<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 OBSERVER</p>
<p>The past five years have seen pretty good returns for well-diversified investors.</p>
<p>While cash and bond returns have been modest, growth assets have been strong.</p>
<p>Average balance growth superannuation funds have returned 8.5% pa over the five years to June and that’s after fees and taxes.</p>
<p>This is particularly impressive given that inflation has been around 2%.</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/2018/8/28/RETURN%201.jpg" alt=""> </p>
<p> <br>Shares have climbed a wall of worry in recent years with a revolving door list of worries around Europe, deflation, inflation, rate hikes, Trump, North Korea, China, trade, house prices, etc. And unlisted commercial property and infrastructure have benefitted from an ongoing search for yield. But can it continue over the next five years? This note looks at the main issues.</p>
<p><strong>Declining medium-term return potential</strong></p>
<p>While investment returns have been good, the medium-term (say 5-10 year) potential from major asset classes has been moving down.</p>
<p>Investment returns have two components: yield (or income flow) and capital growth.</p>
<p>Looking at both of these components points to lower average investment returns over the next five years compared to the last five years.</p>
<p>First, it’s well known that investment yields are not what they used to be. Back in the early 1980s the medium-term return potential from investing was pretty solid for the simple reason that interest rates, bond yields, dividend yields and rental yields were so high.</p>
<p>The RBA's "cash rate" was around 14%, 3-year bank term deposit rates were around 12%, 10-year bond yields were around 13.5%, property yields were running around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally.</p>
<p>Such yields meant that investments were already providing very high income and only modest capital growth was necessary for growth assets to generate good returns.</p>
<p>As it turns out, most assets had spectacular returns in the 1980s and 1990s and balanced growth superannuation fund returns averaged 14.1% in nominal terms and 9.4% in real terms between 1982 and 1999 (after taxes and fees).</p>
<p><br>Since the early 1980s, investment yields have mostly fallen and this has continued over the last five years. See the next chart.<br> <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/2018/8/28/RETURN%202.jpg" alt=""></p>
<p>Today the cash rate is 1.5%, 3-year bank term deposit rates are 2.5%, 10-year bond yields are 2.5%, gross residential property yields are around 3%, commercial property yields are just above 5%, dividend yields are still around 5.3% for Australian shares (with franking credits) but they are around 2.4% for global shares. This on its own points to a lower return potential.</p>
<p>Second, the capital growth potential from growth assets is likely to be constrained relatively to the past reflecting more constrained nominal economic growth. Several megatrends are likely to impact growth over the medium term.</p>
<p>These include:</p>
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<div class="column">Continued slower growth in household debt.</div>
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<br>An ongoing backlash against the economic rationalist policies of globalisation, deregulation and small government, thanks in large part to weak wages growth and rising inequality resulting in populist, less market friendly policies – such as trade protectionism and rising regulation.</div>
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<br>Rising geopolitical tensions – most notably as the US attempts to constrain the rising power of China.</div>
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<br>Aging and slowing populations – resulting in slowing labour force growth and rising pressure on public sector budgets.</div>
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<br>Constrained commodity prices – as the surge in resource investment last decade boosts supply.</div>
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<br>Technological innovation and automation.</div>
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<div class="column">Continuing rapid growth in Asia and China’s middle class.</div>
<div class="column"> </div>
<div class="column">Rising environmental awareness and pressure to slow the human contribution to global warming.</div>
<div class="column"> </div>
<div class="column">The energy revolution resulting in a shift to sustainable energy as its relative cost continues to collapse.</div>
<div class="column"> </div>
<div class="column">Most of these will constrain economic growth &amp; hence investment returns, with declining population growth the most significant.</div>
<div class="column"><strong> </strong></div>
<div class="column"><strong>Medium-term return projections</strong></div>
<div class="column"> </div>
<div class="column">Our approach to get a handle on medium-term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth reflecting the above-mentioned megatrends. We also prefer to avoid forecasting and like to keep the analysis simple.</div>
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<br>For bonds, the best predictor of future medium-term returns is current bond yields. If a 5-year bond is held for five years its initial yield will be its return. We use 5-year bond yields.</div>
<div class="column"> </div>
<div class="column">For equities, a model of current dividend yields plus trend nominal GDP growth (a proxy for capital growth) does a good job of predicting medium-term returns. This approach avoids getting too complicated.1</div>
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<div class="column">For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.</div>
<div class="column"> </div>
<div class="column">For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.</div>
<div class="column"> </div>
<div class="column">In the case of cash, the current yield is of no value in assessing its medium-term return. So we assume a medium term average that allows for higher than normal bank rates relative to the cash rate and high household debt.</div>
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<div class="column">Our latest return projections are shown in the next table.</div>
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<br><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/2018/8/28/RETURN%203.jpg" alt="">
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<br>The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. </div>
