According to the 2019 Demographia Housing Affordability Survey the median multiple of house prices to income is 5.7 times in Australia versus 3.5 in the US and 4.8 in the UK. In Sydney it’s 11.7 times &amp; Melbourne is 9.7 times.</li>
<li>The ratios of house prices to incomes and rents relative to their long-term averages are at the high end of OECD countries.</li>
<li>The surge in prices relative to incomes has seen household debt relative to household income rise from the low end of OECD countries 25 years ago to the high end now.</li>
</ul>
<a href="https://www.propertyobserver.com.au/images/2019/9/11/house%20price%201.jpg" target="_blank">Click here </a>to enlarge: 
<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/2019/9/11/house%20price%201.jpg" alt="">
These things arguably make residential property Australia’s Achilles heel. But that’s been the case for 15 years or so now.
Second – it’s diverse
While it’s common to refer to “the Australian property market”, in reality there is significant divergence between cities. This divergence has been extreme over the last five years with Perth and Darwin seeing large price falls in response to the end of the mining investment boom, as other cities rose.
<a href="https://www.propertyobserver.com.au/images/2019/9/11/house%20price%202.jpg" target="_blank">Click here </a>to enlarge: 
<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/2019/9/11/house%20price%202.jpg" alt="">
The divergence is also evident in gross rental yields that range from 8.7% in regional WA units to 3.1% in Sydney houses.
Third – talk of mortgage stress is overstated
Headlines of excessive mortgage stress have been common for over a decade now.
There is no denying housing affordability is poor, household debt is high and some households are suffering significant mortgage stress. But most borrowers appear to be able to service their mortgages.
And despite some seeing negative equity and a significant proportion of borrowers switching from interest only to principle &amp; interest loans (which has seen interest only loans drop from nearly 40% of all loans to 23%) there has been no surge in forced sales and non- performing loans.
Non-performing mortgages have increased but remain low at around 0.9%.
While Australia saw a deterioration in lending standards with the last boom, it was nothing like other countries saw prior to the GFC.
Much of the increase in debt has gone to older, wealthier Australians, who are better able to service their loans.
Low doc loans are trivial in Australia and the proportion of high loan to valuation ratio loans has fallen as has the proportion of interest only loans.
<a href="https://www.propertyobserver.com.au/images/2019/9/11/house%20price%203.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/9/11/house%20price%203.jpg" alt="">
Fourth – it’s been chronically undersupplied
Annual population growth since mid-last decade has averaged 373,000 people compared to 217,000 over the decade to 2005, which requires roughly an extra 75,000 homes per year.
Unfortunately, the supply of dwellings did not keep pace with the population surge (see the next chart) so a massive shortfall built up driving high home prices.
Thanks to the surge in unit supply since 2015 this is now being worked off, but it follows more than a decade of accumulated undersupply which is the main reason why housing has remained relatively expensive in Australia.
Not tax breaks or low rates – all of which exist in other countries with far more affordable housing!
<a href="https://www.propertyobserver.com.au/images/2019/9/11/house%20price%204.jpg" target="_blank">Click here </a>to enlarge: 
<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/2019/9/11/house%20price%204.jpg" alt="">
Fifth – house prices go up and down
After several episodes of price declines ranging from 5 to 10% across various cities over the last 15 years and 15%, 21% and 31% for Sydney, Perth and Darwin respectively in recent years home buyers should be under no illusion that prices only go up.
Sixth – the housing market remains rate sensitive
While it varies from city to city, despite much scepticism recent rate cuts have helped push up the property market again.
Finally – house price crashes are not easy to forecast
The expensive nature of Australian property and associated high debt levels have seen calls for a property crash pumped out repeatedly over the last 15 years.
In 2004, The Economist magazine described Australia as “America’s ugly sister” thanks in part to soaring property prices.
Property crash calls were wheeled out repeatedly after the Global Financial Crisis (GFC) with one commentator losing a high-profile bet that prices could fall up to 40%.
In 2010, a US newspaper, The Philadelphia Trumpet, warned that “Los Angelification” (referring to a 40% slump in LA home prices around the GFC) will come to Australia. Similar calls were made a few years ago by a hedge fund researcher and a hedge fund: “The Australian property market is on the verge of blowing up on a spectacular scale."
Over the years these crash calls have often made it on to 60 Minutes and Four Corners.
But our view remains that to get a national housing crash – as opposed to periodic falls in some cities – we need much higher unemployment, much higher interest rates and/or a big oversupply.
But while the risk of recession has increased it remains unlikely, aggressive rate hikes are most unlikely and while property supply still has more upside it’s unlikely to lead to a big oversupply as approvals to build new dwellings are now falling.
