<p>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.</p>

<p>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;</p>

<p>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;</p>

<p>“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;</p>

<p>[smartcode_project:default project_id=110291 project_image_fid=302785]</p>

<h2>Affordable product leads, premium demand remains resilient</h2>

<p>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;</p>

<p>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;</p>

<p>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.</p>

<p>Jual (Shenton Park, Celsius Property) also posted a strong quarter with 28 sales, reaching 39% sold in one quarter.</p>

<p>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;</p>

<p>[smartcode_project:default project_id=148957 project_image_fid=364102]</p>

<h2>Prices underpinned by costs, and the delivery risk is growing</h2>

<p>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.</p>

<p>David Cresp said a growing challenge for private Build‑to‑Sell developers is simply securing a builder in the current environment.</p>

<p>“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;</p>

<p>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.</p>

<p>[smartcode_project:default project_id=108869 project_image_fid=317905]</p>

<h2>Supply: improving later, but still constrained, and Perth lags eastern benchmarks</h2>

<p>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;</p>

<p>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;</p>

<p>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”.</p>

<p>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;</p>


Joel Robinson

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

<p><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.</p>

<p>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.</p>

<p>Sammut Director Julian Sammut said the group had been actively searching Brisbane for several years before identifying Toowong as the right fit.</p>

<p>“Brisbane was the right step for Sammut,” Sammut said.</p>

<p>“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.”</p>

<p><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" /></p>

<p>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.</p>

<p>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.</p>

<p>“We are DA approved now which is very exciting,” Sammut said.</p>

<p>“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.”</p>

<p><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" /></p>

<p>Bureau^proberts said the design responds to Toowong’s evolving urban character, balancing contemporary apartment living with the area’s established residential identity.</p>

<p>“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.</p>

<p>The architecture practice said the project’s form was shaped by its riverfront setting, flood considerations, neighbouring building scales, and view corridors.</p>

<p>“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.”</p>

<p>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.</p>

<p>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.</p>


Sammut secures approval for debut Brisbane apartment development in Toowong

<p>Developer Lanevick is heading back into Sydney’s apartment market after focusing more heavily on the luxury townhouse and terrace sector in recent years.</p>

<p>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.</p>

<p>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.</p>

<p>“Traditionally it’s been difficult for people in that market to downsize because there just hasn’t been the right product available,” Maroun said.</p>

<p>“We’re targeting buyers who might have 30 to 40 per cent of their house value sitting in the bank after downsizing.</p>

<p>“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.”</p>

<p>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.</p>

<p>“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.”</p>

<p>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.</p>

<p>“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.”</p>

<p>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.</p>

<p>“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.</p>

<p>Maroun said Lanevick saw a first-mover advantage within the precinct as planning controls continue to evolve to accommodate greater housing density.</p>

<p>“We think there’s a real opportunity there that hasn’t really been serviced properly yet,” he said.</p>

<p>“There’s going to be a broader evolution of the whole Gladesville village precinct over time, particularly with more activation and mixed-use outcomes.”</p>

<p>The Venus Street proposal will include a commercial and retail component at ground level designed to contribute to that evolving streetscape activation.</p>

<p>“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.</p>

<p>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.</p>

<p>&nbsp;</p>


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

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


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

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


WM Residences fills gap in Mordialloc townhouse market

Shane Oliver

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<p>EXPERT OBSERVATION</p>
<p>The good news is that wages growth has continued to lift from its 2016 low point of 1.9% year on year. However, the lift in wages growth largely owes to a faster increase in the minimum wage for 2017-18 of 3.3% which was up from 2.4% for the previous year and now to a rise of 3.5% for this financial year. Were it not for the acceleration in minimum wage increases, wages growth would still be running at around 2%, so there is still little evidence of significant pick up in underlying wages growth.</p>
<p>Fortunately at least the uptick in wages growth to 2.3% when inflation is just 1.9% means that real wages growth is at least positive. That said at 0.4% year on year real wage growth is still very small and won’t provide much of a boost to consumer spending.</p>
<p><em><a href="https://www.propertyobserver.com.au/images/2018/11/15/wages.jpg" target="_blank">Click here</a> to enlarge</em></p>
<p> <img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/11/15/wages.jpg" alt=""></p>
<p><em>Source: ABS, AMP Capital</em></p>
<p>Falling unemployment should help contribute to a pick-up in wages growth but with the level of unemployment and underemployment remaining very high at 13.3% it’s still hard to see a significant acceleration in wages growth. To get wages growth up to a more reasonable 4% probably requires labour market underutilisation to fall to around 10% at least.</p>
<p><em><a href="https://www.propertyobserver.com.au/images/2018/11/15/underemployment.jpg" target="_blank">Click here</a> to enlarge</em></p>
<p><span> <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/2018/11/15/underemployment.jpg" alt=""></span></p>
<p>Source: ABS, AMP Capital</p>
<p>In other data released today, consumer confidence for November rose 2.8%, with news of lower unemployment and falling petrol prices possibly offsetting news of falling home prices. It’s still stuck in the same range it’s been in all year though. Against this the NAB business survey showed a slight fall in business confidence in October, with both consumer and business confidence running around similar levels which are around or a bit above long term averages.</p>
<p><em><a href="https://www.propertyobserver.com.au/images/2018/11/15/consumer%20confidence.jpg" target="_blank">Click here</a> to enlarge</em></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/11/15/consumer%20confidence.jpg" alt=""> </p>
<p><em>Source: NAB, Westpac/MI, AMP Capital</em></p>
<p><strong>Implications</strong></p>
<p>While it’s good to see wages growth up from its lows two years ago, beyond an acceleration in the minimum wage, which affects about 20% of the workforce, we are yet to see a meaningful pick up in underlying wages growth. This is a drag for consumer spending and will help keep inflation stuck around the low end of the 2-3% inflation target.</p>
<p>As result we remain of the view that the RBA won’t start raising interest rates until 2020 at the earliest and given the housing related downturn there is a significant chance that the next move could turn out to be a rate cut – although this would be unlikely before second half next year as it will take a while to change the RBA’s relatively upbeat thinking on the economy and rates.</p>
<p>With the Fed hiking and the RBA on hold (or maybe even cutting at some point) the Australian dollar still has more downside.</p>
<p><strong><em>SHANE OLIVER</em></strong><em> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em></p>
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soliver-smf6LQXgW9