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<br>We assume inflation averages around or just below central bank targets.</div>
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<br>For Australia we have adopted a relatively conservative growth assumption reflecting constrained commodity prices and slower productivity growth.</div>
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<br>We allow for forward points in the return projections for global assets based around current market pricing – which adds 0.6% to the return from world equities.</div>
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<br>Combining the returns indicates the implied return for a diversified growth mix of assets has fallen to 6.2% pa.</div>
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<br><strong>Key observations</strong>
</div>
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<br>Several things are worth noting from these projections.</div>
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<br>The medium-term return potential using this approach has continued to fall due largely to the rally in most assets which has pushed investment yields lower.</div>
<div class="column"> </div>
<div class="column">Projected returns using this approach for a diversified growth mix of assets has fallen from 10.3% pa at the low point of the GFC in March 2009 to 6.2% now. Five years ago it was nearly 8%.<br><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/2018/8/28/RETURN%204.jpg" alt=""><br>Government bonds offer low returns due to ultra-low yields.<br>Unlisted commercial property and infrastructure continue to come out relatively well, reflecting their higher yields.</div>
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<br>Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian/emerging shares for growth potential.</div>
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<br>The downside risks to our medium-term return projections are that: the world is plunged into another recession driving another major bear market in shares or that investment yields are pushed up to more normal levels as inflation rebounds causing large capital losses. Just allow that drawdowns in returns tend to be infrequent but concentrated and it’s been a while since the last big one – see next chart.</div>
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<br>The upside risks are (always) less obvious but could occur if we see improving global growth but inflation remaining low.<br><strong><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/2018/8/28/RETURN%205.jpg" alt=""></strong>
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<strong>Implications for investors</strong><br>First, have reasonable return expectations. Low yields &amp; constrained GDP growth indicate it’s not reasonable to expect sustained double-digit returns.</div>
<div class="column"> </div>
<div class="column">In fact, the decline in the rolling 10-year average of super fund returns indicates we have been in a lower-return world for many years – it’s just that it only becomes clear every so often with bear markets with strong returns in between. See the last chart.</div>
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<br>Second, much of this reflects very low inflation - real returns haven’t fallen as much.</div>
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<br>Finally, focus on assets with decent sustainable income flow as they provide confidence regarding future returns.</div>
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<br><em>Dr Shane Oliver</em><br><em>Head of Investment Strategy and Chief Economist AMP Capital</em>
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soliver-smf6LQXgW9

Investment returns over the next five years are likely to slow: Shane Oliver

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<p><span>Introduction</span></p>
<p><span>For the last two calendar years the Australian dollar has defied our expectations for weakness. But after hitting $US0.81 in January it’s been trending down as US interest rates fell below the Australian cash rate, the threat of a US-driven trade war increased and it recently broke below a short-term range around $US0.74 and fell as low as $US0.72 on fears of contagion to global growth from a crisis in Turkey. This note looks at outlook for the $A and why it makes sense for Australian-based investors to hold a decent exposure to foreign exchange.</span></p>
<p><span>What are the fundamental drivers of the $A?</span></p>
<p><span>The Australian dollar tends to move in line with relative price differentials over the long term. This is the theory of purchasing power parity (PPP) according to which exchange rates should equilibrate the price of a basket of goods and services across countries – see the next chart.</span></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/2018/8/21/AMP%201.jpg" alt=""></span></p>
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<p>If over time Australian inflation and costs rise relative to the US, then the value of the $A should fall relative to the $US to maintain its real purchasing power and competitiveness. But in the short to medium term, swings in the $A are largely driven by swings in the prices of Australia's key commodity exports and the terms of trade (when they go up the $A tends to rise and often been significant divergences. This has notably been the case lately with the RBA hiking in 2009 (as the mining boom returned) and the Fed holding and the RBA continuing to cut in 2016 even though the Fed had commenced a tightening cycle. While US growth is running well above potential and has largely used up spare capacity, Australian growth has been running below potential and there is plenty of spare capacity. This is evident in the combination of unemployment and vice versa) and relative interest rates such that a rise in US rates relative to Australian rates makes it more attractive to park money in the US and hence pushes the $A down.</p>
<p>Why the $A is likely to fall further</p>
<p>At current levels, the Australian dollar at around $US0.7350 is around where it should be on a long-term purchasing power parity basis - see the first chart. But the $A rarely spends much time at the purchasing power parity level and tends to be pushed to extremes above and below it.</p>
