Melbourne developer Spacious Group has completed Voyage Altona, one of the closest new apartment developments to Altona Beach.

Off the plan purchasers have started moving into the 49-apartment project on Pier Street, with the remaining move-in-ready one-, two- and three-bedroom apartments starting from just over $500,000.

Display apartments have now been fitted out, allowing prospective buyers to inspect the completed residences by appointment.

[smartcode_project:default project_id=112195 project_image_fid=372638]

The completed apartments feature open-plan living and dining areas which extend onto private balconies and terraces, while full-height glazing maximises natural light throughout the interiors.&nbsp;

Hybrid timber-look flooring, stone benchtops, Miele appliances, porcelain-tiled bathrooms and generous storage feature throughout the building which also features landscaped communal areas, expansive shared terraces, lift access and secure on-grade parking.

Drawing inspiration from its bayside setting, Voyage adopts a restrained palette of warm neutral tones and textured finishes. Many of the apartments take advantage of views across Port Phillip Bay, while the indoor-outdoor living spaces have been designed to make the most of the coastal outlook.

[smartcode_project:default project_id=112195 project_image_fid=3286]

Voyage was developed to address what Spacious Group identified as an undersupply of higher-quality apartment product in Altona, with a focus on owner-occupiers looking to remain within the bayside community.

"Voyage responds to very strong local buyer demand for quality, owner-occupier-focused product," says Barry Plant Projects Director Jarrod Farey, who has handled sales since the project's launch.

"The project delivers an elevated lifestyle proposition, with its design and quality of finish far exceeding anything previously produced in the area, as well as its proximity to Pier Street Village and the beach."

The majority of purchasers have been local downsizers and owner-occupiers looking to stay within the Altona community but who previously had limited opportunities to buy a brand-new apartment.

[smartcode_project_cta:default project_id=112195]

Joel Robinson

Spacious Group completes Voyage Altona in Altona's beachside precinct

Homecorp has secured approval for a $360 million apartment development at Budds Beach, paving the way for one of the Gold Coast's most amenity-rich residential projects to launch later this year.

Gold Coast City Council has approved Lýon Residences, a 32-level tower that will deliver 178 two and three-bedroom apartments across a prominent corner site at 8-10 Acacia Avenue and 25-27 Oak Avenue.

The approval comes as developers continue to invest in premium lifestyle-driven apartment projects on the Gold Coast, where owner occupiers are increasingly prioritising amenity as much as apartment size and location.

<a href="https://www.apartments.com.au/new-apartments/l-on-residences-25-27-oak-avenue-surfers-paradise-qld-4217">Lýon Residences</a> has been designed around a resort-style wellness offering, headlined by a Moroccan-inspired spa precinct featuring treatment rooms, a Nordic sauna and steam room, hot and cold plunge pools, a soaking pool and a residents-only juice bar.

The rooftop will include a heated infinity pool and spa, residents' lounge with private kitchen and bar, gymnasium, yoga and Pilates studio, outdoor entertaining areas and barbecue facilities overlooking the Surfers Paradise skyline.

<img alt="Lyon" data-entity-type="file" data-entity-uuid="2d3e29af-8793-486e-a684-52cef862241f" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-15%20at%204.32.26%E2%80%AFPM.png?VersionId=ayG2zpLf3SS6Zy8XmKDcQods4kVWb0gm" />

Homecorp Founder and CEO Ron Bakir said Budds Beach provided the ideal location for the company's latest luxury apartment project.

"Budds Beach represents one of the most unique and sought-after pockets of the Gold Coast, and Lýon Residences has been designed to reflect that sense of rarity and refinement," Bakir said.

The project arrives as wellness continues to become a defining feature of new residential developments both in Australia and internationally.

The latest Global Wellness Institute figures show wellness real estate remains the fastest-growing segment of the global wellness economy and is forecast to exceed $1.8 trillion by 2030. Australia continues to rank among the world's 15 largest wellness real estate markets, with developers increasingly integrating health, recreation and community facilities into apartment projects.

Queensland is also experiencing strong population growth, with the Gold Coast continuing to outperform many other Australian cities as demand for new housing remains elevated ahead of the 2032 Olympic and Paralympic Games.

Bakir said the project had been designed to respond to that shift in buyer expectations.

"Strong population growth and sustained demand across the Gold Coast continue to highlight the need for well-designed new housing supply. Lýon Residences responds directly to this demand while setting a new benchmark for residential living," he said.

Each apartment has been designed to maximise views across the coastline, the Nerang River and the Gold Coast hinterland.

Located just minutes from Surfers Paradise beach and the Broadwater, the development also offers easy access to the light rail network, Broadbeach and Burleigh Heads.

Early site works are underway, with construction expected to commence later this year.

Homecorp approved for Budds Beach apartment tower, Lýon Residences

New apartment developments with uninterrupted, north-facing views over Perth's Swan River are exceptionally rare.

Recognising just how limited those opportunities are, <a href="https://www.apartments.com.au/developers/edge-visionary-living">Edge Visionary Living</a>, one of Perth's most respected builder-developers, targeted <a href="https://www.apartments.com.au/developments/applecross-wa-6153">Applecross</a>, assembling an unrepeatable 6,342 sqm riverfront site on the corner of Moreau Mews and Canning Beach Road to create one of Perth's only new north-facing apartment developments directly overlooking the Swan River.

Today, <a href="https://www.apartments.com.au/buildings/riviere-residences-applecross-59-canning-beach-road-applecross-wa-6153">Rivière Residences</a> offers buyers a unique opportunity to choose between completed residences ready to move into now and off-the-plan homes in the final stage, Rivière West.

[smartcode_project:default project_id=28384 project_image_fid=3823]

Across the completed East and Central buildings, residents are already enjoying the development's luxury amenity, while two of the precinct's hospitality venues are now open.

The completed component of the development gives buyers the advantage of experiencing the finished product firsthand, including its uninterrupted river views, while still having the opportunity to secure a residence in the final stage.

"People are wowed by the view and the quality of the apartments,"&nbsp;Edge Visionary Living Sales Executive, Holly McSweeney, says.

"They're looking for the convenience of lock-and-leave living, but they're not looking to downsize on quality."

[smartcode_project:default project_id=28384 project_image_fid=3826]

The rarity of the development hasn't been lost on prospective buyers, McSweeney says.

For McSweeney, it all comes back to a location that is becoming increasingly difficult to replicate.

"Location, location, location," she says. "We are nestled right on the front of the Swan River. You can never get built out, so wherever you are in Rivière Residences, you've got views of the river forever."

The unique waterfront position has resonated particularly strongly with local downsizers. McSweeney says many buyers are long-time Applecross residents looking to transition from large family homes into a luxury apartment without sacrificing space, quality or the lifestyle they've enjoyed for decades.

<iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/N_FowNW0wu8?si=vb25XFq1wZ-iufAW" title="YouTube video player" width="560"></iframe>

A major focus for Edge in recent years has been resident amenity. Across its apartment portfolio, from beachfront developments in Scarborough to luxury towers in South Perth, the developer has increasingly invested in the spaces beyond the apartment itself.

The strategy has largely been shaped by downsizer demand. Many buyers are moving from large family homes with swimming pools and established gardens. While they're looking to leave the maintenance behind, they don't want to compromise on lifestyle.

At Rivière, <a href="https://www.apartments.com.au/architects/hillam-architects">Hillam Architects</a> designed the resident facilities as an extension of each apartment. A 25-metre heated swimming pool takes advantage of the north-facing river outlook, complemented by a large gym, sauna and steam rooms, private dining spaces, residents' lounges, a cinema, games room, and dedicated wine and whisky rooms.

[smartcode_project:default project_id=28384 project_image_fid=372542]

The waterfront location has also proved to be a major drawcard. Residents are within walking distance of the Raffles Hotel, South of Perth Yacht Club, the Heathcote Cultural Precinct and the cafés, restaurants and boutiques along Ardross Street.