Consumer confidence up but business confidence down: Shane Oliver

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<div class="column">EXPERT OBSERVATION</div>
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<br>October was a bad month for shares with global shares losing 6.8% in local currency terms and Australian shares losing 6.1%. It’s possible that following top to bottom falls of 9% for global shares, 11% for Australian shares, 21% in emerging markets and even 31% in Chinese shares we have now seen the low in the share market rout. Shares were due a bounce and from their October lows and Australian shares have risen around 4%. But it’s impossible to be definitive and with the worry list around US interest rates, trade, politics, etc, there could still be another leg down. However, our view remains that recent turbulence in share markets is a correction or a mild bear market at worst (like 2015-16) rather than the start of a deep bear market like the global financial crisis. This note reviews the key recent worries for shares and why they are unlikely to be terminal.</div>
<div class="column"><strong> </strong></div>
<div class="column"><strong>US inflation &amp; interest rates</strong></div>
<div class="column"><strong> </strong></div>
<div class="column">The US economy is very strong as evident by consumer confidence at an 18-year high, unemployment at a 49-year low and strong economic growth. With spare capacity being used up wages growth is edging higher as evident in the next chart.</div>
<div class="column"> </div>
<div class="column">
<a href="https://www.propertyobserver.com.au/images/2018/11/9/share%20market%201.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/2018/11/9/share%20market%201.jpg" alt="">
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<p><span>Against this backdrop it makes sense for the Fed to continue the process of returning monetary policy and interest rates to something more normal. Naturally, the ongoing removal of monetary stimulus in the US creates consternation and has been periodically ever since former Fed Chair Bernanke started talking about slowing or “tapering” quantitative easing in 2013. In short, investors continue to fear a return to the GFC and so any move to remove monetary support creates periodic bouts of fear. Several points are worth noting about this though. First, the Fed can afford to remain gradual in raising rates. Inflation is at the 2% target, wages growth is a long way from the 4% plus level that preceded past recessions and productivity growth is rising so this will keep growth in unit labour costs down. Meanwhile, intense competition and technological innovation are also continuing to help keep inflation constrained.</span></p>
<p><span>Second, on any measure US monetary policy is a long way from being tight. The Fed Funds rate is zero in real terms, it’s well below nominal growth and the yield curve is still positive.</span></p>
<p><span>Finally, a return to more normal interest rates is a good thing because it reflects a stronger, more normal economy.</span></p>
<p><span>In short, expect gradual 0.25% Fed rate hikes to continue, with the next hike coming in December, and this will cause bouts of market volatility but it’s a long way from crunching the economy in a way that would bring on a deep bear market in shares.</span></p>
<p><strong>The US/China trade conflict</strong></p>
<p><span>This issue has been periodically worrying markets since around March. It stepped up a notch after last month’s speech by US Vice President Mike Pence indicating that US gripes with China extend beyond trade which led many to talk of a new Cold War – the implication of which is less trade and occasional military tensions which implies lower economic growth and lower price to earnings multiples. However, it’s still not as bad as it looks.</span></p>
<p><span>First, so far only 12% of US imports have been subject to a tariff hike averaging 15%, which is equivalent to an average tariff hike of 1.8% across all imports. So it’s a non-event compared to 1930 which saw a 20% tariff hike on all imports.</span></p>
<p><span>Second, while initially the US seemed to be picking trade fights with all major countries it has since renegotiated trade agreements with South Korea and Canada/Mexico and is negotiating with Europe and Japan. This tells us Trump is not interested in trade wars with everyone and that he is not anti- trade per se but wants “fairer trade” for the US.</span></p>
<p><span>Third, while Trump has threatened more tariff hikesonChina if it retaliates it’s noteworthy that China has not fully retaliated and </span>has been cutting tariffs and announcing more protections for intellectual property. This may help defuse the tensions a bit.</p>
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<p><span>Fourth, while Trump’s comments expressing optimism about a deal with China should be treated with scepticism as they came just before the US midterm elections, they do highlight cause for optimism that a deal will be reached eventually. At least Trump and Xi are talking and Trump’s optimistic comments ahead of the midterms effectively tells us that he is aware that the trade issue is harming the stock market and potentially the economy. The latter in turn suggests that he wants a deal well before he faces re-election n 2020. So, while it may be premature to expect a deal when Xi and Trump meet later this month, a deal is likely well ahead of the 2020 elections. With China already lowering tariffs, improving IP protections and softening joint venture requirements the outlines of a deal are starting to become apparent and Chinese Vice President Wang has indicated China is ready to negotiate with the US.</span></p>
<p><strong>The US midterm elections – no surprises</strong></p>
<p><span>The US midterm elections saw the Democrats win control of the House and Republicans retain the Senate which was what had been indicated by the polls and betting markets. So, it provided no surprises - in contrast to Brexit and Trump’s 2016 win! While the Democrat House is likely to prevent Trump from cutting taxes any further it won’t be able wind back last year’s tax cuts, reverse Trump’s deregulation of the economy or change his trade policy. But there is some chance that Trump and the Democrats may agree on infrastructure spending. While the Democrat House will likely set up committees to investigate Trump and consider impeachment charges, it’s very unlikely to get the required 67 out of 100 senate votes to remove him from office unless he is shown to have done something really bad. All up, while there may be some skirmishes around shutdowns and debt ceilings, the midterm outcome could be positive because it means less policy uncertainty.</span></p>
<p><span>On average the US resident has lost 29 House seats in his first midterm election. Clinton lost 54 and Obama lost 63. Trump looks to have lost around 34 but only needed to lose 23 to lose control of the House so what has happened is not unusual.What’s more the Republicans look to have increased their Senate majority so it’s not all bad for Trump. More broadly, it should be noted that “divided government” is the norm in the US. Perhaps the biggest risk is that Trump takes it personally and ramps up the populism, but if he wants to get re-elected in 2020 (which he does) then he won’t want to do anything that damages the economy and amongst otherthingsthis points to cutting a deal with China and getting the tariffs removed. Since 1946 the US S&amp;P 500 has risen in the 12 months after all midterm elections – probably because the president starts to focus on re-election and so tries to boost the economy.</span></p>
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<p><strong>US tech stocks</strong></p>
<p><span>Having accounted for a big chunk of US share market gains this year the US tech sector has corrected around 13%, but that still leaves it vulnerable to relatively high valuations (Nasdaq is on a PE of 42 times), sales growth slowing down for some of them and the prospect of increasing regulation. However, we have not seen anything like the tech boom euphoria of around 1999/2000 so a crash like back then is unlikely. Our base case is that the US share market will start to see a rotation from expensive tech to cheap cyclical stocks (with many trading on forward PE less than ten times).</span></p>
<p><strong>Eurozone worries – German and Italy</strong></p>
<p><span>Fears that the Eurozone is about to blow apart causing financial mayhem threatening global growth has been with us since the Eurozone crisis that started in 2010. Lately the fear is that populist governments will take countries out of the Euro. This started with Greece in 2015. It was an issue last year but then pro Euro parties and candidates won in various elections. This year it’s been an issue with Italy particularly, as its populist government sought a wider budget deficit, and Germany with Angela Merkel indicating she will step down as Chancellor in 2021. In terms of Italy, there will no doubt be a conflict between the European Commission and Italy over the size of its planned budget deficit but don’t expect it to go too far as the deficit is not outlandish and German and France won’t want to embolden the Eurosceptics in Italy by pushing back too hard.</span></p>
<p><span>In terms of Germany, the poor performances of the governing German grand coalition parties (the Christian Democratic Union (CDU), the Christian Social Union and the Social Democrat Party(SPD)) at state elections do not signal a threat to the Euro. First, comments by SPD leader Nahles indicate the grand coalition is not under imminent threat. Second, Germany’s budget surplus and falling public debt indicate plenty of scope to provide fiscal stimulus, which would be positive for Germany and the Eurozone and provide an electoral boost for the grand coalition partners. Thirdly, German Euroscepticism is not on the rise. In fact, support for the Euro in Germany has risen to 83% and it was support for the pro-Euro Greens that surprised in Bavaria and Hesse, not support for the Alternative for Deutschland. Finally, a new election is unlikely as both the CDU and SPD have seen a loss of support, so they aren’t going to support an early election. So those looking for a breakup of the Euro can keep looking.</span></p>
<p><strong>Oil prices – back down again</strong></p>
<p><span>In early October world oil prices reached their highest since 2014 with West Texas Intermediate topping $US76/barrel with talk it was on its way to $US100 on the back of strong demand and supply threats including impending US sanctions on Iran. This in turn was adding to concerns about the impact on global economic growth and rising inflation. However, since then the oil price has fallen by nearly 19%. US sanctions on Iran have started but with little new impact as Iranian oil exports had already fallen and the US granted waivers to allow eight countries - including Japan, China, India, Taiwan and South Korea - to continuing importing Iranian oil. The Iranian export cutbacks at a time of threats to production from Venezuela and Libya leaves a now tight global oil market at risk of higher prices, but for now the threat has receded a bit.</span></p>
<p><span><span class="s1"><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author"><em>SHANE OLIVER</em></a></span><span class="s2"><em> is head of investment strategy and economics and chief economist at </em><a href="https://www.ampcapital.com.au/home"><span class="s1"><em>AMP Capital</em></span></a><em> and is responsible for AMP Capital's diversified investment funds.</em></span></span></p>
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Rising US interest rates, trade wars, the US midterm election results, etc - should investors be worried? Shane Oliver