<p>Our view remains that the downtrend in the $A that started in 2011 when the iron ore price peaked at over $US190/tonne has further to go. The main reason is the interest rate differential in favour of the $A is likely to go further into negative territory as the Fed continues to hike rates and the RBA remains on hold. This is making it relatively less attractive to park money in Australia putting downwards pressure on the $A. The Fed is on track to hike rates again next month as the US economy has continued to strengthen highlighted by a very tight jobs market. This will take the Fed Funds rate to a range of 2- 2.25%. If the RBA leaves rates on hold at 1.5%, as is almost certain, then the gap between Australian and US official interest rates will fall to -0.5-0.75%, from a whopping +4.5% in 2011. Periods of a low and falling official interest rate differential between Australia and the US usually see a low and falling $A.</p>
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<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/2018/8/21/AMP%202.jpg" alt=""></span></p>
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<p>While some think the RBA just follows the Fed there was often been significant divergences. This has notably been the case lately with the RBA hiking in 2009 (as the mining boom returned) and the Fed holding and the RBA continuing to cut in 2016 even though the Fed had commenced a tightening cycle. While US growth is running well above potential and has largely used up spare capacity, Australian growth has been running below potential and there is plenty of spare capacity. This is evident in the combination of unemployment and underemployment in the US running about as low as it ever gets whereas in Australia it’s about as high as it ever gets.</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/2018/8/21/AMP%203.jpg" alt=""></p>
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<p><span>While there are some positive signs in Australia with investment picking up, strong export volumes and strong employment growth, uncertainty remains high around the housing sector and consumer spending. Wages growth and inflation also remain very low so the RBA is likely to be on hold for a long while yet as the Fed continues to hike. Given falling home prices in Sydney and Melbourne a rate cut cannot be ruled out if it threatens overall growth and inflation.</span></p>
<p><span>Our base case is that solid global growth will support </span>commodity prices – particularly iron ore and coal – and that this will provide a floor for the $A in the high $US0.60s. However, history suggests we are still in a commodity price bear market after last decade’s surge in prices, the recent 20% or so plunge in metal prices is a warning of weakness and there are threats to emerging world growth from a rising $US, a potential contagion from Turkey, slower growth in China and from US trade policy.</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/2018/8/21/AMP%204.jpg" alt=""></p>
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<p><span>In the very short term the Australian dollar is oversold and this along with speculative short positions warns of a bounce higher. However, beyond this our assessment is that the $A has further to fall and will likely reach $US0.70 by year end.</span></p>
<p><span>What does it mean for investors?</span></p>
<p><span>With the risks skewed towards more downside in the value of the $A, there are several implications for investors.</span></p>
<p><span>First, there remains a strong case to maintain a decent exposure to offshore assets that are not hedged back to Australian dollars. A decline in the value of the $A boosts the value of an investment in offshore assets denominated in foreign currency by one for one. This can be seen in relation to international equity returns in the next table. The first column shows the return from global shares in local currency terms; the second shows the return in Australian dollars (if foreign currency exposures are not hedged back to Australian dollars); the third column shows the difference, which is the change in the $A on a weighted basis; and the final column shows the return to global shares if hedged back to Australian dollars.</span></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/2018/8/21/AMP%205.jpg" alt=""></span></p>
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<p><span>When the $A rises as it did last year it reduces returns from international shares for an unhedged investor. But when the $A falls as was the case in 2005, 2008, 2013, 2014 and 2015 it boosts the value of global assets and hence the return from global shares for an unhedged investor.</span></p>
<p><span>Furthermore, when Australian interest rates are above global rates, investors are “paid” to hedge their foreign currency exposure back to Australian dollars. As can be seen in the last column the return from global shares when hedged back to Australian dollars has been higher than the local currency return because hedging investors receive the difference between Australian and foreign rates. However, with Australian rates falling versus global rates the incentive to hedge is falling.</span></p>
<p><span>Second, if the global outlook turns sour, having an exposure to foreign currency provides protection for Australian investors as the $A usually falls in response to threats to global growth. As can be seen in the next chart there is a rough positive correlation between changes in global shares in local currency terms and the $A. Major falls in global shares associated with the emerging market/LTCM crisis in 1998, the tech wreck into 2001, the GFC, the Eurozone crises and the 2015-16 global growth scare saw sharp falls in the $A. This has been evident this year with worries about a trade war and Turkey weighing on the $A. So being short the $A and long foreign exchange provides good protection against threats to the global outlook.</span></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/2018/8/21/AMP%206.jpg" alt=""></span></p>
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<p><span>Finally, continuing weakness in the $A will be positive for Australian sectors that compete internationally like tourism, higher education, manufacturing, agriculture and mining.</span></p>
<p>Dr Shane Oliver<br>Head of Investment Strategy and Chief Economist AMP Capital</p>
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Why the A$ is likely to fall further: Shane Oliver

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<p>GUEST OBSERVATION</p>
<p>Earlier this year the big fear was that inflation was going to surge led by the US and that this was going to drive aggressive interest rate hikes by the US Federal Reserve and much higher bond yields, which in turn would pressure other asset classes.</p>
<p>Such fears saw a significant correction in global share markets with US shares falling 10%, global shares falling 9% and Australian shares falling 6%. Since then, inflation fears seem to have taken a back seat.</p>