Beyond the location and amenity, McSweeney says many buyers take confidence from Edge's fully integrated development model.

Having delivered apartments across Perth for decades, Edge now designs, develops and constructs its projects in-house, giving the company greater control over quality, delivery and the finished product.

"What I love is when people walk through their apartment for the first time and say, 'This is better than what we imagined,'" McSweeney says. "We hear that all the time."

Completed apartments in the East and Central buildings are now available to inspect by appointment, while Rivière West, the final stage of the precinct, is expected to be completed in the first quarter of 2027.

[smartcode_project_cta:default project_id=28384]

North-facing Swan River views drive demand at Rivière Residences in Applecross

Nearly 60 per cent of apartments at McNab Group's $220 million The Tannery development in Brisbane's West End have sold ahead of the project's public launch, including a suburb-record $2.57 million sale for a two-bedroom apartment.

The early sales campaign has secured buyers for 50 of the project's 87 apartments, highlighting continued demand for larger owner-occupier apartments that combine generous floorplans with premium lifestyle amenities in one of Brisbane's most tightly held inner-city suburbs.

[smartcode_project:default project_id=143337 project_image_fid=374768]

McNab Group Executive Chairman Michael McNab said selling more than half the project before launch reflected changing buyer expectations.

"Selling more than half the project before public sales open tells us buyers are actively seeking apartments that offer something genuinely different," McNab said.

"Today's buyers are looking beyond four walls. They want homes that genuinely enhance the way they live, with spaces that support health, connection and everyday wellbeing."

[smartcode_project:default project_id=143337 project_image_fid=374767]

A key point of difference for the project is the adaptive reuse of the heritage-listed Dixon's Tannery building, which will become The Retreat, a residents-only wellness precinct rather than being redeveloped into additional apartments.

The Retreat will feature a sauna and steam room, hot and cold plunge pools, a commercial-grade gym, Pilates studio, cinema, library, co-working spaces and private dining room. Rooftop amenities will include a swimming pool, landscaped gardens, outdoor entertaining areas and dog-friendly spaces.

[smartcode_project:default project_id=143337 project_image_fid=374760]

Designed by Cottee Parker Architects with interiors by Tom Mark Henry and landscape architecture by Aspect Studios, The Tannery comprises 87 two, three and four-bedroom apartments across 11 levels overlooking the Brisbane River.

Cottee Parker principal Dee Passenger said preserving the original tannery building had been central to the project's design.

"The easy option would have been to maximise the site's development potential with additional apartments. Instead, McNab has chosen to preserve the original tannery as a shared wellness retreat, ensuring this important piece of Brisbane's history remains at the heart of the community."

Passenger said sustainability also played a key role in the design, with materials from the original industrial site salvaged and repurposed throughout the development.

[smartcode_project:default project_id=143337 project_image_fid=374761]

Motiv CEO Carly Cottam said buyers had responded strongly to the combination of larger apartments, wellness facilities and the West End lifestyle.

"We are seeing more buyers looking for homes in the sky that provide the space and functionality of a traditional home, while benefiting from the convenience and lifestyle that apartment living brings," Cottam said.

She said purchasers included both owner occupiers and investors, with demand coming from local buyers as well as interstate purchasers.

Coinciding with the public launch, McNab also announced a partnership with Queensland Ballet, whose neighbouring Thomas Dixon Centre shares historical ties with the original Dixon family.

Located on a 4,465 sqm site at 439 Montague Road, The Tannery overlooks the Brisbane River and is around 10 minutes from the CBD.

Construction is underway, with completion expected in the second half of 2027.

[smartcode_project_cta:default project_id=143337]

More than half of residences sold before public sales as McNab announces significant partnership with Queensland Ballet

McNab's The Tannery nears 60 per cent sold before public release, sets two-bedroom West End record

Iwan Sunito's vision for a landmark mixed-use precinct in Sydney's Inner West has taken a major step forward, with approval granted for the $1.9 billion Five Dock development first unveiled earlier this year.

The approved scheme by <a href="https://www.apartments.com.au/developers/one-global-capital">One Global Capital</a> will deliver an 80,500 sqm mixed-use precinct comprising 840 apartments, integrated hotel accommodation, commercial and retail space, alongside publicly accessible open space designed to create a new destination for the growing suburb.

"This is a significant milestone for One Global Capital and for the future of housing delivery in Sydney," Sunito said.

"The Housing Delivery Authority was established to identify major housing projects capable of delivering meaningful supply more efficiently, and we are delighted that Spencer Street has been recognised as one of those projects.”

He said the declaration reflected the rapid progress achieved since acquiring control of the site.

"In less than seven months we have progressed from taking control of the site to securing entry into one of the NSW Government's most important planning pathways. It reflects the experience of our team, the strength of our consultant group led by Urbis, and our long-term commitment to delivering transformational projects that contribute to Sydney's future."

When the project was revealed earlier this year, Sunito described the opportunity as one of the strongest development sites he had worked on.

"I probably hadn't appreciated the uniqueness of the site until more recently when putting together the concept plans," Sunito said.

"The proximity to the water, and the golf course opposite, is unlike any other part of Parramatta Road. We have a unique position and view corridors over the water that makes this one of the best sites I've worked on."

The development has evolved since its initial announcement, with the approved plans increasing the residential component from the originally proposed 750 apartments to 840 homes while retaining the project's focus on creating an integrated neighbourhood rather than a standalone residential development.

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/a-city-within-a-city-iwan-sunito-flags-1-5-billion-mixed-use-precinct-in-five-dock">"A city within a city": Iwan Sunito flags $1.5 billion mixed-use precinct in Five Dock</a>

The precinct will combine apartments with hotel accommodation, commercial workplaces, retail offerings and public spaces, creating a mixed-use environment intended to serve both residents and the broader Five Dock community. The proposal also continues the collaboration between One Global Capital and internationally recognised architect <a href="https://www.apartments.com.au/architects/koichi-takada-architects">Koichi Takada</a>, whose previous work with Sunito includes Infinity, Arc and Skye North Sydney.

Takada previously said the design was driven by a philosophy of integrating nature into the built environment.

"The concept for this development is born from our design approach to naturalising architecture," Takada said.

"The public realm benefits from biophilic design that integrates generous landscaping, and the development is optimised for natural daylight, airflow and water views to foster wellbeing, sustainability and spaces that foster community interaction."

Sunito has consistently described the project as a "city within a city", with a strong emphasis on creating a destination that extends beyond housing.

"We want to create a development that's not only to be seen, but to be experienced by the whole local community," he said.

The approval comes as Five Dock continues its transformation ahead of the opening of the Sydney Metro West line, with the new Five Dock station set to significantly improve connections between the Inner West, Parramatta and the Sydney CBD.&nbsp;

The precinct will also benefit from its proximity to the Parramatta Road corridor, nearby waterfront parklands and established retail and dining offerings that have made Five Dock one of Sydney's most tightly held Inner West suburbs.

