Local developer Harridan is seeking to turn its Woolloongabba apartment project into the first stage of a broader transformation of Burke Street, using a new 16-storey mixed-use building to establish a greener pedestrian connection toward the rapidly evolving Boggo Road transport and knowledge precinct.

The South East Queensland developer has filed plans for 154 apartments on the <a href="https://www.apartments.com.au/new-apartments/4-burke-street-woolloongabba-qld-4102">southern side of Burke Street</a>, where its proposal has been designed alongside a wider vision by LatStudios for the street.

That vision positions the southern side of Burke Street for buildings of 15 storeys and above, while envisaging lower-rise development of up to five storeys on the northern side to transition into Woolloongabba's existing character housing. It also proposes wider pedestrian verges, deep planting, new street trees and upgrades to the pedestrian approach to Boggo Road Station.

The Harridan development itself has been designed by Brisbane-based Arqus Design and will comprise 154 apartments across 16 storeys. The mix is weighted heavily toward two-bedroom apartments, with 121 proposed alongside 10 one-bedroom and 23 three-bedroom residences. There will typically be around 14 units per floor.

A lower-ground car park and three podium levels will accommodate 156 resident parking spaces, along with visitor and commercial parking. There will also be 154 resident bicycle spaces and 40 visitor bicycle parks.

&nbsp;

Harridan is a family-owned developer and part of the Holmwood Highgate Group, with more than three decades of development activity across South East Queensland. Its portfolio spans residential, commercial and industrial property, with current residential projects including Riverbank on Byron in Bulimba, Esperance Residences in Carina and The Precinct at Kinross Road in Thornlands.

Wooloongabba has been popular for apartment developers, particularly since the announcement of the 2032 Summer Olympics games in Brisbane.

While there have been a lot of development applications, it has failed to materialize into real supply.&nbsp;

Sarazin has been the major player in the area. They are under construction at Murcia Residences, on the fringe of East Brisbane and Woolloongabba. They have just launched <a href="https://www.apartments.com.au/new-apartments/the-stanley-residences-woolloongabba-8-trafalgar-street-woolloongabba-qld-4102">The Stanley Residences</a>, in Woolloongabba on Trafalagar Street. They also have Nuage coming soon on the nearby <a href="https://www.apartments.com.au/new-apartments/nuage-woolloongabba-14-wellington-road-woolloongabba-qld-4102">Wellington Road</a>.

Joel Robinson

First look: Harridan plans Burke Street transformation beside Boggo Road transport hub

IN BRIEF

<ul>
	<li>
	Just three double-storey Sky Homes sit at the top of The Waterline, each with its own private marina berth and rooftop terrace.
	</li>
	<li>
	Construction on The Waterline is complete, with the first residents expected to move in from mid-October.
	</li>
	<li>
	Sky Homes range from 282 sqm to 367 sqm and are priced from $3.65 million.
	</li>
</ul>

<hr />
Lewis Land has opened the first completed sky home for inspection at Harbour Shores, giving buyers their first opportunity to step inside one of just three double-storey residences crowning The Waterline.

Each sky home comes with its own private marina berth, rooftop terrace and Broadwater views, combining the scale of a larger home with direct access to the boating lifestyle that underpins the wider <a href="https://www.apartments.com.au/new-apartments/harbour-shores-biggera-waters-564-oxley-drive-biggera-waters-qld-4216">Harbour Shores</a> masterplan.

[smartcode_project:default project_id=113271 project_image_fid=366708]

Lewis Land Head of Development Michael Long said the inclusion of a berth with every Sky Home had become increasingly valuable as marina access across the Gold Coast tightened.

“Marina berths are becoming increasingly difficult to secure across the Gold Coast, so including one with every Sky Home makes this a genuinely rare offering,” Long said.

“The private 70-berth marina will accommodate boats up to 12 metres in length and is positioned just 2.5 kilometres from the Broadwater, placing the open ocean only 15 minutes away.

“Being able to step out of your home onto your boat is a rare luxury, and it’s something residents here can look forward to when it opens later this year.”

[smartcode_project:default project_id=113271 project_image_fid=366709]

The display opening comes as construction completes on The Waterline, with the first residents expected to move in from mid-October.

The three Sky Homes range from 282 sqm to 367 sqm and each feature three bedrooms, three bathrooms, multiple living zones, expansive kitchens with butler's pantries and large balconies taking in the Broadwater outlook.

Each residence also has three secure basement car spaces and additional storage.

“This is the first opportunity the Gold Coast has had to step into Harbour Shores and see, touch and feel what we’re bringing to life here,” Long said.

“There are only three Sky Homes within The Waterline, ranging in size from 282sqm to 367sqm, with each residence featuring three large bedrooms, three bathrooms, multiple living zones, expansive custom-built kitchens with butler’s pantry, and large balconies capturing Broadwater views.”

<img alt="Harbour Shores" data-entity-type="file" data-entity-uuid="bab65e10-4fab-45e1-92d8-fc56e2ab98ff" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-25%20at%202.00.16%E2%80%AFPM.png?VersionId=XT8q76LsPkw3cYTsvN3JfFDaPLud90PN" />

Residents of The Waterline will have access to a private pool, along with Harbour Shores' wider collection of amenity including a lagoon pool, social clubhouse, tennis court, gym, yoga facilities and sauna.

Lewis Land partnered with Studio Collective to furnish the completed display, with the interiors designed to demonstrate how the residences could function as permanent homes rather than simply as show apartments.

Studio Collective Director Melissa Park said the surrounding waterways informed the interiors, but in a more restrained way than a traditional coastal scheme.

“We drew inspiration from the canals and coastal surrounds, but our approach was to interpret that subtly through layered materials and a grounded palette of earthy tones, rather than literal coastal references,” Park said.

“We introduced hero moments of green and teal to reference the surrounding waterways, while mirrored elements help reflect natural light.

“The result is a residence that feels elevated yet comfortable, somewhere buyers can genuinely imagine themselves living, entertaining and unwinding.”

Sky Homes are priced from $3.65 million.

Lewis Land is also offering private marina berths with The Residences, its limited collection of three and four-bedroom villas positioned directly along the Harbour Shores waterfront boardwalk.

Three-bedroom villas are priced from $2.99 million, while four-bedroom residences start from $3.19 million.

Harbour Shores is being marketed by Colliers International.

[smartcode_project_cta:default project_id=113271]

Lewis Land opens sky home display as The Waterline completes at Harbour Shores

St Vincent de Paul Society Housing Australia has filed plans for a major mixed-use housing precinct on the southern edge of the North Sydney CBD, adding another significant proposal to a pocket around North Sydn​ey Station that is quickly becoming one of the LGA's busiest development zones.

