Developer <a href="https://www.apartments.com.au/developers/bottega-property-group">Bottega House</a> has secured council approval for its first Brisbane project - a $270 million luxury residential development on an absolute riverfront site in leafy St Lucia.&nbsp;

The 15-storey project, known as <a href="https://www.apartments.com.au/new-apartments/st-lucia-by-bottega-house-180-macquarie-street-st-lucia-qld-4067">St Lucia by Bottega House</a> , will occupy a prime north-facing site at 178-180 Macquarie Street, directly fronting the Brisbane River in the established inner-west suburb known for its rowing clubs, golf courses and sprawling University of Queensland campus.&nbsp;

St Lucia by Bottega House will feature a suite of amenities including dedicated wellness spaces, a mineral pool and cold plunge. The project has been positioned to attract affluent owner-occupiers seeking high-quality, house-sized apartments.&nbsp;

Bottega House has been set up by co-directors Nick Malloch, Louis Mennes and Craig Marsh.

Malloch said the project drew inspiration from its Brisbane River setting and leafy inner-west surrounds, while responding to the demands of discerning locals looking to transition from freestanding homes into apartment living.&nbsp;

"With an expansive river frontage and lush green surrounds, we knew we had to create something special that reflects the natural beauty of the location while offering residents masterfully crafted homes," said Malloch.&nbsp;

"Our intent was to complement the project's quiet, private setting by introducing residences that offer a calm retreat and sanctuary from the everyday. The result is a harmonious blend of architecture, interiors and amenity that emphasises wellbeing, comfort and beauty without excess."&nbsp;

Malloch added that project consultants had been carefully selected in alignment with Bottega House's commitment to care, quality and attention to detail. The design team includes architects <a href="https://www.apartments.com.au/architects/plus-studio">Plus Studio</a>, interiors practice <a href="https://www.apartments.com.au/interior-designers/mim-design">Mim Design</a> and landscaping by <a href="https://www.apartments.com.au/architects/urbis">Urbis</a>.&nbsp;

Three-bedroom apartments are expected to start around $5 millio. Selling agents Keenan &amp; Byrne said the pricing strategy for the project was anticipated to achieve upwards of $25,500 per square metre.&nbsp;

The project's development approval this week follows the success of Bottega House's inaugural Queensland project - a 22-storey collection of full-floor sky homes at Broadbeach on the Gold Coast which included the sale of a two-storey penthouse at a record price for a beachside residence.&nbsp;

St Lucia by Bottega House is expected to launch to market in November, with construction anticipated to be completed mid 2029.

[smartcode_project_cta:default project_id=151826]

Joel Robinson

Bottega House to make Brisbane debut with St Lucia riverfront apartment development

<a href="https://www.apartments.com.au/developers/sherpa-property-group">Sherpa Property Group</a> is advancing its affordable apartment model into Brisbane with the acquisition of another site at Cordelia Street in South Brisbane for $27 million.

Sherpa, which has a $1.7 billion pipeline across Southeast Queensland, intends to bring a cohort of apartments exclusively for first homebuyers into its proposed 186-apartment project to be built at 2 Cordelia Street.

The Sherpa model has already been incredibly well received from their Gold Coast projects, where Sherpa Group set aside a number of apartments exclusively for first homebuyers.

The new $320 million project marks Sherpa Group's second development in Brisbane, following its $255 million Symphony project, also on Cordelia Street, which is currently under construction.

Symphony will deliver 146 apartments across 28 levels, offering a mix of one, two and three-bedroom apartments. With 114 already sold, construction by <a href="https://www.apartments.com.au/builders/lps-group">LPS Group</a> is scheduled for completion in 2028.

[smartcode_project:default project_id=7574 project_image_fid=351654]

Sherpa Founder, Christie Leet, said the company was excited to be venturing into Brisbane for its second residential project.

“We’re big believers in the future of Brisbane as we lead into the 2032 Olympics and beyond,” Leet said.

“The success of Symphony has guided us into what will be our second project and we look forward to submitting our plans with council soon so we can deliver yet another quality project to the inner city residential market.

“Our Flourish model has been very well received both in Brisbane and the Gold Coast, and we’re excited to be able to offer some of these apartments again exclusively to first homebuyers to help get them into the property market.

“The model has been extraordinarily well received in our previous projects and it is something we are committed to moving forward.”

2 Cordelia Street will be designed by <a href="https://www.apartments.com.au/architects/hal-architects">HAL Architects</a> &amp; Finegrain and will include Sherpa’s signature residential amenities including pool, gym, recreation, wellness and work from home spaces.

The project will feature ground-floor commercial space, creating a vibrant amenity for residents and the surrounding community.

A development application will be lodged with Brisbane City Council in August on the code compliant site and will be launched to the market early 2027.

Sherpa acquires new site for second Brisbane apartment tower

One of North Sydney's best-known commercial buildings could become hundreds of new homes, with insurance giant Zurich Australia lodging a State Significant Development Application (SSDA) to transform 5 Blue Street into a mixed-use residential development above North Sydney Station.

Rather than demolishing the existing building and starting again, Zurich is proposing an adaptive reuse project that would convert the landmark office building into a 15-level residential development delivering 62 apartments, 86 affordable co-living dwellings, activated retail and significant upgrades to the Blue Street Plaza.

The proposal reflects a growing trend of commercial property owners repositioning ageing office assets into residential housing as Sydney grapples with housing supply shortages and changing workplace demand.

