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


Joel Robinson

Spacious Group completes Voyage Altona in Altona's beachside precinct

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


Homecorp approved for Budds Beach apartment tower, Lýon Residences

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


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

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


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

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

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


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

Shane Oliver

<html><body>
<p class="x_MsoNormal">EXPERT OBSERVATION</p>
<p class="x_MsoNormal">As widely expected, the June RBA Board meeting saw it leave interest rates on hold for a record 20 meetings or 22 months. </p>
<p class="x_MsoNormal">Yet again the RBA made little substantive changes to its post meeting Statement. While it saw recent Australian data as being consistent with its forecasts for growth to pick up to a bit above 3% there was no sense of urgency to move interest rates in response to this and while recent data does point to an acceleration in March quarter GDP growth (to be published tomorrow) there have been numerous growth spikes in Australia to around 1% quarter on quarter in recent years only to be followed by a cooling again and the RBA is not doubt aware of this tendency for the economy to run hot and cold.</p>
<p class="x_MsoNormal">On the housing market the RBA does not appear to be too fussed by the further fall in Sydney and Melbourne property prices or the further tightening in lending standards now underway. Its doubtful though that the further tightening in lending standards will be offset by a continuing decline in “the average mortgage interest rate on outstanding loans” as the RBA seems to be implying, as the latter is simply occurring as new borrowers have lower rates than borrowers from say five years ago whereas the tightening in lending standards around income and expenses will act to slow the number of new borrowers who can get into the housing market.</p>
<p class="x_MsoNormal">Overall, there was nothing in the RBA’s latest Statement to suggest an imminent change in monetary policy.</p>
<p class="x_MsoNormal">While the global backdrop (assuming no upset from trade wars, Trump or Italy), business conditions, non-mining investment and infrastructure activity are positive and will support growth, uncertainty remains around the outlook for consumer spending, household debt is high, banks are tightening lending standards, wage growth and inflation remain low and will pick only gradually and house prices are falling.</p>
<p class="x_MsoNormal">As a result, we remain of the view that the RBA is likely to remain on hold for a long time yet and we don’t see a rate hike until 2020 at the earliest. And 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><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>
<p><span><span class="s2"><em> </em></span></span></p>
<div> </div>
</body></html>

soliver-smf6LQXgW9

RBA likely to remain on hold out to 2020: Shane Oliver

<html><body>
<p>EXPERT OBSERVATION </p>
<p>Australian capital city dwelling prices fell for the seventh month in a row in May, with a fall of -0.2% which left prices down -1.1% from a year ago.</p>
<p>Sydney dwelling prices fell another 0.2% and have now fallen 4.5% from their August 2017 high, Melbourne prices fell another 0.5% and are down 1.6% from their November high.</p>
<p> </p>
<p>Late last year Oliver predicted prices would drop between five and 10 percent.</p>
<p>Perth (-0.1%), Darwin (-0.2%) and Canberra (-0.1%) fell but Brisbane and Adelaide saw modest gains and Hobart remains very strong with prices up 0.8% in May or 12.7% year on year.</p>
<p class="m_-8369363944413479336x_MsoNormal"> </p>
<p class="m_-8369363944413479336x_MsoNormal"><img class="CToWUd a6T" src="https://mail.google.com/mail/u/0/?ui=2&amp;ik=b3e74386fa&amp;view=fimg&amp;th=163b8edf9574d7a0&amp;attid=0.4&amp;disp=emb&amp;attbid=ANGjdJ8yEFQwzoDUvcePcBG9z2954F0oQ74JXqS55cFGGqOXdCdvwdT1N5rNBYNayye8itcVkfOuurYBuLFnUn8Lqq4XyH2z8iIUzVkUo38NBM9xjM2WdQMrOTiAf_Q&amp;sz=w998-h650&amp;ats=1527816381594&amp;rm=163b8edf9574d7a0&amp;zw&amp;atsh=1" width="499" height="325"></p>
<p class="m_-8369363944413479336x_MsoNormal"><span>Source: CoreLogic, AMP Capital</span> </p>
<p class="m_-8369363944413479336x_MsoNormal">APRA’s earlier tightening in lending standards for investors and interest only borrowers is clearly continuing to impact and along with poor affordability, rising supply, falling price growth expectations and the end of FOMO (fear of missing out) are pushing prices down in cities which have seen strong gains over the last few years, ie Sydney and Melbourne.</p>
<p class="m_-8369363944413479336x_MsoNormal">The latest round of tightening bank lending standards around borrower’s income and expenses is adding to this particularly in the very high home price to income cities of Sydney and Melbourne.</p>
<p class="m_-8369363944413479336x_MsoNormal">We expect prices in Sydney and Melbourne to fall another 4% or so this year, another 5% next year and to still be falling in 2020.</p>
<p class="m_-8369363944413479336x_MsoNormal"> </p>
<p class="m_-8369363944413479336x_MsoNormal"><img class="CToWUd a6T" src="https://mail.google.com/mail/u/0/?ui=2&amp;ik=b3e74386fa&amp;view=fimg&amp;th=163b8edf9574d7a0&amp;attid=0.5&amp;disp=emb&amp;attbid=ANGjdJ8dS9IyUYufyKljW7lgu1UCvwkNPXszTWBuHbF_xsRSAqdb5_oohOcZFAOy5cXgzlwEqOL0dDVgCFbKL2bmF9zbSsLxfF1eBgvd-pC1psmY1FEXwgg7B8tzHSA&amp;sz=w980-h636&amp;ats=1527816381594&amp;rm=163b8edf9574d7a0&amp;zw&amp;atsh=1" width="490" height="318"></p>
<p class="m_-8369363944413479336x_MsoNormal"><span>Source: CoreLogic, AMP Capital</span></p>
<p class="m_-8369363944413479336x_MsoNormal">However, having not had the same boom over the last five or six years other capital cities are likely to perform better. Perth and Darwin look to be at or close to bottoming, Adelaide, Brisbane and Canberra are likely to see moderate growth and the boom in Hobart is likely to continue for a while yet.</p>
<p class="m_-8369363944413479336x_MsoNormal">Similarly home prices in regional centres (+0.2%mom/+2.2%yoy) are likely to hold up better with continuing modest growth as generally speaking they haven’t had the same boom as Sydney and Melbourne and so offer much better value and much higher rental yields. The average gross rental yield for regional areas is 4.9% compared to just 3.4% in the capital cities.</p>
<p class="m_-8369363944413479336x_MsoNormal">Capital city unit prices have been holding up better than home prices but may be starting to come under more pressure – they fell by 0.3% in May – as more supply comes on. The residential crane count may have peaked in Sydney and Melbourne but its still high meaning that there is still a huge amount of units to hit these two markets.</p>
<p class="m_-8369363944413479336x_MsoNormal"><img class="CToWUd a6T" src="https://mail.google.com/mail/u/0/?ui=2&amp;ik=b3e74386fa&amp;view=fimg&amp;th=163b8edf9574d7a0&amp;attid=0.6&amp;disp=emb&amp;attbid=ANGjdJ8xojTc_jnDT0AYF0qB8mZukTX8SEif1ZjQ-ZjgOFTUoWNAaNzGE2jfxjs5z8B6NjDsrcmuEkEdh5beT_8Ls0XjxR6hq6iu1fVzbiz59V_FDKrm0rymXzD-Dfk&amp;sz=w1048-h636&amp;ats=1527816381594&amp;rm=163b8edf9574d7a0&amp;zw&amp;atsh=1" width="524" height="318"></p>
<p class="m_-8369363944413479336x_MsoNormal"><span>Source:  Rider Levett Bucknall Crane Index, AMP Capital</span> </p>
<p class="m_-8369363944413479336x_MsoNormal">Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 15% spread out to 2020, but for national average prices the top to bottom fall is likely to be around 5%. A crash landing is unlikely in the absence of much higher interest rates or unemployment.</p>
<p class="m_-8369363944413479336x_MsoNormal"><strong>Implications for interest rates</strong></p>
<p class="m_-8369363944413479336x_MsoNormal">The continuing weakness in home prices in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse. It’s consistent with our view that the RBA will leave rates on hold out to 2020. Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so while it’s not our base case we can’t rule out the next move in rates being a cut rather than a hike.</p>
<p class="m_-8369363944413479336x_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>
</body></html>