The State Significant Development Application covers a 5,990 sqm site at <a href="https://www.apartments.com.au/new-apartments/1-19-mackenzie-street-lavender-bay-nsw-2060">1-19 MacKenzie Street and 211 Blues Point Road in Lavender Bay</a>, immediately south of Nor​th Sydney Station and between the commercial core and the lower-rise Lavender Bay Heritage Conservation Area.

Designed by Wardle, the proposal would deliver a new residential tower comprising 88 build-to-sell apartments and 19 affordable apartments, alongside a separate co-living building with 57 rooms and a building manager's studio.

It would also see the significant restoration and upgrade of St Francis Xavier Catholic Church, the adaptive reuse of the former school building, new parish facilities, retail, a new public square and around 1,000 sqm of publicly accessible open space.

<img alt="Vinnies North Sydney" data-entity-type="file" data-entity-uuid="d5dd7f87-a617-463e-b577-17541e01f0e9" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-26%20at%209.10.13%E2%80%AFAM.png?VersionId=4R8TsFN3P_LrrXO2HswTOIrx2blil8lh" />

The project is seeking a concurrent rezoning of the site to R4 High Density Residential and an increase in the maximum building height to allow a tower reaching RL120, or up to 20 storeys. The proposal was progressed through the NSW Government's Housing Delivery Authority pathway.

The build-to-sell component will be weighted toward larger apartments, with just six one-bedroom apartments compared with 31 two-beds, 43 three-beds and eight four-bedroom residences.

The 19 affordable apartments will comprise two studios, 15 one-bedroom apartments and two two-bedroom apartments, taking the total apartment component to 107 residences before the 58 co-living rooms are included.

<img alt="Vnnies" data-entity-type="file" data-entity-uuid="7d568ca5-cb90-4e18-96c6-d9795dba0c56" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-26%20at%209.10.05%E2%80%AFAM.png?VersionId=GY2R5M9VtQh0EKy1vajaea19PSLOPuRD" />

Wardle's design for the Vinnies site has sought to negotiate that emerging high-rise context while retaining the lower-scale character of MacKenzie Street and the adjoining heritage conservation area.

The main building adopts a three-storey podium and tower arrangement, with the podium aligned to the ridgeline and front setback of St Francis Xavier Church.&nbsp;Wardle has designed the podium with colonnades, seating, recessed entries and active ground-floor frontages, with sandstone-toned precast concrete and face brick referencing the materiality of the existing church.

The tower then steps back eight metres to the south and six metres to the north before rising in a sculpted form comprising four interlocking quadrants. Wardle has also introduced rounded forms and chamfered corners to reduce the tower's perceived bulk and improve view sharing with neighbouring development sites.

Resident facilities and outdoor areas are planned at the separation between the podium and tower at Level 3, oriented toward Sydney Harbour and the CBD skyline.

The tower itself will feature a glass reinforced concrete facade, with recessed balconies and deep reveals used both to provide shading and privacy and frame views toward the harbour and city. The lower levels take a different architectural approach, using brick and sandstone-toned finishes intended to establish a stronger relationship with St Francis Xavier Church. The Church itself will be conserved and upgraded for its continued use, while the former school building will be adaptively reused as part of the co-living component.

<img alt="Lavendar Bay" data-entity-type="file" data-entity-uuid="2d4418ad-90aa-4d49-af93-c80b140aea80" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-26%20at%209.09.47%E2%80%AFAM.png?VersionId=Kv4gzbsACaGvZSRuaqcfGC54jEJRXIDJ" />

&nbsp;

The proposal adds to an increasingly concentrated pipeline of residential development around Blue Street, MacKenzie Street and Lavender Bay.

Just west of the site, Central Element lodged plans earlier this year for one of the most significant residential developments proposed in Lavender Bay in recent years.

Central Element's SJB-designed scheme at 64-66 Lavender Street and 3-7 Middlemiss Street would deliver 163 apartments across two towers rising 23 and 32 storeys, replacing five existing apartment buildings containing 32 homes. The project also forms part of the Housing Delivery Authority pathway.

<a href="https://www.apartments.com.au/news/nsw/first-look-central-element-reveals-lavender-bay-apartment-plans?utm_source=chatgpt.com" rel="noopener" target="_blank">First look: Central Element reveals Lavender Bay apartment plans</a>

Immediately around North Sy​dney Station, another two significant proposals have emerged at 5 and 15 Blue Street.

Zurich Australian Insurance Properties is seeking to adaptively reuse its longstanding commercial building at 5 Blue Street, directly above North Sydney Station, rather than demolishing the structure.

Its SSDA proposes converting the building into a 14-storey mixed-use development with 62 apartments and 86 co-living rooms, together with ground-floor retail and a major refurbishment of Blue Street Plaza. The application is currently at the Response to Submissions stage.

<a href="https://www.apartments.com.au/news/nsw/first-look-zurich-targets-north-sydney-office-conversion-with-148-unit-proposal-above-metro-station">First look: Zurich targets North Sydney office conversion with 148-unit proposal above Metro station</a>

&nbsp;

First look: Vinnies files for 20-storey Lavender Bay apartment tower as North Sydney housing pocket heats up

When the opportunity arose for South Australian developer Palumbo to return to Kent Town, where it had previously delivered East Park Apartments and the East 
Rundle Apartments, it wasn't one the longstanding developer-builder was going to pass up.

The decision was quickly vindicated, with more than 30 apartments sold within the first month of launching <a href="https://www.apartments.com.au/new-apartments/royal-apartments-kent-town-2-8-north-terrace-kent-town-sa-5067">Royal Apartments</a> to the market.

The 206-apartment development, which will bring significant new supply to Adelaide's tightly held eastern city fringe, also gives <a href="https://www.apartments.com.au/developers/palumbo">Palumbo</a> the opportunity to bring new life to one of Kent Town's most recognisable watering holes.

[smartcode_project:default project_id=6109 project_image_fid=376073]

Royal Apartments incorporates the historic Royal Hotel, a venue Palumbo Managing Director Daniel Palumbo said has a longstanding connection with the local community.

"Everyone in the area has history with the Royal Hotel," Palumbo told Apartments.com.au.

"It was quite an active pub and social gathering place for locals. We want to bring it back to its former glory."

[smartcode_project:default project_id=6109 project_image_fid=376072]

The wider development will comprise two residential towers alongside the restored hotel, sitting on North Terrace opposite the Adelaide Park Lands.

For Palumbo, the project also marks a return to familiar territory.

