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GUEST OBSERVER
The Westpac Melbourne Institute Index of Consumer Sentiment fell by 0.8% in December from 101.7 in November to 100.8 in December. 
The Index has held on to most of the gains from last month’s surprise 4% lift and is 10.7% above its levels this time last year. There have only been two months since January 2014 with higher Index readings.
In the December survey we ask respondents about the news items that most attracted their attention and whether these were viewed as favourable or unfavourable. This can give us a guide as to what factors may be driving movements in the Index.
The most recalled news was around ‘economic conditions’ (48% of respondents); ‘Budget and taxation’ (42.8%); ‘interest rates’ (24.3%); and ‘international conditions’ (20%).
The most important change was around ‘Budget and taxation’ with the proportion of respondents recalling news on this topic almost doubling since September and the news assessed as considerably less favourable. Presumably speculation around tax changes, particularly with respect to the GST, is beginning to unnerve respondents.
Despite no official rate cuts from the Reserve Bank and mortgage rate increases from the banks before the November survey respondents viewed news on interest rates more favourably than in September. That comfort with the current level of interest rates is also emphasised by the 8% jump in the confidence of those respondents who hold a mortgage.
News on ‘international conditions’ was less prominent than in September although a vast majority of respondents continue to view international events as unfavourable.
Views around economic conditions were largely unchanged from September.
Other topics that gained less attention were: ‘politics’ (more favourable); the Australian dollar (much more favourable); and employment (much more favourable).
There is an important message from the movements in the components of the Index. Last month we saw a surge in sub- indexes measuring the economic outlook whereas respondents’ assessments of their finances deteriorated. We attributed the economic boost to confidence in the Government’s new leadership team, and the concerns around finances to the banks’ mortgage interest rate increases in October.
In this month’s survey assessments around finances have almost fully recovered their October levels but expectations for the economic outlook have been pared back, albeit with these components still well above their October levels. 
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The sub-index tracking views on ‘family finances vs a year ago’ increased 5.5% while the ‘family finances over the next 12 months’ sub-index jumped 5.8%. The ‘economic conditions, next 12 months’ sub-index fell 4.2% and the ‘economic conditions, next 5 years” dropped 11.3% (the latter is still 10.2% above its October level).
The component tracking assessments of ‘time to buy a major household item’ lifted 0.8% to be 11.8% above its level a year ago.
All components have increased over the last year with gains ranging from 8% to 13.4%.
Two months ago we saw a 13.7% fall in the Westpac Melbourne Institute Index of Unemployment Expectations (recall that a lower print indicates more confidence in the labour market). We have since seen the Index increase somewhat including a 1.7% lift this month. However the Index is still 9.4% below its September level and continues to point to an improving outlook for the labour market.
Confidence around the housing market continues to deteriorate. The index tracking assessments of ‘time to buy a dwelling’ fell a further 3.4% in December to 99.5. The Index is now 5.3% below its level a year ago and 31.5% below its most recent high in September 2013.
The news was worse on house prices. The Westpac Melbourne Institute Index of House Price Expectations fell 9.4% in December to be 19.7% down on a year ago and 38% off its high back in 2013.
Housing-related sentiment continues to show sharper falls and considerably weaker reads in NSW and Victoria where the individual state ‘time to buy a dwelling’ indexes are at 78.0 and 83.4 respectively. House price expectations have also fallen more heavily in these two states although households in WA remain the most pessimistic on prices. 
In December we also ask respondents to nominate the ‘wisest place for their savings’. Responses show that the proportion favouring bank deposits continues to drift down, with 26.2% nominating this option compared to 27.0% in September and 37% a year ago. Preferences for equities are lifting somewhat with 9.9%, nominating equities compared to 7.0% a year ago. While the proportion nominating ‘real estate’ is up on a year ago there was a sharp fall between September (28.2%) and December (23.4%).
The Reserve Bank Board next meets on February 2. We expect the Board will decide to hold rates steady pending further evidence on the labour market; commodity prices; the Australian dollar; and inflation. Westpac has long held the view that the RBA will be on hold throughout 2016 with the risk to any move being clearly to the downside.
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Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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Consumer sentiment consolidates, but confidence around the housing market continues to deteriorate: Westpac's Bill Evans

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GUEST OBSERVER
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The Westpac Melbourne Institute Index of Consumer Sentiment rose by 3.9% in November from 97.8 in October to 101.7 in November. 
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This is a cracking result. Apart from the brief surge we saw following last May’s Budget this is the highest print for the Index since January 2014. The Index is now 8.3% higher than in September, immediately preceding the change of leadership in the government. 
It marks only the third month out of the last twenty one that optimists have outnumbered pessimists. 
The increase also comes despite the banks’ decisions to raise mortgage rates for both owner occupiers and investors. It is surprising that such events did not have a negative impact on confidence. It appears that such is the boost to confidence from the recent political events that the impact of the interest rate increases was comfortably contained Most remarkably, the confidence of respondents who hold a mortgage increased by 4.1% – a slightly larger increase than the rise in the overall Index. 
There is evidence to support this observation that the result is the net effect of two strong opposing forces. The components of the index that measure respondents’ assessments of their own finances were down, on average, by 5.7% whereas the components of the index that measure respondents’ expectations for the overall economy increased by an average of 15.0%. 
The assessments of personal finances were presumably linked to the interest rate increases whereas the outlook for the economy was most likely boosted by confidence in the new leadership. 
Following a spectacular 13.7% fall in October the Westpac Melbourne Institute Index of Unemployment Expectations rose by 3.3% in November. Recall that lower readings indicate fewer consumers expect unemployment to rise in the year ahead. The Index remains 10.9% below its September level and continues to signal a much less pessimistic attitude towards the labour market than we have seen for a number of years. 
As discussed there were some significant conflicting movements amongst the components of the Index. The sub-index tracking assessments of ‘family finances compared to a year ago’ fell 2.2% and the sub-index tracking expectations for ‘family finances over the next 12 months’ slumped 9.1%. Those falls were probably in direct response to the increase in mortgage rates. 
On the other hand the sub-index tracking expectations for ‘economic conditions over the next 12 months’ increased 5.8% while that tracking expectations for ‘economic conditions over the next five years’ soared 24.2% to its highest level since September 2013. It is likely that a boost in confidence towards the economic credentials of the new leadership team played an important hand here. 
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In an encouraging sign for retailers, the sub-index tracking views on ‘time to buy a major household item’ lifted 4.8% although it is still 2.2% below its level this time last year. 
Another encouraging sign for the Christmas spending outlook comes with our special question: “Do you expect to spend more; less; or about the same on Christmas gifts compared to last year”. Since we started this question, seven years ago, the average proportion proclaiming ‘more’ has been 12.5%. Today’s survey scored 16.9% whereas ‘less’ registered 29.6% compared to the average of 34.7%. Consumers in NSW were particularly upbeat with more planning to increase than cut Christmas spending compared to a year ago. 
In fact, this survey shows the most positive mix of Christmas spending plans since we began running this special question in 2009 – a very encouraging signal in the lead in to the holiday period. 
Prospects for the housing market remained soft in this survey. The ‘time to buy a dwelling’ index rose slightly in November but the 1.4% gain still leaves the index down 12.5% over the last year and 29% below its most recent peak in 2013. Weakness persists in NSW; Queensland softened markedly; while Victoria held up well. Possibly in response to recent price falls there was a marked boost in confidence in Western Australia. 
There was another sharp fall in house price expectations. The Westpac-Melbourne Institute House Price Expectations Index fell 7.9% to be down 18.7% over the year. The biggest falls this month were in NSW and Queensland with price expectations in Victoria remaining remarkably robust. 
The Reserve Bank board next meets on December 1. Following its November meeting the Bank has adopted a ‘medium’ easing bias with the low inflation environment affording scope to ease if that is deemed necessary. 
However, the Bank currently expects growth in 2016 of 3.0% (above trend) building to 3.5% in 2017. The positive results from this survey will only bolster these confident growth expectations. There is little chance of a rate cut in December.
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The real issue is whether the Bank will eventually act to cut rates next year – as confidently expected by the market. It is our current view that the growth dynamics of the Australian economy will remain sufficiently supportive through 2016 to ensure steady rates. The lift in spending expectations and confidence around the employment outlook from the survey point in that direction 
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Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Political change further boosts consumer sentiment: Bill Evans

