<section data-scroll-anchor="false" data-testid="conversation-turn-48" data-turn="assistant" data-turn-id="request-WEB:55d7c6ac-8e6d-4881-ad49-0ed9bf66d1cc-23" dir="auto">
Melbourne’s apartment market entered 2026 with renewed momentum, but the recovery is uneven, policy-driven, and increasingly shaped by constrained supply.

According to the RPM Apartments &amp; Townhomes Market Report (April 2026), apartments have begun to outperform detached housing on key metrics,yet that performance is occurring against a backdrop of falling approvals and a tightening development pipeline.

At the end of 2025, Melbourne unit values reached a three-year high of $656,500, recording quarterly growth of two per cent. That figure edged ahead of the 1.8 per cent growth recorded in the house market over the same period, marking a notable shift in relative performance. While modest in absolute terms, the outperformance is significant given the sustained dominance of houses through much of the previous cycle.

This shift has been driven in large part by policy. The federal government’s expanded five per cent Deposit Scheme has had a disproportionate impact on apartment demand, particularly in Melbourne where the $950,000 price cap captures a large share of medium- and high-density stock.

As RPM notes, the scheme “heavily favours medium and high-density dwellings,” effectively accelerating demand in the apartment sector.

The impact is most visible in buyer activity. Victoria recorded more than 43,000 new housing loans in Q4 2025, the highest quarterly volume since mid-2022 and one of the strongest results in over a decade. This lift was broad-based across all buyer types, with first home buyers, owner-occupiers and investors all returning to the market with greater confidence.

This surge in demand has flowed directly into apartment pricing, particularly in Melbourne’s middle and outer rings. Middle-ring unit values reached approximately $757,500, a four-year high, while outer-ring units climbed to a record $650,000. Quarterly growth of 2.9 per cent and 2.5 per cent respectively significantly outpaced both the inner ring (0.8 per cent) and the broader house market.

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<img alt="RPM" data-entity-type="file" data-entity-uuid="4628dde5-ad63-4b03-b18e-77d0f750e2aa" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-24%20at%209.23.32%E2%80%AFAM.png?VersionId=ig6mqc7Oz7UaszRuzULrGtLPUxGf4NJC" />

&nbsp;

The divergence between apartments and houses is also being shaped by affordability. Detached housing remains out of reach for many buyers, pushing demand toward apartments as a more accessible entry point into well-located suburbs. This is particularly evident among first home buyers and downsizers, both of whom are increasingly prioritising location, amenity and lifestyle over land size.

At the same time, population growth continues to underpin demand. Victoria added more than 122,000 residents in the year to Q3 2025, with Melbourne attracting both overseas migrants and interstate movers, partly due to its relative affordability compared to other capitals.

&nbsp;

<img alt="Population" data-entity-type="file" data-entity-uuid="49e10567-a8b3-47c3-afbd-290f0bb62c49" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-24%20at%209.22.25%E2%80%AFAM.png?VersionId=.2Drmko4TPh02X55JdF3mIC1EcG0ZfGl" />

However, the most critical factor shaping the apartment market is not demand, it is supply.

Apartment approvals across Greater Melbourne have fallen sharply, signalling a constrained pipeline of future stock. In Q4 2025, just 2,339 apartments were approved, down 20 per cent on the previous quarter and 47 per cent lower than the same period a year earlier. On an annual basis, 11,066 apartment approvals were recorded, an improvement on the previous year, but still well below medium- and long-term averages.

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<img alt="Apartment approvals" data-entity-type="file" data-entity-uuid="12f2e7bc-fe01-40c0-80b5-9e829b279d98" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-24%20at%209.21.56%E2%80%AFAM.png?VersionId=5mnIXkXGoDgIJdAFhA0alm0cSKzEytqZ" />

This decline reflects a broader contraction cycle that has been underway since 2020. As RPM notes, “apartment approvals appear to be sliding back into a downward trend,” with developers increasingly focused on launching and completing existing projects rather than initiating new ones.

The reasons are well understood. Construction costs have risen more than 20 per cent since 2021, driven largely by labour shortages and material price escalation. At the same time, financing conditions have tightened, with lenders requiring higher contingencies and taking a more cautious approach to risk. Combined with recent interest rate rises, these factors have made feasibility more challenging, particularly for higher-density projects.

This dynamic is creating a disconnect in the market. Demand for apartments—particularly at the more affordable end—is strengthening, while the pipeline of new supply is weakening. In the short term, this may limit the number of new projects coming to market. Over the medium term, however, it is likely to support price resilience and potentially further outperformance relative to houses.

There are some signs of policy-driven supply response. The introduction of Victoria’s Mid-Rise Code, which streamlines approvals for four- to six-storey developments, is expected to improve delivery in well-serviced middle-ring locations. However, this is unlikely to materially offset the broader decline in apartment approvals in the near term.