<p>While in most major countries 10-year bond yields are well up from their 2016 multi-decade lows, US bond yields have struggled to stay above 3%, German bond yields are around 0.3%, Japanese bond yields are around 0.09% and Australian bond yields are around 2.58%, with most well below their highs seen earlier this year. So, what happened? Should we still worry about inflation?</p>
<p><strong>What happened?</strong></p>
<p>A whole bunch of things have helped bond yields remain low and kept investors focused elsewhere:</p>
<ul>
<li>First, although US inflation has moved up it remains relatively benign with the core private final consumption deflator around 2% year on year which is the Fed’s inflation target. <br><br>It seems every US jobs report has seen the same “Goldilocks” (not too hot/not too cold) combination of strong jobs growth and falling (now sub-4%) unemployment but low wages growth of around 2.7-2.8% year on year implying low inflation pressures. See the next chart.</li>
</ul>
<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/2018/8/14/AMP%201.jpg" alt=""></p>
<ul>
<li>While the Fed has continued its drip feed of rate hikes consistent with strong economic conditions, the lack of any inflation break-out has meant that they have been able to remain gradual, with one hike every three months and monetary policy remains very easy.<br><br>
</li>
<li>Strong US earnings growth has helped distract share market investors. June quarter earnings results have seen 84% of companies surprise on the upside regarding earnings and 71% beat revenue expectations, both of which are above normal levels. <br><br>Reflecting this, June quarter earnings growth has come in around 27% on a year ago, up from expectations for 20% earnings growth in early July.</li>
</ul>
<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/2018/8/14/AMP%202.jpg" alt=""></p>
<ul>
<li>The trade war threat has tended to dominate, leading to fears of a hit to global (and US) growth and safe haven demand for assets like bonds (which has helped keep their yields down).<br><br>
</li>
<li>Worries about Italy’s new populist government blowing out its budget deficit and already high level of public debt, or worse still threatening to leave the Euro resulting in bond holders taking a hit on their investment in Italian bonds, have boosted demand for German bonds depressing their yields and helped extend expectations of easier for longer European Central Bank monetary policy.<br><br>
</li>
<li>Other geopolitical events like the crisis in Turkey have kept investors on edge for deflationary shocks. The latest worries about contagion from Turkey as its currency plunged anew are likely overdone. Yes, there will be some impact on Eurozone banks that are exposed to Turkish debt (which will keep the ECB cautious), but it’s unlikely to be economically significant. <br><br>More fundamentally, Turkey is not indicative of the bulk of emerging countries. Its currency has crashed 40% or so this year because of current account and budget deficit blowouts, surging inflation, political interference in its central bank and populist economic mismanagement generally. <br><br>In addition, political tensions with the US following the imprisonment of an American pastor resulting in US sanctions on Turkey including tariff hikes on steel and aluminium have made things even worse. <br><br>The crisis is now being intensified by Turkish PM Erdogan’s rejection of higher interest rates and an international bailout. <br><br>While Brazil, Argentina and South Africa also have particular problems, most of the rest of the emerging world is in far better shape. <br><br>That said, emerging markets will remain vulnerable until the US dollar stops rising (as a rising $US boosts US dollar denominated debt servicing costs for emerging countries that have high foreign debt), the global trade threat ends and uncertainty regarding Chinese growth fades. <br><br>And upwards pressure on the US dollar is likely to continue as the Fed is unlikely to stop its process of gradual rate hikes anytime soon.</li>
</ul>
<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/2018/8/14/AMP%203.jpg" alt=""></p>
<ul>
<li>Finally, while growth in the US has accelerated this year, in other major countries it looks to have slowed. So, while there was talk of the Bank of Japan, the European Central Bank and even the Reserve Bank of Australia following the US into tightening this has been pushed out further. Similarly, some signs of a softening in growth in China and the tariff threat have seen the PBOC (China’s central bank) move towards monetary easing.</li>
</ul>
<p>Implications – another extension to the cycle?</p>
<p>These considerations have combined to help fade the inflation/Fed tightening fears of earlier this year with the result that bond yields have been contained and most share markets have been able to recover from their February inflation-scare lows. <br><br>In some ways it’s more of the same because the whole post global financial crisis (GFC) experience has been one of two or three steps forward towards stronger global growth followed by one or two steps back (with eg the Eurozone debt crisis, the 2015 growth scare and various deflation fears along the way). What we have seen this year is effectively a continuation of that.</p>
<p>By delaying or slowing monetary tightening this has all helped extend the economic and investment cycle. The implications have been:</p>
<ul>
<li>A continuation of low returns from cash and low bank deposit rates.<br><br>
</li>
<li>Yield-sensitive share market listed investments like real estate investment trusts have been able to rebound.<br><br>
</li>
<li>Unlisted assets like infrastructure and commercial property have continued to benefit from a search for yield by investors. </li>
</ul>
<p>With global monetary conditions remaining easy and US recession warning indicators still not flashing red (although the yield curve is worth keeping an eye on) our assessment remains that the investment cycle has more upside and that a US recession remains a way off yet. However, the main risks around this relate to the threat of a global trade war should the tariff threat from the US continue to escalate.</p>
<p>But should we still worry about inflation?</p>
<p>However, while the investment cycle has been extended it would be wrong for investors to dismiss the inflation threat – particularly in relation to the US:</p>
<ul style="list-style-type: square;">
<li>First, while it has taken a long time to get there resulting in numerous deflation scares along the way, spare capacity in the US economy has been mostly used up.<br><br>