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GUET OBSERVER
In its November Statement on Monetary Policy (SoMP), the Reserve Bank maintained its key forecast that growth in the economy would be 3.00% in the year to December 2016.
We believe this is 0.25% above where the Bank currently estimates trend growth. Therefore, at this stage, the Bank expects there will be no need to cut rates further in 2016. If it had for instance decided to cut rates in November, or was signalling an intention to cut at the December board meeting, it is likely to have forecast growth in 2016 at 2.50% – 0.25% below trend.
The growth forecast for the year to December 2015 has been lowered to 2.25% from 2.50% in the August SoMP. This largely reflects the soft 0.2% of Q2, but also indicates that the Bank is expecting growth in the final two quarters of 2015 to average around 0.60% (slightly below trend, unchanged from the August view). It has lowered its forecast for growth to the year ending December 2017, from 3.75% to 3.50%. Importantly, that is not a downgrade on the outlook for domestic demand, but simply reflects a revision to the expected contribution to net exports from LNG.
Overall, the Bank’s growth forecasts are little changed since the August SoMP.
There were also changes to the inflation outlook. Underlying inflation to December 2015 has been lowered from 2.50% to 2.00%. With 1.30% coming in the first half of 2015, and the surprisingly low 0.3% read of the September quarter, the implied assumption is for another low number in the December quarter – around 0.40–0.50%.
Underlying inflation through the year ended June 2016 is also forecast at 2.00%, indicating an expectation that these measures will resume a “normal pace” of around 0.60% per quarter in the first half of 2016. Consistent with that view, underlying inflation is expected to print 2.50% in the year to December 2016 – back to the middle of the target range. That forecast is maintained for the year to December 2017.
The discussion around inflation highlights that the lagged effect of the fall in the Australian dollar is expected to add around 0.50% to underlying inflation in both 2016 and 2017. That means the drag on inflation from domestic factors, particularly weak wages growth, is expected to be sustained in 2016 and 2017.
Assumptions
In February this year, the Bank adopted a new assumption around the interest rates being used to drive their forecasts. That assumption was to move away from “rates unchanged” to “rates to move broadly in line with market pricing”, although that is qualified with “does not represent a commitment by the Board to any particular path or policy”.
In August for instance, market pricing implied a 40% probability of a rate cut by November, rising to a 60% probability of a cut by February. Today’s market pricing is more aggressive, with a 75% probability of a cut by February, and a 100% probability of a cut by May. Clearly the Bank is in an awkward position and probably values stability in communications rather than changing its model unexpectedly.
With growth forecast at 3.00% next year, we expect that, even with a no rate change forecast, the growth forecast in 2016 would still have been at or above trend, and therefore this assumption does not imply that the rate cut is necessary to achieve at or above trend growth.
It is also important that the assumptions around bank interest rates are noted. The assumption here is that banks will increase interest rates on variable rate mortgages by up to 20bps. This assumption implies that no further increases by the banks are considered likely.
Other assumptions around the AUD and oil prices are broadly the same as in the August SoMP. The AUD is forecast to remains steady at USD0.72 (USD0.74 in August). And the oil price at USD52 per barrel, compared to USD53 per barrel in August.
Commentary
Because the Bank does not consistently provide forecasts for the unemployment rate, the commentary around the labour market is always important. In that regard, the Bank notes “employment growth is expected to be a bit stronger than had been forecast earlier”. Leading indicators around the business surveys, job advertisements and vacancies are pointing to an uptrend in employment. On the other hand, there is no marked upgrading of the outlook for the unemployment rate. In August, the Bank expected it to remain steady and to decline gradually in 2016 H2 and 2017. However, this lift in employment growth is expected to be offset by a more than expected increase in labour supply, due to the increase in the participation rate – overall, a marginally more positive assessment of the labour market since August, and significantly more positive than seen in May, when the Bank expected that the unemployment rate would continue to rise.
The Household Sector
The key to the expected lift in growth between 2015 (2.25%) and 2016 (3.00%) is the view on household consumption. The Bank expects household consumption growth to be a bit above average in 2016 (that is broadly 3.00%+ compared to 2.00–2.50% in 2015). That is expected to be driven by the stronger employment growth and falls in the savings rate, although it is recognised that weak wages growth will continue to weigh on income growth. From our perspective, this is a key assumption. Evidence that
the household sector is not gaining momentum will be the key trigger for the bank to revise down its growth outlook.
Housing
Views on house prices remain cautious, with risks that excess demand could continue to pressure prices, particularly in Sydney. The forecasts also indicate that the Bank expects residential investment to add to growth in 2016 given the strong pipeline – a forecast that we do not share.
Business Investment
The Bank continues to forecast an overall fall in business investment, with the downturn in mining investment swamping improving non-mining investment. The commentary on non-mining investment is more upbeat than we have seen in recent SoMP’s. For example, in August, the Bank further revised down its forecasts for non-mining investment. Whereas, in this SoMP, it notes that “the preconditions for a pick-up in investment are in place”.
The Outlook
We continue to expect that rates will remain on hold over the course of 2016. The Bank’s forecasts in this statement are consistent with it expecting that to be the outcome as well. However, the fact that it is using a “rate cut profile” for its forecasts and appears to expect that the December quarter underlying inflation print will be a soft circa 0.40–0.50% signals that the risks to our outlook are to the downside.
The key appears to be an ongoing improvement in employment growth which will boost consumer confidence and lift the pace of household spending. Our forecasts for household spending and GDP growth are slightly more modest than indicated in the SoMP, but are still consistent with steady rates. Surprises for the Bank might always be a further substantial deterioration in the terms of trade, associated with a weaker than expected world environment which would threaten incomes, and the all important profile for household spending and employment.
The really key events in the lead up to the February Board meeting will be the Q3 national accounts, printing on December 2, and the December quarter inflation report printing on January 27. Further, any major shocks to the global economy which significantly lower our terms of trade will also be very important.
As discussed however, the Bank will need to assess all of these factors as pointing to a downward revision to growth in 2016, from its current 3.00% to a below trend 2.50%, to trigger lower rates.
Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA Statement on Monetary Policy consistent with rates on hold in 2016: Westpac's Bill Evans