Despite the positive momentum at the end of 2025, the outlook for 2026 has become more complex. Two interest rate rises early in the year have already impacted consumer confidence, while broader cost pressures, particularly energy and fuel, are feeding through to construction and development costs.

“Victoria’s built form market ended 2025 on a high, but early 2026 rate rises quickly reversed the momentum,” RPM notes.

The implication is that while apartments are currently outperforming houses, the trajectory of that outperformance will depend on how these competing forces evolve. Policy support and affordability are clearly working in favour of apartments, but constrained supply and rising costs are likely to shape the pace and nature of future growth.

What is increasingly clear is that apartments are playing a more central role in Melbourne’s housing market. As population growth continues and affordability pressures intensify, higher-density housing is becoming not just an alternative to detached homes, but a primary solution to the city’s housing needs.
</section>

Joel Robinson

Units lead Melbourne price growth as apartments outperform houses: RPM

Brunswick is set for some of its largest apartments ever delivered with the upcoming new development Frith &amp; Howarth, where the apartments are around 20 per cent larger than what has come before it in the sought-after suburb.

Developer Young Group focused its design on Frith &amp; Howarth around size and scale, but within a boutique building, to create a mini neighbourhood within the mid-rise development. There are just 24 apartments in the mid-rise building on Victoria Street, a short walk to Brunswick Station and the cafe and dining strip along Sydney Road.

“We spent hours comparing what’s currently on the market so we could offer genuine points of difference,” Young Group says, pointing to room sizing, storage, and functional planning as key drivers behind the design.

All of the two-bedroom apartments in the building have been snapped up, with just the large three- and four-bedroom apartments, with the biggest floorplans and best outlooks, remaining.

[smartcode_project:default project_id=134317 project_image_fid=354139]

Apartments open directly into open-plan living zones where full-height glazing draws light deep into the apartment. Sliding doors extend the space outward to terraces, many oriented toward the adjacent park or back toward the city skyline.

Kitchens sit within this central space, anchored by sculptural island benches that reference the building’s faceted exterior language. Storage is integrated across multiple layers, overhead cabinetry, concealed joinery, and, in larger configurations, dedicated sculleries or butler’s pantries.

[smartcode_project:default project_id=134317 project_image_fid=354137]

The penthouse is the largest ever offered in Brunswick. The penthouse measures nearly 400 sqm all-up, with 242 sqm of internal space complimented by a further 149 sqm of terraces.

It spans the whole top floor and has four bedrooms, four bathrooms, and parking for four cars.

[smartcode_project:default project_id=134317 project_image_fid=354133]

Low maintenance resident amenity has been created in the form of a landscaped rooftop, complete with&nbsp;vegetable plots, outdoor cooking areas, and aflresco dining spaces, designed as a place for neighbours to gather outside of their homes.

“To enable connection with neighbours, generous rooftop gardens with communal spaces and outdoor cooking areas offer a chance to develop a sense of community,” says John Patrick, Principal of <a href="https://www.apartments.com.au/landscape-architect/john-patrick-landscape-architects">John Patrick Landscape Architects</a>.&nbsp;

“Private open spaces with a selection of native and exotic plantings and gorgeous city views on the rooftop create a high-end aesthetic, with a low maintenance lifestyle. The perfect balance, so that residents can enjoy a serene living space.”

[smartcode_project:default project_id=134317 project_image_fid=354134]

Sustainability is embedded at both the building and apartment level. <a href="https://www.apartments.com.au/new-apartments/frith-howarth-288-290-victoria-street-brunswick-vic-3056">Frith &amp; Howarth</a> is one of only a small number of all-electric residential developments in Brunswick, supported by solar infrastructure, EV-ready parking, and high-performance glazing. These measures sit alongside less visible systems such as rainwater reuse and high-grade insulation, reducing long-term operational costs while maintaining consistent internal conditions.

Positioned within walking distance of Brunswick Station, Route 96 trams, and established retail along Sydney Road and Barkly Square, the development balances access to transport with proximity to open space, a combination that has become increasingly difficult to secure in inner-city sites.

“These exquisite homes are nestled in a culturally diverse neighbourhood, with parklands and nature right on your doorstep,” says Young Group.

[smartcode_project_cta:default project_id=134317]

Frith & Howarth to deliver Brunswick’s largest apartments

<a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> in Brunswick is entering its final stages of construction, with the removal of the project’s last tower crane and the unveiling of the building’s full façade marking a significant milestone ahead of completion this coming spring.