The developer completed East Park Apartments next door more than a decade ago and jumped at the opportunity to develop in Kent Town again when the Royal Hotel site became available.

"The opportunity emerged, and we moved to secure the site," Palumbo said.

"We were approached by the previous landowner, who said they had extensive commitments in Sydney and weren't in a position to deliver the project.

"We took over the site and within six months recut the design scheme to be more in keeping with the type of development we want to bring to Adelaide.

"Now we're on the market and those changes have really resonated with local buyers."

That has translated into a strong start to sales, with 33 apartments transacting in the project's first 35 days.

Palumbo said the early purchaser profile had been consistent with the group's traditional focus on owner-occupiers rather than investor-led apartment stock.

"Local owner-occupiers have always been our market," he said.

"There are always some investors, but we've never developed what would be called traditional development stock. Owner-occupiers are very much our market."

[smartcode_project:default project_id=6109 project_image_fid=376068]

The buyer mix has been diverse so far, with downsizers and younger professionals both accounting for a significant portion of early sales.

South Australia's current stamp duty settings, which allow&nbsp;eligible homeowners in South Australia aged 60 savings of up to $103,830 on stamp duty when they downsize to a new property valued at up to $2 million,&nbsp;have helped encourage downsizer activity, while younger buyers in their late 20s and early 30s have been attracted to the opportunity to live immediately outside the CBD while still being able to walk into the city.



Location has been a major part of the proposition for both buyer cohorts.

[smartcode_project:default project_id=6109 project_image_fid=376075]

Royal Apartments sits on North Terrace directly opposite the Adelaide Park Lands, with residents able to walk through the parklands toward the East End, Rundle Street and Rundle Mall.

Apartments have been positioned to capture views across the parklands, Adelaide skyline, Botanic Gardens and Adelaide Hills.

Palumbo believes the scarcity of developable land along this section of the Park Lands makes the site particularly difficult to replicate.

"There's very few allotments on that side that can be developed," he said.

"If this location was in New York and you were sitting on Central Park, you'd be talking about a $60 million apartments."

Royal Apartments will offer a broad mix of residences, ranging from one-bedroom apartments through to four-bedroom sub-penthouses and penthouses.

Current listings include one-bedroom apartments from $680,000, while larger three and four-bedroom residences are priced around $2.5 million.

Residents will have access to a swimming pool, gym, barbecue and recreation areas, residents' lounge and dining space, and a communal deck.

[smartcode_project:default project_id=6109 project_image_fid=376067]

The apartments will feature generous balconies, while secure parking, bicycle storage and storage cages will also be provided.

A porte-cochère-style arrival and drop-off area has also resonated with buyers, particularly those attracted to being able to walk into the CBD during the day while retaining secure vehicle access at home.

Palumbo is acting as developer, architect and builder on Royal Apartments, continuing the vertically integrated model it has used across its South Australian portfolio.

The group was also behind the $150 million Sofitel Adelaide, the 251-room five-star hotel and residential tower which opened in 2021.

Palumbo said Royal's launch had come at an interesting time for the broader Adelaide apartment market.

Buyer confidence had initially been impacted by uncertainty surrounding the Federal Budget and broader economic conditions, but Palumbo believes sentiment is beginning to improve against a backdrop of significant investment flowing into South Australia.

He pointed to increased activity across defence and resources, including Olympic Dam, as potential long-term drivers of the state's economy and housing market.

"Money is starting to flow into Adeliade, significant amounts as Adelaide bucks the trend of the rest of the country.," Palumbo said.

"There's a lot of activity in the economy over the next decade. I think more investment will come into this market."

Early works on Royal Apartments are expected to commence this year, with major construction activity and cranes anticipated on site from early next year.

[smartcode_project_cta:default project_id=6109]

Palumbo's return to Kent Town strikes early chord with buyers

Go-to builder-developer <a href="https://www.apartments.com.au/developers/graya">GRAYA</a> is continuing to bulk out its already impressive and diverse apartment portfolio across South East Queensland. Their latest milestone is securing development approval for Silk, its boutique riverfront apartment development in St Lucia.

The approval clears&nbsp;the way for the team to begin construction planning for the 22-residence project.

<a href="https://www.apartments.com.au/new-apartments/silk-st-lucia-16-18-sandford-street-st-lucia-qld-4067">Silk</a> will rise 15 levels from an 810 sqm site at 16-18 Sandford Street, occupying a prominent bend of the Brisbane River with a prized northern aspect across Orleigh Park toward the Brisbane CBD.

The approved scheme will comprise 16 split-floor and six full-floor residences, continuing GRAYA's move into larger-format apartment developments targeting Brisbane's prestige owner-occupier market.

The project has been designed around the site's broad river frontage and dual-direction views, with GRAYA prioritising larger residences, privacy and outlook over apartment yield.

<img alt="Silk St Lucia" data-entity-type="file" data-entity-uuid="aa5c2349-f96c-4914-a812-1f2cd6827af8" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-26%20at%208.25.44%E2%80%AFAM.png?VersionId=WY0vEU_7vYjeRJKQHiCwFdMxu8PvFh52" />

GRAYA Co-founder and Chief Executive Officer Rob Gray said the project had been shaped around local homeowners wanting to remain in St Lucia without maintaining a traditional family home.

"St Lucia is one of those suburbs people do not want to leave," Gray said.

"They know the river, the trees, UQ, the golf course, Toowong and Indooroopilly, and that familiarity is hard to replace.

"True riverfront opportunities here are exceptionally scarce. What we have designed at Silk is a way to stay in the suburb people love, with the scale and privacy of a private home and far less to maintain.

"This is not typical apartment product. It is a proper home on the river, and that is exactly what this market has been missing."

The approval comes as new apartment development continues to increase across the St Lucia and neighbouring Toowong corridor, although direct riverfront sites remain considerably more tightly held.

GRAYA Co-founder and Managing Director Andrew Gray said securing the approval had removed a significant element of development risk from Silk.

"Genuine riverfront sites of this quality in St Lucia are not something that comes up regularly," Gray said.

"The approval removes a substantial layer of execution risk, and the location underwrites demand in a way very few inner-city sites can.

"The fundamentals here are as strong as anything we have assessed in Brisbane."

<img alt="Silk St Lucia" data-entity-type="file" data-entity-uuid="d0f3d734-65e1-48e8-8ed3-2e0715ffcdd9" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-08-26%20at%208.25.56%E2%80%AFAM.png?VersionId=sOLSs_jdHkXLWbBKzRyayf5BfTb2vPsD" />

Silk will see GRAYA return to a stretch of the Brisbane River where it already has recent construction experience. The vertically integrated group recently completed ARC in neighbouring Toowong as builder for developer Spyre, delivering the riverfront project on a constrained site.