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<p>EXPERT OBSERVER</p>
<p>A few months ago Reserve Bank Governor Phillip Lowe provided four common sense points we should all keep in mind regarding borrowing to finance a home.</p>
<p>I thought they made sense and so summarised them in a tweet to which someone replied that every checkout operator knows them.</p>
<p>Which got me thinking that maybe many do know them, but a lot don’t, otherwise Australians would never have trouble with their finances.</p>
<p>So I thought it would be useful to expand Governor Lowe’s list to cover broader financing and investment decisions we make.</p>
<p><strong> 1. Shop around</strong></p>
<p>We often shop around to get the best deal when it comes to consumer items but the same should apply to financial services. As Governor Lowe points out “don’t be shy to ask for a better deal whether for your mortgage, your electricity contract or your phone plan”.</p>
<p>The same applies to your insurance, banking, superannuation, etc. It’s a highly-competitive world out there and financial companies want to get and keep your business.</p>
<p>So when getting a new financial service it makes sense to look around. And when it comes time to renew a service – say your home and contents insurance - and you find that the annual charge has gone up way in excess of inflation (which is currently around 2%) it makes sense to call your provider to ask what gives.</p>
<p>I have often done this to then be offered a better deal on the grounds that I am a long-term loyal customer.</p>
<p><strong> 2. Don’t take on too much debt</strong></p>
<p>Debt is great, up too a point. It helps you have today what you would otherwise have to wait till tomorrow for.</p>
<p>It enables you to spread the costs associated with long term “assets” like a home over the years you get the benefit of it and it enables you to enhance your underlying investment returns.</p>
<p>But as with everything you can have too much of it. Someone wise once said “it’s not what you own that will send you bust but what you owe.”</p>
<p>So always make sure that you don’t take on so much debt that it may force you to sell all your investments just at the time you should be adding to them or worse still potentially send you bust.Or to sell your house when it has fallen in value.</p>
<p>A rough guide may be that when debt servicing costs exceed 30% of your income then maybe you have too much debt – but it depends on your income and expenses.</p>
<p>A higher income person could manage a higher debt servicing to income ratio simply because living expenses take up less of their income.</p>
<p><strong>3. Allow that interest rates can go up as well as down </strong></p>
<p>Yeah, I know that it’s a long time since offical interest rates were last raised in Australia – in fact it was way back in 2010.</p>
<p>So as Governor Lowe observes “many borrowers have never experienced a rise in official interest rates”. But don’t be fooled by the recent history of falling or low rates.</p>
<p>My view is that an increase in rates is still a long way off (and they may even fall further first) - but that’s just a view and views can be wrong.</p>
<p>History tells us that eventually the interest rate cycle will turn up.</p>
<p>Just look at the US where after six years of near zero interest rates, official US interest rates have risen 2% over the last three years.</p>
<p>So, the key is to make sure you can afford higher interest payments at some point. And when official rates move up the moves tend to be a lot larger than the small out of cycle moves from banks that have caused much angst lately.</p>
<p><strong>4. Allow for rainy days</strong></p>
<p>This is another one raised by Governor Lowe who said: “things don’t always turn out as we expect. So for most of us having a buffer against the unexpected makes a lot of sense.”</p>
<p>The rainy day could come as a result of higher interest rates, job loss or an unexpected expense.</p>
<p>This basically means not taking all the debt offered to you, trying to stay ahead of your payments and making sure that when you draw down your loan you can withstand at least a 2% rise in interest rates.</p>
<p><strong>5. Credit cards are great, but they deserve respect</strong></p>
<p>I love my credit cards. They provide me with free credit for up to around 6-7 weeks and they attract points that can really mount up (just convert the points into gift cards and they make optimal Christmas presents!).</p>
<p>So, it makes sense to put as much of my expenses as I can on them. But they charge usurious interest rates of around 20-21% if I get a cash advance or don’t pay the full balance by the due date.</p>
<p>So never get a cash advance unless it’s an absolute emergency and always pay by the due date.</p>
<p>Sure the 20-21% rate sounds a rip-off but don’t forget that credit card debt is not secured by your house and at least the high rate provides that extra incentive to pay by the due date.</p>
<p><strong> 6. Use your mortgage for longer term debt</strong></p>
<p>Credit cards are not for long term debt, but your mortgage is. And partly because it’s secured by your house, mortgage rates are low compared to other borrowing rates – at around 4-5% for most.</p>
<p>So if you have any debt that may take longer than the due date on your credit card to pay off then it should be on your mortgage if you have one.</p>
<p><strong>7. Start saving and investing early</strong></p>
<p>If you want to build your wealth to get a deposit for a house or save for retirement the best way to do that is to take advantage of compound interest – where returns build on returns.</p>
<p>Obviously, this works best with assets that provide high returns on average over long periods.</p>
<p>But to make the most of it you have to start as early as possible. Which is why those piggy banks that banks periodically hand out to children have such merit in getting us into the habit of saving early.</p>
<p>Of course, this gives me an opportunity to again show my favourite chart on investing which tracks the value of $1 invested in Australian shares, bonds and cash since 1900 with dividends and interest reinvested along the way.</p>
<p>Cash is safe but has low returns and that $1 will have only grown to $237 today.</p>
<p>Shares are volatile (&amp; so have rough periods highlighted by arrows) but if you can look through that they will grow your wealth and that $1 will have grown to $526,399 by today.</p>
<p><img src="https://www.urban.com.au/images/2018/11/15/Share%20VS%20Cash%20100%20years.JPG" alt=""></p>
<p><strong>8. Allow that asset prices go up and down</strong></p>
<p>It’s well known that the share market goes through rough patches.</p>
<p>The volatility seen in the share market is the price we pay for higher returns than most other asset classes over the long term.</p>
<p>But when it comes to property there seems to be an urban myth that it never goes down in value.</p>
<p>Of course property prices will always be smoother than share prices because it’s not traded daily and so is not subject to daily swings in sentiment. But history tells home prices do go down as well as up.</p>
<p>Japanese property prices fell for almost two decades after the 1980s bubble years, US and some European countries’ property values fell sharply in the GFC and the Australian residential property market has seen several episodes of falls over the years and of course we are going through one right now.</p>
<p>So the key is to allow that asset prices don’t always go up – even when the population and the economy are growing.</p>
<p><strong>9. Try and see big financial events in their long-term context</strong></p>
<p>Hearing that $50 bn was wiped off the share market in one day sounda scary – but it tells you little about how much the market actually fell and you have only lost something if you actually sell out after the fall.</p>
<p>Scarier was the roughly 20% fall in share markets through 2015-16 and worse still the GFC that saw roughly 50% falls.</p>
<p>But such events happen every so often in share markets – the 1987 crash saw a 50% in a few months &amp; Australian shares fell 59% over 1973-74. And after each the market has gone back up.</p>
<p>So, we have seen it all before even though the details may differ.</p>
<p>The trick is to allow for periodic sharp falls in your investment strategy and when they do happen remind yourself that we have seen it all before and the market will find a base and resume its long-term rising trend.</p>
<p><strong>10. Know your risk tolerance</strong></p>
<p>When embarking on investing it’s worth thinking about how you might respond if you found out that market movements had just wiped 20% off the value of your investments.</p>
<p>If your response is likely to be: “I don’t like it, but this sometimes happens in markets and history tells me that if I stick to my strategy I will see a recovery in time” then no problem.</p>
<p>But if your response might be: “I can’t sleep at night because of this, get me out of here” then maybe you should rethink your strategy as you will just end up selling at market bottoms and buying tops.</p>
<p>So try and match your investment strategy to your risk tolerance.</p>
<p><strong>11. Make the most of the Mum and Dad bank</strong></p>
<p>The housing boom in Australia that got underway in the mid 1990s and reached fever pitch in Sydney &amp; Melbourne last year has left housing very unaffordable for many.</p>
<p>This contributed to a huge wealth transfer from Millennials to Baby Boomers and some Gen Xers.</p>
<p>Hopefully the current home price correction underway will help in starting to correct that. But for Millennials in the meantime, if you can it makes sense to make the most of the “Mum and Dad bank”.</p>
<p>There are two ways to do this.</p>
<p>First stay at home with Mum and Dad as long as you can and use the cheap rent to get a foot hold in the property market via a property investment and then using the benefits of being able to deduct interest costs from your income to reduce your tax bill to pay down your debt as quickly as you can so that you may be able to ultimately buy something you really want.</p>
<p>(Of course, changes to negative gearing if there is a change to a Labor Government could affect this.) Second consider leaning on your parents for help with a deposit.</p>
<p>Just don’t tell my kids this!</p>
<p><strong>12. Be wary of what you hear at parties</strong></p>
<p>A year ago Bitcoin was all the rage.</p>
<p>Even my dog was asking about it – but piling in at around $US19,000 a coin just when everyone was talking about it back then would not have been wise (its now below $US6500) even though many saw it as the best thing since sliced bread.</p>
<p>Often when the crowd is dead set on some investment it’s best to do the opposite.</p>
<p><strong>13. There is no free lunch</strong></p>
<p>When it comes to borrowing &amp; investing there is no free lunch – if something looks too good to be true (whether it’s ultra-low fees or interest rates or investment products claiming ultra-high returns &amp; low risk) then it probably is and it’s best to stay away</p>
<p>In closing, I have focused here mainly on personal finance and investing at a very high level, as opposed to drilling into things like diversification and taking a long-term view to your investments.</p>
<p><em>DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist AMP Capital</em></p>
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Shane Oliver's 13 common sense tips to help manage your finances