The Park Street development, designed by <a href="https://www.apartments.com.au/architects/bates-smart">Bates Smart</a>&nbsp;and Mirvac Design with landscaping by <a href="https://www.apartments.com.au/landscape-architect/jack-merlo">Jack Merlo</a>, is now largely structurally complete, with internal works progressing across the 169-apartment project opposite Princes Park.

<a href="https://www.apartments.com.au/builders/mirvac-construction">Mirvac Construction</a> Project Manager Sam Payne said the latest update reflects a transition from structure to refinement.

“Since our last update, all façade panels have been installed and the scaffolding and gantry has come down, unveiling the building in its full form for the very first time,” Payne said.

“A significant milestone was reached this month with the removal of our final tower crane, signalling the completion of major structural works and a pivotal step forward in the building’s transformation.”

[smartcode_project:default project_id=4802 project_image_fid=366856]

Apartments are now well advanced internally, with joinery completed to level eight and tiling to level six, alongside the delivery of a prototype apartment used to set the benchmark for the remaining residences.

This next phase coincides with the release of a completed furnished residence, styled by MCM House, and the introduction of private buyer tours, giving purchasers a clearer understanding of the finished product ahead of settlement.

<a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> will comprise 169 one to four-bedroom apartments, with completion targeted for early spring. Interiors focus on natural materials and muted tones with two design schemes, while kitchens and bathrooms adopt a restrained palette anchored by stone, timber and textured finishes.

Bates Smart Director Jeffery Copolov said the project reflects a shared design direction centred on liveability and sustainability.

“Blending Mirvac and Bates Smart’s focus on wellness and sustainability, <a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> offers a new kind of conscious, elevated living in Melbourne’s inner north,” Copolov said.

<a href="https://www.urban.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> presents Mirvac's third parkside collaboration with&nbsp;<a href="https://www.urban.com.au/architects/bates-smart">Bates Smart</a>&nbsp;in Victoria.&nbsp;Their previous collaborations delivered two of the city’s landmark apartment buildings: The Melburnian opposite Kings Domain and The Eastbourne on Fitzroy Gardens.

[smartcode_project:default project_id=4802 project_image_fid=366857]

A key focus of the development is its landscape-led amenity offering. The central courtyard, spanning around 600 sqm, will feature established trees and planting grown off-site, alongside communal lawns and seating areas designed for everyday use.

Development Manager James Gardner said the outdoor spaces are central to the project’s lifestyle positioning.

“<a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> isn’t just a home, it’s a complete lifestyle offering, and the resident amenity is just one example of the elevated living experience the soon-to-be-complete building will be known for,” Gardner said.

The courtyard connects to a series of shared indoor and outdoor spaces, including a residents’ lounge, dining room, library and secondary west-facing garden area, designed as extensions of the apartments themselves.

Located directly opposite Princes Park and around four kilometres from the CBD, the development places residents within one of Melbourne’s most established inner-north precincts, with access to open space, transport and the retail and hospitality offerings of Brunswick and Carlton.

With façade works complete and landscaping and final finishes now underway, <a href="https://www.apartments.com.au/new-apartments/prince-parade-by-mirvac-brunswick-701-park-street-brunswick-vic-3056">Prince &amp; Parade</a> is moving into its most active construction phase, with permanent services and external works to be finalised in the coming months ahead of completion in spring.

[smartcode_project_cta:default project_id=4802]

Mirvac’s latest landmark, Prince & Parade Brunswick, enters final construction phase

Boutique Perth developer ADC has unveiled its latest project.

The developer, which focuses on bringing apartments to some of Perth's most premium inner-city and riverside suburbs, has launched <a href="https://www.apartments.com.au/new-apartments/mos-lane-mosman-park-46-manning-street-mosman-park-wa-6012">Mos Lane</a>, 68 luxury apartments and townhouses in the heart of <a href="https://www.apartments.com.au/developments/mosman-park-wa-6012">Mosman Park</a>.

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Alongside the one-, two-, three- and four-bedroom apartments, the development will also include five two-level townhomes and two luxe penthouses. ADC is also introducing a significant retail offering for residents through Mos Lane Village, which will feature a wellness studio, fish and chips shop, barber, and florist, adding a layer of amenity not typically found in the predominantly residential Mosman Park area.

Construction has already commenced on the project, which sits just a short walk from the Swan River, Mosman Park Bowls Club, and Mosman Park Golf Course.

House Agency Directors Tom House and Lachlan McDonald say they are fielding the majority of buyer interest from local downsizers, as well as buyers with a long-standing affinity for Mosman Park.
</section>

[smartcode_project:default project_id=148957 project_image_fid=364591]

Mos Lane will comprise two buildings; Samson House and Manning House, which have been designed by&nbsp;<a href="https://www.apartments.com.au/architects/nelson-koo">Nelson + Koo</a>, an emerging design consultancy specialising in the masterplanning and design of mixed use places and spaces.