The slide in Australian home prices is set to continue: AMP's Shane Oliver

<html><body><div lang="EN-AU">
<div class="x_WordSection1">EXPERT OBSERVER</div>
<div class="x_WordSection1"> </div>
<div class="x_WordSection1">Australian capital city dwelling prices fell for the sixth month in a row in April, with a fall of -0.3% in April which left prices down -0.3% from a year ago.</div>
<div class="x_WordSection1"> </div>
<div class="x_WordSection1">Weakness continues to be led by Sydney (-0.4%mom/-3.4%yoy) and Melbourne (-0.4%/+3.7%yoy) with most other cities seeing gains. </div>
<div class="x_WordSection1"> </div>
<div class="x_WordSection1">Click here <a href="https://www.propertyobserver.com.au/images/2018/5/1/cooling.jpg" target="_blank">to enlarge.</a>
</div>
<div class="x_WordSection1"> </div>
<div class="x_WordSection1"><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/2018/5/1/cooling.jpg" alt=""></div>
<div class="x_WordSection1">
<p class="x_MsoNormal">Last year’s APRA driven tightening in lending standards for interest only borrowers is clearly continuing to impact and along with poor affordability, rising supply, falling price growth expectations and the end of FOMO (fear of missing out) are pushing prices down in cities which have seen strong gains over the last few years, ie Sydney and Melbourne.</p>
<p class="x_MsoNormal">The latest round of tightening bank lending standards around borrower’s income and expenses will add to this. We expect prices in Sydney and Melbourne to fall another 5% this year, another 5% next year and to still be falling in 2020.</p>
<p class="x_MsoNormal">Click here <a href="https://www.propertyobserver.com.au/images/2018/5/1/downside.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/2018/5/1/downside.jpg" alt=""></p>
<p class="x_MsoNormal">However, having not had the same boom over the last five or six years other capital cities are likely to perform better. Perth and Darwin look to have bottomed, Adelaide, Brisbane and Canberra are likely to see moderate growth and the boom in Hobart (+1.2%mom/+12.7%yoy) is likely to continue for a while yet.</p>
<p class="x_MsoNormal">Similarly home prices in regional centres (+0.4%mom/+2.4%yoy) are likely to hold up better with continuing modest growth as generally speaking they haven’t had the same boom as Sydney and Melbourne and so offer much better value and much higher rental yields.</p>
<p class="x_MsoNormal">Despite the surge in supply capital city unit prices (+0.1%mom/+1.9%yoy) are continuing to hold up better than house prices. This may reflect the entrance of more first home buyers following last year’s stamp duty concessions for them in some states and a perception that a new unit closer to transport may offer better value than a stand alone house. I would still be cautious in areas with lots of cranes though!</p>
<p class="x_MsoNormal"><strong>Implications for interest rates</strong></p>
<p class="x_MsoNormal">The continuing weakness in home prices in Sydney and Melbourne with more to go is consistent with our view that the RBA will leave rates on hold out to 2020. Home price weakness is now at levels where the RBA started cutting rates in 2008 and 2011.</p>
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Falling prices in Sydney and Melbourne - is this the crash?