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<p>EXPERT OBSERVATION</p>
<p>This month’s RBA Board meeting saw interest rates left on hold for the 25th meeting in a row.</p>
<p>While there were no surprises on rates the RBA’s growth expectations have surprisingly moved higher seeing GDP growth of 3.5% this year and next (which is up by around 0.25% compared to its previous forecasts) and it now sees unemployment falling to around 4.75% in 2020 (which is down by around 0.25%) and it sees inflation moving above its previous forecast of 2.25% in 2020. </p>
<p>While some upwards revisions to growth forecasts and downwards revisions to unemployment forecasts were justified by recently released data our assessment is that the RBA is underestimating the threat posed by slowing growth in China, tightening credit conditions and a negative wealth effect as house prices continue to fall, particularly in Sydney and Melbourne where we anticipate a top to bottom fall of 20% stretching out to 2020.</p>
<p>As a result, in contrast to the RBA we see growth slowing to around 2.5-3% through 2019 as opposed to the RBA’s expectation for 3.5% growth which in turn will result in higher unemployment and keep wages growth and inflation lower for longer than the RBA is allowing.</p>
<p>Right now the RBA likely feels comfortable in its assessment that while there is no case to change monetary policy at present that the next move on interest rates is more likely to be up than down. This also remains our base case, although we don’t see a rate hike until late 2020 at the earliest.</p>
<p>However, with the risks to growth around tighter credit, falling house prices, the associated drag on consumer spending and the risks around China our assessment is there is a rising risk that the next move on rates will be a cut. But that’s a second half 2019 story at the earliest because the RBA will need to see broader signs of softness to consider cutting interest rates and that will take time. So, there is no prospect of imminent RBA rate cuts “rescuing” the housing market.</p>
<p><em><strong><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> </strong>is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em></p>
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Rising risk the RBA's next rate move will be a cut: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p>Australian capital city dwelling prices fell another 0.6% in October marking 13 months of consecutive price declines since prices peaked in September last year. This has left prices down 4.6% from a year ago, their weakest since the GFC.</p>
<p>The decline is continuing to be led by Sydney and Melbourne. Sydney dwelling prices fell another 0.7% and they have now fallen 8.2% from their August 2017 high, Melbourne prices fell another 0.7% and are down 4.9% from their November high. Perth (-0.8%) also saw prices fall, but Hobart (+0.9%) and Adelaide (+0.2%) saw prices rise with prices flat in Brisbane, Darwin and Canberra.  </p>
<p><a href="https://www.propertyobserver.com.au/images/2018/11/1/AMP%201.jpg" target="_blank">Click here</a> to enlarge:</p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/11/1/AMP%201.jpg" alt=""></p>
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<p><span>Source: CoreLogic, AMP Capital</span></p>
<p><span>Tighter bank lending standards particularly around tougher income and expense verification and total debt to income limits, poor affordability, rising unit supply, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors are pushing prices down in cities which have seen strong gains since 2012, ie Sydney and Melbourne. This is continuing to be evident in very weak auction clearance rates and auction sales volumes in those cities. Recent auction clearance rates averaging around the mid 40s in Sydney and Melbourne are consistent with ongoing price declines of around 7% pa.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2018/11/1/AMP%202.jpg" target="_blank">Click here </a>to enlarge:</p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/11/1/AMP%202.jpg" alt=""></p>
<p><span>Source: Domain, CoreLogic, AMP Capital</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2018/11/1/AMP%202.jpg" target="_blank">Click here</a> to enlarge:</p>
<p> <img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/11/1/AMP%202.jpg" alt=""></p>
<p><span>Source: CoreLogic, AMP Capital</span></p>
<div>The decline in Sydney and Melbourne property prices likely has much further to go as these considerations continue to impact potentially accentuated by further out of cycle bank mortgage rate increases and expectations that negative gearing and capital gains tax concessions will be made less favourable if there is a change of Government at the coming Federal election. In these cities we expect to see a top to bottom fall in prices of around 20% spread out to 2020. If anything the risks are on the downside, particularly if negative gearing and capital gains tax arrangements are changed. So there is more to go yet!</div>
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<a href="https://www.propertyobserver.com.au/images/2018/11/1/AMP%204.jpg" target="_blank">Click here</a> to enlarge:</div>
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<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/11/1/AMP%204.jpg" alt=""> </div>
<div><span>Source: CoreLogic, AMP Capital</span></div>
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<div>Having not had the same boom over the last five or six years other capital cities are likely to perform better. Perth and Darwin are likely close to bottoming (albeit the bottoming process is taking a lot longer than I have been expecting!), Adelaide, Brisbane, Canberra and Hobart are likely to see moderate growth, with Hobart slowing down after its recent mini-boom.</div>
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<div>Similarly home prices in regional centres are likely to hold up better with modest growth as they haven’t had the same boom as Sydney and Melbourne and offer much better value and much higher rental yields. The average gross rental yield for regional areas is 5% compared to just 3.6% in the capital cities.</div>
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<div>Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 20% spread out to 2020, but for national average prices the top to bottom fall is likely to be around 10%. A crash landing – say a national average price fall in excess of 20% - remains unlikely in the absence of much higher interest rates or unemployment, but it’s a significant risk given the difficulty in gauging how severe the tightening in bank lending standards in the face of the Royal Commission will get and how investors will respond as their capital growth expectations collapse at a time when net rental yields are around 1-2%.</div>
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<div><strong>Implications for interest rates</strong></div>
<div>Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse and so homeowners will be less inclined to allow their savings rate to decline. It’s also a negative for banks. It’s consistent with our base case view that the RBA will leave rates on hold out to late 2020 at least. However, home price weakness is at levels where the RBA started cutting rates in 2008 and 2011 and the 2015-16 property slowdown was also turned around by rate cuts in May and August 2016. So we still can’t rule out the next move in rates being a cut rather than a hike – but at this point the RBA is a long way from contemplating a rate cut as it would need to see evidence that the slump in home prices and the drag on consumer spending is seriously threatening to push inflation even lower - so it’s probably a second half 2019 story at the earliest.</div>
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<span class="s1"><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author"><em>SHANE OLIVER</em></a></span><span class="s2"><em> is head of investment strategy and economics and chief economist at </em><a href="https://www.ampcapital.com.au/home"><span class="s1"><em>AMP Capital</em></span></a><em> and is responsible for AMP Capital's diversified investment funds.</em></span>
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Next RBA move could still be a cut: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p>Key points</p>
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<div class="column">1. The current pullback in shares has been triggered by a range of things – but most notably worries about rising US interest rates and the US/China conflict.</div>