<img alt="Zurich" data-entity-type="file" data-entity-uuid="0bba7d12-06dc-4375-aad7-238c94b21ac5" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-22%20at%2010.42.05%E2%80%AFAM.png?VersionId=NJl5oLAEBDGuPmY3RnyliKODjMc8lvRh" />

Located directly above North Sydney Metro and train station, the 3,051 sqm site occupies one of the most strategically positioned parcels of land on Sydney's Lower North Shore.

Designed by fjcstudio, the proposal seeks to retain and adapt much of the existing structure while creating a contemporary residential address that better connects with the public domain surrounding North Sydney Station.

The application proposes two basement levels, ground floor retail, affordable co-living accommodation across the podium levels, and apartments above, while preserving and enhancing the publicly accessible Blue Street Plaza.

Rather than pursuing maximum apartment numbers, Zurich has opted for a housing mix heavily weighted towards larger owner-occupier residences.

The proposal includes 62 build-to-sell apartments comprising 12 one-bedroom, 19 two-bedroom, 29 three-bedroom apartments and two premium penthouses. It also incorporates 86 affordable co-living dwellings, which would be managed in perpetuity by a Community Housing Provider.

That balance between traditional apartments and affordable housing reflects the NSW Government's push to increase housing diversity around major transport infrastructure.

The proposal has been lodged concurrently with a rezoning application, with Zurich arguing the site is ideally positioned to support additional housing given its immediate proximity to public transport, employment and services.

"The proposal aims to respond to the housing challenges facing Sydney through the delivery of diverse housing types in a highly accessible location," the design report by fjcstudio states. It also seeks to improve pedestrian amenity through upgrades to Blue Street Plaza while creating a high-performing residential building that responds to the surrounding context.

<img alt="Zurich" data-entity-type="file" data-entity-uuid="36082e15-c636-4481-bb68-5a5f6443fe39" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-22%20at%2010.41.36%E2%80%AFAM.png?VersionId=5P6VD.fvmqjQfIG3TWWMRXxQWiQBjeFB" />

Rather than replacing the commercial building, fjcstudio has developed a design that works with the existing structural framework above the rail corridor, an approach that significantly reduces demolition while allowing the site to be repositioned as a mixed-use residential precinct.

The existing structural constraints have informed much of the building's design, including its relationship with Blue Street and surrounding public spaces.

The building has been designed as a slender tower rising above a clearly defined podium, with vertically expressed façades intended to reduce the perceived bulk while reinforcing North Sydney's emerging skyline.

According to fjcstudio, the architectural language responds directly to the surrounding commercial towers while maintaining a finer grain expression more closely aligned with the neighbouring Lavender Bay streetscape.

The tower incorporates articulated façade elements, landscaped podium edges and recessed upper levels to soften its appearance and improve pedestrian amenity below.

A significant component of the proposal is the revitalisation of Blue Street Plaza.

The existing public space has long served as one of the primary pedestrian connections between North Sydney Station, Greenwood Plaza and Blue Street, yet its role is expected to become even more important following the opening of Sydney Metro.

Zurich's proposal seeks to strengthen that role by improving landscaping, introducing new retail frontages, enhancing pedestrian permeability and creating more active edges throughout the day and evening.

Ground floor retail would wrap the plaza, while separate residential and co-living entries have been designed to improve wayfinding without reducing street activation.

Landscape design has been integrated throughout the podium and public realm, softening what is currently one of the most heavily urbanised parts of North Sydney.

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fjcstudio has carefully oriented apartments towards Sydney Harbour and the CBD while using privacy blades and articulated façades to minimise overlooking between neighbouring buildings.

Large framed openings along the western elevation maximise harbour outlooks, while the eastern apartments have been angled towards the south-east to improve privacy from neighbouring development.

The project forms part of the continuing transformation of North Sydney from a predominantly commercial CBD into a genuine mixed-use city centre.

Since the completion of Victoria Cross Metro Station, developers have increasingly shifted their attention towards residential projects capable of leveraging the area's unparalleled transport connectivity.

&nbsp;

FiveX recently lodged plans for a 61-storey, 490-apartment tower that would become one of the tallest residential buildings in North Sydney if approved.

Aqualand continues to expand its Lower North Shore presence following the completion of AURA on Walker Street and its recent St Leonards and Roseville proposals.

Developers are also progressing projects throughout Walker Street, Miller Street and the Victoria Cross precinct as demand for well-located owner-occupier apartments continues to strengthen.

First look: Zurich targets North Sydney office conversion with 148-unit proposal above Metro station

Busy developer Aqualand Prestige has formally taken the next step in its expansion across Sydney's Lower North Shore, lodging a State Significant Development Application (SSDA) for its long-held Archer Street site in Chatswood.

The application covers <a href="https://www.apartments.com.au/new-apartments/51-55-archer-street-chatswood-nsw-2067">51-55 Archer Street</a>, a 1,767 sqm amalgamated site on the eastern edge of the Chatswood CBD, where the developer is seeking approval for a 45-level mixed-use tower delivering 114 apartments, including a significant affordable housing component, alongside retail, commercial space and six basement levels of parking.

The SSDA marks the latest milestone for a project Aqualand has been quietly progressing over the past two years. The developer first secured the site for its Aqualand Prestige platform before undertaking an alternative design excellence process with PTW Architects, ultimately avoiding a formal design competition through the Housing Delivery Authority pathway.