As we have seen for years now overvaluation and high debt on their own are not enough to bring on a crash.
So where to now?
The rebound in buyer interest since May has seen auction clearance rates in Sydney and Melbourne rise to around 75% and prices lift nearly 2%, albeit other cities are mixed.
<a href="https://www.propertyobserver.com.au/images/2019/9/11/house%20price%205.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/9/11/house%20price%205.jpg" alt="">
 
This has so far come on low volumes, but they now look to be rising. Our base case is that house price gains will be far more constrained than the 10-15% implied by current auction clearance rates.
Compared to past cycles debt to income ratios are much higher, bank lending standards are tighter, the supply of units has surged with more to come and this has already pushed Sydney’s rental vacancy rate above normal levels and unemployment is likely to drift up as economic growth remains soft.
So, we don’t expect to see a return to boom time conditions and see constrained gains through 2020 – eg around 5% or so. There are three key things to watch:
<ul>
<li>The Spring selling season – if auction clearances remain elevated as listing pick up then it will be a positive sign that the pick-up in the property market has legs.</li>
<li>Housing finance commitments – these have bounced but will have to pick up a lot further to get 10-15% price rises.</li>
<li>Unemployment – if it picks up significantly in response to slow economic growth then it will be a big constraint on house prices and could result in another leg down in prices.</li>
</ul>
We don’t see the rebound in the Sydney and Melbourne property markets as a barrier to further monetary easing, but it may reduce the need as it turns the wealth effect from negative to positive. And if it continues to gather pace then expect a tightening of the screws again from bank regulators.
Implications for investors
Over long periods of time residential property provides a similar return to shares (at around 11% pa) but it offers good diversification as it performs well at different times to shares so it has a role to play in investors’ portfolios.
The pull back in prices in several cities in the last few years provides opportunities for investors, but just bear in mind that rental yields remain relatively low in Sydney and Melbourne and be wary of areas where there is still a lot of new units to hit.
There is probably better value to be found in regional centres and Perth, and Brisbane looks attractive in offering reasonable yields, a low vacancy rate and improving population growth.
Key points
<ul>
<li>
The Australian housing market remains far more complicated than optimists &amp; doomsters portray it to be.
</li>
<li>
Yes, it’s expensive and heavily indebted but talk of mortgage stress is overstated &amp; it’s been undersupplied.
</li>
<li>
The combination of rate cuts, the election and a modest regulatory relaxation have helped turn property prices back up, but the upswing is likely to be constrained.
</li>
</ul>
Dr Shane Oliver is Head of Investment Strategy and Chief Economist AMP Capital.
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The seven things you need to know about the Australian property market: Shane Oliver 

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EXPERT OBSERVATION
Employment increased by a stronger than expected 41,100 jobs in July recovering from a loss of -2,300 jobs (revised) in June.
Annual employment growth slightly increased to 2.6%, from 2.4% the month prior.
Full time employment rose by 34,500 building on a gain of 21,100 in June. Part-time employment rose by 6,700 after being preceded by a loss of 23,300 jobs last month.
The unemployment rate remained steady at 5.2% retaining an uptrend from a low of 4.9% in February. The participation rate increased marginally to 66.1%.
Hours worked were up 0.5% after being flat last month and annual growth has recovered to 2.0%.
Underemployment in the labour market rose slightly to 8.4% compared to 8.2% in June, and remains very high.
<a href="https://www.propertyobserver.com.au/images/2019/8/15/job%20growth%20vs%20unemployment%201.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/8/15/job%20growth%20vs%20unemployment%201.png" alt="">
Source: ABS, AMP Capital
Jobs growth improved strongly in July, albeit after last month’s glacial pace of additions was revised to a net loss of jobs. 
However, a rise in the participation rate prevented the unemployment rate from falling.
 Meanwhile, despite a modest improvement in the last few months our Jobs Leading Indicator continues to point to slower jobs growth ahead on the back of a slowing trend in jobs ads, job vacancies and hiring plans, so we still see a further slowdown in jobs growth over the next six months as the housing construction downturn flows through the economy. 
This is likely to see trend jobs growth continue to fall well below the roughly 19,000 new jobs needed each month to absorb new entrants to the labour force. 
As a result we continue to see unemployment drifting up to 5.5% by the end of the year.
<a href="https://www.propertyobserver.com.au/images/2019/8/15/employment%20.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/8/15/employment%20.png" alt="">
 
Source: Bloomberg, AMP Capital
 
Labour market underutilisation ticked up to 13.6% in July from 13.4% in June as underemployment rose indicating that “spare capacity” in the labour market remains very high.