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<div class="column">The Australian economy grew 2.4% through 2017, good but well below potential given high population growth.</div>
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<div class="column">There is good reason to expect growth to continue and pick up a bit: the drag from falling mining investment is nearly over, non-mining investment is turning up, public investment is strong, trade should add to growth and profits are rising. But growth is likely to be constrained to just below 3% this year and underlying inflation is likely to remain low.</div>
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<div class="column">We don’t expect the RBA to start raising rates until 2019 (we were looking for a hike late this year). Australian shares are likely to move higher by year end, but to continue underperforming global shares.</div>
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<p><strong>Growth just muddling along</strong></p>
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<p><span>For the last few years the Australian economy has been </span>meandering between 2-3% growth. This remained the case through last year with December quarter GDP up just 0.4%, and annual growth of 2.4% as a bounce a year ago dropped out.</p>
<p>In the quarter growth was helped by consumer spending and public investment but soft housing and business investment and a large detraction from net exports weighed on growth.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/3/8/gdpgrowth.jpg" target="_blank">to enlarge.</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/8/gdpgrowth.jpg" alt=""></p>
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<p><span>Australia continues to defy recession calls. Against this, economic growth is well below potential, with per capita growth running at just 0.8% year on year, which is below that in most major countries. </span></p>
<p><strong>The usual worry list</strong></p>
<p><span>Global threats aside, Australia's worry list is well known.</span></p>
<p><span>- The solid contribution to growth from housing construction seen over 2013-16 has faded and building approvals are off their highs.</span></p>
<p>- Average house prices have started to edge down, with fears of a deeper crash. But in the absence of a stronger supply surge, the Reserve Bank of Australia (RBA) making a mistake and raising rates too high and/or unemployment surging, our view remains that price declines in Sydney and Melbourne will be limited to 5-10% and other cities face a more positive outlook.</p>
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<p><span>- The outlook for consumer spending is constrained and </span>uncertain given record low wages growth, high levels of underemployment and slowing wealth gains. Consumers have been running down their savings rate helped by rising wealth (to now just 2.7%), but this is unlikely to continue as property prices in Sydney and Melbourne slow.</p>
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<p><span>- Mining investment is still falling </span><span>with investment plans </span>pointing to roughly 15% falls this financial year and next.</p>
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<p><span>- The Australian dollar at around $US0.78 is up 12% from </span>its 2015 low and risks threatening growth in trade-exposed sectors like tourism, agriculture and manufacturing.</p>
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<p><span>- Underlying inflation is too low </span><span>with a fall in inflationary </span>expectations, making it harder to get wages growth up and with the stronger $A not helping.</p>
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<p><span>- Our political leaders seem collectively unable to </span>undertake productivity-enhancing economic reforms. And it’s unlikely this will change any time soon which is a concern with productivity falling 0.8% through 2017. </p>
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<p><span>These drags are nothing new. We continue to see five reasons </span>why recession will be avoided, and growth will be okay:</p>
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<p><span>- <strong>First, the drag from falling mining investment is nearly </strong></span><strong>over. </strong></p>
<p>Mining investment peaked at nearly 7% of GDP five years ago and has since been falling, knocking around 1.5% pa from GDP growth. At around 2% of GDP now, its growth drag has fallen to around 0.3% pa and it’s near the bottom. </p>
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<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/3/8/mining.jpg" target="_blank">to enlarge.</a></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/2018/3/8/mining.jpg" alt=""></span></p>
<div class="page" title="Page 2">- <strong>Second, non-mining investment is now rising</strong>
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<p><span>Comparing corporate investment plans for this financial year with those made a year ago points to a decline in business investment this year of around 3% (see next chart) and a similar sized rise in 2018-19. But this is the best since 2013 and once mining investment is excluded this turns into an 8% gain for non-mining investment in both years.</span></p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/3/8/capital.jpg" target="_blank">to enlarge.</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/8/capital.jpg" alt=""></p>
<p>- <strong>Third, public investment is rising strongly</strong>, reflecting state infrastructure spending.</p>
<p>- <strong>Fourth, net exports are likely to add to growth</strong> as the completion of resources projects and strong global demand boosts resources export volumes and services sectors like tourism and higher education remain strong.</p>
<p>- <strong>Finally, profits for listed companies are rising</strong>. This is a positive for investment.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/3/8/EPS.jpg" target="_blank">to enlarge.</a></p>
<p><a href="https://www.propertyobserver.com.au/images/2018/3/8/EPS.jpg" target="_blank"><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/2018/3/8/EPS.jpg" alt=""></a></p>
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<p><span>While profit growth has slowed from 16% in 2016-17 to </span>around 7% now as the 2016-17 surge in commodity prices dropped out, more companies (74%) are seeing profit gains than at any time since before the GFC. 92% of Australian companies either raised or maintained their dividends in the most recent reporting season indicating a high degree of confidence in the earnings and growth outlook.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/3/8/company%20profits.jpg" target="_blank">to enlarge.</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/8/company%20profits.jpg" alt=""></p>
<p>So while housing is slowing and consumer spending is constrained )with January retail sales data suggesting consumer spending this year is off to a weak start), a lessening drag from mining investment and stronger non-mining investment (both public and private) along with solid export growth are likely to keep the economy growing and see a pick-up in growth to between 2.5% and 3%.</p>
<p>However, growth is likely to remain below Reserve Bank of Australia expectations for a pick up to 3.25% this year and next. As a result, and with wages growth and inflation likely to remain low for a while yet we have pushed out the epected timing for the first RBA rate hike from later this year into February next year. </p>
<p><strong>Implications for investors</strong></p>
<p>There are several implications for Australian investors. First, continuing growth should provide a reasonable backdrop for Australian growth assets. Australian shares are vulnerable to the concerns impacting global markets - particularly US inflation and Fed fears and worries about a trade war - but we remain of the view that the ASX 200 will be higher by year end.</p>
<p>Second, bank deposits are likely to provide poor reutnrs for investors for a while yet. The issue for investors in bank deposits is to think about what they are really after. If it's peace of mind regarding the capital value of their investment, then maybe stay put. But if it's a decent income yield then there are plenty of alternatives providing superior yield. The yield gap between Australian shares and bank deposits remains wide.</p>
<p>Third, while Australian shares are great for income, global shares are likely to remain outperformers for capital growth. Global shares have been outperforming Australian shares since October 2009 and over the last five years have outperformed in local currency terms by nearly 4$ pa and by 9% pa in Australia dollar terms. This reflects relatively tighter monetary policy in Australia, the commodity slump, the lagged impact of the rise in the $A above parity in 2010, and a mean reversion of the 2000 to 20009 outperformance by Australian shares. While earnings growth in Australia is around 7%, it's double this globally, suggesting the relative underpformance of Australian shares in terms of capital growth may go for a while yet. Which all argues for a continuing decent exposure to global shares.</p>
<p>Finally, the risks remain on the downside for the $A. With the RBA comfortably on hold and the Fed set to raise rates later this month with four hikes this year in total, the interest rate gap between Australia and the US will go negative and keep falling this year. Historically this has been associated with falls in the value of the Australian dollar. Fears of a global trade war may add to this risk given Australia’s relatively high trade exposure. All of which is another reason to maintain a continuing decent exposure to global shares but on an unhedged basis. </p>
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<div class="page" title="Page 2"><em><span><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> </span>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></div>
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jrobinson-rf4aSBido9