The proposal has evolved considerably from Aqualand's original concept. The revised scheme has been designed around larger owner-occupier product, with an unusually high proportion of three and four-bedroom apartments, targeting the more affluent buyer profile, and downsizer, emerging across the North Shore.

<img alt="Archer St" data-entity-type="file" data-entity-uuid="0171204c-5811-41b5-9b09-2335d1b7c3d0" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-07-22%20at%208.52.48%E2%80%AFAM.png?VersionId=6YTuxfq.puZo7k2wbfgemcO5K3QfXYGQ" />

The 114-apartment mix comprises six studios, 27 one-bedroom apartments, 18 two-bedroom apartments, 50 three-bedroom residences and 13 four-bedroom homes. A quarter of the building will be dedicated to affordable housing, well above the mandated 15 per cent&nbsp;

PTW has structured the building vertically, with affordable housing across levels one to six, premium apartments through levels seven to 31, duplex skyhomes on klevels 32 to 43, a penthouse on level 44, and a rooftop plant level above. Six basement levels will provide resident parking and servicing.

The tower is proposed to reach approximately 154 metres, placing it among a growing collection of residential high-rises transforming Chatswood's skyline.

Rather than competing purely on height, PTW says the design has been driven by creating a slimmer tower capable of delivering significantly larger apartments.

"The primary objective of this project was to create a distinctive building that stands out from the recently approved or built structures in the Chatswood area," the design report states, noting the structural efficiency allows greater investment into apartment quality and resident amenity.

Residents would have access to more than 450 sqm of communal open space including landscaped gardens, swimming pool, rooftop entertaining areas, fitness spaces, community gardens, children's play areas and barbecue facilities.

A major focus of the design has been the public domain.

The ground plane has been opened up through landscaped terraces inspired by Willoughby's sandstone ridges, with native planting, public seating, artwork, retail activation and a series of gathering spaces intended to soften what has traditionally been a hard commercial streetscape.

The landscape strategy references Blue Gum forests once common throughout the area, while incorporating Indigenous storytelling, public art and lighting installations to strengthen the connection to Country.

Chatswood has been one of Sydney's busiest apartment markets over the past 12 months, with a steady pipeline of both new project launches and fresh development applications.

Hyecorp recently launched Celine, a 122-apartment development just along Archer Street, while Changfa and Huirong Group are progressing The Anderson, an 84-apartment project on Anderson Street.

Develotek recently secured approval for a 101-apartment tower on Pacific Highway, while Tian An LFD received the green light for Hammond Greens, its apartment development on the edge of the Chatswood Bowling Club.

Commercial property developer FiveX is also making its move into the residential market. Last month it lodged plans for a 61-storey tower with 490 apartments, which, if approved, would become one of the tallest residential buildings in Chatswood.

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/first-look-fivex-targets-chatswood-skyline-with-61-storey-tower-after-north-sydney-plans">First look: FiveX targets Chatswood skyline with 61-storey tower after North Sydney plans</a>

Aqualand is also expanding its development pipeline following the launch of its luxury residential brand, Aqualand Prestige. The developer has delivered a string of high-end apartment projects across Sydney's affluent suburbs over the past decade, most recently AURA by Aqualand on Walker Street in North Sydney.

[smartcode_project:default project_id=30959 project_image_fid=292863]

It has since quietly assembled its next wave of projects.

Earlier this year Aqualand launched Boronia in Roseville, a boutique 111-apartment development on Larkin Street. The project is one of the first significant apartment developments to launch in the suburb ahead of what is expected to become one of Sydney's most active new housing precincts under the NSW Government's Low and Mid-Rise Housing reforms, which allow greater density around train stations.

[smartcode_project:default project_id=152095 project_image_fid=373685]

The developer has also lodged plans for a two-tower, 413-apartment development on Herbert Street in nearby St Leonards, further strengthening its presence across the Lower North Shore.

Beyond that, Aqualand remains behind the final stage of Barangaroo, where plans will deliver a five-hectare mixed-use precinct comprising new homes, retail, hospitality and community facilities, alongside a new Metro entrance and more than two hectares of public open space, completing the Barangaroo precinct.

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/central-barangaroo-development-takes-big-step-with-concept-proposal-approval">Central Barangaroo development takes big step with concept proposal approval</a>

Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/first-look-aqualand-joins-st-leonards-apartment-party">First look: Aqualand joins St Leonards apartment party</a> 
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First look: Aqualand pushes ahead with Chatswood apartment tower as SSDA lodged for Archer Street

Mass timber is becoming an increasingly popular construction material in apartment developments, but Adelaide developer <a href="https://www.apartments.com.au/developers/otello">Otello</a> is taking the approach a step further.

At its new <a href="https://www.apartments.com.au/new-apartments/flowe-bowden-18-gibson-street-bowden-sa-5007">Flowe Bowden</a> development, the exposed cross-laminated timber (CLT) structure isn't just about reducing the building's environmental footprint. It also forms the foundation of a broader wellness strategy, influencing everything from indoor air quality and natural materials to the way residents move through and experience the building.

The 115-apartment mixed-use development, designed by Melbourne-based architecture practice Fieldwork, will occupy a prominent island site opposite Bowden Village Reserve, combining one, two and three-bedroom apartments with retail and a dedicated wellness destination.

[smartcode_project:default project_id=152022 project_image_fid=375528]

Wellness isn't confined to a gym or shared resident facility at Flowe. Instead, Fieldwork embedded the concept into the building itself.