 The comparable measure in the US is just 7% and it fell last month! With jobs growth expected to slow in Australia, labour market underutilisation is likely to remain high and this in turn will prevent much if any pick up in still weak wages growth.
<a href="https://www.propertyobserver.com.au/images/2019/8/15/labour%20marekt.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/8/15/labour%20marekt.png" alt="">
Source: Bloomberg, AMP Capital
Implications
The rise in unemployment from 4.9% earlier this year and continuing high underemployment indicates that significant “spare capacity” remains in the labour market and in the economy.
The rebound in employment growth seen in July may provide the RBA with some encouragement and breathing space.
However, while the RBA’s back-to-back rate cuts, tax refunds for low and middle income earners and strong infrastructure investment should help limit the rise in unemployment to around 5.5%, they are unlikely to be enough get unemployment down to the 4.5% or less needed to see stronger wages growth and higher inflation.
And in the meantime the risks of even slower global growth on the back of the escalating US/China trade war are rising as indicated by falling share markets and bond yields racing to zero and below.
As a result we remain of the view that the RBA will have to cut rates further and see the next 0.25% cut coming next month followed by another cut in November ultimately taking the cash rate down to 0.5%.  
Dr Shane Oliver Head of Investment Strategy and Chief Economist AMP Capital
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RBA on track to cut to 0.5% by year end: Shane Oliver 

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Introduction
A common concern ever since the Global Financial Crisis (GFC) ended a decade ago is that the next recession is imminent.
This concern has become more pronounced recently as yield curves – ie the gap between long-term bond yields and short-term borrowing rates - have inverted (or gone negative) as in the US.
This concern has taken on added currency now that the US economic expansion is the longest on record. Surely it must be living on borrowed time?
This matters a lot. The US is the world’s biggest economy in US dollar terms (at 24% of world GDP), its share market is around 56% of global share market capitalisation and being central to the world’s financial system it sets the direction for global share markets, including Australia’s.
What’s more, while share corrections (say falls of 5-15%) and even mild bear markets (with say a 20% decline that turns around quickly) are common, the key driver of whether they turn into a major bear market (where shares fall 20% and a year later are down another 20% or so like in the GFC) is whether we see a recession or not –notably in the US (see the table in Correction time for shares?).
So, whether a US recession is imminent or not is critically important in terms of whether a major bear market is imminent.
Longest but not the strongest
The cyclical bull market in US shares is now over 10 years old. This makes it the longest since WW2 and the second strongest in terms of percentage gain. And according to the US National Bureau of Economic Research the current US economic expansion that started in June 2009 is now 121 months old and compares to an average expansion of 58 months since 1945.
This makes it the longest on record (since 1854). See the next two tables. But it’s noteworthy that it’s not the strongest.
In fact, GDP and employment growth through this expansion have averaged around half that seen in the average post war expansion. Both have been the second weakest.
<a href="https://www.propertyobserver.com.au/images/2019/7/24/amp%201.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/7/24/amp%201.jpg" alt="">
<a href="https://www.propertyobserver.com.au/images/2019/7/24/amp%202.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/7/24/amp%202.jpg" alt=""> 
Absence of excess
Numerous growth slowdowns and recession scares – notably around 2011-12, 2015-16 and since last year - and post GFC caution have kept this expansion slow.
A key lesson of past economic expansions is that “they do not die of old age, but of exhaustion”.
The length of economic expansions depends on how quickly recovery proceeds, excess builds up, inflation rises and the central bank tightens.
The current US economic expansion may be long, but it has been slow. As a result, it’s been taking longer than normal for excesses that precede recessions – around cyclical spending, debt and inflation - to build up.
First, cyclical spending in the US as a share of GDP remains low. In particular, there has been no “boom” in spending on consumer durables, business or housing investment resulting in a glut that needs to be worked off as occurred prior to all of the recessions in the last 50 years. All are around or below long-term averages as a share of GDP, in contrast to highs seen prior to past recessions. Basically, no boom = no bust!
<a href="https://www.propertyobserver.com.au/images/2019/7/24/us%201.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/7/24/us%201.jpg" alt="">
Second, growth in private sector debt has been modest and well below the surge seen prior to the recessions of the early 1990s, early 2000s and 2008-09 as household debt growth has been weak. While corporate debt is up, the ratio of profits to interest payments is well above average and the ratio of corporate debt to assets is low. (Yes, public debt to GDP in the US is a concern but high public debt has not been a precursor to recession and the public sector’s taxing and money printing abilities mean it’s a totally different risk to excessive private debt.)
