<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

<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>
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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>
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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>
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<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>
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<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>
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<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>
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<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>
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<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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<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>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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