</li>
<li>Second, numerous indicators point to a very tight labour market in the US – with more vacancies than there are unemployed, very high hiring and quits rates, companies nominating finding suitable labour as a bigger problem than weak demand – suggesting that sooner or later wages growth will start to pick up more significantly.<br><br>
</li>
<li>Third, inflation is well known to be a lagging indicator and it often appears as a problem after the pace of economic growth has peaked.<br><br>
</li>
<li>Finally, from a longer-term perspective there is a risk that the lessons of the break out in inflation from the late 1960s into the 1970s are being forgotten and that populist politicians will seek to weaken the institution of an independent central bank targeting low inflation. President Trump’s tweets critical of the Fed raising interest rates are concerning in this regard.</li>
</ul>
<p>As a result, we remain of the view that (absent a full-blown global trade war) the drip feed of Fed rates hikes will continue well into next year, that the 35 year bull market in bonds that began in the early 1980s is over and that the risks to US and by implication global bond yields into next year are still on the upside. <br><br>This suggests investors need to be a little more wary of yield-sensitive globally-exposed investments that don’t offer inflation protection (like inflation-linked bonds do and the potential for rising rents do in the case of commercial property and infrastructure) than was the case a few years ago when there was still plenty of spare capacity in the US. <br><br>Ongoing Fed rate hikes also point to ongoing upwards pressure on the US dollar which in turn suggests that investors should remain cautious in relation to emerging market shares.</p>
<p>The upside risks for bond yields is less in Australia given much higher unemployment and underemployment and that the RBA is likely to remain well behind the US in raising interest rates. <br><br>With the Fed hiking and the RBA holding, this is all consistent with ongoing downwards pressure on the Australian dollar which we still see falling to around $US0.70, having recently broken below $US0.73.</p>
<p><em><strong>SHANE OLIVER<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author"></a></strong> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em></p>
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What happened to all the worries about rising inflation and bond yields? AMP's Shane Oliver

Australian capital city dwelling prices fell for the ninth month in a row: Shane Oliver

CPI inflation below market expectations: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p>The past financial year saw solid returns for investors but it was a story of two halves.</p>
<p>While the December half year was strong as global share markets moved to factor in stronger global growth and profits helped by US tax cuts, the last six months have been messier and more constrained – with US inflation and interest rate worries, trade war fears, uncertainty around Italy, renewed China and emerging market worries and falling home prices in Australia.</p>
<p>But will returns remain reasonable or is the volatility of the past six months a sign of things to come?</p>
<p><strong>A good year for diversified investors </strong></p>
<p>The 2017-18 financial year saw yet again pretty solid returns for well diversified investors.</p>
<p>Cash and bank deposits continued to provide poor returns and the combination of low yields and a back-up in some bond yields saw low returns from bonds.</p>
<p>The latter resulted in mixed returns from yield sensitive investments, but Australian real estate investment trusts performed well helped by the RBA leaving rates on hold.</p>
<p>Reflecting strong gains in the December half as investors moved to factor in stronger global growth and profits assisted in the US by tax cuts global shares returned 11% in local currency terms and 15% in Australian dollar terms.</p>
<p>Australian shares also performed well with the ASX 200 rising to a 10-year high and solid dividends resulting in a total return of 13%.</p>
<p>Unlisted assets have continued to benefit from “search for yield” investor demand and faster growth in “rents” with unlisted property returning around 12% and unlisted infrastructure returning around 13.5%.</p>
<p>As a result, balanced growth superannuation returns are estimated to have returned around 9% after taxes and fees which is pretty good given inflation of 2%.</p>
<p>For the last five years balanced growth super returns have also been around 8.5% pa.</p>
<p><img src="https://www.urban.com.au/images/2018/7/5/Oliver%20Graph%201.JPG" alt=""></p>
<p>Australian residential property slowed with average capital city prices down 1.6%, with prices down in Sydney, Perth and Darwin. Average returns after costs were around zero.</p>
<p><strong> Key lessons for investors from the last financial year </strong></p>
<p>Be cautious of the crowd – Bitcoin provided a classic reminder of this with its price peaking at $US19500 just when everyone was getting interested in December only to then plunge 70% in price.</p>
<p>Turn down the noise – despite numerous predictions of disaster it turned out okay.</p>
<p>Maintain a well-diversified portfolio – while cash, bonds and some yield sensitive listed assets had a tougher time, a well-diversified portfolio performed well.</p>
<p>Cash is still not king – while cash and bank deposits provided safe steady returns, they remain very low.</p>
<p><strong>Expect more constrained returns and volatility</strong></p>
<p>We expect returns to slow a bit over the new financial year and just as we have seen over the last six months volatility is likely to remain high.</p>
<p>First the positives, while global growth looks to have passed its peak the growth outlook remains solid.</p>
<p>Business conditions indicators – such as surveys of purchasing managers (Purchasing Managers Indexes or PMIs) – are off their highs and point to some moderation in growth, but they remain strong pointing to solid global overall.</p>
<p><img src="https://www.urban.com.au/images/2018/7/5/Oliver%20Graoh%202.JPG" alt=""></p>
<p>In Australia, growth is likely to remain between 2.5% and 3% with strong business investment and infrastructure helping but being offset by a housing slowdown and constrained consumer spending.</p>
<p>Second, solid economic growth should continue to underpin solid profit growth from around 7% in Australia to above 10% globally</p>