The two buildings adopt distinct architectural responses to their surroundings. Manning House references the strong roof forms of nearby homes, with floorplates oriented to maximise light and long-range views, while Samson House is organised around a central atrium designed to bring daylight deep into the building and create a greater sense of openness.

At ground level, the inclusion of five townhomes introduces a typology more commonly associated with Mosman Park’s established streets, each with private courtyards and direct frontage, offering a transition between traditional housing and apartment living.

[smartcode_project:default project_id=148957 project_image_fid=364103]

Interiors have been led by Melbourne-based Hecker Guthrie, with an emphasis on practical, long-term liveability. Residences incorporate sculpted joinery, generous storage and flexible multi-purpose rooms that can adapt to changing household needs, whether for working from home, guest accommodation or additional living space.

Material selections draw on a restrained palette of textured stone, timber and neutral tones, with options for lighter or darker schemes. Detailing such as fluted glass, full-height joinery and integrated appliances is intended to balance functionality with a more refined residential finish.

Outdoor spaces are a consistent feature across the development, with balconies and terraces designed for dining and entertaining, and larger apartments incorporating outdoor kitchens. Orientation has been considered to allow residents to choose between morning or afternoon sun, while mature street trees and landscaped communal areas contribute to a softer streetscape.

[smartcode_project:default project_id=148957 project_image_fid=364107]

Shared amenities are positioned to support both day-to-day convenience and occasional use. These include a private dining room with a caterer’s kitchen, alfresco entertaining areas, and a bookable guest suite for visiting friends and family. Additional practical features such as a resident workshop, storage facilities, car and pet wash areas, and concierge-style services for cleaning and dry-cleaning collection reflect a focus on usability.

Positioned between the Swan River and Cottesloe Beach, and within reach of schools such as Iona Presentation College and St Hilda’s Anglican School, the development is aimed at a broad buyer group, from downsizers seeking a lower-maintenance alternative to larger homes, through to local residents looking to remain in the area in a different housing format.

Mos Lane represents one of the more significant additions to Mosman Park’s limited pipeline, combining new housing supply with a village-style retail centre in a suburb where opportunities for large-scale redevelopment are relatively constrained.

[smartcode_project_cta:default project_id=148957]

Living village precinct set for Mosman Park as ADC launches Mos Lane

An entity linked to I&amp;D Group Founder Ivan Filipović has filed plans for a new residential development at 188–202 Swan Street in Cremorne, targeting a prominent site within the tightly held Swan Street activity corridor.

The proposal seeks to redevelop the consolidated Swan Street landholding into a <a href="https://www.apartments.com.au/new-apartments/188-202-swan-street-cremorne-vic-3121">high-density mixed-use project</a>, replacing a series of existing commercial buildings with a significantly scaled residential outcome. The planning submission positions the development as a response to increasing demand for housing in well-connected inner-urban locations, particularly within established activity centres.

Plans outline the construction of a 14-storey building delivering 165 apartments above a four-level basement, alongside a ground-floor retail and commercial offering designed to activate the streetscape. A key feature of the scheme is a new north–south pedestrian link connecting Swan Street to Railway Place, intended to “enhance permeability and provide an active, publicly accessible connection through the site.”

<img alt="First Look: Plans lodged for Ivan Filipović-linked Cremorne apartment project on Swan Street" data-entity-type="file" data-entity-uuid="7332a8f8-dd2b-483d-b86e-320658838c84" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/cremorne.png?VersionId=cXm8vAaRdHh.LpYVbecrRkjckgu9mtAF" />

The development will retain part of the existing built form at 198–200 Swan Street, while the remainder of the site will be cleared to accommodate the new structure. Basement levels will provide 196 car spaces and 113 bicycle spaces, with vehicle access from Railway Place. Communal amenity is distributed across the building, including a shared outdoor area on Level 1 and a rooftop terrace for residents.

Ground level uses include retail tenancies fronting Swan Street and the pedestrian link, a residential lobby, and a flexible commercial space positioned to support community-oriented uses. The planning report notes this space “could be offered as a flexible space within the development for community groups,” supporting short-term or longer-term occupancy arrangements.

<img alt="First Look: Plans lodged for Ivan Filipović-linked Cremorne apartment project on Swan Street" data-entity-type="file" data-entity-uuid="8208bf7b-cc67-485d-ad0f-1d73a74c907f" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/cremorne%20lane.png?VersionId=69ctjC0txXv0zCHy7qQUpJyGwvPAT7gw" />

The site sits within the Swan Street Major Activity Centre, surrounded by a mix of retail, hospitality, and emerging residential development, and directly opposite tram services along Swan Street. East Richmond Station is located to the south, providing strong rail connectivity, while the broader Cremorne precinct continues to evolve as a mixed-use hub.