Finally, there is no sign of the surge in inflation that traditionally precedes recessions. Sure, the labour market has been flashing warning signs with unemployment and underemployment having fallen sharply, warning of a wages breakout and inflation pressure.
<a href="https://www.propertyobserver.com.au/images/2019/7/24/us%202.jpg" target="_blank">Click here</a> to enlarge
<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/2019/7/24/us%202.jpg" alt="">
However, there is arguably still spare capacity in the US labour market (the participation rate has yet to see a normal cyclical rise) and wages growth around 3% remains very low.
The last three recessions were preceded by wages growth above 4%. And industrial capacity utilisation at 78% is well below levels that in the past have shown excess and preceded recessions.
Reflecting this, along with intense competition which has been accentuated by technological innovation, core inflation has fallen below target.
<a href="https://www.propertyobserver.com.au/images/2019/7/24/us%203.jpg" target="_blank">Click here </a>to enlarge:
<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/2019/7/24/us%203.jpg" alt="">
So, while the Fed has raised interest rates since late 2015 it has not slammed the brakes on with tight monetary policy.
Past US recessions have been preceded by the Fed Funds rates being well above inflation and nominal growth, whereas that’s not the case now. See the last chart. And given perceived risks to growth and the concern that it will be easier to deal with a rise in inflation than deflation, the Fed is now moving to cut rates again anyway.
The bottom line is that the excesses that normally precede US recessions – a spending boom, surging private debt and/or rising inflation/tight monetary policy – are absent.
So while US economic expansion may be long in the tooth it’s far from exhausted.
But what about the inverted yield curve?
The inverted US yield curve that started in the last few months is certainly a concern as they have preceded past US recessions.
<a href="https://www.propertyobserver.com.au/images/2019/7/24/us%204.png" target="_blank">Click here</a> to enlarge:
<img src="https://www.urban.com.au/images/2019/7/24/us%204.png" alt="">
However, there are several reasons not to be too concerned. First, the lag from yield curve inversion to recession averages around 15 months (which takes us to second half next year), there have been numerous false signals and following yield curve inversions in 1989, 1998 and 2006 shares actually rallied.
Second, various factors may be inverting the yield curve unrelated to growth expectations including still falling long-term inflation expectations, low German and Japanese bond yields and higher levels of investor demand for bonds post the GFC as they have proven to be a good diversifier to shares in times of crisis. Third, the retreat from monetary tightening has been a factor behind the rally in bonds but this is positive for growth.
Finally, other indicators are not pointing to imminent recession – as noted above we have not seen the sort of excess that normally precedes recession.
The bottom line
Issues around the trade war and tensions with Iran certainly pose a risk to US growth and could drive short term volatility in share markets.
But the combination of easing monetary conditions globally, the removal of caps on US Government spending for next year (which threatened a mini “fiscal cliff”) as part of a deal to suspend the debt ceiling and the absence of the excesses that contribute to recessions would suggest that US - and hence global and Australian - shares are likely to be higher in 6-12 months’ time.
Shares up and bond yields down – which is right?
This brings us back a puzzle that has worried some this year: share markets are up but bond yields are down...surely one market must be wrong?
But this occasionally happens in the investment cycle. Basically, shares having fallen last year on growth fears are looking through short-term growth uncertainties and focusing on lower for longer interest rates and bond yields making shares relatively cheaper and the likelihood that monetary and fiscal stimulus will ultimately boost economic growth.
By contrast bonds have been focussing on falling inflation and lower for longer short-term interest rates.
So, there is logic behind both shares and bonds rallying at the same time. Ultimately though if global growth picks up over the next 12 months, bond yields will start to rise again – but it’s likely to remain gradual and constrained.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist AMP Capital.
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The longest US economic expansion ever - does this mean recession is around the corner? Shane Oliver

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EXPERT OBSERVER
Australian capital city dwelling prices rose 0.1% in July according to CoreLogic. After a 10.2% decline over 22 months (which was worse than the decline seen in the GFC), this is their first rise since September 2017. Dwelling prices are still down 7.3% from a year ago.
Sydney dwelling prices rose 0.2% which their second gain in a row and Melbourne prices also rose 0.2% which is also their second gain in a row.
Prices also rose in Brisbane (+0.2%), Hobart (+0.3%) and Darwin (+0.4%) but fell in Adelaide (-0.3%), Perth (-0.5%) and Canberra (-0.3%). Perth prices are now down 20.2% from their 2014 high.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/house%20price%201.png" target="_blank">Click here</a> to enlarge:
<img src="https://www.urban.com.au/images/2019/8/1/house%20price%201.png" alt="">
Source: CoreLogic, AMP Capital
The boost from the election result which removed the threats to negative gearing and the capital gains tax discount, RBA rate cuts, and positive headlines around the relaxation of the 7% mortgage rate serviceability test and tax cuts have helped provide a bounce in home buyer demand.