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GUEST OBSERVER
The Reserve Bank Board decided to leave the cash rate unchanged at 2%.
Following the print of the September quarter Consumer Price Index markets priced a probability of a rate cut at around 70%. With the clearer guidance from the US Federal Reserve that a Fed rate hike in December was a realistic prospect markets revised down that probability to around 50%.
In the last 24 hours that market probability drifted a little further down to around 40%.
It has always been our view that policy would be unchanged at this meeting. That was because the low inflation print allowed the Bank scope to cut if it so desired but that decision would be predicated on a substantial downward revision in the outlook for economic growth.
We could not see how that downward revision could be justified and therefore were prepared to look through the low CPI. In the event the Bank confirmed its somewhat more confident view around the growth outlook citing “business surveys suggest a gradual improvement in conditions over the past year” and “somewhat stronger growth in employment”; “prospects for an improvement in economic conditions had firmed a little over recent months”.
There was some risk that the very low (0.3%) quarterly print for the CPI in the December quarter may have led the Bank to question the prospect that inflation would remain within the target band of 2-3%. However in the Governor’s statement he confirms his view that inflation will remain within the target over the next one to two years, albeit a little lower than earlier expected.
This theme around inflation is confirmed in the all-important final paragraph where the Bank adopts an explicit, although moderate, easing bias. This bias is expressed with the words “the inflation outlook MAY afford scope for further easing of policy, should that be appropriate to lend support to demand”. This is a weaker easing bias than the terms that had been used around inflation in the past, e.g. “were demand conditions to weaken materially the inflation outlook WOULD provide scope for easier monetary policy” (April 2012). Further evidence that this is a softer bias comes with the first sentence in the closing paragraph where the Governor assesses that “prospects for an improvement in economic conditions had firmed a little over recent months”.
Commentary around housing and credit was also consistent with the “unchanged” decision. Overall conditions in the housing market are still described as “accommodative” and credit growth has increased a little in recent months. Dwelling prices in Melbourne and Sydney and reported to be continuing to rise albeit at a more moderate pace.
There is no change in the assessment of the prospects that the Fed will start increasing its policy rate – just being described as “in the period ahead” and global financial conditions continue to be “very accommodative”.
In previous statements the Governor has singled out weakening prospects in China but China does not rate a mention in this statement although recent falls in our terms of trade are noted.
There is no change in the commentary around the Australian dollar: “the Australian dollar is adjusting to significant declines in key commodity prices”.
Outlook
Over the last week or so market pricing for a full 25bp reduction in the cash rate by December reached almost 100%. Despite the Bank adopting an easing bias we do not consider it likely that the cash rate will be reduced at the December Board meeting. The data flow over the next few weeks will be concentrated on economic activity rather than any further news on inflation. It seems unlikely that, given the Bank’s somewhat more constructive view on the growth outlook such data would trigger a rate cut by December. Of most interest will be the impact on confidence from the increase in mortgage rates by the banks and that will be known with the release of the Westpac Consumer Sentiment survey on November 11.
Other important data events will be the employment report; the quarterly wage price index; housing-related activity and prices; and the capital expenditure survey. The all-important GDP report for the September quarter will not be available until after the December meeting. Furthermore, the December Board meeting will be held only two weeks before the next meeting of the Federal Reserve where a Fed rate hike can be realistically expected.
Markets continue to price 100% probability of a rate cut by February. That is a much more realistic assessment given more time will be available to assess growth momentum and most importantly the December quarter inflation report. It is our view and, apparently, the view of the RBA that the next report will see core inflation move back to the normal “trend” number of around 0.6%. In that event our assessment of the likely growth momentum in the economy will point to rates remaining on hold in February and thereafter.
Any change in that view will be largely driven by an assessment that growth prospects in the economy are likely to lose significant momentum through 2016. 
Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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December RBA rate cut seems unlikely: Westpac's Bill Evans