Olivers insights: Growth will continue but rate hikes not expected till 2019

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<p class="x_MsoNormal">The Australian economy as measured by GDP grew 0.4% in the December quarter of 2017, which was just under consensus estimates for a 0.5% lift and is a weak finish to 2017.</p>
<p class="x_MsoNormal">Annual growth declined to 2.4% (from 2.9% - see chart below) which remains below Australia’s potential (at around 2¾%). Per capita GDP growth was just 0.8% year on year. Annual GDP growth in 2017 averaged out at 2.3%, the lowest annual rate since 2013 and less than would be expected given a strong labour market (employment was up by 3.3% over the year to December 2017).</p>
<p class="x_MsoNormal">This can be explained by a decline in productivity which was down by 0.8% over the year.</p>
<p class="x_MsoNormal">Click here <a href="https://www.propertyobserver.com.au/images/2018/3/7/GDP.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/2018/3/7/GDP.jpg" alt=""> </p>
<p class="x_MsoNormal">The main points from the December quarter GDP data are:</p>
<ul type="disc">
<li class="x_MsoNormal">
<strong>Stronger than expected consumer spending.<span class="Apple-converted-space"> </span></strong>Consumer spending rose by 1.0% in the quarter (contributing 0.6 percentage points to growth and retail accounting for a third of the contribution). This was a strong quarter for consumers but is unlikely to be repeated in early 2018, with the latest retail data showing poor growth in spending over January. The household savings rate is low (at 2.7% in the December quarter) and has probably bottomed for now (stabilising from a downwardly revised 2.5% in mid-2017) but still is well below levels of 8% around three years ago. 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.</li>
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<strong>Residential construction</strong><span class="Apple-converted-space"> </span>detracted 0.1 percentage points from growth, as expected. Housing construction has passed its peak and will continue to make a small negative contribution to growth in 2018. But, building approvals remain at high levels which will keep residential construction elevated.<span class="Apple-converted-space"> </span>
</li>
</ul>
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<strong>Underlying business investment</strong><span class="Apple-converted-space"> </span>(which takes into account asset transfers between the private and public sector) detracted 0.1 percentage points from growth, with non-residential building up, engineering construction down and a solid lift in plant and equipment spending. Business investment growth is recovering as the mining investment decline has nearly finished and non-mining investment is improving. The recently published capital expenditure survey indicated that the environment for business investment is becoming more favourable in Australia, but the pick-up in non-mining investment growth is still probably a little softer compared to what is required to push GDP growth to 3% (the RBA’s forecast for 2018 GDP growth). </li>
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<strong>Underlying government spending</strong><span class="Apple-converted-space"> </span>(which takes into account asset transfers between the private and public sector) remains strong and contributed 0.3 percentage points to growth. Public infrastructure spending remains high, particularly across transport projects (particularly across the east coast of Australia) and this will continue in 2018.</li>
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<strong>Inventories</strong><span class="Apple-converted-space"> </span>made no contribution to growth in the December quarter, but inventory levels are relatively low posing no real threat to growth going forward.</li>
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<strong>Net exports</strong><span class="Apple-converted-space"> </span>detracted 0.5 percentage points from growth as export growth declined while imports rose. The outlook for export growth is still positive, as various resources projects continue to complete, there is plenty of global demand for Australian resources and as service exports like tourism and education continue to grow.</li>
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<strong>Inflation pressures and wages are still weak but have bottomed for now.</strong><span class="Apple-converted-space"> </span>The household consumption deflator (an alternative measure of inflation) is just up 1.3% year on year which is well below the rate of inflation as measured by the CPI. And while total compensation of employees was up by 4.8% over the year this just reflects strong employment growth – average compensation per employee was up by just 1.6% over the year. This is below the 2.1% wages growth recorded in the Wage Price Index because jobs growth has been faster for low paid jobs than for high paid jobs.<strong> </strong>
</li>
</ul>
<p class="x_MsoNormal"><strong>Implications</strong></p>
<p class="x_MsoNormal">GDP growth ended 2017 close to the RBA’s forecasts (of 2.5%) but the central bank still expects growth to average at around 3% in 2018 which may be challenging because of the poor outlook for consumer spending and a slowing in housing construction. And while non-mining business investment is rising, public infrastructure spending is surging and the labour market is strong, there are few signs of significant cost pressures as the economy is running below its capacity. Our view is that the Australian economy will strengthen somewhat in 2018 as business conditions are still very positive which will work through the spare capacity in the economy and eventually lift inflation. But that process will take some time. We see the RBA starting to lift the cash rate at the end of this year, but the risk is that the first rate hike for this cycle won’t happen until sometime in 2019.</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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No case for a near-term RBA rate hike as December quarter GDP soft and below-trend: Shane Oliver