This is clearly evident in a rebound in auction clearance rates where July saw the best monthly average clearance rates in Sydney since May 2017 and in Melbourne it was the best since October 2017. See the next two charts.
While this has come on very low volumes its usually the case that improved clearance rates lead a pick up in volumes and this is likely to be seen in the months ahead.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/house%20price%203.png" target="_blank">Click here</a> to enlarge:
<img src="https://www.urban.com.au/images/2019/8/1/house%20price%203.png" alt="">
Source: Domain, CoreLogic, AMP Capital
<a href="https://www.propertyobserver.com.au/images/2019/8/1/house%20price%204.png" target="_blank">Click here</a> to enlarge:
<img src="https://www.urban.com.au/images/2019/8/1/house%20price%204.png" alt="">
Source: Domain, CoreLogic, AMP Capital
However, while home prices may have bottomed its doubtful that annual price gains are on their way to 10% or so as implied by the past relationship between clearances and prices and the current level of clearances. See the charts above. 
The situation today is very different to 2011 when the RBA first started to cut rates in this interest rate cutting cycle which in turn helped unleash booming conditions in the NSW and Victorian economies and rapid debt growth made easy by somewhat lax bank lending standards against a backdrop of undersupplied property markets all of which fuelled rapid growth in Sydney and Melbourne property prices.
 By contrast today, household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged pushing Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak. 
So we don’t see a return to boom time conditions and expect constrained low single digit price gains through 2020.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/houseprice%202.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/8/1/houseprice%202.png" alt="">
 
Source: CoreLogic, AMP Capital
Rising unemployment will be the key to watch. We expect unemployment to drift up to around 5.5% by year end, but a sharper rise could result in forced property sales and another leg down in property prices. This is not our base case but is the key risk in terms of the property outlook.
Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5% or below – so our view remains for further cash rate reductions in November and February next year taking the cash rate to 0.5%.
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
 
 
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Australian capital city house prices up 0.1% in July, but do not expect a return to boom time conditions: Shane Oliver 

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EXPERT OBSERVATION
Australian shares back to their 2007 high...at last!
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After nearly 12 years the Australian share market is above its November 2007 pre-Global Financial Crisis (GFC) high. 
The All Ords index surpassed it last week and the ASX 200 has done so this week. 
Basically, the Australian share market is looking through short-term uncertainties around the economy and focussing on lower interest rates and bond yields making shares relatively cheap, the likelihood that policy stimulus will ultimately boost growth, high iron ore prices boosting mining companies and a positive global lead. 
But why has it taken so long? Is the break out sustainable? And is the relative underperformance of Australian versus global shares over?
Why has it taken so long?
12 years is a long time to make a new high. US shares made it back to their 2007 high in 2013 and global shares did so in 2014. 
See the next chart. Since the March 2009 GFC low, Australian shares are up 118%, versus a 222% gain in global shares in local currency terms and a 347% gain in US shares.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%201.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/8/1/share%20market%201.jpg" alt="">
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So why has the Australian share market underperformed global shares since the GFC such that it’s taken far longer to regain its 2007 high? There are basically five reasons:
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• Payback for its huge outperformance last decade –Australian shares go through periods of relative out performance and underperformance versus global shares. 
This can be seen in the next chart that shows the value of Australian shares relative to global shares. After underperforming global shares through the 1990s tech boom during which Australia was seen as “old economy” itcame roaring back during the resources boom last decade resulting in a huge outperformance. 
This is also evident in the previous chart – whereas global and US shares just made it back to their 2000 tech boom high by 2007 Australian shares more than doubled in value. 
This meant that the 2007 high for Australian shares was a much higher high than for global shares which really just spun their wheels last decade. 
So, the poor relative performance of Australian shares this decade is payback for their huge outperformance last decade. So, it’s naturally taken longer for Australian shares to get back to their pre-GFC high.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%202.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/8/1/share%20market%202.jpg" alt="">
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• Tighter monetary policy for much of the post GFC period –whereas the US, Europe and Japan had near zero interest rates and quantitative easing, Australia has had much higher interest rates (until just recently) and no money printing.
 In fact, the relative underperformance really started in October 2009 when the RBA started to raise interest rates post GFC which was not followed by other major developed countries. See the previous chart.
• The surge in the $A to $US1.10 in 2011 – this reduced the competitiveness of Australian companies from which the damage can take a long time to reverse even though the $A has fallen to around $US0.70 in the last four years.