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GUEST OBSERVER
The Reserve Bank board meets next week on November 3. We expect the board will decide to keep rates on hold. 
Markets have lifted the probability of a cut from 25% to around 65% following the release of the September quarter Inflation Report. In the Report core inflation for the September quarter printed 0.3% (both Trimmed Mean and Weighted Median). That compared with market expectations of 0.5%.Annual core inflation is now printing 2.1% (Trimmed Mean) and 2.2% (Weighted Median). 
Note that in the August Statement on Monetary Policy the Bank forecast core inflation at 2.5% for the year to December 2015. At that time the six months to June 2015 had printed 1.6% for both Trimmed median and Weighted Median. That forecast implied that the Bank was expecting core inflation over the second half of 2015 to print 1.2% – around 0.6% per quarter. That is around twice the print for the September quarter. 
As such the September quarter read will come as a significant surprise. There is a precedent for this shock result. The Trimmed Mean measure for the September quarter last year also surprised on the low side at 0.3% (Weighted Median at 0.5%). We expect that the Trimmed Mean is given a greater weight in the eyes of the authorities than the Weighted Median – recall that other countries (e.g. US) only talk of Trimmed Means when they use sophisticated measures for core inflation. That measure pushed annual Trimmed Mean down from 2.8% to 2.4%. This measure has pushed it down from 2.2% to 2.1%.
Despite that “shock” on the Trimmed Mean in September last year the Bank held rates steady at the November board meeting and even maintained the call that the most appropriate approach to policy was a “period of stability”. At that time the Bank was forecasting underlying inflation to print 2.25% for the year to December 2014 but anticipated that lifting to 2.5% in the year to June 2015 and to 2.75% in the year to December 2015. So in the near term the Bank took notice of the low print but because of the fall in the AUD expected inflation to lift one year out. With the AUD having fallen even further it will still be mindful of some eventual upward pressure as demand conditions firm. 
The Bank will now revise down its forecast for core inflation to December 2015 from 2.5% to 2.25% (just as it had in November last year) but that will not be sufficient to change policy. We expect it will still hold its forecast for 2.5% through 2016 due to a combination of an expected lift in demand and a lagged impact from the fall in the AUD. Note that its growth forecasts in the August SOMP imply growth momentum in the second half of 2016 of around 3.75% (annualised). 
Last year the surprise low print for the Trimmed Mean did not prompt the Bank to move from “period of stability” to cutting rates in February. It was the growth outlook. 
The drop in core inflation was known at both the November and December meetings but it was the surprise slump in growth that was recorded in the September quarter GDP report that printed the day after the December board meeting that prompted the rate cut. 
In February when it cut rates it revised down its growth forecasts for 2015 from 3% to 2.75% and noted:” growth overall is now forecast to remain at a below-trend pace somewhat longer than had earlier been expected. 
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Accordingly, the economy is expected to be operating with a degree of spare capacity for some time yet, and domestic cost pressures are likely to remain subdued and inflation well contained”. 
The emphasis here was clearly on a deteriorating growth profile rather than a low inflation print. In fact the December quarter Trimmed Mean showed a rebound to 0.6% (Double the September print). Recall that the forecasts at the February board meeting were for growth at 2.75% in 2015 – below trend despite a rate cut and an assumption of a follow up rate cut by May. 
Could the Board be confronted by another below trend growth forecast in 2016 which would trigger another rate cut? 
It seems unlikely. 
Firstly the starting point is higher than we saw in February. The November growth forecast for 2015 was 3% – bang on trend whereas the August forecast for growth in 2016 is 3% (now 0.25% above trend, since trend has been revised down). 
To forecast below trend growth in 2016 which would be associated with a rate cut the Bank would have to forecast growth in 2016 of 2.5% down from 3%. 
The major “growth negative” development since the August SOMP has been the soft GDP print for the June quarter. We do not think the Bank was particularly surprised by the weak 0.2% print for GDP growth in the June quarter (largely driven by seasonally weak exports). Certainly the rhetoric in the October minutes was, on balance, more positive than we have seen, particularly around the labour market. The view has shifted over the last six months from unemployment rate rising through 2016 (May SOMP); to now having peaked (August SOMP); to possibly falling (October minutes). 
The one big change which may prompt a major downward revision to growth would be an anticipated impact from the recent independent increase in bank mortgage rates. Because most borrowers (Westpac has reported around 70% of its borrowers) are ahead on repayments the cash flow effect of the banks’ increase will be muted. 
The major impact would be through confidence. The weekly Morgan/ ANZ Consumer Sentiment Index , which printed after all majors had raised rates hardly moved this week. This is a volatile measure (as would be expected with weekly series) but it is the only one available in the window before the Board meeting. It’s result would be inconclusive from the Bank’s perspective and certainly not sufficient to justify a large mark down in the growth outlook. 
Conclusion 
We still expect the RBA to be on hold at its meeting next week. The surprise drop in the inflation measure is not unique and, in the past, the Bank has looked through a one off number. 
The motivation for cutting next week would be a significant downward revision to the growth outlook. The data flow and the RBA’s recent commentary does not point to such an event. 
Consequently we expect rates to stay around the current record lows. 
 
Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA still on hold next week: Westpac's Bill Evans