I&amp;D Group, founded by Ivan Filipović, is regarded as one of Victoria’s largest formwork contractors, partnering with major construction firms across large-scale public and private developments. The Swan Street proposal signals a move into development-backed opportunities tied to strategic inner-city sites.

First Look: Plans lodged for Cremorne apartment project on Swan Street

Yields

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GUEST OBSERVER 
It’s hard to argue that the search for yield has gone too far given how low bond yields are. A range of assets still provide much better yields than cash and bonds.
However, bond yields are likely to gradually trend higher helped by stronger global growth, a gradual rise in global inflation and the Fed moving to reduce its bond holdings. This suggests the search for yield will slowly start to wane and the risk of a reversal down the track will gradually rise.
That the Fed can move to start reversing its post Global Financial Crisis (GFC) quantitative easing is another sign the US and global economy is getting back to normal after the GFC. This is good for investors.
Introduction
For some time now, the investment world has been characterised by a search for decent yield paying investments. This “search for yield” actually started last decade but was interrupted by the Global Financial Crisis (GFC) and the Eurozone debt crisis before resuming again in earnest.
When investment assets are in strong demand from investors, their price goes up relative to the cash flow (eg dividends, interest or rent) they provide pushing their yield down. This is evident in recent times in response to the “search for yield” with yields falling across the board as the next chart shows. 
<a href="https://www.propertyobserver.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.45.14%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.45.14%20AM.png" alt="">
But everything goes in cycles. So has the "search for yield" gone too far? Will the US Federal Reserve’s shift to start reducing its bond holdings cause a reversal?
Drivers of the search for yield
Interest in yield based investing is not new and is in fact a normal part of investing. Particularly when investors are a bit wary about going for growth. In fact, in Japan it’s become pretty much the norm as interest rates have been stuck at zero for years. In the 1950s, yield focussed investing was the norm in the US and Australia.
The search for yield also became apparent last decade and played a role in the GFC itself (as investors piled into yield based investments underpinned by "sub-prime" mortgages, oblivious of the risks). There are three main drivers of the “search for yield” in recent years:
First, low interest rates and bond yields and the flow on to bank deposit rates due to low inflation and sub-par growth have encouraged investors to search for higher yielding investments. Central banks buying up bonds and displacing investors into other assets have accentuated this.
Second, reduced fear of economic meltdown (as the GFC and subsequently the Eurozone public debt crisis subsided) has helped investors feel comfortable in taking on the greater risk that this entails.
Finally, aging populations in developed countries is seeing baby boomers move into pre-retirement and retirement, driving a demand for less volatile investments paying income.
Normally, this demand would go to bonds and bank deposits but as their yields are so low some of this demand has gone into other yield paying investments.  
Demand for yield from aging populations has further to go as populations age.
For example, in Australia the share of the population aged 65 and over is projected to rise from 15% now to 22% by 2061. However, the second driver is cyclical and will reverse next time there is a sustained bout of risk aversion – just as it did in the GFC.  
The first driver is a mix of structural and cyclical influences, though, and it’s probably been the main driver of the search for yield. Bond yields and interest rates have been trending down for 30 years or so and this is structural reflecting a downtrend in inflation, which resulted in a long-term super cycle bull market in bonds. But falls this decade also contain a big cyclical element reflecting the sub-par global growth and deflation seen after the GFC.
This accentuated the super cycle bull market in bonds and put the search for yield on steroids. This is where the greatest risk of a reversal in the search for yield trade lies.  The logic of falling yields  The search for yield is understandable and can be seen in relation to Australian commercial property ie office, retail and industrial property.
The next chart shows average commercial property yields and 10-year bond yields. While average commercial property yields have fallen since the early 1980s from an average of 8.3% to around 5.5%, the yield on bonds has crashed. The longer the decline in bond yields has persisted, the more investors have expected it to continue, driving rising demand for higher yielding assets like property. 
<a href="https://www.propertyobserver.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.46.51%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.46.51%20AM.png" alt="">
With Australian 10-year bonds yielding 2.8%, it’s little wonder investors might find commercial property on an average yield of around 5.5% more attractive particularly once capital growth of, say, 2.5% pa (ie inflation) for a total return of 8%, is allowed for. The property risk premium – the return potential property provides over bonds – at 5.2% remains high &amp; well above early 1990s and pre-GFC levels that caused problems for property. 
<a href="https://www.propertyobserver.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.48.05%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.48.05%20AM.png" alt="">
The same logic applies to investment in assets such as unlisted infrastructure, listed variants of both commercial property and infrastructure, shares and corporate debt.
But are we getting close to a reversal?
Has it gone too far? The greatest risks are around corporate debt where the gap between US investment grade and junk bond yields and US government bond yields has narrowed sharply to around levels that prevailed prior to the tech wreck and again prior to the GFC. But as we saw in the mid-1990s and mid-2000s, spreads can remain low for a while before trouble arises, which is usually when the economy turns down and there is no sign of that just yet.
For equities the gap between the forward earnings yield on shares and bond yields has narrowed in recent years. But this gap – which is a guide to the risk premium shares offer over bonds – still remains relatively wide by pre GFC standards. 
<a href="https://www.propertyobserver.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.49.36%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/09/28/Screen%20Shot%202017-09-28%20at%2011.49.36%20AM.png" alt="">
And finally for real assets, using commercial property as a guide, as indicated earlier the risk premium offered by commercial property relative to bonds remains wide, albeit it 
has narrowed as property yields have fallen and bond yields have risen (a bit). Overall, it’s hard to argue the search for yield has gone too far given how low bond yields still are. That said, corrections like what we saw in shares and corporate debt during 2015-16 are healthy in ensuring this remains the case.
But what about the risk of an upswing in bond yields, particularly with the Fed moving to quantitative tightening? This is the biggest risk and our view is that the super cycle bull market in bonds is over. There are several reason for this:
  First, global growth is looking stronger as evident in strong business conditions indicators across most countries. Global growth is improving and becoming more synchronised globally. Nearly 75% of the 45 countries tracked by the OECD are seeing accelerating growth, the highest it’s been since the initial bounce out of the GFC in 2010.
  Part of the reason for this is that the “muscle memory” from the GFC, which commenced a decade ago, is fading and this is contributing to stronger confidence.
  The risk of deflation is receding and giving way to the risk of a rise in inflation as capital and labour utilisation is on the rise globally &amp; productivity growth is poor, reflecting: low levels of investment; increasing levels of populist regulation in some countries; and as older workers retire. While the impact of technological innovation (the Amazon effect, artificial intelligence) will keep this gradual there will still be a cycle in inflation and the risks are gradually pointing up.
  Reflecting this, central banks are gradually retreating from ultra easy policy
. The Fed is the most advanced here as the US economic recovery is further advanced. As a result, the Fed is moving towards allowing its holding of government bonds and mortgage-backed securities to start declining.
This will be achieved by the Fed not rolling over (ie not reinvesting) the bonds on its books as they mature so it won’t be as dramatic as actually selling bonds. But its holding of bonds will nevertheless decline and it will be sucking cash out of the US economy. In other words, it will be undertaking “quantitative tightening” to reverse the “quantitative easing” of a few years ago.
This is good news and reflects the strength of the US economy much as its commencement of rate hikes did in 2015. Nevertheless, combined with continuing gradual Fed rate hikes, it will likely see a resumption of the upwards pressure on bond yields acting as a gradual dampener on the search for yield .
The upswing in bond yields is likely to be gradual – with periodic spurts higher then fall backs like over the last year – as the Fed will likely be gradual, other central banks including the Reserve Bank of Australia are well behind the Fed in being able to tighten and yield focussed demand from aging populations will act as a constraint. But the trend in bond yields is likely to be up unless there is an unexpected relapse in global growth.
 What does it all mean for investors?
 There are several implications for investors: expect lower returns from government bonds as yields gradually rise; the search for yield likely has further to go in relation to commercial property and infrastructure but it is likely to wane as bond yields rise; share markets are now more dependent on earnings growth for future gains (and the signs are positive) but cyclical sectors geared to higher earnings will likely be the outperformers and yield plays may be underperformers.
That the Fed is moving to start reversing its post-GFC quantitative easing (money printing) is another sign the global economy is getting back to normal. This is good for investors.
 <a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> 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.
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Where are we in the search for yield? Shane Oliver