• The slump in commodity prices from 2011 – this weighed heavily on resources shares into 2006. US, European and Japanese shares have a lower exposure to resources.
• Property crash phobia – foreign investor fear of a crash inAustralia’s relatively expensive housing market has been a constant theme. Therefore, many stayed away.
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Are high dividends holding Australian shares back?
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An often heard view is that Australian companies are not investing because shareholders are demanding high dividends, and this is causing poor earnings growth and share market returns. This is unlikely. 
The dividend payout ratio (ie dividends relative to earnings) is in line with its historic norm. And it’smainly resources stocks that have boosted payouts since the GFC – but it’s been hard to argue they should ramp up investment so soon after the mining investment boom.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%203.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/8/1/share%20market%203.jpg" alt="">
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The real reasons for the lack of investment by non-mining companies are likely to be post-GFC caution, wariness after getting smashed through the mining boom by the high $A, spare capacity &amp; competitive pressures, uncertainty about demand and too-high investment hurdle rates.
More fundamentally, Australia’s high dividend payouts arehealthy from a long-term perspective: high dividend payouts mean less risk of poor investment decisions from retained earnings, they are indicative of corporate confidence about future earnings and they indicate earnings are real.
2007 high was reached in 2013 with dividends
In fact, because Australian shares pay relatively high dividend yields (around 4.1%) compared to global shares (2.5%) they should be included in comparisons of Australian with global share market returns. 
Once dividends are allowed for (ie looking at the accumulation index, or total returns) the Australian share market surpassed its 2007 high in 2013.
<a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%204.j">Click here </a>to enlarge: 
<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/2019/8/1/share%20market%204.jpg" alt="">
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The next chart compares the relative performance of Australian to global shares since 1970 in terms of: relative share price performance in local currency terms (green line); relative total returns ie with dividends added in (blue line); and relative total returns with global shares in Australian dollars (red line). 
A rising ratio means Australian outperformance and vice versa. Several things stand out. First over long periods of time and when dividends are allowed for Australian shares have had better returns than global shares. 
Since 1970 Australian shares have returned (capital growth plus dividends) 10.4% per annum compared to 8.3% pa for global shares in local currency terms. 
The falling $A over this period has enhanced the return from global shares to 9.9% pa but they still slightly underperformed Australian shares.
Second, the swings in the relative performance of Australian shares are apparent if dividends and currency movements are allowed for or not - in particular in the big outperformance last decade and underperformance this decade.
Since October 2009 Australian shares have returned 8.4% pa compared to 10.4% pa from global shares in local currencies or 12.5% in Australian dollar terms (as the $A fell).
<a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%205.jpg" target="_blank">Click here </a>to enlarge: 
<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/2019/8/1/share%20market%205.jpg" alt="">
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What’s the outlook?
Is the break out by the All Ords and ASX 200 to new highs sustainable? Going through past bull market highs after a long period below can attract investors into the market so it could push on for a bit. 
But after such a huge run – the market is now up 21% year to date – its vulnerable to a short-term correction: we are coming into a seasonally weak part of the year; the August earnings reporting season could result in volatility; and there are various risks in relation to trade wars, tensions with Iran and soft economic data. 
However, the combination of low bond yields which means that the share market is comparatively cheap, monetary easing by the RBA and other central banks and a likely pick up in global growth by year end and Australian growth next year point to even higher share prices on a six to 12 month horizon.
In terms of the Australian share market’s valuation, its price to 12 month ahead consensus earnings multiple of 16.5 times is above its long-term average, but shares are known to trade on higher PEs when inflation and interest rates are low. 
In fact, the gap between the forward earnings yield of 6.1% and the 10 year bond yield of just 1.2% is well above average making shares relatively cheap.
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Is the secular underperformance of Australian shares versus global shares over? So far this year Australian shares have outperformed global shares and the various comparisons in the last chart have hooked higher. 
Several of the factors that drove the relative underperformance this decade are fading:
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Much of last decade’s outperformance has been reversed. Payback has happened albeit it could still go further.
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The RBA is easing more aggressively.
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The surge in the $A to $US1.10 of 2011 has reversed making Australian companies more competitive.
</li>
<li>
The commodity price slump from their 2008-2011 highs (depending on the commodity) looks to be over.
</li>
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Finally, the risks of a property crash dragging banks and the economy into recession may be receding.
The Australian dollar is still likely to fall a bit and it makes sense to maintain a decent exposure to global shares for portfolio diversification reasons. But with many of the negatives for the Australian share market fading it’s hard to maintain a strong case against it versus global shares.