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<br>2. Shares may still have more downside, but we are of the view that it’s just another correction.</div>
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<br>3. Key things for investors to bear in mind are that: corrections are normal; in the absence of recession, a deep bear market is unlikely; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; while shares may have fallen, dividends haven’t; and finally, to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise during times like this.</div>
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<p><strong>Rough Patches</strong></p>
<p>Every so often shares go through rough patches. We saw this most recently around February on the back of US inflation and interest rate concerns and the start of US tariffs which saw US shares and global shares fall roughly 10% and Australian shares fall 6%. Shares mostly recovered – even getting through the seasonally weak months of August and September surprisingly well – with US shares making new records and Australian shares hitting a ten-year high, but the worry list has returned again with US, global shares and Australian shares now down around 7% from their recent high. This note looks at the issues for investors and puts the falls into context.</p>
<p><strong>What’s driving the latest plunge?</strong></p>
<p>The recent plunge reflects a range of factors.</p>
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<li>Investors have started to worry again that the very strong US economy will push the Fed into tightening a lot more and that this will cause a further sharp rise in bond yields which will threaten growth and share market valuations.</li>
<li>The trade conflict between the US and China is continuing to intensify and spilling over into other areas.</li>
<li>Technology shares, which have been key drivers of the US share markets rally (and outperformance) have been vulnerable – being somewhat overvalued and facing increased regulation in the US (which is something that President Trump has been threatening).</li>
<li>Rising oil prices due to strong global demand and threats to supply have added to concerns about inflation and growth.</li>
<li>Problems in the emerging world partly due to rising US interest rates poses a threat to global growth as reflected in a recent downgrade to the IMF’s global growth forecasts.</li>
<li>Nervousness remains in the US around President Trump and the Mueller inquiry and the upcoming US mid-term Congressional elections.</li>
<li>Tensions in the Eurozone regarding the Italian budget are weighing on European shares.</li>
<li>October is also known for share market volatility and this October is the 31st anniversary of the 1987 crash which often seems to create a bit of apprehension.</li>
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<p><span>Because shares have fallen rapidly they are technically oversold and so could have a short-term bounce. But given that many of these issues could get worse before they get better the risk is that the pullback has further to go.</span></p>
<p><strong>Considerations for investors</strong></p>
<p><span>Sharp market falls with headlines screaming that billions of dollars have been wiped off the share market (funny that you never see the same headlines on the way up!) are stressful for investors as no one likes to see the value of their investments decline. However, several things are worth bearing in mind:</span></p>
<p><span>First, periodic corrections in share markets of the order of 5- 15% are healthy and normal. For example, during the tech/dot. com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average fall of 8%. All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (the taper tantrum), an 8% fall in 2014, a 20% fall between April 2015 and February 2016 and a 7% fall earlier this year all in the context of a gradual rising trend. And it has been similar for global shares, but against a strongly rising trend. See the next chart. While they can be painful, share market corrections are healthy because they help limit a build-up in complacency and excessive risk taking.</span></p>
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<p><span>Related to this, shares climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately up &amp; providing higher returns  </span>than other more stable assets. Bouts of volatility are the price we pay for the higher longer-term returns from shares.</p>
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<p><span>Second, the main driver of whether we see a correction (a fall 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly like we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC)) is whether we see a recession or not – notably in the US. T</span><span>he next table shows US share market falls greater than 10% since the 1970s. I know it’s a bit heavy – but I like this table! The first column shows the period of the fall, the second shows the decline in months, the third shows the percentage decline from top to bottom, the fourth shows whether the decline was associated with a recession or not, the fifth shows the gains in the share market one year after the low and the final column shows the decline in the calendar year associated with the share market fall. Falls associated with recessions are highlighted in red. Averages are shown for the whole period and for falls associated with recession at the bottom of the table.</span></p>
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<p><span>Several points stand out. First, share market falls associated with recession tend to be longer and deeper. Second, falls associated with recessions are more likely to be associated with negative total returns (ie capital growth plus dividends) in the associated calendar year as a whole. Finally, as would be </span>expected the share market rebound in the year after the low is much greater following falls associated with recession.</p>
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<p><span>So whether a recession is imminent or not in the US is critically important in terms of whether we will see a major bear market or not. In fact, the same applies to Australian shares. </span><span>Our assessment remains that US/global recession is not imminent:</span></p>
<p><span>• </span><span>Still high levels of business and consumer confidence globally are only just starting to help drive stronger consumer spending and business investment.</span></p>
<p><span>• </span><span>While US monetary conditions have tightened they are far from 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.</span></p>
<p><span>• </span><span>Fiscal stimulus will boost US growth into next year, partly offsetting Fed rate hikes.</span></p>
<p><span>• </span><span>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.</span></p>
<p><span>Reflecting this, global earnings growth is likely to remain reasonable providing underlying support for shares. So, for all these reasons its likely that the current pull back is more likely to be a correction rather than a major bear market.</span></p>
<p><span>Third, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering.</span></p>
<p><span>Fourth, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities the pullback provides. It’s impossible to time the bottom but one way to do it is to average in over time.</span></p>
<p><span>Fifth, while shares may have fallen, dividends from the market haven’t. So the income flow you are receiving from a well- diversified portfolio of shares remains attractive, particularly against bank deposits.</span></p>
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<p><span>Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie just when you and everyone else feel most negative towards them. So the trick is to buck the crowd. “Be fearful when others are greedy. Be greedy when others are fearful,” as Warren Buffett has said.</span></p>
<p><span>Finally, turn down the noise. At times like this, negative news reaches fever pitch. Talk of billions wiped off share markets and warnings of disaster help sell copy and generate clicks and views. But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market. Moreover, they provide no perspective and only add to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So best to turn down the noise and chill out – yeah, I agree it’s sometimes easier said than done, but still!</span></p>
<p><span><span>Dr Shane Oliver</span><br><span>Head of Investment Strategy and Chief Economist AMP Capital</span></span></p>
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The pullback in shares - seven things investors need to keep in mind: Shane Oliver 