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Last week we wrote about the potential impact on monetary policy of an independent move by Westpac to raise its variable mortgage rates by 0.2%.
We observed that the Reserve Bank has noted in the past that it moves its cash rate to target retail rates.
The issue was whether a move by one bank would trigger a response from the RBA.
We argued that it was too early to make such a prediction given that the extent of financial tightening was not known. A move by one bank was insufficient to make a significant impact on overall financial conditions.
Yesterday the CBA Group, which covers 25% of mortgages, raised their mortgage rates by 0.15%. Today the NAB (14.8%) moved by 0.17%. and ANZ (14.7%) moved by 0.18%.
Overall, those banks that have been subject to the increase in capital requirements, and are now raising their mortgage rates, cover around 77.5% of mortgages in the system. The rest is covered by the regional banks (16.9%) and non-bank lenders (5.5%).
However, only about 85% of mortgages are on variable rate terms. This means that the net effect across the economy of these changes to variable mortgage rates by the majors will be around 11bps.
When the RBA moves rates it can affect both mortgages and business loans. Mortgages represent around 60% of total loans in the system so this initiative by the banks roughly equates to a 6-8bp rate hike by the RBA that is fully passed on by all financial institutions to both mortgage and business borrowers (depending on the exact share of loans directly affected by an RBA move).
On this basis it seems unlikely that the RBA would move immediately to offset bank rate rises with a 0.25% rate cut.
However last week we noted the historical precedent of 2012 when the RBA cut by 0.5% in May following increases of only 0.10% in variable mortgage rates by the banks.
Points we made about that period were firstly that the RBA had a very strong easing bias at the time, giving clear guidance that “inflation outlook would provide scope for easier monetary policy”. Despite that bias there was an extended delay between the banks’ moves in February that year and the eventual RBA cut in May.
When it did finally make a cut it also revised down its growth forecasts for 2012 from 3.25% to 3.0% and for 2013 from 3.5% to 3.0%. The 2013 change was very significant, cutting the outlook from comfortably above trend to around trend.
So to recap: despite fully neutralising the banks’ move and delivering a cut over and above that and subsequent bank moves (the banks only passed on 0.35% of the RBA’s 0.50% cut by the RBA) the RBA still revised down its growth forecasts significantly. One can only imagine what the revision would have been without the rate cut.
This brings us to the conclusion that given the move by the banks tightens financial conditions by significantly less than 0.25%, a full 0.25% rate cut would result in a net easing in financial conditions (on the basis that banks pass on the full cut). Hence the case would need to be made that the RBA needs to provide a net easing of financial conditions to justify a rate cut in November.
There was nothing in the Board’s minutes from the October meeting to suggest that a net financial easing was going to be required in the near term. In fact the minutes indicated that the Board was a little more upbeat about the domestic outlook, in particular noting: “forward-looking indicators had generally been consistent with the unemployment rate being around its current level or possibly slightly lower in the months ahead”. Recall that six months ago the Board was forecasting the unemployment rate to continue to rise through to the first half of 2016.
However we must acknowledge that November has in the past been a very popular month for the Bank to move rates. That is because, like February, May and August it presents the Bank with the opportunity to review its forecasts.
A scenario that would see the Bank cutting rates in November would be associated with a significant downward revision in its growth forecasts for 2016. If that decision was based around the banks’ actions then it would mean that the expected tightening in financial conditions would be sufficient to lower the growth outlook.
Given the effective size of the tightening though it seems unlikely that this would be viewed as sufficient to sharply lower the growth outlook.
With the RBA currently forecasting growth in 2016 to be an above trend 3.0% it would be necessary for the Bank to be considering a below trend 2.5% for the 2016 view to trigger a rate cut in November.
That seems premature given that the key way in which the banks’ decisions would impact the economy would be through confidence. Even the cash flow effect is likely to be muted. For example, Westpac noted that 70% of its borrowers are ahead on repayments – the rate rise will mean that these borrowers will take a little longer to pay down their loans rather than take a cash flow ‘hit’.
Surely the RBA would need to see the confidence impact of the banks’ moves before it decided to cut rates and lower its growth forecasts. A clean measure of that response will not be available until the Westpac Melbourne Institute Index of Consumer Sentiment is released on November 11.
The minutes were also used to signal the RBA’s comfort with the decisions of the banks so far with the comment that: “members judged that there were signs that the response of the banks to supervisory measures implemented by APRA were helping to manage risks in the housing market”. 
While that statement is probably referring to the banks’ tightening in lending guidelines and increase in interest rates for investor loans (announced back in July) it could, arguably have been used as a way of signalling that it was also comfortable with the Westpac move given it was only targeted at the housing market which has been the area of ‘excess’ concerns for the RBA.
So we feel quite comfortable in ruling out a rate cut in November. A December move, triggered by a major slump in confidence, remains a possibility. But our core view that rates are on hold through 2015 and 2016 is much more at risk in the early months of 2016.
After all, markets have been pricing in a full 0.25% cut by March and a 50% chance of a second cut by June.
A slowdown in consumer spending associated with the banks’ tightening or adverse developments offshore are much more likely to be triggers for the sort of downward revision to growth that would be linked with a February rate cut.
The October minutes implied such concerns with a more downbeat assessment of the outlook for China; and a marked change in the assessment of the outlook for the Federal Funds rate, noting that some market participants did not expect a Fed hike for the foreseeable future.
That compared with the September minutes which commented that “a tightening of monetary policy in the United States could start at the September meeting of the Federal Open Market Committee”.
The heavy emphasis on global issues culminated in the minutes concluding: “information about economic and financial developments, both domestically and abroad, would continue to inform the Board’s assessment of the outlook”. [Westpac’s emphasis]
Conclusion
We see little chance of an RBA rate cut in November. December remains ‘live’ as it allows for the Bank to assess the impact of the moves by the banks on confidence.
A combination of a more lagged impact on spending from the banks’ moves and adverse global developments including an extended pause from the FOMC (meetings in December and January before the February meeting of the RBA) might trigger the cut which the market so confidently expects from the February meeting.
For our part, including our expectation of a Fed tightening in December, we retain our central view that rates will be on hold over the course of the remainder of 2015 and 2016. 
 
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Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA on hold in November despite banks’ rate hikes: Westpac's Bill Evans