<p>Third, while we are now further through the global economic cycle there is still little sign of the sort of excess that normally brings on an economic downturn – there is still spare capacity globally, growth in private debt remains moderate, investment as a share of GDP is around average or below, wages growth and inflation remain low and we are yet to see a generalised euphoria in asset prices.</p>
<p>Fourth, global monetary policy remains very easy with the Fed continuing to raise rates gradually, the ECB a long way from raising rates and tightening in Japan years away.</p>
<p>Finally, share valuations are not excessive. While price to earnings ratios are a bit above long-term averages, this is not unusual for a low inflation environment. Valuation measures that allow for low interest rates and bond yields show shares to no longer be as cheap as a year ago but they are still not expensive, particularly outside of the US.</p>
<p><strong> Against this though there are a few storm clouds</strong></p>
<p>First, the US economy is more at risk of overheating – unemployment is at its lowest since 1969, wages growth is gradually rising and inflationary pressures appear to be picking up. The Fed is aware of this and will continue its process of raising rates. While other countries are behind the US, its share market invariably sets the direction for global markets</p>
<p>Second, global liquidity conditions have tightened compared to a year ago with central bank quantitative easing slowing down and yield curves (ie the gap between long term and short-term bond yields) flattening.</p>
<p>Third, the risks of a trade war dragging on global growth have intensified. While the share of US imports subject to recently imposed tariffs is minor so far (at around 3%) they are threatened to increase. Our base case remains that some sort of negotiated solution will be reached but trade war worries could get worse before they get better.</p>
<p>Fourth, emerging countries face various risks from several problem countries (Turkey, Brazil and South Africa), slowing growth in China, concerns the rising US dollar will make it harder for emerging countries to service their foreign debts and worries they will be adversely affected by a trade war.</p>
<p>Finally, various geopolitical risks remain notably around the Mueller inquiry in the US, the US mid-term elections and Italy heading towards conflict with the EU over fiscal policy. A problem is that various threats around trade and Trump, Italy and China have come along at a time when the hurdle for central banks to respond may be higher than in the past – with the Fed focussed on inflation and the ECB moving to slow its stimulus and less inclined to support Italy.</p>
<p><strong><br></strong><strong>What about the return outlook?</strong></p>
<p>Given these conflicting forces it is reasonable to expect some slowing in returns after the very strong returns seen in the last two years.</p>
<p>Solid growth, still easy money and okay valuations should keep returns positive, but they are likely to be constrained and more volatile thanks to the drip feed of Fed rate hikes, trade war fears, China and Emerging Market worries and various geopolitical risks.</p>
<p>In Australia, falling home prices in Sydney and Melbourne along with tightening bank lending standards will be drags.</p>
<p>Looking at the major asset classes, Cash and bank deposit returns are likely to remain poor at around 2% as the RBA is expected to remain on hold out to 2020 at least.</p>
<p>Investors still need to think about what they really want, if it’s capital stability then stick with cash but if it’s a decent stable income then consider the alternatives with Australian shares and real assets such as unlisted commercial property continuing to offer attractive yields.</p>
<p><img src="https://www.urban.com.au/images/2018/7/5/Oliver%20Graph%203.JPG" alt=""></p>
<p>Still ultra-low sovereign bond yields and the risk of a risking trend in yields, which will result in capital losses, are likely to result in another year of soft returns from bonds.</p>
<p>Unlisted commercial property and infrastructure are likely to benefit from the ongoing “search for yield” (although this is waning) and okay economic growth.</p>
<p>Residential property returns are likely to be mixed with Sydney and Melbourne prices falling, Perth and Darwin bottoming and other cities providing modest gains.</p>
<p>Shares are at risk of a further correction into the seasonally weak September/October period given the storm clouds noted above, but okay valuations, reasonable economic growth and profits and still easy monetary conditions should see the broad trend in shares remain up – just more slowly. We continue to favour global shares over Australian shares.</p>
<p>Finally, the $A is likely to fall as the RBA holds and the Fed hikes adding to the case for unhedged global shares.</p>
<p><strong>Things to keep an eye on</strong></p>
<p>The key things to keep an eye are, global business conditions PMIs for any deeper slowing; risks around a trade war; risks around Trump ahead of the US mid-term elections; the drip feed of Fed rate hikes; conflict with Italy over fiscal policy in Europe; risks around China and emerging countries; and the Australian property market – where a sharp slump in home prices (which is not our view) could threaten Australian growth.</p>
<p><strong>Concluding comments</strong></p>
<p>Returns are likely to remain okay over 2018-19 as conditions are not in place for a US/global recession.</p>
<p>But expect more constrained returns (say around 6% for a diversified fund) and continued volatility.</p>
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How listed property performed against other assets in last financial year: Shane Oliver

Australian house prices will continue to slide: AMP Capital's Shane Oliver

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<p><span>EXPERT OBSERVER</span></p>
<p>While RBA Governor Lowe reiterated the mantra that the next move in interest rates is likely to be up, he also said any increase “still looks to be some time away” and indicated that to raise rates the RBA is looking for reduced labour market slack, faster wages growth and increased confidence inflation is picking up. At present there is no sign of reduced labour market slack and this is likely to continue to weigh on wages growth.<span class="Apple-converted-space"> </span></p>
<p>We remain of the view that with trend growth likely to be remain subdued, bank lending standards tightening, Sydney and Melbourne house price falls having further go that the RBA won’t start raising rates to 2020 at the earliest and in the meantime the next move being a cut can’t be ruled out.</p>