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<p>EXPERT OBSERVER</p>
<p class="x_MsoNormal">Yet again, this month’s RBA Board meeting provided no surprises – with the RBA on hold for the 24<sup>rd</sup><span class="Apple-converted-space"> </span>meeting in a row. </p>
<p class="x_MsoNormal">It’s getting hard to come up with anything new to say on this! But that’s as it should be as raising rates just to get rates back to more “normal levels”, or so as to be able to cut them later if needed, would make no sense and would be bad for the economy. A premature hike would be akin to shooting yourself in the foot to be able to practice going to the hospital. (Sorry I know I have used that one before but couldn’t resist using it again!)</p>
<p class="x_MsoNormal">And don’t forget that official interest rates in Japan have been around zero for nearly 10 years, they have been around zero for around four years in Europe and they were stuck near zero for seven years from the GFC in the US. So just over two years at 1.5% in Australia is a non-event in terms of global comparisons.</p>
<p class="x_MsoNormal">On the one hand, the RBA can point to the continuing global expansion, above trend Australian GDP growth over the last year, an increase in the terms of trade and an improving labour market. But against this uncertainty remains high regarding consumer spending, underemployment remains very high, the drought will have a negative impact, house prices are continuing to fall in Sydney and Melbourne, “credit conditions are tighter than they have been for some time” and wages growth and inflation remain very weak.<span class="Apple-converted-space"> </span></p>
<p class="x_MsoNormal">Given all these cross currents it remains appropriate for the RBA to leave rates on hold. And there remains nothing in the RBA’s latest post meeting Statement suggesting an imminent change in monetary policy.</p>
<p class="x_MsoNormal">Our view remains that the RBA will keep rates on hold out to 2020 at least and the next move in rates could still turn out to be a rate cut given the risks around house prices and consumer spending, albeit this would not occur for at least another six months.</p>
<p><span><span class="s1"><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author"><em>SHANE OLIVER</em></a></span><span class="s2"><em> is head of investment strategy and economics and chief economist at </em><a href="https://www.ampcapital.com.au/home"><span class="s1"><em>AMP Capital</em></span></a><em> and is responsible for AMP Capital's diversified investment funds.</em></span></span></p>
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Nothing to suggest imminent change in rates: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p>There is lots of talk about when the next major economic downturn will be. This interest seems to have been particularly noticeable over the last week or so given the ten-year anniversary of the failure of Lehman Brothers which helped usher in the worst phase of the Global Financial Crisis (GFC), which naturally prompted the question of when the next one will be.</p>
<p>But it’s also been given impetus as the current US bull market and economic expansion are approaching record territory in terms of duration and given the threats from a US driven trade war. The historical experience indicates that share market downturns are much deeper and longer when there is a recession, particularly in the US economy.</p>
<p>So, whether a recession is imminent or not in the US, and more broadly globally, is critically important in terms of whether a major bear market is on the way. Of course, no one really knows for sure (despite many claiming they do!). But certain indicators help provide some guidance as to the risks. This note looks at five charts to monitor in terms of the state of the global economy.</p>
<p>Chart #1 – Global business conditions PMI Global Purchasing Managers Indexes (PMIs), which are surveys of purchasing managers at businesses in most major countries, provide an excellent and timely guide to the state of the global economy. As can be seen in the next chart, while they are down from their peaks of earlier this year they remain very strong indicating that global growth remains strong. This is particularly the case in the US. Quite clearly a sharp downturn, as occurred going into the GFC, would be a concern for global growth but so far so good.</p>
<p><img src="https://www.urban.com.au/images/2018/9/20/AMP%201.JPG" alt=""></p>
<p>Chart 2 – Global inflation Most major economic downturns are preceded by a rise in inflation to above central bank targets resulting in aggressive monetary tightening. The period prior to the GFC was something of an exception in terms of core inflation, ie inflation excluding food and energy. But average headline inflation rose to around 4% across the US, the Eurozone and Japan at the time as energy prices surged and the run up to the GFC was associated with tight monetary policy in the US and Europe (where the focus at the time was on headline inflation). Source: Bloomberg, AMP Capital At present, core inflation in major global economies is benign. In the US core inflation is around 2%, which is the Fed’s target and headline inflation is falling. Inflation in China is also around 2%, which is below the Government’s 3% target/forecast. And inflation in the Eurozone and Japan, whether headline or core, is below both the European Central Bank’s and the Bank of Japan’s 2% targets. While a lack of spare capacity in the US means that the Fed will continue raising interest rates to more normal levels, with inflation around target (and other signs of</p>
<p><img src="https://www.urban.com.au/images/2018/9/20/AMP%202.JPG" alt=""></p>
<p>Chart 3 – The US yield curve The yield curve is a good guide to the stance of monetary policy. When short-term interest rates are low relative to long-term rates businesses can borrow short and lend (or invest) long and this grows the economy. But it’s not so good when short rates are above long rates – or the curve is inverted. And an inverted US yield curve has preceded US recessions. So, when it’s heading in this direction some start to worry. As a result, it’s worth keeping an eye on and it’s our third chart. But there are several complications to allow for. First, there are several versions of the yield curve. The traditional yield curve based on the gap between 10-year bond yields and the Fed Funds rate has flattened but only to 1.2%. Moreover, a shorter yield curve based on the gap between 2-year bond yields and the Fed Funds rate predicted past recessions like the longer yield curve but has actually been steepening lately which is positive. So our chart includes both yield curves. Both are yet to go negative as occurred prior to the last three US recessions. Source: NBER, Bloomberg, AMP Capital But there are several other things to allow for. The yield curve can give false signals (circled on the chart) and the lags from an inverted curve to a recession can be around 15 months. Various factors may be flattening the traditional yield curve unrelated to economic growth expectations including low German and Japanese bond yields holding down US 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. On top of all this, a flattening yield curve caused by rising short term rates and falling long term-rates is more negative than a flattening when both short and long-term rates go up like recently. So all up the yield curve is worth keeping an eye on but both its long term and short term versions really need to go negative before getting too concerned. So far so good. Of course, it’s worth keeping an eye on other measures of US monetary tightness as well – for example past US recessions have been preceded by the Fed Funds rates being well above inflation and nominal economic growth whereas it’s still a long way from either now.</p>