The development has been split into two residential wings connected by a naturally ventilated central breezeway, replacing traditional enclosed corridors with open-air walkways that improve natural light, encourage cross ventilation and create more opportunities for neighbourly interaction.

"Rather than treating wellness as something that only happens on the ground floor, our response integrates it throughout the building, which led us to ask what it really means to design a healthy building," Fieldwork Director Quino Holland said.

[smartcode_project:default project_id=152022 project_image_fid=375531]

The building's architecture also reflects Bowden's industrial heritage. The lower podium references the area's historic brick and sandstone buildings, while the upper levels transition to exposed CLT, allowing the timber structure to become a defining feature throughout the apartments and shared spaces.

The use of mass timber sits alongside a range of sustainability initiatives, including a fully electric, gas-free design, rooftop solar and a targeted 5 Star Green Star rating.

[smartcode_project:default project_id=152022 project_image_fid=375524]

Inside the residences, the focus remains on natural, durable materials. Blackbutt engineered timber flooring, exposed CLT ceilings, porcelain surfaces and warm timber joinery create a calming interior palette, while low-VOC finishes and responsibly sourced materials have been selected to improve indoor air quality.

Kitchens have been designed as the centrepiece of each apartment, featuring porcelain island benchtops, timber-look cabinetry and brushed steel tapware, with layouts that maximise natural light and ventilation.

[smartcode_project:default project_id=152022 project_image_fid=375530]

The more traditional interpretation of wellness comes in the form of Level Eleven, a two-storey wellness club spanning the ground floor, mezzanine and first floor.

The facility will include a gym, yoga and reformer Pilates studios, Finnish and infrared saunas, magnesium hot and cold plunge pools, and dedicated recovery spaces. Unlike many residential wellness facilities, Level Eleven will also operate commercially, allowing the broader Bowden community to access the venue while giving residents exclusive membership benefits.

The ground floor has also been designed around everyday living. A café overlooking Bowden Village Reserve will activate the street frontage, while a bike workshop with tool storage, co-working space and dog wash has been incorporated to support daily routines and encourage interaction between residents.

"Flowe brings together my two biggest passions, creating places and creating healthier lives," Otello founder Daniel Harris said.

"We wanted to create something Adelaide hasn't seen before, a genuinely healthy building, where the way you live is lifted without even trying."

Flowe is positioned directly opposite Bowden Village Reserve and within walking distance of Bowden Railway Station and the Adelaide Entertainment Centre, placing future residents just minutes from the Adelaide CBD while remaining connected to one of the city's most established urban renewal precincts.

[smartcode_project_cta:default project_id=152022]

Otello launches wellness-focused Flowe Bowden with Adelaide-first mass timber apartment design

Bill Evans

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The RBA's recent discussion around housing was "quite understated," according to the Westpac chief economist Bill Evans.
He noted the latest minutes indicated “the process of adjustment in the housing market had continued.”
Evans said there was some recognition by the RBA board members of the spill-over of housing prices to activity, “some part of the slowdown in retail and motor vehicle spending in NSW was likely to have been related to declines in housing prices”.
Evans also said he was "disappointed" to note that the RBA was persisting with a view that “the pipeline of work to be done remained large and was expected to support dwelling investment through 2019”.
Evans said that dwelling investment peaked in mid-2018 with around a six per cent fall in the second half of 2018.
He supports the RBA’s expectation for a “marked slowing in dwelling investment”, but expects that this has come earlier than their expectation of “in 1-2 years’ time”.
<div>
Evans noted the RBA has raised the importance of data releases over the next few months and left open the possibility to cut rates should those releases disappoint.
"Certainly, the December quarter national accounts would have fitted into that category, although the emphasis remains on the labour market data.
"Westpac does expect that consistent with the slowdown in spending and deterioration in both business and consumer confidence, we will see emerging evidence of a slowing labour market over the course of the next six months.
"Westpac’s timetable for policy action remains a 25bps cut in August to be followed by a second 25bps cut in November.
"These dates will give the RBA appropriate scope to explain their decisions in the context of weaker growth, employment and inflation forecasts in an orderly fashion, rather than be seen to overreact to any particular data report," Evans said.
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j.ballantyne1990-6AQqhLzZaK