Iwan Sunito secures approval for $1.9 billion Five Dock mixed-use precinct

Shane Oliver

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EXPERT OBSERVATION
Australian GDP rose by 0.4% in the March quarter and annual growth slowed to 1.8%, which missed market forecasts of 0.5% and is also a little weaker than the RBA's recent forecasts. This was the weakest annual growth since September 2009.
The weakness in the Australian economy that started in mid-2018 has continued into early 2019 with the latest GDP data showing low economic growth in the March quarter (see chart below).
What’s more the make-up of growth in the March quarter remains concerning with falling private final demand for the second quarter in a row. Were it not for government spending and net exports GDP growth would have been zero.
We expect that this low growth environment will continue in Australia for now and we see GDP growth averaging around 1.75% over 2019, which is below RBA’s forecasts for growth around 2.75%.  
The economy is now in its 28th year of recession-free economic growth, and while the near-term outlook for growth still looks positive as the various parts of the economy muddle through, the outlook for 2020 looks challenging as government infrastructure spending looks like it will slow after this year, residential construction looks likely to continue to decline, the consumer is expected to remain weak and risks are building around the global economic outlook as a result of Trump’s trade wars. So we see a higher risk of an Australian recession in 2020 (risk of around 25% from 15% before).
More RBA interest rate cuts along with fiscal stimulus are likely to be necessary to offset the threat to growth. 
<a href="https://www.propertyobserver.com.au/images/2019/6/5/gdp%20growth.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/6/5/gdp%20growth.png" alt="">
Source: ABS, AMP Capital
The key components of the data are:
<ul type="disc">
<li>
Consumer spending rose by 0.3%, contributing 0.1 percentage points to March quarter GDP, and annual growth in spending declined to 1.8%. The household savings rate increased again, to 2.8% after bottoming at 2.5% in the September quarter. We expect that the fall in home prices and the associated negative wealth effect will push the household savings ratio higher over the next 1-2 years which will be a drag on consumer spending as wages growth is stuck at just over 2%. But consumer spending will benefit from the latest RBA interest rate cut (and further potential cuts) as well as tax stimulus, announced in the Federal Budget which will be paid after July when households do their tax return.</li>
</ul>
<ul type="disc">
<li>
Housing investment continues to decline with residential construction down by 1.8% in the March quarter, alterations and additions spending falling by 3.8% and ownership transfer costs (a proxy for housing turnover activity) plummeting by 13.0% which all detracted 0.3 percentage points from growth. Building approvals for residential property have continued to fall so there is still further downside to residential construction. </li>
</ul>
<ul type="disc">
<li>
Underlying business investment (which takes into account asset transfers between the private and public sector) rose by 0.5% and contributed 0.1 percentage points to growth. Non-residential building activity is lifting after many quarters of weakness, engineering construction fell and machinery and equipment investment declined marginally. The outlook for non-mining investment is still looking okay, particularly for manufacturing, and mining investment looks like it is starting to lift again after falling since 2012 as commodity prices have held up well. </li>
</ul>
<ul type="disc">
<li>
Underlying government spending (which takes into account asset transfers between the private and public sector) rose by 0.7% and contributed 0.2 percentage points to growth. State and Federal government spending on infrastructure has been driving public spending over the past few years. While there are still many projects in the construction pipeline (particularly for transport), the pace of growth in public spending is declining and recent state government budgets indicate lower revenue (as stamp duty collections have fallen) and therefore some tightening in state fiscal spending which means that government spending growth will start to slow and in the absence of more infrastructure projects may become a drag on the economy later in 2020.</li>
</ul>
<ul type="disc">
<li>
Inventories detracted 0.1 percentage points from growth as farm and public inventories collapsed (following a build up in the prior quarter) but private inventories increased.</li>
</ul>
<ul type="disc">
<li>
Net exports contributed 0.2 percentage points to growth with a rise in export volumes and a fall in import volumes. Australia’s external sector is doing extremely well from the booming iron ore price (around $100USD/tonne) which is a boost to the government’s budget. But the risk is that the weakening global environment, particularly around trade, will hit net exports.</li>
</ul>
<ul type="disc">
<li>
Inflation pressures and wages growth are still poor. Inflation as measured by the private final consumption deflator was just 0.4% in the March quarter or 1.5% over the year. Average compensation per employee was up by just 0.4% or 1.4% over the year which is well below the wage price data (of 2.3% year on year) reflecting compositional changes.</li>
</ul>
<ul type="disc">
<li>
Productivity declined by 0.4% in the March quarter and is down by 0.9% which reconciles the divergence between strong employment growth and the weakening GDP numbers. </li>
</ul>
Implications
With economic growth running well below potential, which is around 2.75%, the RBA will need to cut interest rates multiple times to get growth up and get the unemployment rate down below 4.5% (it is currently 5.2%) in order to get inflation back into its 2 to 3% target range.
We see another 0.25% rate cut in July or August and two more rate cuts in the first half of 2020 which will take the cash rate to 0.5% in 2020. Hopefully additional fiscal stimulus will help too. The need for quantitative easing is a rising risk, but hopefully it won’t be necessary.  
DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital.
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soliver-smf6LQXgW9