GRAYA will take a different role at Silk, controlling the project from design and development through construction and aftercare under its vertically integrated model.

The development will include a gym and resident leisure areas at ground level, integrated with the river's edge.

Silk joins a growing pipeline for GRAYA across Brisbane and the Gold Coast, which includes Enclave, The Gallery, Coral and Ripple.

The developer-builder has also recently lodged plans for its largest project to date, <a href="https://www.apartments.com.au/new-apartments/the-silo-19-chester-street-newstead-qld-4006">The Silo</a>, a proposed <a href="https://www.apartments.com.au/news/qld/graya-buys-frasers-newstead-site-plans-the-silo-between-james-street-and-gasworks-precincts">$700 million mixed-use development</a> in Brisbane's James Street precinct.

Silk is expected to predominantly target local owner-occupiers and prestige buyers seeking a permanent riverfront home in Brisbane's inner west.

Registrations of interest are now open, with further details on the project and construction program to be released as it progresses.

<hr />
<h2>SILK PROJECT FACTS</h2>

Developer-builder: GRAYA

Project: Silk

Location: 16-18 Sandford Street, St Lucia

Apartments: 22

Built form: 15 levels

Site: 810 sqm riverfront holding

Mix: 16 split-floor and six full-floor residences

Status: Development approved

Next step: Construction planning underway

[smartcode_project_cta:default project_id=152168]

GRAYA greenlit for riverfront St Lucia apartment development, Silk

National Australia Bank (NAB) has brought forward the timing of the first RBA cash rate cut by three months.

NAB is now expecting a cut in February, in line with ANZ and Westpac, having initially thought a cut wouldn't come until May.

Commonwealth Bank, the nation's largest lender, still thinks the first cut will come in December.

NAB changed its call following the August monthly inflation figures that were released at the end of September, showing it had dropped to 2.7 per cent.

"The risk has been skewed to a first cut earlier in 2025, and today’s change acknowledges the balance of risks has likely shifted sufficiently for the RBA to feel comfortable cutting a little sooner than we earlier expected," NAB noted in its latest update.

They added that the cadence of the cuts may be faster than its central profile.

"Domestic inflation pressures are cooling, but only gradually, and we continue to expect the conditions for a cut will not be in place this year.

NAB believes the easing cycle will end at 3.1 per cent by early 2026, which is five cuts from the current 4.35 per cent cash rate.&nbsp;

CBA also thinks 3.1 per cent will mark the end of the cutting cycle, while Westpac is forecasting 3.35 per cent, and ANZ is the most pessimistic at 3.6 per cent, which would be just three interest rate cuts.

<h2>What would a rate cut in February look like for borrowers?</h2>

According to&nbsp;<a data-saferedirecturl="https://www.google.com/url?q=https://link.mediaoutreach.meltwater.com/ls/click?upn%3Du001.IVvjJ-2BPT0A8C3VxtqKc6e3bj5hBuw27WFEYqovsYs7kPsgFulYrdOzeP8gI7CybJOya3_RgrM7qq-2BfK-2FtAHeRBLv5Qrb-2Bii5fzjLeKcP4w-2FkNgJPXygpiRhVUan3WV3QEggcf617UC8Z60RjQJZAqx7PiO7FtVJQSn0D46Zc3iTVP0kAhTTzG51cPpa5hrqz1OkSA-2BiXAxUajQ686MTtiseWBIdMdknd83aB7cOVgXlVTeHCGf3-2BcMHwfvI8TYlkUovqEhn4dj0KXf2eJGpb9-2BBv20hPXdLlPP9yD7DvFFDBM5yrTqxvcCiMfAsW1onD-2FcriL628eYdhNQE7bwzYrxcOYnmaYfRhGl-2FEHQ6eK2uQcLxs6Cbu6Dx0bYvpi5A6enmxMWU5TkcRYrP6Z8GbXZYtc5qSoKu6eWFBQR9K7fsjXwHMmby3D3X6Yx-2BxcDcdRruTG&amp;source=gmail&amp;ust=1727774368149000&amp;usg=AOvVaw2vK2ujS77CHs9VRvSSXzLC" href="https://link.mediaoutreach.meltwater.com/ls/click?upn=u001.IVvjJ-2BPT0A8C3VxtqKc6e3bj5hBuw27WFEYqovsYs7kPsgFulYrdOzeP8gI7CybJOya3_RgrM7qq-2BfK-2FtAHeRBLv5Qrb-2Bii5fzjLeKcP4w-2FkNgJPXygpiRhVUan3WV3QEggcf617UC8Z60RjQJZAqx7PiO7FtVJQSn0D46Zc3iTVP0kAhTTzG51cPpa5hrqz1OkSA-2BiXAxUajQ686MTtiseWBIdMdknd83aB7cOVgXlVTeHCGf3-2BcMHwfvI8TYlkUovqEhn4dj0KXf2eJGpb9-2BBv20hPXdLlPP9yD7DvFFDBM5yrTqxvcCiMfAsW1onD-2FcriL628eYdhNQE7bwzYrxcOYnmaYfRhGl-2FEHQ6eK2uQcLxs6Cbu6Dx0bYvpi5A6enmxMWU5TkcRYrP6Z8GbXZYtc5qSoKu6eWFBQR9K7fsjXwHMmby3D3X6Yx-2BxcDcdRruTG" target="_blank">Canstar</a>, if there is a cut in February, a borrower with a $600,000 loan today and 25 years remaining would see their monthly repayments drop by $92.&nbsp;