Bill Evans says the RBA's view on dwelling pipeline was disappointing

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EXPERT OBSERVER
Some economists are concerned about the “wealth effect” of falling property prices. They need not be concerned about that. 
What should concern them is their disturbing lack of knowledge about residential real estate markets. They have misunderstood what’s happening with prices in the many different markets around Australia.
Bill Evans, high-profile economist from Westpac, is one of those who think “falling property prices” will affect consumer spending. He thinks the Reserve Bank will be forced to cut the official interest rate a couple of times this year because of this hypothetical impact of falling property prices.
Mainstream media, as if so often sadly the case, have given great credibility to these forecasts. Journalists have forgotten that Westpac, until last week, was predicting that the cash rate would not change this year and that the next move would be a rise. Now they’ve back-flipped. What does that say about their forecasting?
But the big issue is the lack of understanding about real estate markets. Like most economists, Evans and his cohorts turn their attention to residential property only occasionally, and, when they do, they generalise. They talk about “the Australian property market” and what’s happening with “Australian property prices”. This is a clue that they lack depth of knowledge.
This kind of generalisation is the curse of real estate consumers across the nation. It’s the source of much of the misinformation that permeates mainstream media and which confounds consumers.
Here’s the difference between those Westpac economists and the Hotspotting team: we spend all day, every day, researching residential markets. They do not.
And here’s what I know to be true: locations where property prices have fallen a lot are in the minority. Most markets around the nation have prices that are rising or are holding firm. 
In Hotspotting’s latest location-by-location analysis of sales activity and prices for every suburb and town across the nation, we have identified a number of “danger” markets – those where demand is falling, prices are down and vacancies are rising.
But these danger locations are greatly outnumbered by those where markets are rising. Our national survey finds only 8.5% of locations are negative – what we classify as “declining” or “danger” markets. By comparison, 20.5% of locations are strongly rising. The vast majority – the big lump in the middle – comprises markets where demand is steady and prices solid.
Here's what economists do: they look at a graph or table which describes “Australian property prices”. This is a figure from someone like CoreLogic which provides an average figure for the change in prices for the capital cities. Currently that’s a minus figure because of the weight of Sydney. So they declare that Australian property prices are falling and that this is a national problem.
Apparently, Australians will be so distressed by this that they’ll stop spending in supermarkets and retail stores. It’s a ludicrous proposition.
In Melbourne, only the top end of the market is sharply down. Undoubtedly, the Tooraks of this world have seen prices falling significantly. But Middle Melbourne is remaining very solid price-wise and the cheaper outer-ring suburbs still have rising prices. Most of the suburbs of humble Melton are up by more than 20%.
That’s why most research sources (not including CoreLogic) have Melbourne prices overall down only moderately or, in one case, slightly up.
Meanwhile, Regional Victoria is going ballistic. Geelong, Ballarat, Bendigo, Pakenham, Officer, Warragul and dozens of other regional cities and towns have rising demand and very strong prices.
Hobart prices are still rising and Regional Tasmania is as buoyant as Regional Victoria. Both those regional markets are being supercharged by demand out of Melbourne.
Canberra is rock solid. As I wrote last week, it’s the strongest real estate economy in the nation and it’s doing the opposite to struggling Sydney.
Likewise, Regional NSW. There are growth markets spread right throughout the state. Newcastle and neighbouring LGAs like Lake Macquarie, Port Stephens and the Hunter Region municipalities have formed the strongest market in NSW in the past 12months.
Other important regional centres are rising, including Orange, Tamworth, Byron Bay, Dubbo and many of the smaller towns. Overall it’s a story of growth, in defiance of the Sydney trend.
Those past their best but still solid include Wollongong, Coffs Harbour, Port Macquarie and the towns of the Southern Highlands.
Brisbane overall is not rising strongly with prices, but it’s not falling either – and individual pockets are out-performing. It’s not hard to find suburbs where median prices have risen in double digits in the past year.
The Sunshine Coast is Queensland’s strongest market, with top-end suburbs around Noosa particularly buoyant.
Central Queensland locations are recovering from the previous malaise induced by the mining sector, led by the strategic city of Mackay. Others rising from the previous downturn include Emerald, Rockhampton, Dalby, Chinchilla, Moranbah – and we’re now seeing the first evidence of recovery in Gladstone.
Key regional cities like Toowoomba and Cairns have steady markets. Only time will reveal the real estate impacts from Townsville’s floods.
Adelaide is one of the really solid markets in capital city Australia. Demand is steadily rising and, like Brisbane, the city has individual pockets that are out-performing. There’s no sign of falling values here.
Perth has been in downturn for the past four years, but no longer. All the figures show recovery is under way – vacancies down, rents starting to rise, sales activity trending up and the top-end suburbs showing good price growth.
The only markets of significance where major price decline is prevalent are Sydney and Darwin.
Darwin just can’t escape its malaise because the underlying economy is so weak. The Northern Territory is the only state or territory which failed to deliver population growth last year.
Sydney’s situation is heavily documented but very poorly reported. There are plenty of declining markets and more than a few danger ones. But there are still many markets where demand is solid and prices are resilient.
One situation that media has completely overlooked is the defiant performance of the apartment market. Sydney’s gradual decline, which started back in 2016 long before the royal commission and other distractions that economists think important, was precipitated by the market’s reaction of price levels. Affordability became an issue at all levels of the market. 
So now we have a situation where the cheaper products like apartments are still attracting demand and achieving good prices. Throughout inner and middle ring Sydney, there are many dozens of suburbs where the median house price is sharply down but the median apartment price is strongly up.
So where are all these Australians who are so afflicted by falling property prices that they’re going to hide their money under their beds and not spent. Outside of Sydney (but not all of Sydney) and Darwin, they really don’t exist.
And this is reflected in multiple surveys. The latest Westpac poll shows consumer confidence is up and is specifically not affected by all the negative media about house prices. The ME survey indicated most Australians expect house prices to stay solid or to rise this year and the Momentum Wealth survey found investors are planning to buy, with Perth and Brisbane their No.1 targets.
I think these thoughts from veteran real estate analyst Michael Matusik are also relevant: “It is somewhat sobering to find that the majority aren’t that caught up in all the incessant real estate chat. To most a house is their home and not something that needs a lot of day-to-day analysis or comment. The majority just roll their eyes at the daily house price indices. I am in that crowd.”
I, too, am in that crowd. The media and economists like Bill Evans misinterpret and over-estimate the impact of recent price decline on a relatively small number of Australians.
For most of us, a falling property market is simply not part of our day.
 