RBA to cut interest rates to 0.5%: Shane Oliver 

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EXPERT OBSERVER
As had become widely expected in the past two weeks, the Reserve Bank of Australia has cut the official cash rate by 0.25% which takes it to 1.25%.
This is the first move in official interest rates since August 2016 but is the 13th rate cut in this rate cutting cycle that started back in November 2011 when rates were 4.75%. (It’s not a new rate cutting cycle as rates have not been raised since they started to fall in 2011.) This takes the cash rate to a record low 1.25% in the longest easing cycle on record.
Assuming banks cut their rates by 0.25% it will take deposit rates to their lowest since the mid-1950s and headline mortgage rates to their lowest since the early 1950s, although some mortgage rates are already at record lows.
<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/2019/6/5/Chart1.jpg" alt="">
So what’s driven this? Will it help the economy? How low might rates go? And what does it mean for investors?
What drove the rate cut?
Put simply economic growth has slowed sharply below its long- term potential reflecting the housing downturn, but other factors from drought to the threat to global growth from the US trade wars cloud the outlook.
This in turn has seen the outlook for unemployment deteriorate – at a time when there is still a high combined level of unemployed and underemployed (at 13.7% of the workforce). Which in turn threatens to keep wages growth low and inflation below the RBA’s 2-3% inflation target for even longer.
Reflecting this the RBA has revised down sharply its growth and inflation forecasts over the past six months and now doesn’t see inflation rising above 2% out to 2021 even with the technical assumption of two rate cuts.
The RBA has concluded that it needs much lower unemployment than the 5% or so recently seen to get inflation back to target. But recent indicators point to rising unemployment. Hence the RBA has returned to cutting the cash rate to help boost growth.
What’s driving low inflation?
Inflation was just 1.3% over the year to the March quarter. Abstracting from volatile items, underlying inflation is just 1.4%.
This reflects a combination of weak demand, high levels of spare capacity &amp; underutilised workers, intense competition, technological innovation &amp; softish commodity prices. The problem is that inflation has been undershooting RBA forecasts and the inflation target for some time, threatening its credibility.
<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/2019/6/5/Chart2.jpg" alt="">
What’s wrong with low inflation anyway?
Surely low price rises or falling prices are good. So, many have suggested the RBA should just lower its inflation target. Such arguments are nonsense. First, the whole point of having an inflation target is to anchor inflation expectations. If the target is just moved each time it’s breached then those expectations will blow around. There would be no point having an inflation target.
Second, there are problems with allowing too-low inflation. Statistical measures of inflation tend to overstate actual inflation by 1-2% because statisticians have trouble adjusting for quality improvements. And targeting too low an inflation rate could mean we are knocked into deflation in an economic downturn.
Third, deflation is not good if its associated with falling wages, rising unemployment, falling asset prices and rising real debt burdens – particularly when debt levels are high. It risks a debt deflation spiral of falling asset prices &amp; incomes leading to rising debt burdens and defaults, and more falls in asset prices, etc.
Finally, targeting very low inflation gives central bankers less flexibility to achieve easy monetary policy in downturns as they have limited ability to achieve negative real interest rates.
More simply, low inflation is synonymous with low wages growth and this is contributing to a sense of dissatisfaction in the community. Getting both up to more normal levels is desirable.
It’s global not just local
While its natural to assess the RBA in isolation it’s clear that it is being caught up in global forces. The weakness in inflation is evident globally and reflects the same drivers as in Australia. Combine this ongoing softness in inflation with the latest threat to global growth – from Trump’s trade wars – and bond yields have pushed to new record lows globally. Reflecting this Australia bond yields have also been pushed to a new record low. So, the RBA is really just ratifying global market forces!
<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/2019/6/5/Chart3.jpg" alt="">
&gt;
How far will the RBA cut rates?
Rate cuts are a bit like cockroaches. If you see one there is normally another nearby. We expect another 0.25% rate cut in July or August and two more rate cuts by mid next year taking the cash rate to 0.5%. We had thought 1% would mark the low and positive signs regarding residential property prices are helpful in this regard.
But the flow of weak economic data and increasing risks to the global outlook with Trump’s trade wars and the slowing jobs market pointing to unemployment rising to 5.5% by year end make it hard to see just two rates cuts being enough, given that the RBA really needs to see unemployment fall to 4% or below to get inflation back to target.
But will the banks pass on RBA rate cuts?
With the recent reduction in bank funding costs meaning that last year’s 0.1-0.15% mortgage rate hikes should now be reversed and nearly 90% of bank deposits on interest rates above 0.5% (and hence able to be cut) we expect most banks to pass on all or the bulk of the RBA’s cut to customers. Short of a funding cost blow out, the interest rate structure on deposits should allow the bulk of subsequent cuts to be passed through but this may diminish as the cash rate reaches 0.5%.
But will more rate cuts help anyway?
Various arguments have been put up against RBA rate cuts: it should “preserve its fire power till it’s really needed”; “rate cuts haven’t helped so far so why should more cuts help”; “low rates won’t help as they cut the spending power of retirees and many of those with a mortgage just maintain their payments when rates fall”. However, looking at these in turn:
First, waiting till rate cuts are “really needed” risks leaving it too late as by then the economy will be in recession – monetary policy needs to be forward looking.
Second, rate cuts have helped the economy rebalance after the end of the mining investment boom by supporting non-mining spending. If the cash rate was still 4.75% and mortgage rates 7.5% the economy would have long ago gone into recession.
Finally, the level of household debt is more than double that of household deposits, so the household sector is a net beneficiary of lower interest rates. The responsiveness to changes in spending power for a family with a mortgage is far greater than for retirees. And, even if many with a mortgage just let their debt get paid off faster in response to falling rates this provides an offset to the negative wealth effect of the fall in house prices, reducing pressure to cut spending.
And RBA rate cuts help keep the $A lower. So, while rate cuts may not be as potent with higher household debt levels and tighter lending standards, they should provide some help for households with a mortgage and for businesses that compete internationally.
Should the RBA do quantitative easing?
As the cash rate falls, we are likely to see an increasing debate around whether the RBA will use quantitative easing - ie using printed money to buy bonds to inject cash into the economy. QE is not our base – as we don’t think things are that bad – but as has been the case at other major central banks the RBA is likely to prefer exhausting cash rate cuts before considering QE and this is unlikely until it gets the cash rate down to 0.5% (beyond which lower rates will be a negative for the banks).
QE is an option but to the extent that it lowers 10-year bond yields it may not help much in Australia as most household borrowing is on short term rates. It’s also debatable as to whether QE was the best approach globally. A more efficient and fairer option may be for the RBA to work with the Federal Government to provide direct financing of government spending or “cheques in the mail” to households with use by dates.
This is often referred to as “helicopter money”. Such stimulus would be guaranteed to boost inflation! Hopefully, it won’t come that, and we don’t think it will but it’s an option. In the meantime, more fiscal stimulus could take some pressure off the RBA.
Implications for investors?
There are a number of implications for investors from the continuing fall in interest rates. First, low interest rates will remain in place for some time keeping bank deposit rates unattractive so it’s important for investors in bank deposits to assess alternative options.
Second, the low interest rate environment means the chase for yield is likely to continue supporting commercial property, infrastructure and shares offering sustainable high dividends. Eg, the grossed-up yield on shares remains far superior to the yield on bank deposits. Investors need to consider what is most important – getting a decent income flow from their investment or absolute stability in the capital value of that investment. Of course, the equation will turn less favourable if economic growth weakens too much.
<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/2019/6/5/Chart4.jpg" alt="">
Third, the earlier than expected rate cut will likely contribute along with the election result and other recent moves to an earlier bottom in Australian house prices. However, with still high debt levels, tight lending conditions and rising unemployment it’s unlikely to set off another property boom.
Finally, RBA rate cuts will help keep the $A down in the face of already high short $A positions, strong iron ore prices and rising risks that the Fed will cut rates this year.
DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital.
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What the RBA rate cut means for investors: AMP's Shane Oliver

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EXPERT OBSERVATION
This month’s RBA Board meeting saw interest rates remain on hold for the 30th meeting (or 33rd month) in a row.
While the RBA still sees the labour market as being strong it has further revised down its 2019 growth forecast to 2.75% (from 3% in February and from 3.25% in November) and its underlying inflation forecast to 1.75% for this year (from 2% in February and from 2.25% in November) and to 2% for next year (from 2.25% in February). This reflects weaker than expected data for growth and inflation in recent months.
Our expectation was that the RBA would cut at this meeting particularly given the weak March quarter inflation outcome. But given the timing of the election and the RBA’s focus on the jobs market it was a close call and in the event while the RBA has yet again lowered its growth and inflation forecasts it has opted to leave rates on hold for the time being.
Unfortunately we won’t really know whether the RBA has moved to an easing bias until the Minutes are released for this meeting in two weeks time because in recent times it has expressed its bias either in the minutes or in speeches. However, in a dovish twist it noted at the end of its post meeting statement that it recognises “that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target.”
This continues the RBA’s focus on the labour market and implies that in the absence of a further improvement in the labour market inflation won’t head back to target. Which in turn would be consistent with rate cuts.
Our assessment is that unemployment will drift up from here – not dramatically but to around 5.5% by the end of the year – and we continue to see the RBA cutting the cash rate to 1% by year end. We have pencilled in a cut for June but concede that the RBA may wait a bit longer given that there is only one month’s worth of jobs data to be released between now and then. 
The problem for the RBA is that inflation has been undershooting its forecasts and the 2-3% inflation target for several years now. The longer this persists the more the RBA will lose credibility, seeing low inflation expectations become entrenched making it harder to get inflation back to target and leaving Australia vulnerable to deflation in the next economic downturn.
<a href="https://www.propertyobserver.com.au/images/2019/5/7/RBA.png" target="_blank">Click here </a>to enlarge:
<img src="https://www.urban.com.au/images/2019/5/7/RBA.png" alt="">
Source: RBA, Bloomberg, AMP Capital 
DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist for AMP Capital.
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RBA rate cuts are coming: Shane Oliver 

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Our base case remains that national capital city property prices will have a top to bottom fall of 15% out to a bottom in 2020 of which they have so far done nearly 10% and that for previous boom time cities of Sydney and Melbourne the top to bottom decline will be around 25% (of which they have so far done nearly 15% and 11% respectively). 
The negatives weighing on the property market remain significant and include tight credit (which will get another boost from mid-year with the start-up of Comprehensive Credit Reporting which will see banks crack down on borrowers with multiple undeclared loans), the ongoing switch from interest only to principle and interest loans, record unit supply still to hit particularly in Sydney and Melbourne, an 80% collapse in foreign demand, fears that negative gearing and capital gains tax arrangements will be made less favourable if there is a change of government and falling prices feeding on themselves with FOMO (the fear of missing out) becoming FONGO (the fear of not getting out).
Taken together these are continuing to drive a perfect storm for the Sydney and Melbourne property markets because they saw the strongest gains into 2017 and had become more speculative with a greater involvement by investors. 
<a href="https://www.propertyobserver.com.au/images/2019/5/1/shane%20oliver%201%20.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/5/1/shane%20oliver%201%20.png" alt="">
 