<table border="1" cellpadding="0" cellspacing="0">
	<tbody>
		<tr>
			<td colspan="3">
			Impact of 0.25% pt cut in February 2025
			</td>
		</tr>
		<tr>
			<td>
			Current loan size
			</td>
			<td>
			Drop in monthly repayment
			</td>
			<td>
			New monthly repayment
			</td>
		</tr>
		<tr>
			<td>
			$600,000
			</td>
			<td>
			-$92
			</td>
			<td>
			$3,907
			</td>
		</tr>
		<tr>
			<td>
			$750,000
			</td>
			<td>
			-$114
			</td>
			<td>
			$4,884
			</td>
		</tr>
		<tr>
			<td>
			$1M
			</td>
			<td>
			-$153
			</td>
			<td>
			$6,512
			</td>
		</tr>
		<tr>
			<td colspan="3">
			Source:&nbsp;<a data-saferedirecturl="https://www.google.com/url?q=https://link.mediaoutreach.meltwater.com/ls/click?upn%3Du001.xWMOP9hChsvn-2BC9O-2FebBihXIZ4cEzbiuENdxm-2Bx3-2FYEEgYMhZlKWNj5Zzy1YZ56RuASD_RgrM7qq-2BfK-2FtAHeRBLv5Qrb-2Bii5fzjLeKcP4w-2FkNgJPXygpiRhVUan3WV3QEggcf617UC8Z60RjQJZAqx7PiO7FtVJQSn0D46Zc3iTVP0kAhTTzG51cPpa5hrqz1OkSA-2BiXAxUajQ686MTtiseWBIdMdknd83aB7cOVgXlVTeHCGf3-2BcMHwfvI8TYlkUovqEhn4dj0KXf2eJGpb9-2BBv20v2akwr6-2BqLyRrlEgkJ4J-2BCCyY0x189xEHZA4Ylf8c7ChBqNIkhmftZzoFuZKFn43pw3oJVg2o1gumrpdA-2B7MB-2FBtmL2rFCI-2FXORATQHySCLVOMg7Vywv-2BqnnQUAtDz6XkvpwxdHFXh70VwKazzhJsICilEYOvP4ju0sIfi5g6TL&amp;source=gmail&amp;ust=1727774368149000&amp;usg=AOvVaw2qVnp6oqATgqDUi2Frm22q" href="https://link.mediaoutreach.meltwater.com/ls/click?upn=u001.xWMOP9hChsvn-2BC9O-2FebBihXIZ4cEzbiuENdxm-2Bx3-2FYEEgYMhZlKWNj5Zzy1YZ56RuASD_RgrM7qq-2BfK-2FtAHeRBLv5Qrb-2Bii5fzjLeKcP4w-2FkNgJPXygpiRhVUan3WV3QEggcf617UC8Z60RjQJZAqx7PiO7FtVJQSn0D46Zc3iTVP0kAhTTzG51cPpa5hrqz1OkSA-2BiXAxUajQ686MTtiseWBIdMdknd83aB7cOVgXlVTeHCGf3-2BcMHwfvI8TYlkUovqEhn4dj0KXf2eJGpb9-2BBv20v2akwr6-2BqLyRrlEgkJ4J-2BCCyY0x189xEHZA4Ylf8c7ChBqNIkhmftZzoFuZKFn43pw3oJVg2o1gumrpdA-2B7MB-2FBtmL2rFCI-2FXORATQHySCLVOMg7Vywv-2BqnnQUAtDz6XkvpwxdHFXh70VwKazzhJsICilEYOvP4ju0sIfi5g6TL" target="_blank">www.canstar.com.au</a>. Starting rate is the RBA existing average owner-occupier variable rate of 6.36%. Assumes banks pass the cash rate cut on in full the month after the meeting.
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Canstar Data Insights Director, Sally Tindall, says if core inflation continues to track in the right direction, or unemployment starts to accelerate significantly, we could well see a cash rate cut as early as February of next year.

“All four big banks now believe the RBA will be ready to cut the cash rate in just over four months’ time, if not before, in the case of CBA.

“However, the outlook for both inflation and unemployment is still highly uncertain. A couple of wobbly sets of inflation data could see the RBA holding for longer, particularly if unemployment remains relatively steady."

&nbsp;

Commonwealth Bank, the nation's largest lender, still thinks the first cut will come in December.

NAB bring forward first RBA cut to February 2025

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GUEST OBSERVER
Today’s decision to leave the cash rate unchanged came as no surprise to either economists or market participants. As such, the focus was on the Governor’s accompanying Statement which turned out to be basically a carbon copy of last month’s wtatement.
With concerns around the outlook in China weighing on global markets we thought that the Statement might contain something new on China, but the Governor simply repeated last month’s comment that there has been, “some further softening in conditions in China and east Asia of late”.
The Governor’s comments on the Australian labour market are unchanged which means that their forecasts for a flat unemployment rate over the next year remain intact.
There were only two material changes from last month’s statement. The Governor notes that dwelling prices “continue to rise strongly in Sydney and Melbourne” (last month only Sydney was cited). And Steven’s stated that “the available information suggest that moderate expansion in the economy continues” (last month he stated that “most of the available information.....”)
The Governor again refrained from making any comments around the AUD needing to move lower. In our view, the AUD is currently trading in the RBA’s ‘comfort zone’. It’s has fallen enough to help the Australian economy rebalance without posing a risk to the near term inflation outlook. We see the AUD falling further over the next few months.
The outlook
Markets are assigning a 50% probability that the RBA eases policy again in 2015 (a 29% chance of a November rate cut is priced). In our view, the case to leave rates unchanged is stronger than the case for a near term rate cut so we have the RBA on hold at 2.0%. The forward looking indicators of the labour market are consistent with a flat unemployment while the lower AUD is helping the economy to rebalance. The RBA would need to downgrade their growth forecasts in the November Statement on Monetary Policy to justify a rate cut and in our view that looks unlikely.
The focus for RBA enthusiasts turns to a run of speeches by RBA officials (Assistant Gov. Debelle [7 Oct.], Head of Economic Research Simon [8 October] and Deputy Gov. Lowe [13 Oct]. On the data front, QIII inflation data towards the end of the month and the jobs report next week are the most important pieces of economic information ahead of the November meeting. A decent employment report next week would probably see market pricing for a November rate cut recede. But a poor print and a low CPI outcome would mean that the November meeting would be seen as ‘live’. 
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Gareth Aird is economist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905" target="_blank">here</a>.
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jchancellor-FAypfDUnLy

Melbourne gets added to the strong as October RBA issues a carbon copy of last month’s statement: Gareth Aird

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The Reserve Bank of Australia (RBA) has kept the official cash rate at 2%, for the fifth month. The meeting noted regulatory measures are helping to contain risks that may arise from the housing market. 
CoreLogic RP Data head of research Tim Lawless said the flat rate of growth across the Sydney housing market last month, together with a slowdown in investment related mortgage activity wasn’t enough to sway the RBA into another interest rate cut this month. 
"We saw the rate of capital gain flatten out across the Sydney housing market during September, however the trend rate of growth remains very strong, with Sydney values almost 17% higher over the past twelve months and 4.6% higher over the September quarter," he said.
"In contrast, Australia’s second largest housing market has gathered some momentum over the past quarter, outperforming Sydney with a 2.4% rise in dwelling values last month and a 7.4% shift over the quarter. Other housing market data is suggesting that conditions may be slowing, with clearance rates reducing to the low 70% range in both Sydney and Melbourne on higher volumes and the number of homes available for sale rising higher than a year ago, providing prospective buyers with more options and less urgency in their decision making. 
"With the Aussie dollar holding around the US$0.71 mark, inflation remaining low and labour market conditions relatively steady, the RBA is in a good position to keep interest rates at their record lows.
"The slower capital gain conditions in Sydney may give the RBA some flexibility when considering future interest rate movements, however if the Melbourne market continues to gather pace as Sydney slows down, the effects of slower conditions in Sydney may not be seen in the headline readings for housing market performance. 
"With interest rates remaining on hold, borrowers are still enjoying historically low mortgage rates which should continue to drive demand for housing."
 