<p>Australian data was back to being a bit on the softish side. Business confidence slipped a bit in May but remains solid, consumer confidence remains stuck around long term average levels, housing finance continued to slow in April with tighter bank lending standards pointing to more weakness to come and jobs data was a bit soft in May.</p>
<p>Employment growth was weaker than expected with full time jobs falling and while unemployment fell slightly this was because of a decline in participation. Meanwhile underemployment rose slightly over the last three months to 8.5% so total labour market underutilisation remains very high at 13.9%.</p>
<p>In Australia, ABS March quarter data is expected to confirm a 1% or so decline in home prices (Tuesday) consistent with already released private sector surveys and population growth data (Thursday) for 2017 is expected to show continued strength of around 1.6% year on year with Victoria the strongest on the back of high immigration levels and interstate migration. The minutes from the RBA’s last board meeting (Tuesday) are likely to confirm that the RBA remains comfortably on hold.</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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RBA won't start rising rates until 2020 and a cut can't be ruled out: Shane Oliver

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<p>EXPERT OBSERVER</p>
<p class="x_MsoNormal">As generally expected the US Federal Reserve raised the key Fed Funds rate by another 0.25% for the seventh time since starting to hike in December 2015. This takes the Fed Funds rate to a range of 1.75% to 2%.</p>
<p class="x_MsoNormal">Supporting this the Fed sees growth as “solid” and it revised slightly upwards growth and inflation forecast for this year (with core inflation now expected to be at its 2% inflation target) and it revised down the unemployment forecast to 3.6%.</p>
<p class="x_MsoNormal">Consistent with this the median expectation of Fed officials moved up from three rate hikes for this year (ie the so-called “dot plot”) to four and it remains for three hikes next year, which taken together saw the profile for Fed interest rate expectations move higher relative to that seen in March. See the next chart.</p>
<p class="x_MsoNormal">Click here <a href="https://www.propertyobserver.com.au/images/2018/6/14/chart1.jpg" target="_blank">to enlarge.</a></p>
<p class="x_MsoNormal"><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/2018/6/14/chart1.jpg" alt=""></p>
<p class="x_MsoNormal">What’s more there was no reference to international developments (eg on trade or Italy) as potentially slowing the Fed down and the Fed’s post meeting statement removed a reference to the Fed Funds rate likely remaining below longer run levels for some time.</p>
<p class="x_MsoNormal">Taken together (and while it only took one Fed official to change the dot plot from 3 to 4 hikes for this year) the Fed has yet again become a bit more hawkish. The Fed is continuing to raise rates gradually, but its becoming a bit less gradual.</p>
<p class="x_MsoNormal">Fed Chair Powell also indicated that starting next year the Fed will have a press conference after every meeting. While this is in the interest of transparency and doesn’t signal anything necessarily about more frequent hikes it does make every meeting “live” for a rate move.</p>
<p class="x_MsoNormal">Our assessment remains that the Fed will hike four times this year (so two more to go - in September and December) and like the Fed we expect three hikes next year.  US money market expectations, which for example see just over two hikes over the next 12 months, remain too dovish (see the previous chart) </p>
<p class="x_MsoNormal">While the market reaction to the Fed’s announcement was a bit confused (US shares down slightly, ten year bond yields little changed and the $US down slightly) ultimately we see continued Fed tightening putting upwards pressure on bond yields and the US dollar. But because US monetary policy is still a long way from being tight it won’t yet threaten the strong US growth outlook or the ongoing rising trend in share markets. That said, the uncertainty around US inflation and interest rates will be a continuing source of volatility in share markets and serve to constrain returns this year.</p>
<p class="x_MsoNormal">For Australia, the Fed’s latest hike confirms that US growth is strong and this is good for Australia. However, the RBA is a long way from following the Fed higher in terms of interest rates because there is still a lot more spare capacity in the Australian labour market compared to the US. See the next chart. We don’t expect the RBA to start raising rates until 2020 at the earliest.</p>
<p class="x_MsoNormal">Click here <a href="https://www.propertyobserver.com.au/images/2018/6/14/chart2.jpg" target="_blank">to enlarge.</a></p>
<p class="x_MsoNormal"><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/2018/6/14/chart2.jpg" alt=""> </p>
<p class="x_MsoNormal">Australian official interest rates have now fallen further below those in the US. Historically, a low and falling interest rate differential relative to the US has seen the $A fall and so we expect further downside in the $A over the year ahead as US rates continue to rise further above Australian rates. However, strong commodity prices should prevent a fall to $US0.48 as occurred in 2001 which was the last time Australian rates were below US rates!</p>
<p class="x_MsoNormal">Click here <a href="https://www.propertyobserver.com.au/images/2018/6/14/chart3.jpg" target="_blank">to enlarge.</a></p>
<p class="x_MsoNormal"><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/2018/6/14/chart3.jpg" alt=""> </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>
<p class="x_MsoNormal"> </p>
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US strong growth good for Australia: Shane Oliver

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<p class="x_MsoNormal">EXPERT OBSERVATION</p>
<p class="x_MsoNormal">The Australian economy as measured by GDP grew by 1.0% in the March quarter of 2018, which was above consensus estimates for a 0.9% lift and indicates that the economy started the year off strongly. Annual growth rose to 3.1% (from 2.4% - see chart below) which is running above estimates for Australia’s growth potential (which is around 2¾%). But, the strength in GDP growth over first quarter is unlikely to be repeated again in the June quarter. Australian GDP has had a tendency to run hot and cold lately. Looking back at history, the last three strong GDP prints (around 0.9% or 1.0%) have been followed by a weaker outcome in the following quarter which is often caused by “one-off” impacts like strong net exports or an inventory build that are then unwound in the following period.</p>