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The thriving student accommodation market doesn’t seem to be popular with lenders despite top yields.
Student apartments around major universities and colleges regularly generate 8 per cent yields, or twice the return of most short-term savings products, according to agents specialising in student property. But with most major banks blacklisting inner-city high-rises and tightening criteria for investors, purpose-built student apartment values are continuing to fall.
Stephen Fitzsimon, head of business development for Melbourne Real Estate, which rents more than 1,000 apartments in Melbourne's CBD, told The Australian Financial Review that the price of a small apartment purchased about a decade back had dropped by about 10 per cent to $210,000.
Fitzsimon said demand for accommodation from overseas students (particularly from China and India) is "off the charts" and "continues on an upwards trajectory".
More than 170 groups of students recently registered to view a one-bedroom apartment in Melbourne's CBD that was renting for about $430 a week, he said. 
"These apartments are yielding through their teeth.”
Rental activity will pick up further as the start of the second academic semester nears.
But lenders are reluctant to lend to investors, the AFR reported.
Lending to investors must be capped at 10 per cent annual growth, says APRA.
"If the banks changed their lending policy to allow normal mums and dads to buy, prices would go up because the yields are so strong."
Student apartments are popular with cashed-up self managed superannuation fund (SMSF) investors and retirees looking for yield. 
Overseas buyers are holding on to the apartments because capital losses have been offset by the rising Australian dollar. They are also used to offshore assets, particularly Chinese investors.
The gap between student numbers and student accommodation is rising.
In Melbourne, it is more than 84,000, according to JLL, while in Sydney it is about 43,000 and in Brisbane – excluding the Gold Coast – more than 18,000.
The gap reflects the underlying demand.
Savills' director of student accommodation Conal Newland said the ratio of purpose-built student accommodation in Sydney, Melbourne and Brisbane is about one bedroom for every 10 students, compared with more than two and a half bedrooms for each student in more established markets like London.
Overseas students in Australia are expected to increase to between seven and eight million in the next eight years from about 4.5 million now. 
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Student units earn top yields, but lenders' reluctance pushes prices lower  