Terry Ryder is the founder of hotspotting.com.au
<a href="https://mailto:ryder@hotspotting.com.au">ryder@hotspotting.com.au</a>
twitter.com/hotspotting
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terryryder-YECXbqmri2

Westpac economist Bill Evans has the property market decline wrong: Hotspotting's Terry Ryder

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The minutes of the Reserve Bank Board meeting for February have largely confirmed the themes which were set out in the February Statement on Monetary Policy.
Key to these themes is “the probabilities around these scenarios were now more evenly balanced than they had been over the preceding year when an eventual increase in the cash rate had appeared more likely”. Of course, the two scenarios relate to an eventual increase and an eventual decrease in the cash rate.
The policy outlook is firmly linked to progress in reducing the unemployment rate and moving the inflation rate back into the 2-3% policy band.
The risks around the outlook centre on the household sector and dwelling investment. The Bank remains generally comfortable with the outlook for business investment; government spending and external conditions.
Clearly, developments in the housing market, particularly in Sydney and Melbourne, are attracting considerably more attention than we had seen in the minutes of meetings held in 2018. In particular, the Bank’s current position that the effect of recent price falls on overall economic activity was expected to be relatively small is noted.
However, in a very significant warning around the policy outlook, the minutes state “if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast”. This statement directly links developments in house prices to the Bank’s key policy forecasts.
The causal mechanism would be around a larger wealth effect than currently expected impacting consumer spending, and a sharper downturn in residential building activity than has been recognised, even in the Bank’s new much more subdued forecasts relative to the November Statement on Monetary Policy.
Note that for the record, the RBA’s GDP growth is forecast at 3% in 2019 and 2.75% in 2020. These forecasts are down from 3.25% in 2019, and 3% in 2020. The downward revisions are largely attributed to softer consumption growth and a sharper downturn in dwelling investment.
Westpac has long argued that the RBA’s previous growth forecasts were too high, and indeed, our current forecasts for 2019 and 2020 of 2.6% are still below the RBA’s numbers.
The RBA’s handle on the outlook for housing prices in Sydney and Melbourne appears tenuous. The minutes note that the recent falls “were relatively large by historical standards, and that it was unusual for housing prices to fall significantly in an environment of low mortgage interest rates and a declining unemployment rate”.
Note that in previous periods of falling house prices, large interest rate cuts have followed, and were successful in stabilising the markets.
The current period of low mortgage rates means that the usual policy response to stabilise markets with large rate cuts will not be possible, and it is therefore not unreasonable to expect that further falls in house prices may occur.
Based on the comments in these minutes, such an outcome is likely to lead to further downward revisions in the RBA’s forecasts.
Conclusion
The minutes note that financial market pricing implied that the Australian cash rate was expected to remain unchanged for a considerable period with some expectation of a decrease by late 2019.
Over most of last year when markets; the RBA, and most economists were forecasting higher rates, Westpac’s view was consistently that rates would remain on hold in 2019 and 2020. That was largely because our growth, inflation and employment forecasts did not justify higher rates.
Our current forecasts remain lower than those of the RBA and we therefore expect that, over time, the RBA will further revise down their forecasts.
However  we do not think that those downward revisions will be sufficient to trigger a rate cut. As usual, our forecasts will continue to be reviewed.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA emphasises the importance of house prices: Bill Evans

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EXPERT OBSERVER
The consumer mood continues to hold at cautiously optimistic levels. With another reading above 100, December now marks a full year in which optimists have outnumbered pessimists, a turnaround on 2017 which saw ten out of twelve sentiment updates below the 100 line. That said, the margin is still fairly small with some of the detail in the December update on the soft side. The component indexes show more downbeat views on family finances and longer term economic prospects offset by a solid rise in buyer sentiment.
Given the negative atmospherics around falling house prices in Sydney and Melbourne; falling share markets (the ASX200 now down around 13% from its recent peak in late August and 4.5% since the last survey); ongoing concerns around global trade wars; and political uncertainty, it is reasonable to question why consumer sentiment has held up so well.
There are several significant positives supporting consumers. Firstly, interest rates remain low and fears about rising rates must be subsiding. To this point, the confidence of respondents who hold a mortgage improved by 2.9% in the month to be up by 8.8% over the year. The labour market also remains a source of comfort with the unemployment rate widely reported at a six and a half year low. Finally, a sharp drop in petrol prices has likely provided some additional support over the last month with the average pump price down around 20% since the November survey.
Click here to enlarge.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/12/12/Consumer.jpg" alt="">
Without a doubt our housing-related indexes show considerable unrest, particularly in NSW and Victoria, while our survey also shows that risk aversion continues to rise.
The ‘finances vs a year ago’ sub-index recorded a 1.9% decline, reversing about half of last month’s surprisingly firm 4.9% gain. The ‘finances, next 12 months’ sub-index also posted a small 0.6% decline following a solid 3.2% gain in November. In both cases, the state detail shows more pronounced monthly declines in NSW and Victoria partially offset by strong gains in the mining states. While some of the weakening in the eastern states may be a sign that the housing downturn is starting to undermine consumer views on their finances, these state measures are still comfortably above their earlier 2018 lows.
Consumers were a touch less optimistic around the economy. The ‘economic outlook, next 12mths’ sub-index rose slightly by 0.1% but the ‘economic outlook, next 5yrs’ sub-index retraced 1.5% – giving up some of the 9.7% jump in November. Both sub-indexes remain well above long run averages. The mix suggests relatively little impact from the disappointing September quarter national accounts update.
The ‘time to buy a major household item’ sub-index rose 3.7%, more than reversing a 3.5% decline in November. While this marks a promising lift in buyer sentiment leading into the Christmas retail peak the lead-in is still less upbeat than a year ago, the sub-index down 1.9% on December 2017. Recall that our survey in November signalled that the Christmas selling season would somewhat underperform the disappointing results of last year.
The Westpac Melbourne Institute Unemployment Expectations Index rose 0.5% in December (recall that higher reads mean more consumers expect unemployment to rise in the year ahead). While this still marks a 5.2% improvement on a year ago, expectations are flattening, suggesting labour market momentum is slowing.
Responses to additional questions on news recall emphasise some of the key themes. News on ‘economic conditions’ had the highest cut through with nearly a third of consumers noting news on this topic (up from 20% in September) and the news viewed much more unfavourably. The next highest recall was for news around ‘interest rates’ (21%); ‘Budget and tax’ (20%); and ‘international conditions’ (14%). Assessments of the news on ‘interest rates’ showed some improvement compared to September while ‘Budget and tax’ news was viewed about the same as three months ago but much less negatively than in December last year. Not surprisingly, there was a sharp deterioration in assessments of news around international conditions.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
 