Laing+Simmons managing director Leanne Pilkington supported the RBA’s decision to leave interest rates on hold as the wider market undergoes several key shifts heading towards summer.
 
“By maintaining the low interest rate environment for the foreseeable future, the Reserve Bank is providing stability to a real estate market that is otherwise undergoing a significant transition at the moment,” Ms Pilkington said.
 
“Firstly – and at long last – we are beginning to see new stock come online and present some more options for buyers. This is the result of a combination of factors, including a new wave of development bringing new supply as well as the spring selling season playing out.
 
“As a consequence auction clearance rates have been lower in recent weeks, albeit from an extremely high base, as buyers exercise the discretion that comes with more alternatives.
 
“Nevertheless, warnings about auction bloodbaths and plummeting prices remain the domain of doomsayers as opposed to actual experts in the market."
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mick.cee-iDmgDDAmu8

RBA holds rates at 2% for fifth month

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Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.
The global economy is expanding at a moderate pace, with some further softening in conditions in China and east Asia of late, but stronger US growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia's terms of trade are falling.
The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease policy. Equity market volatility has continued, but the functioning of financial markets generally has not, to date, been impaired. Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.
In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.
In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney and Melbourne, though trends have been more varied in a number of other cities. Regulatory measures are helping to contain risks that may arise from the housing market. In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved lower and been more volatile recently, in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.
The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.
 
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Varied housing prices noted with Melbourne stronger: RBA Governor Glenn Stevens' October 2015 meeting statement

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With one of the country’s biggest lenders announcing lending restrictions to certain suburbs, could this signal changes which could have a much broader impact to the property market? 
Tiered pricing 
It’s not unrealistic for banks to change pricing structures and cap LVR’s based on suburbs. This could take the form of higher rates and/or low LVR caps for certain ‘high risk’ suburbs and lower rates and higher LVRs for what lenders consider a ‘safer’ suburb. A recent example was ING DIRECT’s decision in June to restrict investment lending in NSW to a maximum LVR of 80% (usually 90%), but this has since been restricted to 80% in all other states as well. If this becomes a market-wide issue, this could impact existing owners if they decided to refinance under new rules by making such a move to the goalposts.
Specific apartment developments under the spotlight 
If lenders start to put a red flag on suburbs, specific apartment developments which are deemed high risk or where there’s a glut of development, might be next. This could squeeze a huge percentage of investors out of the market,  reducing the affordability and ‘entry point’ for many first time buyers and see them locked out of certain developments but leave the gate open for overseas investors. 
These two changes could see a big shift in the way people buy property altogether by changing buying habits, upping rates and lowering accessibility for new buyers. 
Change buying habits
If either of these changes occur, we’ll see a shift in the market. Investors will flood certain suburbs because it’s the only places they can buy and owner occupiers will be locked out of certain suburbs due to LVR restrictions. This could have a big impact on property prices - and that of surrounding suburbs - and at a higher level, the demographic make-up of a city. 
Increase in number of declined loans 
Being knocked back for finance based on a building type or suburb could have a residual impact on a borrower’s ability to apply for loans. This could also impact a borrowers credit score more broadly. 
Higher rates across the board 
If tiering and capping presents too much of a logistical challenge for lenders combined with a backlash from borrowers, lenders may choose to cover their credit risk by simply increasing interest rates across the board. 
Lenders withdrawing from some areas altogether 
Mining towns have already been mentioned as high risk areas and if we see large lenders withdraw form these areas, smaller lenders will likely follow suit. This trend tends to apply for most high level changes like pricing or lending criteria – when the big guys move, the smaller lenders follow.
STEVE JOVCEVSKI is property expert at Mozo.com.au.
FOR MORE INSIDER INFORMATION ON PROPERTY LOANS, RATES AND MORE: DOWNLOAD THE<a href="http://propertyobserver.com.au/forward-planning/tools/ebooks-and-webinars/42368-get-loan-savvy-expert-tips-for-a-first-time-investment-or-refinancing-loan-in-a-free-ebook" target="_blank"> FREE MOZO EBOOK</a>.
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Lending criteria changes have potential to lock owner-occupiers out of market: Mozo's Steve Jovcevski

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The Australian Securities and Investments Commission has released a calculator to help potential investors work out three key factors behind an interest-only mortgage.
The interest-only mortgage calculator, <a href="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/interest-only-mortgage-calculator?utm_medium=email&amp;utm_campaign=MoneySmart+tips+-+October+2015&amp;utm_content=MoneySmart+tips+-+October+2015+CID_0285e24379a5279d45b24b562a5b1177&amp;utm_source=CampaignMonitor&amp;utm_term=interest-only%20mortgage%20calculator" target="_blank">available here</a>, crunches the numbers behind the repayments before and after the interest-only period, the total cost of an interest-only mortgage and how much more you will pay with an interest-only mortgage compared to a principal and interest loan.
ASIC has also released a handy guide to interest-only loans for property investors <a href="/expert-insights/finance/asics-interest-only-guide-for-property-investors">available here</a>, as well as a checklist for property investors considering <a href="/expert-insights/finance/are-interest-only-mortgages-in-your-interest-asic">interest-only payments for mortgages</a>
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ASIC releases interest-only mortgage calculator

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The CAMA RBA Shadow Board believes the RBA will keep the current interest rate on hold at 2% due to a weakening outlook for the global economy and shaky financial markets.
According to the CAMA RBA Shadow Board, due to the latest estimates of inflation at 1.5%, below the RBA’s target band of 2-3%, and delayed action by the US Fed, 72% of Shadow Board members believe the RBA will keep rates as they are.
The said the Australian property market is still looking strong, with the construction PMI surging to 53.8 in August, from 47.1 in July. 
"However, in the same month building permits have fallen by nearly 7%. The local stock market has been suffering considerable losses, the S&amp;P/ASX200 closing below 5000 earlier this week. With heightened uncertainty affecting global capital markets, it is unlikely domestic share prices will rebound significantly," it said.
"The Federal Reserve Bank has delayed the highly anticipated increase in the federal funds rate, citing low inflationary pressure and fragile capital markets. Delayed action by the Federal Reserve is likely to reduce the pressure to increase the domestic cash rate. In Europe, attention has shifted from the Greek debt crisis to the unabating refugee crisis. China’s economy continues to slow, with its manufacturing sector contracting for the second month in a row. Many experts are now expecting China’s GDP growth to fall to 6%. Global capital markets continue to pose threats.
"The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2% equals 25% (27% in September). The estimated need for an interest rate increase lies at 62% (65% in September), while the need for a rate decrease is estimated at 13% (8% in September). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 68% (six percentage points down from September), in a required cash rate decrease 14% (9% in September) and in a required hold of the cash rate 18% (unchanged)."
 