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Key points
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The long time taken for Australian shares to regain their 2007 high and their underperformance compared to global shares this decade reflects a combination of payback after their strong performance last decade, tighter monetary policy, the strong $A into 2011, the slump in commodity prices and property crash phobia.
</li>
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High dividend payouts are not to blame.
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While the Australian share market is at risk of a short-term pull back it’s likely to be higher on a 6-12 month horizon and its period of relative underperformance compared to global shares is likely at or close to an end.
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DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital.
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Australian shares hit record highs - is the decade long underperformance versus global shares over? Shane Oliver

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EXPERT OBSERVATION
Australian capital city dwelling prices fell by just 0.1% in June, according to CoreLogic.
This marks 22 months of consecutive price declines since prices peaked in September 2017.
This has left prices down 8% from a year ago and they have fallen 10.2% from their September 2017, high which is worse than their GFC decline of 7.6%. 
The pace of monthly capital city average declines has slowed progressively from 1.3% in December to now just 0.1%, with Sydney and Melbourne actually seeing small price gains in June which along with Hobart helped offset quite steep price falls in all the other capital cities.              
Sydney dwelling prices rose 0.1% their first gain since July 2017 after a 14.9% top to bottom fall (which was their worst fall since the early 1980s recession) and Melbourne prices rose 0.2% which is their first gain since November 2017 after an 11.1% top to bottom fall (which was their worst fall in the period since 1980)
Perth prices fell another 0.7% and are now down 19.8% from their 2014 high and Darwin prices fell another 0.9% and are down 30.1% from their 2014 high.
Prices also fell in Brisbane (-0.6% in June and down 2.9% for their recent high), Adelaide (-0.5%) and Canberra (-0.9%). Hobart was the only capital city to see a gain (+0.2%). 
All capital cities have seen prices fall over the last three months.
 <img src="https://www.urban.com.au/images/2019/7/1/falling%20capital%20city%20home%20prices%20.png" alt="">
Source: CoreLogic, AMP Capital
The combination of the election result which removed the threats to negative gearing and the capital gains tax discount, RBA rate cuts, and the relaxation of the 7% mortgage rate serviceability test have helped provide a bounce in home buyer demand.
With Sydney and Melbourne likely to have suffered the most under Labor’s proposed tax changes – because they have a greater share of investors in their property markets - they have seen the biggest benefit from the election result.
This is also evident in a continuing improvement in auction clearance rates in those two cities where June was the best month since September 2017 in Sydney and the best since February last year in Melbourne.
 <img src="https://www.urban.com.au/images/2019/7/1/auction%20clearance%20rates.png" alt="">
Source: Domain, AMP Capital
This is consistent with revisions to our home price forecasts after the election which revised the expected top to bottom fall for national capital city average home prices to 12% (from 15%) mainly due to upwards revisions to price forecasts for Sydney and Melbourne.
However, while home prices may now be at or close to the bottom they are likely to remain constrained and downside risks remain.
The situation today is very different to 2011 when the RBA first started to cut rates in this interest rate cutting cycle which in turn helped unleash booming conditions in the NSW and Victorian economies and rapid debt growth made easy by somewhat lax bank lending standards against a backdrop of undersupplied property markets all of which fuelled rapid growth in Sydney and Melbourne property prices.
By contrast today, household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged pushing Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak.  
So while capital city average prices are likely to bottom by year end, we don’t see a return to boom time conditions but rather expect broadly flat home prices through 2020.
 <img src="https://www.urban.com.au/images/2019/7/1/home%20prices%20.png" alt="">
Source: CoreLogic, AMP Capital
Rising unemployment will be the key to watch. We expect unemployment to drift up to around 5.5% by year end and then to around 6% through next year, but a sharper rise could result in forced property sales and another leg down in property prices.
This is not our base case but is the key risk in terms of the property outlook.
Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5% or below – so our view remains for a rate cut tomorrow (or if not then in August) and further cash rate reductions in November and February next year taking the cash rate to 0.5%.
Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.
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Expect property prices to remain constrained: Shane Oliver 

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EXPERT OBSERVATION
This decade has now seen three global growth scares - around 2011-12, 2015-16 and now since last year.
Each have been associated with softening business conditions indicators (or PMIs) as indicated in the next chart – see the circled areas.
<a href="https://www.propertyobserver.com.au/images/2019/6/20/global%20manufacturing%20.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/6/20/global%20manufacturing%20.jpg" alt="">
And each have been associated with roughly 20% falls in share markets.
<a href="https://www.propertyobserver.com.au/images/2019/6/20/global%20growth.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/6/20/global%20growth.jpg" alt="">
All have seen central banks shift towards easing to varying degrees.