Source: CoreLogic, AMP Capital
The slowing in the pace of home price falls (from -1.3% in December to -1.2% in January to -0.9% in February to -0.7% in March to 0.5% in April for the capital cities), along with a bounce in housing finance in February and a pick-up in auction clearance rates from their lows late last year are positive signs and at least suggest that we are not seeing any of the panic/forced selling that some had feared would occur. 
However, the bounce in auction clearance rates looks to be largely seasonal and they remain historically weak, the nearly five year decline in Perth and Darwin property prices has seen several phases where price declines slowed then accelerated again and the start-up of Comprehensive Credit Reporting means that the tightening in lending standards could still have another leg to go, less favourable negative gearing and capital gains tax arrangements if there is an ALP victory could see renewed pressure on property prices next year and property prices outside of Sydney and Melbourne have been proving to be a bit weaker than we expected.
Implications for interest rates
Ongoing home price falls will depress consumer spending as the wealth effect has now become negative and homeowners are less inclined to allow their savings rate to decline further to compensate for weak wages growth. It’s also a negative for banks and is consistent with our view that the RBA will cut the cash rate to 1% by year end.
With growth slowing and inflation coming in weaker than expected, rate cuts are likely to come earlier than our previous expectation for cuts in August and November, with the first cut probably coming next week (although we admit that a May rate cut is a close call given its in the midst on an election campaign).
<a href="https://www.propertyobserver.com.au/images/2019/5/1/shane%20oliver%202.png" target="_blank">Click here</a> to enlarge: 
<img src="https://www.urban.com.au/images/2019/5/1/shane%20oliver%202.png" alt="">
Source: CoreLogic, AMP Capital
What will stop the property price falls?
It’s a while off yet but we expect a combination of RBA rate cuts flowing to lower mortgage rates, improved affordability thanks to lower prices, continuing strong population growth, the prospect of slowing new supply and possibly some form of Government support (like a new round of Federal First Home owner grants and/or a reduction in APRA’s minimum 7% mortgage serviceability test for new home loans) to help prices stabilise sometime around next year.
An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed around four months after the first cut, although it is worth noting stronger supply conditions, tighter lending standards, higher debt to income ratios and depressed investor confidence will likely constrain the response of house prices to interest rate changes this time around.
 
Key points: 
<ul type="disc">
<li>Although the rate of decline has slowed further, Australian capital city dwelling prices fell another 0.5% in April according to CoreLogic. This marks 19 months of consecutive price declines since prices peaked in September 2017. This has left prices down 8.4% from a year ago and they have now fallen 9.7% from their September 2017 high which is worse than their GFC decline of 7.6%.</li>
<li>Sydney dwelling prices fell another 0.7% and they have now fallen 14.5% from their July 2017 high, which is their worst fall since the early 1980s recession. Melbourne prices fell another 0.6% and are down 10.9% from their November 2017 high, which is their worst fall in the period since 1980. Perth prices fell another 0.4% and are now down 18.4% from their 2014 high and Darwin prices fell another 1.2% and are down 28.3% from their 2014 high. Prices also fell in Brisbane (-0.4% in April and down 1.9% for their recent high) and Adelaide (-0.1% in April and down 0.7% from their recent high) and even Hobart is now falling with a decline of 0.9%. Canberra was the only capital city to see a gain (+0.4%). </li>
<li>While Sydney and Melbourne have seen the steepest falls since 2017 (because they had the biggest boom between 2012 and 2017), other cities are pretty soft too with Perth and Darwin having been falling for five years now and Brisbane and Adelaide are proving weaker than we had expected despite not having had the prior boom that Sydney and Melbourne and, much earlier, Perth and Darwin had.   </li>
</ul>
SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital
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Australian house prices down again in April with still more to go: Shane Oliver 

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EXPERT OBSERVATION 
The Australian March quarter Consumer Price Index showed flat headline inflation over the quarter and annual inflation falling to 1.3%, missing expectations of a 0.2% quarter on quarter rise.
The bigger downside surprise came from weaker underlying inflation.
Underlying inflation, as measured by the trimmed mean and weighted median, averaged 0.2% over the quarter and 1.4% over the year which missed consensus expectations of 0.4% quarter on quarter and 1.7% year on year.
The RBA uses underlying inflation as the best guide to fundamental price trends in the economy because it excludes volatile price changes.
Inflation continues to track below the RBA’s 2-3% target band (see chart below) and the central bank is likely to revise down its inflation forecasts.
<img src="https://www.urban.com.au/images/2019/4/19/abs%20.png" alt="">
Source: ABS, AMP Capital
In the March quarter, the largest price rises came from the usual seasonal sources (education and medical services), a lift in motor vehicle prices and a rise in food prices (particularly vegetables). But these were offset by price falls for fuel (given a sharp decline in petrol prices) and domestic and international holiday travel (a seasonal effect). 
While the petrol price has since bounced back the lack of underlying pricing pressure in the economy is evident in pricing weakness across areas like clothing, rents, household equipment and services and communications. The weakness in underlying inflation shows that businesses are still finding it challenging to lift prices in the face of ongoing spare capacity, intense competition and weak demand.
Other measures of underlying inflation also remain very low. Inflation excluding food and energy, which is the US core measure of inflation, is running at just 1.3% year on year (in the US its running at 2% year on year) and inflation in the private sector of the economy (excluding volatile items) is at 1.4% year on year (as measured by the “market goods and services ex volatiles items” index).
Implications
The weakness in Australian inflation confirms the spare capacity remains significant in the economy. With GDP growth expected to remain low in 2019 – at around 2.3% - spare capacity and weak demand will continue to put downward pressure on prices and wages.
The March quarter inflation data missed the RBA forecasts (see chart below), which continues the trend over the past few years of the RBA overestimating inflation, and means that the central bank is likely to downgrade its inflation forecasts yet again next month. The longer inflation undershoots the 2-3% target, the greater the risk that the target will lose credibility. This in turn will see low inflation expectations become more entrenched making it in turn even harder to get inflation back to target. 
Lowering the target would be a huge mistake and would see inflation targeting lose all credibility and only lock in low inflation (and the risk of deflation) for longer.
<img src="https://www.urban.com.au/images/2019/4/19/abs%202.png" alt="">
Source: ABS, AMP Capital
We have been looking for two rate cuts this year since last December and had thought that the RBA would wait till after the election before starting to move. However, with underlying inflation coming in much weaker than expected our base case is now that the first cut will come next month, with the RBA likely to conclude that it’s too risky to wait until unemployment starts to trend up.
Shane Oliver is Head of Investment Strategy and Chief Economist AMP Capital.
Diana Mousina is an Economist at AMP Capital. 
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j.ballantyne1990-6AQqhLzZaK

RBA rate cuts imminent, probably starting in May: Shane Oliver

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Shane Oliver, head of investment strategy and chief economist at AMP Capital, the first major economist to forecast cash rate cuts, has slightly shifted his view saying that we could see the first rate cut pushed back.
His original forecast of multiple 0.25% rate cuts was made back in the first week of December last year.
Since this point a number of economists and institutions have made similar forecasts, including Westpac's chief economist Bill Evans and Alan Oster, NAB's chief economist.
Oliver suggested the first cut would come around June.
Today he suggests it will now come later given some better than expected economic data.
In his original forecast the reasons he gave were a combination of "falling house prices, tightening credit conditions and constrained growth which will keep wages growth weak and inflation below target".
Shane Oliver said, "however, with the RBA still seeing the next move as being up it will take them a while to change their thinking so we don’t see rates being cut until second half next year."
"When it does start cutting the RBA will likely stick to 0.25% increments and since rate moves are a bit like cockroaches there is likely to be more than one." 
He recently revised his forecast.
In the latest weekly report he released Mr Oliver stated, "due to somewhat better economic data lately, tax cuts for low and middle income earners regardless of who wins the election and ongoing RBA optimism about the economy picking up, rate cut expectations have faded a little bit."
"However, while this could see the first rate cut pushed back out a bit we continue to see the RBA cutting rates twice this year as the housing downturn dampens economic growth and keep inflation below target for longer."
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Shane Oliver pushes cash rate cut forecast back to later this year