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RBA to keep interest rates on hold

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GUEST OBSERVER
Fixed rate home loan demand fell significantly last month. 
According to the latest national home loan approval data from Mortgage Choice, fixed rate home loans accounted for just 14.41% of all loans written throughout the month of September – down from 17.41% the month prior. 
Demand for fixed rate home loans hasn’t been this low for more than four years. 
The last time fixed rate demand was this low was back in August 2011, when this type of home loan accounted for 13.78% of all home loans written. 
It seems borrowers are increasingly opting for variable rate home loans as they believe rates are unlikely to rise for some time yet. And, if the minutes of the Reserve Bank of Australia’s September Board meeting are anything to go by, the official cash rate could be left on hold for the foreseeable future.
In the September Board meeting, the Reserve Bank said inflation was forecast to remain consistent with the target over the next one to two years. 
If this proves to be the case, we could see rates left on hold for some time yet. 
Across the country, demand for fixed rate home loans was weakest in Victoria, where this type of product accounted for just 8.61% of all loans written. 
Western Australia was not far behind, with fixed rate home loans accounting for 12.35% of all loans written. At the other end of the spectrum, fixed rate demand was strongest in New South Wales, with this type of product accounting for 16.65% of all loans written.
Of the variable rate loans on offer, ongoing discount products once again proved the most popular with borrowers, with this type of product making up 50.51% of all loans written in September. 
While the property market is showing signs of volatility at the moment, one thing is constant – low rates. 
While rates are low and there is little talk of future rate hikes, borrowers will continue to opt for variable rate products.
<a href="/images/2015/10/02/Screen%20Shot%202015-10-02%20at%208.08.27%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/10/02/Screen%20Shot%202015-10-02%20at%208.08.27%20AM.png" alt="">
 
John Flavell is chief executive officer <a href="https://www.mortgagechoice.com.au/" target="_blank">Mortgage Choice</a>.
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Fixed rate demand hits four year low: Mortgage Choice's John Flavell

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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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bevans-rYk9SxEa4r

Benign outlook for growth and inflation: Westpac's Bill Evans

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GUEST OBSERVER
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A shift in the balance of risks in Australia has prompted us to forecast that the RBA will ease rates twice more, in H1 2016.
This shift in tact means that the probability that the AUD overshoots its fundamental fair value has risen and we revise our forecasts lower. The AUD will now trough at USD0.64.
This means that we are now expecting the AUD/NZD to depreciate modestly. We look for the cross to ease towards 1.0850 by the middle of 2016.
The AUD has continued to trade in a fashion consistent with an overshooting framework for the currency (as outlined in our FX Insight published on 14 September). That is to say, global investors have diverted their collective attention away from events in both the domestic economy and broader commodity markets, and have been more focused on financial market volatility.
In the period ahead, the focus is set to shift back to the domestic economy. ANZ is expecting the RBA to ease rates by a further 50 basis points next year. While we do not expect growth to deteriorate drastically, we do think that growth will not be sufficient over 2016 and 2017 to eat into spare capacity in the economy.
Hence, extra policy support will be needed. Risks to global growth remain to the downside, while housing market activity and the weakness in the AUD will have a diminishing impact on the domestic economy as they start to slow. 
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For some time we have highlighted the fact that we expected an overshoot in the AUD and that risks remain tilted to the downside. This shift in our RBA call makes those risks more tangible, and as such prompts us to further reduce our forecasts, with the expectation of a move deeper into overshoot territory.
We take a further 3 cents off of our terminal AUD forecast and expect the AUD to be at USD0.64 by the middle of 2016.
This will have more serious consequences for our expectations for the AUD/NZD cross. A large portion of our previous bullishness on the cross was driven by a divergence in the biases of central banks, where we expected the RBNZ to maintain it easing track, while the RBA to have remained cautiously optimistic.
With the RBA’s bias now matching that of the RBNZ, we see some near term downside in this cross. That said, this is not a shift that will justify a large move – we simply expect the cross to trade back down towards the bottom of its recent range at 1.0850.
 
Daniel Been is ‎senior FX strategist, <a href="https://www.anz.com/corporate/research/" target="_blank">ANZ</a>.
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RBA cuts make overshoot more certain: ANZ's Daniel Been