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<p>GUEST OBSERVER </p>
<p>December quarter wages growth in Australia was a stronger than expected 0.6% quarter on quarter which lifted the annual pace of wages growth to 2.1%, its strongest in 18 months.</p>
<p>This was above market expectations for a 0.5% quarterly gain.</p>
<p>Underlying wages growth may be bottoming, but its premature to conclude that its starting to lift: as the stronger than expected December quarter gain likely reflects a continuing flow through of last year’s minimum wage rise (which appeared to impact less than expected in the September quarter); adjusting for the minimum wage rise leaves underlying wages growth still stuck around its low of just 1.9% year on year; and the acceleration in quarterly wages growth was only driven by the public sector with private wages growth stuck at 0.5% quarter on quarter.</p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/21/wages.jpg" target="_blank">to enlarge.</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/21/wages.jpg" alt=""></p>
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<p>Meanwhile, wage increases in new enterprise bargaining agreements have been tending to be lower also suggesting there has been no real lift in underlying wages growth and spare capacity in the labour market remains very high.</p>
<p>So our view remains that its premature to conclude that the long awaited lift in wages growth is upon us and so we see no reason for the RBA to change its conclusion that the lift in inflation towards target will be gradual and we continue to expect that the RBA won’t be raising rates until late this year at the earliest. So the Australian dollar was right to give up its initial bounce after the wage data was released.</p>
<p><em><strong><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author">SHANE OLIVER</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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No rate rise as December quarter wages growth not strong enough: Shane Oliver