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<img src="https://counter.theconversation.edu.au/content/68979/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
For the past three decades the yields on long-term bonds have been on a downward trend. This has dramatically reversed since the election of Donald Trump, with more than a trillion dollars wiped off the global bond market in the past week and a half.
But it’s not just investors that are impacted by this spectacular reversal. The bond market is a backbone of the global financial system, meaning the sell off has implications far and wide, from economic growth through to real estate prices. 
<h2>What’s happening in bond markets</h2>
Bonds are a type of long-term debt - companies and governments sell bonds to investors and these will in turn be bought and sold on the bond markets. 
The thing to look at with bonds is the market price, which is reflected in the yield quoted or price paid when a bond is bought and sold. Investors in bonds receive their returns in regular interest payments and the return of principal when the bond matures. 
As the price of the bond rises, the yield will drop. With the price of bonds steadily rising during the 30 year bull market, yields have fallen away significantly, bringing down the interest rates around the world.
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US 10 Yr Treasury Yield. 
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<h2>Why we pay attention to the bond market</h2>
The price of bonds filters through into the rest of the economy. This is because government bonds are considered relatively risk free, and so act as a benchmark for pricing (relatively more risky) securities in all other markets. 
A company’s shares, for example, are expected to yield the risk-free rate (what a government bond would yield) plus an additional amount to compensate investors for their riskiness - called the “equity risk premium”. Investment in corporate bonds can be expected to yield the risk-free rate plus a premium for taking on the added default risk. 
The US bond market is especially important, as it is the largest and its prices act as a benchmark for interest rates globally. Rising bond yields in the US signal a number of things - higher expected inflation from the touted tax cuts and higher spending, and the need to borrow to fund this expansion. All of this puts further downward pressure on bond prices and upward pressure on interest rates, increasing yields. 
Overall, bond prices serve as a “barometer” of what the market is “thinking”. Especially what it thinks will happen in the future, as the relation between long term interest rates and short term interest rates has a mechanical effect on future interest rates. 
<h2>What this could mean</h2>
The sudden increase in bond yields, most notably the 10 Year US Government bond yields, has broad implications for the economy.
Mortgage rates are tied to the 10 year bond yield, for example, meaning borrowers will need to pay more for housing loans. This won’t happen overnight and we will have to wait to see the long-term effect on real estate prices.
But taking in past history, here are a range of possibilities from the end of the bull market.
First, when long-term interest rates are higher than short-term interest rates, the market expects interest rates in the future to be higher. This suggests that this market sell off isn’t an aberration, we can expect higher yields and lower bond prices in the future, and this trend will continue.
Second, long-term bond yields generally reflect an economy’s long-term real growth rate plus a premium for inflation. Inflation measures around the globe have been quite low and central banks have struggled to reach their inflation targets. Rising bond yields could mean the growth starts to tick up.
Third, there will be more uncertainty in global markets until the implications of a Trump presidency are known. Investors will expect a greater return to investment in US government bonds because of this heightened uncertainty. So yields on long-term US Treasuries are likely to stay up and even increase further in the foreseeable future. But even so interest rates are still low by historical standards.
Fourth, new borrowing for housing will be more costly. The risk of rising interest rates on existing mortgages has been mostly shifted elsewhere in the US economy. Let’s hope that the institutions or individuals holding that risk fare better than the institutions which collapsed during the savings and loans crisis in the US in the late 1980s.
Fifth, this is a permanent change in the nature of global interest rates. Rising bond yields could push up interest rates. Australia’s Reserve Bank Governor Phillip Lowe has signalled no further interest rate cuts unless inflation drops well below its current 1.5 percent level.
Christine Brown is professor and head of the Department of Banking and Finance, Monash University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/christine-brown-316660" target="_blank">here</a>.
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jchancellor-FAypfDUnLy