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EXPERT OBSERVATION
When I was in my early 20s I thought socialism might be the way to go. Two things happened. One I studied economics which led me to the conclusion that socialism/heavy state intervention doesn’t lead to the best outcome in terms of living standards for most. Second, I had the benefit of a trip to the USSR before it and the eastern bloc disintegrated. It must have been Paul McCartney’s faux Beach Boys’, “Back in the USSR” that got me interested! Sure the history and scenery were fantastic and I like the fact that I saw it before the wall came down – but economically it was a mess. And trying to spend excess roubles before we left the USSR was a struggle (nothing but off chocolate to spend them on). “Socialism” seemed to work a bit better in the Deutsche Democratic Republic - but not really and it was a relief to come through Checkpoint Charlie knowing decent food (McDonald’s) was waiting.
So I ended up gravitating to the centre with the view that the best approach is to allow a market economy with the government providing a good safety net, education and intervening where there are market failures. But a wise man told me when I was young that it’s best to start off on the left when you are young otherwise you will end being like Attila the Hun, as you move to the right as you age. Given the tendency for the young to start off on the left its no surprise to see younger generations favour a bigger role for government in what The Economist magazine has dubbed “millennial socialism”.
<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/2019/3/14/role%20for%20government%20.jpg" alt="">
If the millennials and Gen Z follow the normal pattern they will shift to the right as they age like their forebears. So nothing new! Well maybe but there is a big difference now compared to the 1980s. Back in the 1980s the political pendulum (or technically the median voter) was moving to the right. So my ageing was in tune with a big picture political cycle. Now the pendulum is swinging left. We first looked at this three years ago. Since then it’s become more evident. This note looks at what’s driving it and what it means for investors.
Political cycles beyond elections
Just as the weather, economies and financial markets go in cycles so it is with politics, even beyond standard electoral cycles. This has been clearly evident over the last century:
1930s-1970s - the Great Depression gave rise to a fear of deflation and high unemployment and a scepticism of free markets. The political pendulum swung to the left and culminated in the economic disaster of the high tax, protectionism, growing state intervention and the welfare state of the late 1960s and 1970s that gave rise to stagflation.
1980s-2000s – stagflation and the failure of heavy government intervention gave rise to popular support for the economic rationalist/right of centre policies of the 1980s. Thatcher, Reagan and Hawke and Keating ushered in a period of deregulation, freer trade, privatisation, lower marginal tax rates, tougher restrictions on access to welfare, measures to reign in budget deficits and other supply side economic reforms designed to boost productivity. The middle class didn’t support higher taxes on the rich because they aspired to be rich. This was all helped along by the collapse of communism and the integration of the old USSR and China into global trade. The political pendulum swung to the right and there was talk of “The End of History” with general agreement that free market democracies were the way to go.
2010 - ? – but post the global financial crisis (GFC) it seems the pendulum is swinging to the left again and support for economic rationalist policies seems to be fading if not reversing.
What’s pushing the political pendulum to the left?
This reflects a range of factors, in particular:
<ul>
<li>the feeling that the GFC indicated financial de-regulation had gone too far;</li>
<li>constrained and fragile economic growth in recent years;</li>
<li>stagnant real wages and incomes for median households;</li>
<li>high household debt levels preventing individuals from</li>
<li>taking on more debt as a way to boost living standards;</li>
<li>rising levels of inequality and perceptions that “it’s unfair”;</li>
<li>the perceived failure of the baby boomer generation of political leaders to do much about climate change;</li>
<li>examples of big business doing the wrong thing;</li>
<li>a backlash against immigration in some countries; and </li>
<li>a backlash against globalisation.</li>
</ul>
Of course, it’s being aided by a dimming of memories of stagflation of the 1970s and its causes and the failures of socialism as highlighted by the USSR (although Venezuela provides a current example). So government related solutions or socialism seem more attractive. Allied to this are economic theories like Modern Monetary Theory (or rather, Magic Mushroom Theory) that contends governments can borrow and spend freely in the current environment of spare capacity globally spurred along by the crazy argument that quantitative easing did not cause hyper inflation and higher interest rates so why should bigger budget deficits.
Of these rising inequality and perceptions of stagnant living standards are the big ones. The next chart shows the Gini coefficient, which is about the best measure of income inequality, calculated on incomes after taxes and transfers. It ranges from zero or perfect equality to one indicating perfect inequality with one household/individual, receiving all income.
<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/2019/3/14/inequality%20.jpg" alt="">
The key point is that there has been a general trend higher in inequality during the past 30 years. This is particularly evident in the emerging world but also the US, UK and Australia. Rising levels of income inequality also appears to have come with increase in wealth inequality. Rising inequality may have been more bearable or “masked” in the 1990s and 2000s as nominal income was rising faster and households took on debt to boost their living standards. But in recent times this has become harder and so rising inequality is leading to a backlash.
The political response
In this environment (often populist) politicians have been able to easily tap into voter anger and argue the case for greater public sector involvement in the economy.
This was evident in support for self-declared socialist Bernie Sanders and Donald Trump in the US in 2016 (although Trump’s focus on deregulation and tax cuts look like a temporary deviation right). It’s now even more evident in the Democrats with the Green New Deal (that plans to rid the US of carbon emissions – and planes &amp; cows – in a decade) and 2020 Democrat presidential aspirants adopting variations of Bernie Sanders’ policies, with proposals for wealth taxes and a 70% tax rate for income above $10 million (which is supported by 59% of Americans). It’s also evident in less US public concern about rising public debt.
It’s been evident in the Brexit vote in the UK which represented a backlash against globalisation and the left wing turn in the British Labour Party under Jeremy Corbyn.
In Australia, we are seeing an intensification of theleft right divide not seen since1970s. The ALP is far from the economic rationalist policies of Hawke and Keating. Policies of higher taxes for the “big end of town” (bringing back the Budget Repair Levy and winding back various tax concessions), significantly increased spending on health and education, some reregulation of the labour market and talk of raising the minimum wage to become a “living wage” all suggest a populist focus reflecting a change in voter preferences. The same pressures are also evident in some ways in proposed intervention in the energy sector.
Qualifications
Of course, there are various qualifications to this leftward shift. First, it’s most evident in Anglo countries because it's here that the swing to the right and economic rationalism was most pronounced in the 1980s and 90s and where inequality is more of an issue. Europe never fully bought into the supply side revolution of Thatcher and Reagan and inequality has not risen much. In fact, France under Macron looks to be embarking on its own version of Thatcherism (with the yellow jacket protests proving nothing more than that Macron is actually doing something) which should augur well for its long-term prospects if Macron stays the course. Second, it’s arguable that if the Democrats are to win the US presidential election next year they have to win the mid-west and a socialist presidential candidate may not cut it there. Third, even many on the left are sceptical of ever larger budget deficits – eg in Australia the ALP has been talking of a stronger budgetary position. Finally, there is an argument that a modest move left is necessary to curb the rise in inequality and so save capitalism – much as Keynesian economics “saved” it after the Great Depression.
But what does it all mean for investors?
The risk over time is that a more left leaning electorate will mean a tendency towards bigger government, bigger budget deficits, more regulation, higher effective top marginal tax rates, less globalisation and tougher rules on immigration in some countries. Or it may just mean a stalling in economic reforms. The risk is that it will act as another constraint on productivity and economic growth and eventually see higher inflation if the supply side of the economy suffers.
It's worth putting this in context. The swing in the political pendulum to the right and the economic rationalist/supply side policies – of deregulation, privatisation, smaller government, tax cuts, low inflation, globalisation - that followed along with the peace dividend from the collapse of communism and attractively high starting point dividend yields and bond yields created a powerful tail wind that drove strong returns in shares and bonds starting in the early 1980s.
Now the environment is very different. Starting point investment yields are ultra-low for most assets and a reversal of economic rationalist policies in favour re-regulation, higher taxes and more government risk slowing productivity growth and eventually resulting in higher inflation.
The key point is that the powerful tailwind from the economic rationalist policies (deregulation, smaller government and globalisation) is now behind us and is contributing along with a range of other factors to a much more constrained return environment for investors. Our medium-term projection for the investment return from a balanced mix of assets have been steadily declining in recent years and is now running around 6.4% pa, which is down from over 10% a decade ago.
In this environment, there is a strong case to focus on investment strategies targeting the achievement over time of goals defined in terms of returns, investment income or whatever is required and using a flexible approach to do so as opposed to relying solely on set and forget strategies that depend heavily on market-based returns. There is also a case to look out for assets that may buck the trend of constrained returns as support for economic rationalist policies recede. French shares may be worth looking at!
DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist for AMP Capital
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The political pendulum swings back to the left - what it means for investors: Shane Oliver