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<p>GUEST OBSERVER</p>
<p>If Australia has an Achille’s heal it’s the high and still rising level of household debt that has gone hand in hand with the surge in house prices relative to incomes.</p>
<p>Whereas several comparable countries have seen their household debt to income ratios pull back a bit since the Global Financial Crisis (GFC), this has not been the case in Australia.</p>
<p>Some worry Australians are unsustainably stretched, and it is only a matter of time before it blows up, bringing the economy down at the same time. Particularly now that global interest rates are starting to rise. This note looks at the main issues. </p>
<p><strong>Australia - from the bottom to the top in debt stakes </strong></p>
<p>The chart below shows the level of household debt (mortgage, credit card and personal debt) relative to annual household disposable income for major countries. </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/2018/2/14/HOUSEHOLD%201.jpg" alt=""></p>
<p>While rising household debt has been a global phenomenon, debt levels in Australia have gone from the bottom of the pack to near the top.</p>
<p>In 1990, there was on average $70 of household debt for every $100 of average household income after tax. Today, it is nearly $200 of debt (not allowing for offset accounts) for every $100 of after tax income. </p>
<p><strong>Why has debt gone up so much in Australia? </strong></p>
<p>The increase in debt reflects both economic and attitudinal changes. Memories of wars and economic depression have faded and with the last recession ending nearly 27 years ago, debt seems less risky. Furthermore, modern society encourages instant gratification as opposed to saving for what you want.</p>
<p>Lower interest rates have made debt seem more affordable and increased competition amongst financial providers has made it more available. So, each successive generation since the Baby Boomers through to Millennials have been progressively more relaxed about taking on debt than earlier generations. </p>
<p><strong>It’s not quite as bad as it looks </strong></p>
<p>There are several reasons why the rise in household debt may not be quite as bad as it looks: </p>
<ul>
<li>Firstly, higher debt partly reflects a rational adjustment to lower rates and greater credit availability via competition. </li>
<li>Secondly, household debt has been rising since credit was first invented. It is unclear what a “safe” level is. This is complicated because income is a flow and debt is a stock which is arguably best measured against the stock of assets or wealth. </li>
<li>The rise in the stock of debt levels has been matched by a rise in total household wealth in Australia. Thanks to a surge in the value of houses and a rise in financial wealth, we are far richer. Wealth rose 9.5% last year to a new record. The value of average household wealth has gone from five times average annual after tax household income in 1990 to 9.5 times today. <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/2018/2/14/HOUSEHOLD%202.jpg" alt="" style="font-size: 12.16px;">
</li>
</ul>
<p>So, while the average level of household debt for each man, woman and child in Australia has increased from $11,837 in 1990 to $93,943 now, this has been swamped by an increase in average wealth per person from $86,376 to $475,569. </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/2018/2/14/HOUSEHOLD%203.jpg" alt=""></p>
<p>As a result, Australians’ household balance sheets, as measured by net wealth (assets less debt), are healthy.</p>
<p>Despite a fall in net wealth relative to income through and after the GFC as shares and home prices fell, net wealth has increased substantially over the last 30 years and is in the middle of the pack relative to comparable countries.</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/2018/2/14/HOUSEHOLD%204.jpg" alt=""> </p>
<ul>
<li>Fourthly, Australians are not having major problems servicing their loans. According to the Reserve Bankís Financial Stability Review non-performing loans are low and Census and Household Expenditure Survey data shows that mortgage stress has been falling. Of course, this may reflect low mortgage rates with interest costs as a share of income running a third below its 2008 high. </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/2018/2/14/HOUSEHOLD%205.jpg" alt=""></p>
<ul>
<li>Fifthly, debt is concentrated in higher income households who have a higher capacity to service it. This is particularly the case for investment property loans.</li>
<li>Sixthly, a disproportionate share of the rise in housing debt over the last 20 years owes to investment property loans. As servicing investment loans is helped by tax breaks the debt burden is not even as onerous.</li>
<li>Finally, lending standards have not deteriorated to the same degree in Australia as they did in the US prior to the GFC where loans were given to NINJAs borrowers with no income, no job and no assets. </li>
</ul>
<p><strong>What are the risks? </strong></p>
<p>None of this is to say the rise in household debt is without risk. Not only has household debt relative to income in Australia risen to the top end of comparable countries but so too has the level gearing (ie the ratio of debt to wealth or assets). </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/2018/2/14/HOUSEHOLD%206.jpg" alt=""></p>
<p>It certainly increases households’ vulnerability to changing economic conditions. There are several threats:</p>
<ol>
<li>Higher interest rates – the rise in debt means moves in interest rates are three times as potent compared to say 25 years ago. Just a 2% rise in interest rates will take interest payments as a share of household income back to where they were just prior to the GFC (and which led to a fall in consumer spending). However, the RBA is well aware of the rise in sensitivities flowing from higher debt and so knows that when the time comes to eventually start raising rates (maybe later this year) it simply won’t have to raise rates anywhere near as much as in the past to have a given impact in say controlling spending and inflation. And so, it’s likely to be very cautious in raising rates (and is very unlikely to need to raise rates by anything like 2%).<br><br>
</li>
<li>Rising unemployment – high debt levels add to the risk that if the economy falls into recession, rising unemployment will create debt-servicing problems. However, it is hard to see unemployment rising sharply anytime soon. <br><br>
</li>
<li>Deflation – high debt levels could become a problem if the global and local economies slip into deflation. Falling prices increase the real value of debt, which could cause debtors to cut back spending and sell assets, risking a vicious spiral. However, the risk of deflation has been receding. <br><br>
</li>
<li>A sharp collapse in home prices – by undermining the collateral for much household debt – could cause severe damage. Fortunately, it is hard to see the trigger for a major collapse in house prices, ie, much higher interest rates or unemployment. And full recourse loans provide a disincentive to just walk away from the home and mortgage unlike in parts of the US during the GFC. <br><br>
</li>
<li>A change in attitudes against debt – households could take fright at their high debt levels (maybe after a bout of weakness in home prices or when rates start to rise) and seek to cut them by cutting their spending. Of course, if lots of people do this at same time it will just result in slower economic growth. At present the risk is low but its worth keeping an eye on with Sydney and Melbourne property prices now falling. But high household debt levels are likely to be a constraint on consumer spending. </li>
</ol>
<p><strong>Conclusion </strong></p>
<p>While the surge in household debt has left Australian households vulnerable to anything which threatens their ability to service their debts or significantly undermines the value of houses, the trigger for major problems remains hard to see. However, household discomfort at their high debt levels poses a degree of uncertainty over the outlook for consumer spending should households decide to reduce their debt levels. </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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Australian's love affair with household debt - how big is the risk? Shane Oliver