If the ‘bond market rout’ continues it could impact home prices

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GUEST OBSERVER
“Record low interest rates”. This seems to be the headline of the year, having been used so many times it is hard to remember any other kind of interest rate. Each time we see this, expectations for another rate cut decrease momentarily, only to return to the same, pre-cut probability-levels after a few weeks. 
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Figure 1 paints a clear picture of a similar short-term outlook, yet weakening long-term expectations.
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While this graph does not include data since the rate cut (yields on 10 year treasuries have lifted a whopping 0.03 percent since the July levels shown in Figure 2), we can see almost identical movements at each maturity date from May to June and from June to July.
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Yields on 3 year bonds are down 0.05 percent, 5 year bonds are down 0.1 percent and 10 year bonds are down 0.2 percent. 
This is almost a textbook example of yield curve inversion. In fact, yields on 90 day treasury bills in June were identical to those on 10 year bonds at 1.93 percent. 
Other than perhaps transaction costs, there is no reason for an investor to take on the extra risk of longer term securities without any increase in expected return. 
The RBA had little choice but to cut rates again. 
Figure 2 shows a similar picture, with greater inversion in the short and medium-term (up until about 2022) and lower yields on long- term maturities. 
This is a dangerous combination. 
An interest rate cut effectively lowers the short-term cash rate (i.e. 90 day yield), which normalises (steepens) the yield curve.
In theory, this stimulates the economy by making borrowing cheaper and incentivising banks to borrow at the short-term rate and lend out at the higher long-term rate. If the curve continues to flatten out (as it did since the last rate cut in May) then this impact is almost entirely negated. Like a see-saw, rates will continue to decrease until long-term expectations increase or at least stabilise. 
For more information, <a href="https://secretagent.com.au/" target="_blank">click here</a>.
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Rates will continue to decrease: Secret Agent 

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Adelaide's weekend clearance rate sat in equal second place at 70 percent, according to CoreLogic RP Data.
The nation's cheapest sale was in Adelaide's Rostrevor.
The one bedroom <a href="https://www.realestate.com.au/property-unit-sa-rostrevor-122565842" target="_blank">Radnor Avenue villa</a> offering fetched $209,000. It had sold at $166,500 in 2008. It was a $235 a week rental, so reflected a 5.8% gross yield.
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5.8 percent yield in weekend's cheapest auction result 

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The Victorian town of Cobram tops CoreLogic RP Data's latest list for median gross yields for units at 7 percent.
Its yield sits considerably higher than the national average of 4.63 percent.
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Property Observer profiles Cobram from a rental perspective.
The median sale price of a unit in Cobram was $170,000, compared with a national average of $438,000, over the last 12 months, according to the data. 
The median price change over one year was 5.26 percent.
Median rent for units was $230pw in Cobram against a national average of $390.
Property Observer looked up a few units around the median range available for renting around the median for Cobram on www.realestate.com.au.
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1. A two-bedroom unit at <a href="https://www.realestate.com.au/property-apartment-vic-cobram-418414534">2/91 High Street Cobram Vic 3644</a> is available for $210 per week. Last traded price $110,000 in 1992, according to CoreLogic RP Data.
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2. A two-bedroom unit at <a href="https://www.realestate.com.au/property-apartment-vic-cobram-418414454">5/69 Campbell Road Cobram</a> is available for a rent of $240 per week.
 
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Victoria's Cobram tops rental yields for units: CoreLogic RP Data

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A new report suggests retail property prices will be built up by investors due to tightening yields, improved consumer sentiment and other asset classes not providing the same stability.
The LJ Hooker Commercial Retail Market Monitor said the value of retail transactions dropped in 2014-15, with the downturn attributed to the lack of available stock, with regional centres hit the hardest.
“Investment transaction activity was a little subdued in the first half of 2015, constrained in dollar terms by the low level of stock available,’’ he said.
“Regional centres have been consolidated on the back of improved retail spending.
"Queensland’s capital and secondary markets experienced a halving of retail turnover from 5.3% in 2013 to 2.5% in July this year.
“But we’re expecting a considerable turn-around for Queensland eclipsed, not surprisingly, only by Sydney and New South Wales over the next two years."
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Tight yields to drive retail property investors

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Capital city rental yields nationwide are lowest in Melbourne and highest in Darwin, according to CoreLogic RP Data, who found Melbourne rental yields at 3% and Darwin at 5.7%.
Unit yields are lowest in Melbourne (4.1%) and highest in Darwin and Brisbane at 5.5%.
Hobart and Canberra are the only two cities where house gross rental yields are steady. 
 
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