<p class="x_MsoNormal">But, the Australian economy is still expected to hold up over the near-term and there is little risk of a recession. The GDP data also shows a slow trend up in productivity growth, which is positive for living standards. Compared to our global peers, Australia’s headline growth profile also looks favourable (US at around 2.5% currently, Eurozone around 2% and Japan near 2%) although much of this growth “outperformance” can be explained by higher population growth in Australia.</p>
<p class="x_MsoNormal">Click here <a href="https://www.propertyobserver.com.au/images/2018/6/6/GDP-Growth.jpg" target="_blank">to enlarge. </a></p>
<p class="x_MsoNormal"><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/2018/6/6/GDP-Growth.jpg" alt=""> </p>
<p class="x_MsoNormal">The main points from the March quarter GDP data are: </p>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Continued weakness in consumer spending.<span class="Apple-converted-space"> </span></strong>Consumer spending rose by 0.3% in the quarter (contributing 0.2 percentage points to growth with retail volumes flat over the quarter).The weakness in consumers is well known – real wages growth is running flat, the savings ratio is now very low at just 2.1% and debt levels are very high. It is difficult to see households gaining confidence to run down their savings rate further in the current environment of low wages growth, slowing wealth accumulation (as home price growth weakens) and high debt levels. Proposed income tax cuts from the government are not large enough to change this outlook. Its worth noting that while the National Accounts reports “compensation of employees” as being up a strong 5.1% over the last year, this mainly reflects the strong employment growth of the last year as “average compensation per employee” is up just 1.6% over the last year consistent with other measures of low wages growth. </li>
</ul>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Residential construction<span class="Apple-converted-space"> </span></strong>contributed 0.1 percentage points to growth. Housing construction has passed its peak but building approvals continue to run at elevated levels compared to recent years so housing investment is still making small contributions to growth. Housing investment will slow over the next year or two though, but large detractions from growth are unlikely.</li>
</ul>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Underlying business investment<span class="Apple-converted-space"> </span></strong>(which takes into account asset transfers between the private and public sector) made no contribution to growth, with non-residential building down, engineering construction up marginally and machinery &amp; equipment spending up. Business investment is slowly lifting in Australia, as the mining investment decline has nearly finished and non-mining investment is improving. There is still more downside for mining investment, but a lift in non-mining expenditure is providing an offset. However, the lift in non-mining investment has been slow and very gradual and capital spending intensions data released last week suggests that this is likely to remain the case<strong>.<span class="Apple-converted-space"> </span></strong>Non-mining investment is still well below its historical average as a share of the economy, so there is still plenty of capacity to lift non-mining investment growth.<strong> </strong>
</li>
</ul>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Underlying government spending<span class="Apple-converted-space"> </span></strong>(which takes into account asset transfers between the private and public sector) was up strongly again and contributed 0.3 percentage points to growth. Public infrastructure spending remains very high, with both the Federal &amp; State governments allocating more funds towards infrastructure over recent periods which will continue contributing to GDP growth.</li>
</ul>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Inventories<span class="Apple-converted-space"> </span></strong>contributed 0.2 percentage points in the March quarter and this is unlikely to be sustained in the June quarter.<strong> </strong>
</li>
</ul>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Net exports<span class="Apple-converted-space"> </span></strong>contributed 0.3 percentage points to growth with strong export growth. The outlook for export growth is still positive, thanks to resource exports and global demand for Australian resources and as service exports like tourism and education continue to grow. But the contribution to growth is likely to slow going forward and it can be volatile from quarter to quarter.</li>
</ul>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Inflation pressures and wages<span class="Apple-converted-space"> </span></strong>remain subdued with the household consumption deflator (an alternative measure of inflation) up by 1.6% year on year which is below the rate of inflation as measured by the CPI and average compensation per employee is up by just 1.6% over the past year – below the 2.0% wages growth recorded in the wage price index (this is due to jobs growth being faster for low paid jobs than for high paid jobs).</li>
</ul>
<p class="x_MsoNormal"><strong>Implications</strong></p>
<p class="x_MsoNormal">While the March quarter GDP data shows that the Australian economy started the year strongly, we still expect Australian growth in 2018 to be a little below the RBA’s forecast of “a bit above 3%” because of a constrained consumer and a slowing housing market. And while non-mining business investment is rising, public infrastructure spending is surging and the labour market is strong, there are few signs of noticeable cost pressures as the economy is still running below its capacity as indicated by high levels of labour market underutilisation.</p>
<p class="x_MsoNormal">Growth needs to be stronger on a sustained basis to work through this spare capacity and lift wages and inflation. We remain of the view that the constrained inflation backdrop will keep the Reserve Bank on hold until early 2020 at least, when we see the central bank starting to lift interest rates. But, given the weakness in home prices and the negative wealth effect that will flow from that its premature to rule out the next move in official rates being a cut.</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>
<p class="x_MsoNormal"> </p>
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Shane Oliver

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