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<p>The current pullback in shares has been triggered by worries around US inflation, the Fed and rising bond yields but made worse by an unwinding of bets that volatility would continue to fall.</p>
<p>We may have seen the worst, but it’s too early to say for sure. However, our view remains that it’s just another correction.</p>
<p>Key things for investors to bear in mind are that: corrections in the order of 5-15% are normal; in the absence of recession, a deep bear market is unlikely; selling shares after a fall just locks in a loss; share pullbacks provide opportunities for investors to pick them up more cheaply; while shares may have fallen, dividends haven’t; and finally, to avoid getting thrown of a long-term investment strategy it’s best to turn down the noise during times like the present.</p>
<p><strong>Introduction</strong></p>
<p>The pullback in shares seen over the last week or two has seen much coverage and generated much concern. This is understandable given the rapid falls in share markets seen on some days. From their highs to their recent lows, US and Japanese shares have fallen 10%, Eurozone shares have fallen 8%, Chinese shares have fallen 9% and Australian shares have lost 6%. This note looks at the issues for investors and puts the falls into context.</p>
<p>Drivers behind the plunge</p>
<p>There are basically three drivers behind the plunge in share prices. First, the trigger was worries that US inflation would rise faster than expected resulting in more aggressive rate hikes by the US Federal Reserve and higher bond yields. Flowing from this are worries that the Fed might get it wrong and tighten too much causing an economic downturn and that higher bond 6000 yields will reduce the relative attractiveness of shares and investments that have benefitted from the long period of low interest rates.</p>
<p>Second, after not having had a decent correction since before Donald Trump was elected president and with high and rising 3000 levels of investor confidence, the US share market was long overdue a correction, which had left the market vulnerable. Finally, and related to this, the speed of the pull back is being exaggerated by the unwinding of a large build up of so-called short volatility bets (ie bets that volatility would continue to fall) via exchange traded investment products that made such bets possible.</p>
<p>The unwinding of such positions after volatility rose further pushed up volatility indexes like the so-called VIX index and that accelerated the fall in US share prices. Quite why some investors thought volatility would continue to fall when it was already at record lows beats me, but this looks to be another case of financial engineering gone wrong!</p>
<p>With shares having had a roughly 5-10% decline (in fact US share futures had had a 12% fall) from their recent highs to their lows and oversold technically and with the VIX volatility index having spiked to levels usually associated with market bottoms, we may have seen the worst but as always with market pull backs it’s impossible to know for sure particularly with bond yields likely to move still higher over time and if there is further unwinding of short volatility positions to go.</p>
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<p><strong>Considerations for investors </strong></p>
<p><span>Sharp market falls with talk of billions of dollars being wiped off shares 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 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 of 8%.</span>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.</p>
<p>More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (remember the taper tantrum?), an 8% fall in 2014 and a 20% fall between April 2015 and February 2016 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. In fact, share market corrections are healthy because they help limit a build up in complacency and excessive risk taking. </p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/9/Chart1.jpg" target="_blank">to enlarge.</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/Chart1.jpg" alt=""></p>
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<p>Related to this, shares literally climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately rising and providing higher returns than other more stable assets. In fact, bouts of volatility are the price we pay for the higher longer-term returns from shares. </p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/9/chart2.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/chart2.jpg" alt=""></p>
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<p>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. Our assessment remains that recession is not imminent:</p>
<p>- The post-GFC hangover has only just faded with high levels of business and consumer confidence globally only just starting to help drive stronger consumer spending and business investment.</p>
<p>- While US monetary conditions are tightening they are still easy, 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.</p>
<p>- Tax cuts and their associated fiscal stimulus will boost US growth in part offsetting Fed rate hikes.</p>
<p>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.<br>Reflecting this, global earnings growth is likely to remain strong providing strong underlying support for shares.</p>
<p>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. The best way to guard against making a decision to sell on the basis of emotion after a sharp fall in markets is to adopt a well thought out, long-term investment strategy and stick to it.</p>
<p>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 that the pullback provides – shares are cheaper. It’s impossible to time the bottom but one way to do it is to average in over time.</p>
<p>Fifth, while shares may have fallen in value the dividends from the market haven’t. So the income flow you are receiving from a well-diversified portfolio of shares continues to remain attractive, particularly against bank deposits. </p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/9/chart3.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/chart3.jpg" alt=""></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. As Warren Buffett once said: “I will tell you how to become rich...Be fearful when others are greedy. Be greedy when others are fearful.” </span></p>
<p><span>Finally, turn down the noise. At times like the present, the flow of negative news reaches fever pitch – and this is being accentuated by the growth of social media. Talk of billions wiped off share markets, record point declines for the Dow Jones index and talk of “crashes” 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. And as share indices rise in level over time of course given size percentage pullbacks will result in bigger declines in terms of index points. And 4% or so market falls are hardly a “crash”. 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 watch Brady Bunch, 90210 or Gilmore Girls re-runs! </span></p>
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The pullback in shares – seven reasons not to be too concerned: Oliver's Insights