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Prior to the 1960s most share investors were long-term investors who bought stocks for their dividend income.
Investors then started to focus more on capital growth as bond yields rose relative to dividend yields on the back of rising inflation.
However, thanks to an increased focus on investment income as baby boomers retire, interest in dividends has returned.
This is a good thing because dividends are good for investors in more ways than just the income they provide.
Australian companies pay out a high proportion of earnings as dividends.
<img src="https://www.urban.com.au/images/2019/2/27/SHOL%201.JPG" alt="">
This is currently around 65% compared to around 45% for global shares. However, some argue that dividends don’t matter – as investors should be indifferent as to whether a company pays a dividend or retains earnings that are reinvested to drive growth.
Or worse still, some argue that high dividend pay outs are a sign of poor long-term growth prospects, that they are distraction from business investment or that they are often not sustainable. And of course, some just see dividends as boring relative to speculating on moves in share values.
My assessment is far more favourable. Seven reasons why dividends are cool First, dividends do matter in terms of returns from shares.
For the US share market, it has been found that higher dividend payouts lead to higher earnings growth.
This is illustrated in the next chart, which shows that for the period since 1946 when US companies paid out a high proportion of earnings as dividends (the horizontal axis) this has tended to be associated with higher growth in profits (after inflation) over the subsequent 10 years . And higher profit growth drives higher returns from shares.
So dividends do matter and the higher the better (within reason).
There are several reasons why this is the case: when companies retain a high proportion of earnings there is a tendency for poor hubris driven investments; high dividend payouts are indicative of corporate confidence about future earnings; and high payouts indicate earnings are real.
Second, dividends provide a stable contribution to the total return from shares, compared to the year-to-year volatility in capital gains. Of the 11.7% pa total return from Australian shares since 1900, just over half has been from dividends.
<img src="https://www.urban.com.au/images/2019/2/27/SHOL%202.JPG" alt="">
Third, the flow of dividend income from a well-diversified pool of companies is relatively smooth. As can be seen below, dividends move in line with earnings but are smoother.
Companies like to manage dividend expectations smoothly. They rarely raise the level of dividends if they think it will be unsustainable.
Sure, some companies do cut their dividends at times, but the key is to have a well-diversified portfolio of sustainable and decent dividend paying shares.
Fourth, investor demand for stocks paying decent dividends will be supported as the ranks of retirees swell.
Fifth, with the scope for capital growth from shares diminished thanks to relatively high price to earnings ratios compared to say 40 years ago, dividends will comprise a much higher proportion of total equity returns.
More than half of the total medium-term return from Australian shares is likely to come from dividends, once allowance is made for franking credits.
Sixth, dividends provide good income. Grossed up for franking credits the annual income flow from dividends on Australian shares is around 5.7%. That’s $5700 a year on a $100,000 investment in shares compared to $2150 a year in term deposits (assuming a term deposit rate of 2.15%).
Finally, while Australian shares are still 10% below their 2007 high, once reinvested dividends are allowed for (ie looking at the ASX 200 accumulation index) the market is well above it.
Another way to look at dividend income How powerful investing for dividend income can be relative to investing for income from interest is illustrated in the next chart.
It compares initial $100,000 investments in Australian shares and one-year term deposits in December 1979.
The term deposit would still be worth $100,000 and last year would have paid $2,200 in interest.
By contrast the $100,000 invested in shares would have grown to $1,111,435 as at December last year (blue line) and would have paid $47,792 in dividends last year (blue bars).
Or around $62,240 if franking credits are allowed for. Over time an investment in shares can rise but a term deposit is fixed.
<img src="https://www.urban.com.au/images/2019/2/27/SHOL%203.JPG" alt="">
But don’t dividends crimp capex?
This issue has been wheeled out repeatedly since the GFC. But it’s ridiculous.
First the rise in dividends this decade has mainly come from cashed up miners and it’s hard to argue they should invest more after the mining investment boom.
Second the dividend payout ratio is not high historically.
Third the reasons for poor business investment lie in: business sector caution after the GFC &amp; the rise in the $A above parity, which squeezed competitiveness; the fall back to more normal levels in mining investment; and the shift to a capital lite economy based around IT and services.
Don’t blame dividends for poor capex.
Why dividend imputation is so important Dividend imputation was introduced in the 1980s and allows Australians to claim a credit against their tax liability for tax already paid on their dividends in the hands of companies as profits and boosts the effective dividend yield on Australian shares by around 1.3 percentage points.
However, over the years it has been subject to claims that it creates a bias to invest in domestic equities, that it biases companies to pay dividends and not invest and that it benefits the rich.
This is all nonsensical as dividend imputation simply corrects a bias by removing the double taxation of company earnings – once in the hands of companies and again in the hands of investors.
The removal of dividend imputation would not only reintroduce a bias against equities but would also substantially cut into the retirement savings and income of Australians, discourage savings and lead to lower returns from Australian shares.
Labor’s proposal to make franking credits in excess of a taxpayer’s tax liability non-refundable could be argued to remove an anomaly in the tax system as dividend imputation was designed to prevent the double taxation of dividends, not to stop them being taxed at all.
<img src="https://www.urban.com.au/images/2019/2/27/SHOL%204.JPG" alt="">
But a problem is that many Australians have planned their retirement around receiving such refunds.
This is a subject for another note. But it is worth noting that Labor’s proposal does not affect at least 92% of taxpayers who will continue receiving franking credits as they have a sufficient income tax liability (as will pensioners who will be exempted).
If it sets off a broader wind back of franking credits, then it would be a bigger concern.
Dividends provide a great contribution to returns, a degree of protection during bear markets and a great income flow.
For investors needing income the trick is to have a well-diversified portfolio of companies paying high sustainable dividends.
 DR SHANE OLIVER Head of Investment Strategy and Chief Economist AMP Capital
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Why I still love dividends and you should too: Shane Oliver 

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EXPERT OBSERVER
This month’s RBA Board meeting saw interest rates left on hold for a record 27th meeting in a row.
No surprises there.
Since its December meeting the RBA has become less upbeat - acknowledging that downside risks have increased globally, revising down its Australian growth forecasts from “around 3.5%” to “around 3% for this year and a little less in 2020”, acknowledging the threat to consumer spending from falling house prices, revising down its inflation forecasts yet again to 2% this year (from 2.25%) and sounding a bit more concerned about the downturn in house prices.
However, despite its growth and inflation downgrades and increased downside risks it retains the view that “further progress in reducing unemployment and having inflation return to target is expected” implying that it still believes that the next move in rates will be up rather than down. 
This probably explains why the $A bounced from around $US0.72 around the time of the rates announcement to around $US0.726 an hour or so later.
Tomorrow’s address by Governor Lowe and Friday’s Statement on Monetary Policy may provide greater clarity as to whether it retains its “next move is more likely to be up” bias on interest rates.
Nevertheless, our view is that RBA is underestimating the impact of the housing downturn on the economy – both directly via reduced housing construction and also indirectly via reduced consumer spending – and as a consequence we see weaker growth and lower inflation than the RBA is forecasting.
Consistent with this we have seen a string of soft economic data releases this year including for business conditions, business conditions PMIs, consumer confidence, retail sales, housing approvals and housing starts, house prices and job ads.
As a result our view remains that the RBA will cut the cash rate to 1% by year end.
DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital
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The RBA will cut the cash rate to 1% by year end: Shane Oliver