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GUEST OBSERVER
We now expect the RBA to cut the cash rate by a further 50bps next year, taking the cash rate to 1.50%. Pinpointing the timing of the cuts is tricky, but we are pencilling in 25bp cuts in February and May at this stage. 
Since the Bank cut the cash rate by 50bps earlier this year, we have consistently characterised the risks as being towards further monetary policy easing at some stage. We are now making that our central case. 
The change of view has largely been driven by two factors and our judgement that growth will not be sufficient over 2016 and 2017 to eat into spare capacity in the economy. Hence, extra policy support will be needed. 
First, we recently downgraded our global growth forecasts to ‘more of the same’ from previously expecting a modest pick-up. The downgrade reflects a softer profile for EM growth. Gaining traction in global growth has remained difficult despite very accommodative monetary policy globally. The fact that ‘everyone’ has wanted a lower currency is telling in our view. Risks to growth in Australia’s major trading partners in Asia, and Australia’s terms of trade, are skewed to the downside, with China in particular facing several significant challenges. 
Secondly, while current momentum in Australia’s non-mining economy is sufficient to keep the RBA ‘content’ this year, we see waning support to non-mining growth from housing market activity and the sharply lower AUD next year. Governor Stevens has previously noted that growth in the non-mining economy needs to be above average for a couple of years to eat into spare capacity – at best it is currently around average with little prospect of improving much in our view. At the same time, mining investment has much further to fall. 
With this backdrop, it is difficult to see how inroads can be made into an elevated unemployment rate. Even an expected unchanged jobless rate for two years – as currently forecast by the RBA – would ultimately be very uncomfortable for a central bank, especially if asset prices are flat and domestic interest rates are above global levels. The economic backdrop we have outlined above points to greater risk that unemployment worsens rather than improves over the next 12-24 months. Governor Stevens’ ‘path of least regret’ suggests he will need to cut rates again. 
Where could we be wrong? (i) A large China stimulus, but this would represent just a delay and could eventually make things worse if it furthers inflates imbalances in their economy. (ii) Momentum in the non-mining economy persists for longer than we expect. We actually expect most domestic activity indicators to remain relatively solid over the next few months; it’s next year where we see things softening. 
FIGURE 1. MORE CUTS NEEDED TO EAT INTO UNEMPLOYMENT
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GLOBAL GROWTH TRACTION REMAINS HARD WON 
For some time we have been expecting global growth to improve. While we remain constructive on the outlook for the US and Europe, we recently revised down the outlook for world GDP growth (see ANZ Live) and view the risks as being tilted to the downside. Emerging market (EM) economies are now half of global economic activity and the lion’s share of economic growth. It is these economies that are slowing. Our still constructive, even optimistic, view of global growth has it steady at around 3.5% for the next two to three years. 
The risks to this view are to the downside and ultimately centre on EM and China where: growth is slowing in a structural sense; there has been a very significant increase in leverage since the GFC and the spectre of rising bad debts lingers, both limiting the prospect of upside surprises to growth; a changing composition of growth – ie less steel intensive – which is less growth-friendly for Australia in the near term; and policymakers face the challenge of keeping reform ticking over given that growth is slowing. 
FIGURE 2. DOWNSIDE RISKS TO AUSTRALIA’S MAJOR TRADING PARTNER GROWTH
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NON-MINING ACTIVITY WILL WANE 
Despite sharp falls in mining investment and the drag on national income from lower commodity prices, overall growth in Australia has been sufficient to keep the unemployment rate broadly unchanged over the past year or so. Heading into 2016, however, we see two key supports to growth so far – housing activity and the lower AUD – waning. 
HOUSING 
Robust housing market activity, largely in Sydney and Melbourne, has supported growth via strong housing construction and positive effects on consumer spending (directly on household goods and indirectly through ‘wealth effects’). While further growth in housing construction is anticipated over the next 6-9 months, there are clear signs that new housing construction will then peak (Figure 3). While we expect dwelling construction to remain at a high level, particularly in Sydney, the impetus to growth will wane. 
At the same time, cooler housing markets in Sydney and Melbourne, particularly investor activity, would remove a clear hurdle for the Bank to cut rates further. Sentiment in auction markets in the major cities has clearly shifted and already suggests that house price momentum is slowing (Figure 4). Signs are also emerging that borrowing by housing investors has started to moderate in-line with regulators’ plans (Figure 5). We expect investor activity to moderate further.
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Combined with the threat of further regulatory action by APRA if needed, our view is that the Bank will become reasonably comfortable that further rate cuts will not pose significant macro or financial stability risks down the track.
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<pre> <a href="/images/2015/09/24/Screen%20Shot%202015-09-24%20at%204.32.37%20PM.png" target="_blank">Click to enlarge</a> <img src="/images/2015/09/24/Screen%20Shot%202015-09-24%20at%204.32.37%20PM.png" alt=""> </pre>
THE CURRENCY
The belated depreciation of the AUD has clearly supported many parts of the economy. Most evidently, the contribution from net services trade has shifted from the largest ever subtraction from GDP growth to the biggest ever contribution to growth (Figure 6). Along with strong support from housing/property markets, the non-mining services part of the economy has strengthened noticeably. Over 90% of jobs growth over the past year came from just three services industries: professional services, health, and hospitality.
The key here is that even with further expected falls in the AUD, the impetus to overall growth from the currency is expected to diminish (Figure 6 highlights this).
While the AUD continues to play its ‘shock absorber’ role (Figure 7), overall GDP growth remains soft at around 2% whichever way one cuts the data. Even if this understates true growth in the economy, it’s clear that growth is not above average which is where it needs to be to eat into economic spare capacity and send the unemployment rate lower. 
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INFLATION NO OBSTACLE TO MONETARY EASING 
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With growth set to be below trend and spare capacity in the labour market, inflation is likely to remain benign over the next year or so. We expect the inflation ‘pulse’ to remain towards the bottom of the RBA’s 2-3% target range for the medium term. The risks to this forecast, as guided by global factors, are to the downside. 
Global disinflationary pressures are also likely to weigh on inflation. Many studies have shown that global factors are increasingly important, if not dominant, in most countries’ inflation outcomes. Spare capacity in the global manufacturing sector, lacklustre wages growth in developed economies, and persistent weakness in commodity prices are all consistent with a subdued global inflation outlook. 
FISCAL POLICY REMAINS CONSTRAINED 
The other main macro policy lever – fiscal policy – remains relatively constrained despite signs of modestly less restraint recently. Government spending is 20% of GDP. 
The prospect of looser fiscal policy to assist growth is negligible, with the new Commonwealth Treasurer Scott Morrison stating this week that expenditure at over 26% of GDP is “not something that we believe is sustainable”. His comments suggest the current trajectory for a tightening in fiscal policy through smaller underlying cash deficits each year for the next three remains firmly in place. Equally, state governments have given no indication that they intend to stray from their policies of keeping a tight rein on expenditure. 
But what about the pick-up in infrastructure spending? Centred on Sydney, this will provide some modest additional support to overall growth in the coming years. Our view has been, and remains, that this support is relatively modest in the face of ongoing weakness in non-residential building and ongoing large falls in mining and related investment.
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CONFIDENCE BOOST FROM NEW LEADERSHIP NOT ENOUGH
While it is encouraging to see a strong lift in consumer confidence following the change in Australia’s political leadership, it may not be enough to move the dial on the economy in the next 12-18 months. Even if the jump in consumer confidence, and what we expect to see as a jump in business confidence, is sustained over the next six months, that needs to be translated into investment spend and employment growth. We doubt it will, or at least not enough to offset the effects of a softening in property markets and weaker EM growth.
The government needs to focus on two key planks to economic policy, both medium to long term in nature. First, they need to get the government’s finances in order. This is well advanced, but more work needs to be done. As noted above, this will be a headwind to the economy, rather than a support. Second, they need to present a vision for Australia’s economy and communicate and legislate the adjustments to how our economy operates to get there. This takes time and may even come at the cost of growth in the short term.
As we move into 2016, sub-par economic growth in the context of weaker property markets will leave the job of supporting activity, once again, to the RBA. In our view, a modest downward adjustment to the cash rate will ensure stable unemployment and support economic activity over the medium term. 
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Warren Hogan is chief economist and Justin Fabo is senior economist, <a href="https://www.anz.com/corporate/research/" target="_blank">ANZ Research</a>.
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