<p><img src="https://www.urban.com.au/images/2018/9/20/AMP%203.JPG" alt=""></p>
<p>Chart 4 – The US dollar Moves in most currencies are usually only really of relevance for the country that the currency belongs to. The US dollar is a clear exception to this mainly because debt is often denominated in US dollars. In particular, emerging countries tend to have a lot of US dollar denominated debt so when the $US falls in value versus their own currency, servicing that debt gets cheaper but when the $US goes up in value, servicing that debt gets more expensive. This has been the case lately with the rising US dollar against most currencies including emerging market currencies as shown in our fourth chart, adding to problems in various emerging countries. Further strong gains in the US dollar as the Fed continues to hike risks worsening emerging market problems and the risks that this poses to global growth (as the emerging world is around 60% of global GDP). By contrast if the US dollar moderates, the pressure on emerging countries is likely to recede.</p>
<p><img src="https://www.urban.com.au/images/2018/9/20/AMP%204.JPG" alt=""></p>
<p>Chart 5 – World trade growth In recent times there has been much debate as to whether the era of globalisation is coming to an end resulting in a peak in world trade. This could be for somewhat benign reasons as services become an ever-greater share of economic activity and manufacturing becomes less labour dependent. But it could also be due to rising protectionism with US policies under Trump a big threat. It’s early days so far with only about 12% of US imports being subject to increased tariffs for an average tariff increase across all US imports of just 1.6% (after the latest tranche is implemented). This is a long way from 1930 that saw all US imports subject to a 20% tariff hike and other countries do the same. While we still see a negotiated solution, it may not come till after the US mid-term elections. Global trade growth has picked up over the last two years but its recently started to slow a bit. It’s too early for this year’s trade conflict to show up in trade data but it’s worth watching this chart as slower global trade growth would pose a threat to global economic growth. Source: CPB World Trade Volume Index, AMP Capital Concluding comments On balance these indicators suggest the outlook remains okay. Perhaps the greatest near-term risks are around the US dollar and Trump’s trade war. Beyond this, cyclical indications are still okay. And while we haven’t had room to fit it in here the signs of cyclical excess that normally precede major economic downturns – eg, very strong wages growth and a high level of cyclical spending (consumer durables, housing and investment) as a share of GDP – aren’t particularly evident in the US and are a long way from being evident in other major countries.</p>
<p><em><img src="https://www.urban.com.au/images/2018/9/20/AMP%205.JPG" alt="">Dr Shane Oliver is the Head of Investment Strategy and Chief Economist at AMP Capital</em></p>
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Five charts to keep an eye on regarding the global economy: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p><span>For years now, many have told us that Australia is heading for an imminent recession. By contrast official forecasts have long been looking for several years of above trend growth. In the event neither has happened and we don’t see them happening anytime soon. Against this backdrop there are five things you should know about the Australian economy.</span></p>
<p><strong>First – the economy grew solidly over the last year</strong></p>
<p><span>After several years of muddling along the Australian economy actually perked up over the last year with GDP growing a surprisingly strong 3.4% year on year, its fastest since 2012.</span></p>
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<p><span>That growth has been able to range between just below 2% and just above 3% over the last six years despite a large drag on growth from the fall back in mining investment is actually pretty good. But it’s below the norm for Australia, which has averaged around 3% GDP growth per annum over the very long term. It should also be remembered that strong population growth has been one of the reasons for the relative resilience of Australia’s economy, but over the last year per capita GDP growth at 1.8% has been running below that in the US and in line with that in Europe.</span></p>
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<p><strong>Second – growth is likely to slow a bit from here</strong></p>
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<p><span>While economic growth averaged a strong 1% quarterly pace in </span>the first half of the year it’s likely to slow going forward:</p>
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<li>The housing construction cycle is turning down as approvals trend down and the cranes come down. Falling alterations and additions won’t help.</li>
<li>Growth in consumer spending is likely to slow given weak wages growth, high levels of underemployment and slowing wealth gains as home prices fall. With falling home prices its unlikely that households will be prepared to keep running down the household saving rate – which is now at a 10 year low of just 1% - to make up for weak income growth.</li>
<li>Business investment plans for the current financial year are still subdued pointing to roughly flat investment (if plans for this year are compared with those made a year ago) and political uncertainty could start to weigh ahead of a potential change in government.</li>
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<li>Drought could knock 0.5 percentage points off economic growth this year.</li>
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<p><span>While agricultural production as a share of GDP is now just </span>2.5%, a 20% slump in farm production as seen in past droughts would still knock 0.5% off economic growth. If it turns into an El Nino phenomenon it could be worse.</p>
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<p><strong>Third – but it’s not going into recession</strong></p>
<p>Despite these drags, recession will continue to be avoided justas it has been over the past 27 years:</p>
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<li>Over the past five years or so the slump in mining investment back to more normal levels has knocked around 1.5% per annum from GDP growth. However, mining investment is no longer 7% of the economy and it’s near the bottom so its drag on GDP growth is approaching zero.</li>