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EXPERT OBSERVATION 
While global and Australian shares had a nice bounce from their late October lows – rallying about 5%, partly reversing their 10% or so top to bottom fall, they have since fallen back to their lows as the worries about US rates, bond yields, trade, tech stocks, etc, have morphed into broader concerns about global growth and profits. Fears of a credit crunch and falling home prices are probably not helping Australian shares either, which this week dipped below their October low. Our assessment remains that it’s too early to say we have seen the lows, but we remain of the view that it’s not the start of major bear market.
The three bears – correction, gummy &amp; grizzly
Very simply there are three types of significant share market falls:
<ul>
<li>
corrections with falls around 10% (of course these aren’t really bear markets – but some might feel that they are!);
</li>
<li>
“gummy” bear markets with falls around 20% meeting the technical definition many apply for a bear market but where a year after falling 20% the market is up (like in 1998 in the US, 2011 and 2015-16 for Australian &amp; global shares); and
</li>
<li>“grizzly” bear markets where falls are a lot deeper and usually longer lived (like in 1973-74, US and global shares through the tech wreck or the GFC).</li>
</ul>
I can’t claim the terms “gummy bear” and “grizzly bear” as I first saw them applied by stockbroker Credit Suisse a few years ago. But they are a good way to conceptualise them. Grizzly bears maul investors but gummy bears eventually leave a nicer taste (like the lollies). Corrections are quite normal and healthy as they enable the sharemarket to let off steam and not get too overheated. As can be seen in the next chart, excluding the present episode since 2012 there have been four corrections and one gummy bear market (2015-16) in global and Australian shares. Bear markets generally are a lot less common, but arguably what we saw in 2015-16 was a gummy bear market.
<a href="https://www.propertyobserver.com.au/images/2018/11/22/bear%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/2018/11/22/bear%20market%201.jpg" alt=""> 
The next table shows conventionally defined bear markets in Australian shares since 1900 – where a bear market is a 20% decline that is not fully reversed within 12 months. The first two columns show bear markets and the size of their falls. The third shows the percentage change in share prices 12 months after the initial 20% decline. The fourth column shows whether they are associated with a recession in the US, Australia or both.
<a href="https://www.propertyobserver.com.au/images/2018/11/22/bear%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/2018/11/22/bear%20market%202.jpg" alt="">
If a gummy bear market is defined by a 20% decline after which the market is higher 12 months later whereas as grizzly bear market sees a continuing decline over the subsequent 12 months after the first 20% decline, then since 1900 there have been 12 gummy bear markets (these are highlighted in black) and there have been six grizzly bear markets (highlighted in red). Several points stand out. First, the gummy bear markets tend to be a bit shorter and see much smaller declines averaging 26% compared to 46% for the grizzly bear markets.
Second, the average rally over 12 months after the initial 20% fall is 15% for the gummy bear markets but it’s a 23% decline for the grizzly bear markets.
Finally, and perhaps most importantly the deeper grizzly bear markets are invariably associated with recession, whereas the milder gummy bear markets including the 1987 share market crash tend not to be. Five of the six grizzly bear markets saw either a US or Australian recession or both whereas less than half of the gummy bear markets saw recession.
It’s also the case that US share market falls are much deeper and longer when there is a US recession.
What’s it likely to be this time?
Our view remains that a grizzly bear market is unlikely because, short of some unforeseeable external shock, a US, global or Australian recession is not imminent. In relation to the US:
<ul>
<li>
Business and consumer confidence are very high.
</li>
<li>
While US monetary conditions have tightened they are not tight and they are still very easy globally and in Australia (with monetary tightening still a fair way off in Europe, Japan and Australia). We are a long way from the sort of monetary tightening that leads into recession.
</li>
<li>
Fiscal stimulus is continuing to boost US growth.
</li>
<li>We have not seen the excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia.</li>
</ul>
Reflecting this, global earnings growth is likely to remain reasonable – albeit slower than it has been – providing underlying support for shares. In relation to Australia – yes housing is turning down and this will weigh on consumer spending, but it will be offset by a lessening drag from mining investment, strengthening non-mining investment, booming infrastructure spending and solid growth in export earnings. Growth is unlikely to be as strong as the RBA is assuming but it’s unlikely to slide into recession either. So, for all these reasons it’s unlikely the current pull back in shares is the start of a grizzly bear market.
However, we have already had a correction in mainstream global shares and Australian shares (with circa 10% falls) and with markets falling again it could turn into gummy bear market, where markets have another 10% or so leg down – a lot of technical damage was done by the October fall that has left investors nervous, the rebound from late October was not particularly convincing and many of the drivers of the October fall are yet to be resolved. Some positives
However, there are three developments that help add to our conviction that we are not going into a grizzly bear market. First, recent comments by Fed Chair Powell and Vice Chair Clarida indicate that the Fed remains upbeat on the US economy and a December hike looks assured (for now), but it is aware of the risks to US growth from slowing global growth, declining fiscal stimulus next year, the lagged impact of eight interest rate hikes and stock market volatility and appears open to slowing the pace of interest rate hikes or pausing at some point next year. The stabilisation in core inflation around 2% seen lately may support this. Past gummy bear markets (1987, 1998, 2011, 2015-16) all saw some pause or relaxation by the Fed.
Second, while it’s messy after the US/China standoff at the recent APEC forum there have been some positive signs on trade. Talks between the US and China on trade have reportedly resumed ahead of a meeting between President Trump and President Xi at the G20 summit next week and President Trump has repeated that he is optimistic of a trade deal with China and that the US might put any further tariff increases on China on hold if there is progress. The US/China trade dispute is unlikely to be resolved quickly when Trump and Xi meet. Perhaps the best that can be hoped for is agreement to have formal trade talks with the aim of resolving the issues and the US agreeing to delay any further tariff increases. With Trump wanting to get re-elected I remain of the view that some sort of deal will be agreed before the tariffs cause too much damage to the US economy. Rising unemployment (as fiscal stimulus will turn to contraction next year if current and proposed tariffs/taxes on China go ahead) and higher prices at Walmart will sink Trump’s re-election prospects in 2020. Of course, investors are now highly sceptical of any progress on the trade front. So any breakthrough in the next six months could be a big positive.
Finally, while the 30% plunge in the oil price since its October high is a short-term negative for share markets via energy producers, it has the potential to extend the economic cycle as the 2014-16 oil price plunge did. The main drivers of the fall in the oil price are slower global demand growth, US waivers on Iranian sanctions allowing various countries to continue importing Iranian oil, rising US inventories, the rising $US and the cutting of long oil positions. While oil prices are unlikely to fall as much as in 2014-16 when they fell 75% (as OPEC spare capacity is less now) they may stay lower for longer. This is bad for energy companies but maybe not as bad for shale producers as in 2015 as they are now less indebted and their break-even oil price has already been pushed down to $50/barrel or less. It will depress headline inflation (monthly US inflation could be zero in November and December) and if oil stays down long enough it could dampen underlying inflation. All of which may keep rates lower for longer. And its good news for motorists who see rising spending power. For example, Australian petrol prices have plunged from over $1.60 a litre a few weeks ago to below $1.30 in some cities. That’s a saving in the average weekly household petrol bill of around $10.
<a href="https://www.propertyobserver.com.au/images/2018/11/22/bear%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/2018/11/22/bear%20market%203.jpg" alt="">
Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.
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Shane Oliver

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