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GUEST OBSERVER
Markets are on alert for an unexpected near term rate cut from the RBA in response to Westpac’s decision to raise the variable mortgage rate by 20 basis points. 
Markets are asking the question as to whether the RBA will move to offset that tightening by cutting rates as early as the next Board meeting on November 3. The market probability for a cut in November has increased from 25% to 40% since the Westpac announcement. 
Below we assess the history of the Reserve Bank’s policy in relation to banks’ pricing. We conclude that based purely on history the most likely outcome is that financial conditions are likely to tighten further, although the exact degree of tightening and its timing is uncertain. 
We expect that the RBA will await this information on the effective change in financial conditions before making a decision as well as assessing any early signs of the impact of this tightening on the economic outlook. 
When this information becomes clearer we will reassess our current view, which, at this stage is for no policy change in 2015 or 2016. 
2008 
During 2008 the banks were severely impacted by the rise in funding costs as the cost of wholesale funding blew out sharply. 
In January 2008 all four majors raised mortgage rates independently of any move by the RBA. First to move was BANK 3 with 12 basis points followed by the others in a 5–7 day window with a range of 10 – 20 basis points. 
The RBA tightened by 25 basis points in both February and March with the banks raising rates by 55 – 65 basis points. 
Later in March and then again in April and July all banks raised rates independently in tranches of around 10 – 15 basis points and by 26 – 34 basis points overall. 
Over that January to July period the banks raised mortgage rates by 101 (BANK 1); 104 (BANK 2); 104 (BANK 3) and 114 (BANK 4) basis points respectively while the RBA raised the cash rate by 50 basis points. 
Observations from that period were that all banks moved closely in step and their moves were in the same direction as the RBA’s moves. Arguably because the banks were supporting the RBA’s policy of tightening there was no move by the RBA to offset any of these bank moves. 
Later in 2008 when the RBA reacted to the GFC with cuts of 25 basis points (September); 100 basis points (October); 75 basis points (November); and 100 basis points (December) the banks clawed back some of these cuts reducing the mortgage rates by 259 (BANK 1); 271 (BANK 4); 272 (BANK 2) and 287 (BANK 3). 
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2009 
In 2009 the RBA cut by 100 basis points in February which was fully passed on by the banks and 25 basis points in April, where BANK 3 who had cut more aggressively through 2008 passed on nothing and the other 3 banks only passed on 10 basis points. 
When rates started to rise, the banks once again supported the RBA’s tightening by raising rates by more than the RBA tightening. From October to December the RBA raised rates by 75 basis points and the banks tightened by 95 (BANK 2); 87 basis points (BANK 1); 85 basis points (BANK 4); and 75 basis points (BANK 3). 
2010 
In March; April and May the RBA tightened by 75 basis points and the banks raised their mortgage rates accordingly. 
With funding conditions still oppressive the banks raised rates in November by 35 (BANK 2); 39 (BANK 4); 43 (BANK 3); and 45 (BANK 1) basis points respectively in response to an RBA rate increase of 25 basis points. 
2011 
In the early stages of the easing cycle the banks passed on the full 25 basis points in RBA cuts in November and December. 
2012 
Tight funding was still pressuring the banks and in February 2012 BANK 4 raised their mortgage rates by 6 basis points to be followed three days later by BANK 3 (9); BANK 1 (10); and BANK 2 (10). 
In April BANK 4 “caught up” with a further 6 basis points increase. 
In May the RBA surprised markets by cutting the cash rate by 50 basis points. BANK 1 (40); BANK 2 (37); BANK 4 (36); and BANK 3 (32), passed on some of the cut. 
The net effect between December 2011 and June 2012 was for the mortgage rate to fall by around 25 basis points despite a 50 basis point cut by the RBA. 
Following 25 basis point cuts by the RBA in October and December the banks passed on an average of 20 basis points on each occasion. 
2013 
In 2013 the RBA continued its easing cycle with cuts in May and August with the banks cutting the mortgage rates by 25 basis points on each occasion. 
2014 
RBA and mortgage rates held steady throughout the year. 
2015 
RBA eased by 25 basis points in both February and May. Banks passed on an average of 30 basis points in February and 20 basis points in May. 
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In July one bank raised its rates on investment property loans by 0.27%; the other banks quickly followed although one restricted the move to “interest only” loans (0.29%). 
With investment property loans representing around 38% of total mortgages this lift could be equated with a 10 basis point increase in across the board in mortgage rates. 
Some Observations 
The historical evidence is that the banks have tended to move in similar, although not identical tranches. 
Most of these moves have been at the time of an RBA interest rate adjustment although there have been 2 periods – 2008 (H1) and 2012 (H1) when the banks have moved independently of an RBA move. 
Overall the banks tightened by a little over 100 basis points in 2008 ( H1) while the RBA tightened by only 50 basis points. However there was no apparent move by the RBA to offset any of that tightening. That was probably because the Reserve Bank favoured tightening policy. As late as June 2008 the Governor noted, “Inflation appears to be in the upper half of the target zone over the next year”. Arguably this could be interpreted as a tightening bias. 
The second period of banks moving out of step with the RBA was in 2012 (H1). After easing by 25 basis points in November and December with the banks passing the cut on fully we saw independent increases by the banks in February: BANK 4 (6) and three days later BANK 3 (9); BANK 2 (10) and BANK 1 (10). 
In February; March; and April the Bank had an explicit easing bias. Each statement from the Governor included, “Inflation outlook would provide scope for easier monetary policy”. Yet the board did not decide to cut rates until May when it cut by 50 basis points noting “In considering the appropriate size of adjustment to the cash rate at today’s meeting the Board judged it desirable that financial conditions be easier than those that prevailed in December”. 
The Banks duly “delivered” 40 (BANK 1); 32 (BANK 3); 36 (BANK 4); and 37 (BANK 2) in mortgage cuts. The net result over 2012 H1 was that the RBA cut by 50 basis points with mortgage rates falling by around a net 25 basis points. 
Arguably, without the banks’ independent tightening, a 25 basis point easing would have been delivered by the Bank in May given its clear easing bias. 
How do those previous periods compare with today? 
Firstly only one bank ( around 12% of total mortgages) has moved (by 20 basis points). History (2008 and 2012) would point to all the majors eventually moving but certainly not by exactly the same amount. 
Secondly, in 2008 the RBA’s bias was in the same direction as the banks’ moves so there was no action from the RBA to offset their independent moves. 
Thirdly, in 2012 the Bank had an explicit easing bias yet it waited for two meetings to respond to a tightening by the banks. Eventually it moved to not only offset the banks’ moves but provide a net easing of policy, consistent with the bias. 
This time the RBA does not have an explicit easing bias. The stance could be described as a “soft” easing bias with various officials’ statements supporting the view that if rates do move further it will be down rather than up although the central position appears to be “rates on hold”. It has been our view that the current policy settings and associated financial conditions are “about right”. 
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If there was a marked across the board increase in retail interest rates , indicating a sharp tightening in financial conditions, then the Bank may see the need to offset that move. 
It will be mindful that a cut in the overnight cash rate is likely to impact a broader spectrum of interest rates including business rates and deposit rates and the AUD. All these factors can be expected to ease financial conditions by more than the tightening represented by the rise in the mortgage rate. However, the Bank will have another degree of uncertainty associated with the degree to which the banks pass on any rate cut. These issues will be weighed by the RBA in making its policy decision. 
Were it to occur,the timing of such a decision is unclear. In 2012, despite an explicit easing bias, the Bank waited nearly three months before easing. But on that occasion it moved not only to offset the banks’ tightening but also provide a net easing consistent with the bias. Presumably, this time it would be seeking to return financial conditions to those that prevailed at the time of the October Board meeting. 
If, for instance, it opted for November when it will produce its Statement on Monetary Policy and will review its forecasts it would also have to indicate that the tightening of financial conditions prompted a downward revision to its growth forecast in 2016. 
At present the Bank is forecasting growth in 2016 of 3.0% (around 0.25 percentage points above its estimated trend growth rate).We expect that it is likely to cut its growth forecast for 2016 to 2.75% before taking into account the impact of a tightening in financial conditions. The implication might be that without an offset to these tighter financial conditions growth was at risk of falling back to a below trend 2.5% in 2016 . An offsetting easing in conditions would allow the growth forecast to be restored to 2.75% – around trend. 
Conclusion 
History has showed us that banks tend to move close in time, but in differing amounts, when operating out of cycle with the Reserve Bank. This reflects the common nature of the funding and regulatory shocks that drive such decisions. However it is by no means certain that history will necessarily repeat itself. 
History also showed us that even when the banks tightened and the Reserve Bank had an explicit easing bias it still took 3 board meetings to decide to offset the effect of the banks’ moves. 
Our position is that the case for the type of net easing we saw in 2012 is not strong but the Reserve Bank, which targets retail interest rates, may decide at some point to offset any tightening by the banks to restore retail rates to those prevailing at the time of the October Board meeting when the Bank was comfortable with financial conditions and policy settings. 
If we are to predict a near term rate cut on the basis of an unexpected tightening of financial conditions then we need to assess the full extent of that tightening and signs of its impact on the real economy. To date that information is not yet available. 
For now, we retain our call for rates to remain on hold in both 2015 and 2016. 
Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA may react to tighter financial conditions: Westpac's Bill Evans