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<li>Net exports are likely to add to growth as the completion of resources projects boosts resources export volumes, although a US/China trade war is a threat here.</li>
<li>Profits for listed companies are rising in contrast to the 2014-16 period. This is a positive for investment.</li>
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<p><span>While profit growth has slowed from 17% in 2016-17 to </span>around 8% it’s positive and 77% of companies in the recent reporting season (the highest since the GFC) have seen rising profits with 86% of companies raising or maintaining their dividends indicating confidence in the outlook.</p>
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<p><span>So while housing construction will slow and consumer spending is constrained, a lessening drag from mining investment and slightly stronger non-mining investment along with solid export growth provide an offset and are expected to see growth between 2.5-3% going forward. Down from over the last year and slower than the RBA expects, but stronger than many doomsters see.</span></p>
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<p><strong>Fourth – spare capacity will remain for a while yet</strong></p>
<p>With the economy’s potential (or sustainable) growth rate <span>running around 2.75% and actual economic growth likely to run <span>around this spare capacity in the economy will be with us for a <span>while yet. To use it up we really need a long period of </span>above </span></span>trend economic growth, but this looks unlikely. Spare capacity remains most obvious in the labour market where the underutilisation rate remains historically high at near 14%. With it likely to remain high for some time to come it’s hard to see much acceleration in wage growth or inflation in the economy.</p>
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<p><span>The RBA’s forecasts for continuing solid economic growth and a gradual rise in underlying inflation argue against a rate cut and support the case for an eventual hike. But our more constrained view on growth implying lower for longer wages growth and inflation along with the risks posed by likely further falls in Sydney and Melbourne home prices, tightening bank lending standards and the drought indicate a rate hike is unlikely to be justified any time soon. The next move in rates is probably still up but not until second half 2020 at the earliest and there is a risk that the next move will actually be down if falling home prices pose a significant threat to consumer spending and inflation starts falling again.</span></p>
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<p><strong>Implications for investors</strong></p>
<p><span><span>There are several implications for Australian investors.</span></span></p>
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<p><span>First, continuing growth should provide support for reasonable </span>returns from Australian growth assets.</p>
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<p><span>Second, bank deposits are likely to provide poor returns for </span>investors for a while yet.</p>
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<p><span>Third, while Australian shares are great for income, global </span>shares are likely to remain outperformers for capital growth.</p>
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<p>Finally, the outlook remains for a further fall in the $A. With the RBA comfortably on hold and the Fed raising rates every three months (with the next move coming this month), the interest rate gap between Australia and the US will go further into negative territory making it even more attractive to park money in the US and not Australia which will drag the $A down. Threats to global growth from a trade war and problems in emerging countries will also weigh on the $A.</p>
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<p><em>Dr Shane Oliver<br>Head of Investment Strategy and Chief Economist AMP Capital</em></p>
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Five things you need to know about the Australian economy: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p class="x_MsoNormal">The September RBA Board meeting provided no surprises – with the RBA on hold for the 23<sup>rd</sup>meeting in a row.</p>
<p class="x_MsoNormal">The RBA’s Statement accompanying the decision saw no major changes. The RBA still sees growth picking up to a bit above 3% and is upbeat on business conditions, non-mining investment and public infrastructure investment but is uncertain about consumer spending and the drought and global trade given US tariffs.</p>
<p class="x_MsoNormal">While the RBA appears to be a bit more upbeat on wages growth having “picked up a little recently”, its hard to get too excited about this given the pick up since 2016 largely reflects a faster increase in the minimum wage rather than underlying supply and demand conditions and in any case wages growth was just 2.1% over the year to the June quarter. Its also worth noting that the pick up in reported wages growth since the time of the last RBA Board meeting only occurred because March quarter wages growth was revised down from 2.1% to 2%.</p>
<p class="x_MsoNormal">Surprisingly the RBA is still relaxed about higher mortgage rates, on the back of higher money market rates, and falling home prices. However, despite its public comments it would have to be feeling a little bit nervous about the slide in Sydney and Melbourne home prices given the build-up in household debt in recent years and it would be aware that when house prices and auction clearances have been this weak in the past it has actually taken lower interest rates to stabilise the housing market.</p>
<p class="x_MsoNormal">Overall, there is still nothing in the RBA’s latest Statement to suggest an imminent change in monetary policy.</p>
<p class="x_MsoNormal">The RBA’s forecasts for solid growth and a gradual rise in underlying inflation argue against a rate cut but the peak in the housing construction cycle, uncertainty about the outlook for consumer spending, the continuing weakening in the Sydney and Melbourne property markets, the drought, low inflation and wages growth and tight bank lending standards all argue against a rate hike.</p>
<p class="x_MsoNormal">So the stand-off continues and the RBA will remain on hold for a while to come. The next move is probably still up but not until second half 2020 at the earliest and there is a rising risk that the next move will actually be down.</p>
<p class="x_MsoNormal"><span class="s1"><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author"><em>SHANE OLIVER</em></a></span><span class="s2"><em> is head of investment strategy and economics and chief economist at </em><a href="https://www.ampcapital.com.au/home"><span class="s1"><em>AMP Capital</em></span></a><em> and is responsible for AMP Capital's diversified investment funds.</em></span></p>
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Shane Oliver

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