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Consumer sentiment continues at cautiously optimistic levels

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EXPERT OBSERVATION
The Reserve Bank Board decided to leave the cash rate unchanged at 1.50% at its December board meeting. That makes 26 consecutive meetings that rates have been on hold.
As has been the case with most Statements by the Governor in this cycle, there are very limited changes in this Statement.
Clearly, developments in global trade are tempering the Bank’s views on the global economy. In November, the Governor referred to “uncertainty from the direction of international trade policy in the United States”. In this Statement, he is much more explicit noting “there are, however, some signs of a slowdown in global trade partly stemming from ongoing trade tensions”.
The positive growth forecasts of 3.5% (average over 2018 and 2019) are confirmed. The positive business conditions and rising levels of public infrastructure expenditure are noted. On the other hand, uncertainty around the outlook for household consumption remains an issue.
With the increase in the AUD since the last meeting (trade weighted index up 1.5%), the sentiment “the Australian dollar remains within the range that it has been in over the past two years on trade-weighted basis” persists. Although in November it was described as being in the lower part of the range.
Since the last board meeting, the Bank has released its November Statement on Monetary Policy (SoMP). In that SoMP, it includes a graph of the wage price index (WPI) and the Bank’s forecasts. A reasonable ‘eyeball’ of the graph points to the official forecast for growth in the wage price index to reach 2.75% by end 2020. Note that at the beginning of the three previous rate hike cycles, the WPI was growing in the range of 3.5 to 4%. That forecast certainly supports the Bank’s observation that the lift in wages growth will be a gradual process. Indeed, a reasonable person might be excused for thinking that even though the rhetoric is for the next move in the cash rate to be up, the Bank expects that event to be a very long way away.
The greatest interest was always going to be in the revised assessment of conditions in the housing market. Despite recent reports of sharp falls in prices in both Sydney and Melbourne, the description of the housing market remains “conditions… have continued to ease”. A stronger description would not have been out of place.
In November, finance conditions were described as “credit conditions are tighter than they have been for some time”. The description in this Statement is “credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend”( arguably a more benign description of credit conditions).
At least the commentary is more cautious on lending growth with the term “growth in credit extended to owner-occupiers… remains robust”, being replaced by a factual assessment that the annualised pace of credit extended to owner-occupiers has eased to 5-6% (that compares with a peak of 8.8% in July 2017). It is also noteworthy that new lending to owner-occupiers fell by around 10% in the two months of August and September 2018.
The final paragraph in the Statement is unchanged, noting that progress towards reducing unemployment and having inflation return to target is expected to be gradual.
Back in early 2017, Westpac predicted that the cash rate would remain on hold through 2017 and 2018. That view was certainly not popular in markets and in consensus forecasts.
The on hold decision today finally justifies that call.
We continue to expect that the cash rate will be on hold through 2019 and 2020.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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RBA's rate likely to be on hold until 2020: Westpac's Bill Evans