And in the first two this saw growth indicators pick up again and share markets rebound and clearly move on to new highs. We now seem to be seeing a re-run – at least with respect to central banks.
Central banks go from tightening to neutral to easing
It had looked like a shift from a tightening bias to a neutral/slight easing bias – the US Federal Reserve’s “patient” “pause” and end to quantitative tightening and the European Central Bank’s new round of cheap bank financing (what they call TLTRO) and pushing out its guidance on how long it won’t be raising interest rates for – would do it for the Fed and the ECB this time.
But then the trade war resumed in May adding to a new round of fears about global growth and inflation. And so the ECB and Fed look to be going beyond neutral and back to “whatever it takes”, joining central banks in China, India, Australia, New Zealand and other countries in easing:
ECB President Mario Draghi has indicated this week that “in the absence of improvement...additional stimulus will be required” and that it “will use all the flexibility within our mandate to fulfil our mandate”. Further ECB easing could include more rate cuts (taking them further into negative territory) and a return to quantitative easing. ECB easing in July or September is looking very likely.
The US Federal Reserve at its June meeting has clearly shifted in a very dovish direction strongly hinting at interest rate cuts ahead.
It downgraded its economic activity assessment from “solid” to “moderate”, it noted falling inflation expectations, it dropped the reference to being “patient” in raising rates, it noted that uncertainties have risen, it lowered its inflation forecasts to below the 2% target and it said it will “closely monitor” the economy, which is often code for moving to easing.
While its dot plot of Fed officials’ interest rate expectations still sees rates on hold this year, it’s now line ball with eight out of 17 officials now seeing a cut of which seven see two cuts and many of those who have rates on hold see an increased case for a cut and it only requires one of those to shift for the dot plot to move to a cut this year.
What’s more, the dot plot now sees a cut next year and it has lowered the long run rate to 2.5%.
The dot plot is well down from a year ago when three rate hikes were indicated for this year and one for next year.
Overall, absent a clear move towards resolution of trade issues and much better data the Fed looks on track for a cut in July and we continue to see two Fed rate cuts this year.
<a href="https://www.propertyobserver.com.au/images/2019/6/20/fed%20dot%20plot.jpg" target="_blank">Click here</a> to enlarge: 
<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/2019/6/20/fed%20dot%20plot.jpg" alt="">
The shift towards monetary easing by the Fed and ECB risks ramping up currency wars again – at least in the minds of commentators – but as we have seen in the past this is just a means of spreading easing globally. And many central banks are already easing anyway.
This is of relevance to the Reserve Bank of Australia, which would prefer to see a lower Australian dollar.
The Fed now moving towards easing does make the RBA’s job a little bit harder on this front.
However, we still see the RBA easing more than the Fed as the Australian economy is weaker than the US economy and has much higher labour market under utilisation than the US (13.7% of the workforce in Australia versus 7.1% in the US).
So, we still see the Australian dollar heading down to around $US0.65 by year end. But Fed easing which will weigh on the $US generally is one reason why the $A is unlikely to crash to past lows.
Presidents Trump and Xi to meet
In the meantime, Presidents Trump and Xi will meet at the G20 meeting in Japan next week.
This could lead to a delay in the next round of tariff hikes on China - on the roughly $US300 billion of remaining Chinese imports.
Ultimately, I expect a deal to resolve the trade dispute because of the threat to growth in both countries (and the risks this poses to Trump’s 2020 re-election prospects). But given the false starts so far it’s not clear this round of meetings will do it just yet.
But it looks like we will get some combination of a trade deal/easier monetary policy or no trade deal and even easier monetary policy.
Implications for investors
The risks are higher this time around given the trade war mess and with the US yield curve inverting – although it does give false signals, has long lags and may be distorted by the threat of more quantitative easing, recently it may more reflect a plunge in inflation expectations as opposed to growth expectations and the normal excesses that precede US recessions aren’t present to the same degree now.
And there will be bumps along the way, ie shares could still go down in response to weak economic data and trade upsets before they go up and we are in a seasonally weak part of the year.
However, for investors it’s always worth remembering the old line “don’t fight the Fed”...or the ECB or RBA, etc. This is because low rates make shares cheaper and can help boost earnings.
While there is scepticism that central banks with the ultra low/negative rates and QE will do the trick, an investor would have made a huge mistake over the last decade betting against them!
So while the risks are higher this time around, my inclination is still to see the current period as just another global growth scare like those in 2011-12 and 2015-16 which will give way to somewhat stronger growth globally and higher share markets on a six to 12 month view.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.
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