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The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 4.2% in October from 93.9 in September to 97.8 in October.
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This result is a little short of the increase we would had expected given the strong boost the government received in the polls following recent leadership and ministerial changes. 
The rise in the Index has failed to offset the loss we saw last month with the Index 1.6% below its August level and still below the key 100 level indicating pessimists still outnumber optimists. The Index has now been below 100 for 18 of the last 20 readings. 
Given that politics is probably the most significant factor in the result it is noteworthy that the Index is 11.6% below the level (110.6) it reached following the election of the Abbott Government in September 2013. 
Other factors that may have contributed to the boost in sentiment this month include recent recoveries in the Australian dollar and the sharemarket, complemented by a steady improvement in the labour market. 
The AUD rose just over 2¢ against the USD between the September and October surveys, and the ASX 200 was up 3.4%. 
The unemployment rate was recently reported to have fallen to 6.2% and jobs growth has been much stronger than anticipated over the past year. 
In that regard, there has been a very significant and unexpected boost to respondents’ assessment of the state of the labour market which looks to be an even more significant result than the increase in the overall Index. 
The Westpac Melbourne Institute Index of Unemployment Expectations fell by 16.3% from 156.3 to 134.9. Because the Index measures respondents’ outlook for the unemployment rate, a fall indicates an improvement in expectations around the labour market. This Index is now at its lowest level since November 2011 indicating a very significant improvement in how respondents assess the labour market including job prospects for those out of work and job security for those in work. This comes after a recent business survey which also showed a significant boost in businesses’ hiring intentions. 
Four of the five components of the Index increased in October. Both components measuring views on family finances increased: the sub-index on ‘family finances vs a year ago’ increased by 1.3% and the sub-index on ‘family finances over the next 12 months’ rose by 3.5%. 
<a href="/images/2015/10/14/Screen%20Shot%202015-10-14%20at%2010.45.39%20AM.png" target="_blank">Click to enlarge</a>
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Expectations around the economy were more mixed: the sub- index on ‘economic conditions over the next 12 months’ rose by 20% whereas the sub-index on ‘economic conditions over the five years’ fell by 7.9%. 
That caution about the longer term outlook contrasts with the 7.1% increase in the five year economic outlook which occurred following the September 2013 election. 
The sub index tracking assessments of ‘time to buy a major household item’ increased by an encouraging 6.3%. 
Confidence around housing remains weak. The ‘time to buy a dwelling’ index slipped from 101.7 to 101.3 (down by 0.4%) to be down by 11% over the year. This Index peaked in September 2013 at 145.3 and is down over 30% from that peak. 
There was a sharp fall in confidence around the outlook for house prices. The Westpac Melbourne Institute Index of House Price Expectations fell by 3.9% to 124.2. It is now down by 14.9% over the last three months and 25% from its peak in December 2013. 
The Reserve Bank Board next meets on November 3. It will be encouraged by the signals from this survey and the official data that employment conditions and confidence around employment prospects appear to be finally improving. However it will probably be a little disappointed that confidence remains below the 100 level where pessimists outnumber optimists. 
Westpac has been firmly of the view that rates will remain on hold for the remainder of 2015 and 2016. Improving conditions in the labour market are very important from this perspective. However, changes in financial conditions will also warrant scrutiny in the period ahead 
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Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Consumer sentiment increased by 4.2%, but a little short in October: Westpac's Bill Evans

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As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 2%.
Arguably the Governor’s statement in October represents the fewest number of changes to the previous month’s statement that we have ever seen. This may be a clear strategy to discourage markets from expecting any imminent change in policy. Of course this is particularly important given that the next meeting will be in November, which is one of the four meetings per year where the Bank reviews its forecasts for both growth and inflation and therefore represents the most likely timing for a policy adjustment. In providing minimal wording changes the signal seems quite clear that it is unlikely that the Bank will see the need to substantially revise its growth forecasts and therefore need to further ease rates.
The most important change in wording was around the assessment of “regulatory measures”. In September the statement merely recognised that the policies were in place whereas in October “regulatory measures are helping to contain risks that may arise from the housing market”. This might seem to be a marked increase in confidence over the month although the minutes to the September meeting noted that “there were indications that the measures implemented by APRA had slowed the growth in lending for investment housing”.
Another change was around house prices where in September prices were acknowledged to have continued to rise strongly in Sydney whereas in the October statement both Sydney and Melbourne were singled out for “strongly rising prices”.
The key consistent themes around “softening conditions in China and east Asia”; “moderate expansion in the Australian economy”; “stronger growth of employment and a steady rate of unemployment over the past year”; “economy operating with a degree of spare capacity”; “inflation under control even with a lower exchange rate” were repeated in this statement.
As expected the wording around the Australian dollar was unchanged,” The Australian dollar is adjusting to the significant declines in commodity prices.” There was also no reason to change the commentary around the Australian dollar which prior to the September meeting was around US 71.20 and today is around US 70.80, with iron ore prices generally stable.
Of course the most important part of the statement is the closing paragraph which is repeated word for word from the September statement. Recall that this statement is ‘middle of the road’. On the one hand not signalling a specific change with terms such as ‘for the time being’ or ‘scope’  but  also not using the language of 2014  ‘the most prudent course is likely to be a period of stability in interest rates’.
Outlook
Markets have shaved the probability of a move this year to around 40% but still have a 100% probability of a move by February/March next year.
It is our view that the Bank will not need to sufficiently change its growth forecasts for 2015 and 2016 that would necessitate further policy support. That would mean rates on hold in both 2015 and 2016. However, risks on rates remain to the downside particularly around the global outlook; the terms of trade; and the labour market.
Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Governor’s recent statement discourages November rate move: Westpac's Bill Evans