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<p>Since the Global Financial Crisis (GFC) there have been a few occasions when many feared inflation was about to rebound and push bond yields sharply higher only to see growth relapse and deflationary concerns dominate.</p>
<p>As a result, expectations for higher inflation globally has been progressively squeezed out to the point that few seem to be expecting it.</p>
<p>However, the global risks to inflation and bond yields are finally shifting to the upside, with investment markets starting to take note as evident in the pullback in global share markets seen over the last few days. But how big is the risk? Are we on the brink of another bond crash that will engulf other assets? </p>
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<div class="column">But first some context. In a big picture sense, inflation has been falling since the mid 1970s-early 1980s. </div>
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<p>The fall in inflation over the last 30-40 years reflects: the inflation-fighting policies of central banks; supply side reforms that boosted productivity; globalisation that brought a billion or so workers into the capitalist system; and the benefits of the information technology revolution harnessed by the likes of Amazon and Uber.</p>
<p>The fall in inflation in turn has been the main driver of a super cycle bull market in bonds, with yields trending down since the early 1980s. (Don’t forget, when bond yields fall, bond prices rise.</p>
<p>Suppose the government issues a $100 bond paying $4 pa in interest for an initial yield of 4%. If investors push yields down to 3%, the bond’s price will be pushed up until the 3% yield is achieved with the $4 interest payment.)</p>
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<p><span>The collapse in bond yields into 2016 was accentuated by: worries about deflation; investors </span><span>extrapolating very low official interest rates; worries economic growth will remain slow; safe- haven investor demand for bonds in response to geopolitical concerns and the experience that bonds always rally when shares fall; an increasing demand for income-yielding assets as populations age; and a shortage in the supply of bonds as budget deficits fell when central banks have been buying bonds. But the main driver since the early 1980s has been the fall in inflation. </span></p>
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<p><span>Inflation and other assets </span></p>
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<p><span>The 35-40-year fall in inflation and bond yields has also underpinned strong gains in most other assets. Put simply: </span></p>
<ul style="list-style-type: disc;">
<li>
<p><span>the shift to lower in inflation allowed interest rates to fall; </span></p>
</li>
<li>
<p><span>this allowed bond yields to fall (resulting in capital gains); </span></p>
</li>
<li>
<p><span>which in turn allowed shares to be rerated higher (price to earnings multiples rose from around seven or eight times in the early 1980s to around 15-17 times), which boosted share returns over and above what would have been expected from dividend yields and earnings growth alone; </span></p>
</li>
<li>lower interest rates allowed other assets to trade on lower yields boosting both commercial property returns, house prices and infrastructure returns. In particular, residential property gained as lower mortgage rates allowed people to borrow more relative to their incomes. </li>
</ul>
<p> </p>
<p>Inflation starting to stir globally, bond yields on the up </p>
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<div class="column">Since late 2016, our assessment has been that the super cycle bull market in bonds is over. This remains the case for several reasons. First, deflation risks are receding and gradually giving rise to inflation risks, led by the US: </div>
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<li>Global growth is now starting to run above potential again and this is leading to a decline in spare capacity and with global growth now accelerating this is likely to have been used up by late next year. Diminishing spare capacity makes it easier for companies to raise prices. </li>
<li>
<p><span>While Europe, Japan and Australia are lag</span>ging (as evident in still low inflation readings recently), the US economy is likely around full capacity evident in unemployment around 4%, increasing anecdotes of labour shortages and rising wages and business surveys pointing to rising selling prices. This will likely drive 4 (or possibly 5) Fed hikes this year whereas the market is only allowing for 2 or 3, with the Fed’s January meeting indicating a bit more hawkishness.</p>
</li>
<li>
<p><span>Commodity prices are rising most notably oil, which will at least boost headline inflation. </span></p>
</li>
</ul>
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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/2018/2/1/inflation%203.jpg" alt="">Second, this is occurring when bond yields remain well below levels consistent with likely long-term nominal growth (see the next table). Over the long-term, nominal bond yields tend to average around long-term nominal GDP growth. </div>
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<p>Thirdly, bonds remain over loved with a huge post-GFC inflow into bond funds in the US. (The same picture applies if ETFs are added in.) This leaves them vulnerable to a reversal if investor sentiment towards them turns really negative. </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/2018/2/1/inflation%205.jpg" alt=""></span></p>
<p><span>Finally, central bank buying of bonds is starting to slow. </span></p>
<p>For these reasons, it’s likely that the upswing in bond yields that began in the second half 2016, then paused last year and has since resumed, will continue.</p>
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<p><span>Reasons bond crash/perfect storm fears are overdone </span></p>
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<p><span>Naturally as falling inflation gives way to rising inflation and bond yields head higher many assume the worst – such as a </span></p>
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<p><span>rerun of the 1994 mini bond crash or some sort of “perfect storm” where inflation takes off but central banks are powerless to stop it because high debt levels mean they can’t raise rates much. While we see bond yields rising, it’s likely to be gradual (like over the last 18 months) and a perfect storm is unlikely</span></p>
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<p><span>ï </span><span>Historically, bond yields have remained low after a long-term downswing for around several years as it takes a while for growth and inflation expectations to really turn back up. See the circled areas for US and Australian bond yields in the second chart in this note. </span></p>
<p><span>ï </span><span>While the Fed is likely to raise interest rates more than currently expected by the US money market (we expect four hikes and the market is factoring in two or three), the process of rate hikes is still likely to remain gradual. </span></p>
<p><span>ï </span><span>Central banks in Europe, Japan and Australia remain a fair way off starting to tighten so global monetary policy will remain easy for a while yet. </span></p>
<p><span>ï </span><span>Global inflation is unlikely to take off too quickly given spare capacity in labour markets (in Europe and Australia) and technological innovation continuing to constrain inflation. </span></p>
<p><span>ï </span><span>Inflation expectations are anchored at low levels far better than was the case in, say, 1994. </span></p>
<p><span>ï </span><span>Finally, the idea that high debt levels mean that central banks will either have to live with a debt crisis or much higher inflation is nonsense. High debt levels just mean that interest rate increases are more potent than they used to be – so when inflation does start to become an issue, they won’t have to raise interest rates as much to bring spending and inflation back under control than was the case in the past. In fact, high debt levels mean central banks have more power than in the past to control inflation.</span></p>
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<p><span><strong>Implications for investors? </strong></span></p>
<p><span>There are several implications from rising bond yields.</span></p>
<p><span>Firstly, expect mediocre returns from sovereign bonds. Over the medium term, the return an investor will get from a bond will basically be driven by what the yield was when they invested. 10-year bond yields of 2.8% in Australia imply bond returns over the next decade of just 2.8% or so! And in the short term, rising bond yields will mean capital loses</span></p>
<p><span>Secondly, higher bond yields will impact share market returns as they make shares more expensive. Shares will be okay if the rise in bond yields is gradual and so can be offset by rising earnings – as we expect this year – but a large abrupt back up in bond yields will be more of a concern. In any case expect a more volatile ride in shares. </span></p>
<p><span>Thirdly, defensive high-yield sectors of the share market are likely to remain under pressure. This includes real estate investment trusts and utilities that benefitted from falling bond yields. With bond yields trending up, REITs and utilities are likely to remain relative underperformers. </span></p>
<p><span>Fourthly, when it comes to real assets like unlisted commercial property and unlisted infrastructure, the search for yield is likely to remain a return driver unless bond yields rise aggressively. Commercial property has lagged listed property in responding to the decline in bond yields and so the gap between commercial property yields and bond yields leaves commercial property still looking attractive. Heading into the GFC, it was only when bond yields rose above commercial property yields that commercial property prices started to struggle. We are a long way from that but as bond yields trend higher the valuation boost to commercial property and infrastructure returns will gradually fade. </span></p>
<p>Key points</p>
<p>&gt;  Rising global growth and rising commodity prices indicate the risks to inflation are gradually moving to the upside. This is most acute in the US with the Fed likely to raise rates more than the market expects this year.</p>
<p>&gt;  This supports the view that the 35-year super cycle decline in bond yields is over.</p>
<p>&gt;  Higher US inflation and a more aggressive Fed will likely boost volatility this year. However, the back up in bond yields is likely to remain relatively gradual, and other countries including Australia will lag the US. </p>
<p><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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