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GUEST OBSERVER
World interest rates are currently very low. Market expectations for future interest rate movements are also remarkably benign.
If we look at the forward swap curves for US and Australia we note the following profiles:
US: Current Federal Funds Rate is 0.12% and markets expect the rate to be 0.61% in one year’s time.
Over the following years markets expect the Federal funds rate to average: 0.9% in the year to September 2017; 1.4% in the year to September 2018; and 1.8% in the year to September 2019.
Australia: Current RBA cash rate is 2.0% and markets expect that rate to be 1.75% in one year’s time.
Over the following years markets expect the RBA cash rate to average 1.8% in the year to September 2017; 2.0% in the year to September 2018; and 2.4% in the year to 2019.
The question is whether these extremely benign expectations are realistic.
For the US for instance these market expectations imply that even over the next 4 years, when inflation is expected to “settle” at around 2%, real interest rates will still be negative.
Real interest rates are also expected to be negative over that period in Australia with inflation reasonably expected to average around 2.5% - the middle of the RBA’s target 2-3% zone.
How does this outlook compare with the pre-GFC period in the US?
Taking a starting date of 1985, when US inflation had moved towards a more normal range, we note that the FEDERAL FUNDS Rate averaged 5.1% and the 10 year bond rate averaged 6.4%.
Over that period economic growth averaged around 3.2% and inflation around 2.5%. A reasonable “rule of thumb” is for bond rates to reflect the sum of economic growth and inflation. We accept that the “theoretical bond rate is the sum of the real cash rate; expected inflation and the term premium although we would expect that the term premium should be related to an expected growth concept.
With the equilibrium margin between bond rates and the cash rate at around 1.5% the current market expectation for bond rates over the 4 years to September 2019 is around 3% (cash rate averaging around 1.5%).
Most forecasters for the US economy would expect growth to average around 2% and inflation around the same. That suggests that current market pricing for rates is probably too “low”, even given the more subdued outlook for growth and inflation since the GFC.
How does this compare for Australia?
If we take a comparable post boom inflation period for Australia: 1993 – 2007 we note that average GDP growth was 3.7% while inflation averaged 2.6%. The 10 year bond rate averaged 6.5% and the RBA cash rate averaged 5.6%. That “rule of thumb” with growth and inflation broadly in line with bond rates also held for Australia during that period.
The equilibrium margin between the cash rate and the bond rate was around 1% - lower than in the US.
The Forward Curves are pricing in much lower interest rates post GFC than pre-GFC.
Is it indeed reasonable to assume a much more subdued outlook for growth and inflation post GFC?
I believe that the answer is a qualified “yes” mainly due to the headwinds which developed economies are now facing on the demand side as a result of the build -up in private and public sector debt since the GFC.
Consider the US: between December 2003 and December 2007 household debt ballooned from USD 9012 trillion to USD 13228 trillion (up nearly 50% in 4 years). Despite significant write-offs US household debt remains at USD 12692 trillion – limited progress has been made in rewinding the debt. Households are cautious, unwilling to take on more debt – that behaviour blunts the effect of low rates, constrains growth, and widens negative output gaps.
Similarly US government debt has ballooned from USD 7959 trillion in late 2007 to USD 16049 trillion by end June 2015. Governments are a drag on growth constantly seeking to repair fiscal damage – this effect is also likely to continue well beyond even the 4 year period we are considering with the yield curves.
In the case of Australia, gross household debt ballooned from 100% of disposable income in 2000 to 153% by the beginning of the GFC. Households have been able to stabilise this ratio at 155% of disposable income but have had no success in being able to reduce the ratio.
However, we have seen how these debt levels have muted the impact of the RBA’s rate cuts with households generally choosing to use any cash flow improvements to pay down debt rather than boost spending.
Although Australian corporates have generally low gearing they have behaved as if they are in a debt minimising world rather than necessarily profit maximising. Prior to the GFC non mining investment averaged around 13.5% of GDP. That ratio fell sharply to around 10.5% and has remained stubbornly around that level ever since. 
Government debt levels have constrained both state and Federal governments. Net government (including both state and Federal) debt has risen from -1.2% of GDP in 2007/08 to 27% of GDP in 2014/15.
Policies to address fiscal fragility have impacted government’s scope to boost growth on the demand side.
Equally we might address the growth outlook from the supply side. Political difficulties associated with the debt levels have constrained government’s scope to embrace the reform needed to boost productivity while the weak demand conditions tempt governments to slow down immigration impacting on the future growth in the workforce.
Similarly firms’ fixation with debt and associated cautious approach to investment will also detract from boosting productivity.
So do these more subdued growth and inflation outlooks post GFC justify current market pricing?
The answer is a qualified “no”.
US pricing implies a bond rate in equilibrium of around 3% whereas, even in a post GFC world, growth (2%) and inflation (2%) implies a bond rate of around 4% rather than 3%.
For Australia, pricing indicates an equilibrium bond rate of around 4.0% whereas inflation (2.5%) and growth (2.5%) would imply a bond rate much nearer to 5%.
Conclusion
Markets are pricing in an incredibly benign outlook for interest rates. There are good reasons associated with the pre and post GFC build up in debt levels that justify a lower growth and inflation outlook.
But markets have gone too far with these assessments and implied bond and cash rates look to be around 1% lower over the next 4-5 years than economic fundamentals would imply.
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BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Benign outlook for growth and inflation: Westpac's Bill Evans

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

Joel Robinson

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

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

Sammut secures approval for debut Brisbane apartment development in Toowong

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

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

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.

The New York-based investor has focused his firm, GreenPoint Partners, on addressing the supply shortage hitting middle market housing in Australia.

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.

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.

“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.

“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.”

<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" />

GreenPoint Partners brings years of experience assembling and scaling real estate operating businesses across major markets. And Green sees a big opportunity in Australia.

“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.”

Green said being a builder-developer would give the company the capacity and flexibility it required to deliver reasonably-priced homes.

“We want it to be at that attainable level; not super high end luxury but at that attainable level,” he said.

<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" />

&nbsp;

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.

Green praised local policy settings.

“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.”

One Living is also&nbsp;looking at high-density projects and could take on more institutional funding in the future.

“The way we will be able to achieve economies of scale is through size,” Green added.

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

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.

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.

Projects by Buxton Director Heath Thompson, who is selling WM Residences, says the townhouses x that perfect middle ground be

"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.

"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."

[smartcode_project:default project_id=134646 project_image_fid=6109]

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.

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.

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.

[smartcode_project:default project_id=134646 project_image_fid=6110]

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.

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.

[smartcode_project:default project_id=134646 project_image_fid=6116]

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.

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.

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.

[smartcode_project_cta:default project_id=134646]

Bill Evans

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