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EXPERT OBSERVER
The minutes of the November monetary policy meeting of the Reserve Bank Board confirm the confident approach we have seen in the recent Statement on Monetary Policy.
While consumption growth is still identified as a source of uncertainty, the Board expects it to remain around the 3% level over the next few years that we have seen recently. Household disposable income growth is also forecast to increase at that rate.
GDP growth and labour market conditions had been stronger than the Bank had expected over the last twelve months. Accordingly, the forecast for the unemployment rate had been lowered to 4 ¾ per cent from 5 per cent by mid-2020, with an implied downside risk to that forecast. With the improved labour market outlook, there has been a modest upward revision to the outlook for wages growth. This is a particular encouraging development for the Bank as they see wages growth as the key uncertainty for future consumption growth and inflation.
In that regard, the forecast for inflation has been lifted modestly, reflecting the brighter outlook for economic activity, the labour market and wages.
Despite a disappointing capex survey, non-mining business investment was expected to continue to make a significant contribution to output growth supported by above average business conditions and the significant pipeline of non-residential construction work.
Their discussion around the housing market is a little less confident. Residential building approvals are recognised to have fallen in the September quarter and liaison with builders paints a difficult picture. Furthermore, it is noted that housing prices have fallen further in Sydney and Melbourne, although are stable in most other cities. With the Bank’s core forecast that consumption and income growth will be aligned, there is no allowance for any negative wealth effects from these housing developments. The minutes discuss the various policy stances of other central banks noting that “market pricing was consistent with policy rates remaining steady over the following year in Australia and New Zealand, where policy rates had not been lowered to the extent they had in some other economies”.
The Board also discussed the Bank’s forecasting performance over the previous year, noting that forecast errors were smaller than historical averages with GDP growth and business investment surprising to the upside, the terms of trade average being higher than expected, and the marked depreciation in the Australian Dollar. Labour market outcomes were also stronger than expected, although wages growth and inflation had evolved largely as expected. This assessment supports the gradualist policy approach supported by growth holding above potential with associated declining spare capacity leading to a gradual increase in wages growth and inflation.
There is also a rather curious discussion around arguments that had been advanced by various commentators. The arguments are set out but they make no qualitative assessment of their reliability.
We know that the Governor has noted that interest rates could be cut in the event of a global shock and it is interesting that the minutes point out that the monetary policy response to that shock would depend on the associated move in the exchange rate.
The final section of the minutes once again emphasises the importance of wages growth. It is noted that there has been a noticeable pick-up in wages growth in most advanced economies, and Australia requires “a gradual increase in wages growth for inflation to be sustainably within the target range”.
As in the section of the minutes on the domestic economy, the concluding section leaves the discussion around housing markets somewhat up in the air. Credit conditions are recognised as being tighter than they had been for some time, but lending rates remain low and there was strong competition for borrowers of high quality.
In the final paragraph in the minutes, the Board emphasises that “there was no strong case for a near-term adjustment in monetary policy”, although the comment “since progress on unemployment and inflation was likely to be gradual” which featured in the October minutes was not used in these minutes. Based on the confident assessment in the body of the minutes, it is possible that the Board is a little more confident with its view that the next move in the cash rate will be an increase.
Conclusion
This is a balanced set of minutes but does indicate more confidence from the Board around its growth, employment, wages and inflation views. The outlook was also boosted by the expectation that consumption and income growth will hold at 3% despite slowing employment growth, and risks around the housing market in Sydney and Melbourne.
By noting that market pricing is not expecting a policy adjustment for the next year, the Bank does appear to be extremely patient with its next policy move. Westpac expects that their growth forecast for 3 ¼ per cent growth in 2019 is too high, mainly because of an expected downturn in residential construction, a slowdown in consumption growth associated with weaker income growth and some wealth effects. That development alone is likely to take the edge off the expectation of rising wages and higher inflation.
We retain our view that the cash rate will remain on hold in 2019 and 2020.
BILL EVANS is the chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
 
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Balanced set of RBA minutes, but confidence indicated from the Board: Bill Evans

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EXPERT OBSERVER
The Reserve Bank has released its November Statement on Monetary Policy and a major interest is always in any revisions to its output, employment and inflation forecasts.
In that regard, we were a little surprised that the forecast for growth in 2019 remained at 3 ¼ per cent. That is because in the Governor’s Decision Statement following the November Board meeting, he noted “the forecast for economic growth in 2018 and 2019 have been revised up a little."
The central scenario is for GDP growth to average around 3 ½ per cent over these two years”. That seemed to point to an upward revision for the 2019 forecast but instead it remains 3 ¼ per cent.
However, there is some recognition of stronger growth in the second half of 2019 since growth through to June 2020 has been revised up from 3 to 3 ¼ per cent.
It is true however, that growth in 2018 has been revised up to 3 ½ per cent from 3 ¼ per cent, although that largely reflects a higher starting point given that the previous estimate of growth to June 2018 was lifted from 3 per cent to 3.4% actual.
The forecast for 2019, nevertheless, is significantly higher than Westpac’s forecast of 2.7%.
This can largely be explained by an assessment by the RBA that there will be no marked reduction in residential construction activity in 2019 and limited reduction in 2020. Secondly, the assumption is that household consumption growth will be sustained at around the current 3 per cent pace over the forecast period.
With regards to the residential construction cycle, the assumption is that the fall in building approvals, which is already apparent and the information the RBA has received from its liaison contacts in the industry that off-the-plan sales have slowed significantly, will not significantly impact activity until beyond 2020.
This seems to overlook evidence of a clear slowdown in non high-rise approvals, the likelihood of an increase in abandonments of approvals which are already in the system, and evidence, which the RBA notes, that “lot sales for new detached housing have also declined sharply in Sydney and Melbourne since late 2017”.
Instead we assess that all of these forces point to a more significant reduction in dwelling construction in 2019 and 2020 than the RBA is expecting.
The view around consumption growth being sustained at 3 per cent looks courageous. It relies on ongoing growth in employment despite a clear slowing through 2018, the elusive pick-up in wages growth, and only a relatively small wealth effect that might be related to the ongoing falls in house prices and associated household wealth. We would expect that with the savings rate down at around 4 per cent, this wealth effect is likely to be more significant.
There has also been an increase in the forecast for underlying inflation for the year to December 2019 from 2 per cent in the August SoMP to 2 ¼ per cent. With the recent September quarter inflation report confirming that underlying inflation is running at 1 ¾ per cent, this forecast lift of ½ per cent in underlying inflation looks to be optimistic.
The justification behind this increase is around expected faster wages growth and a larger reduction in the output gap due to the above trend growth in 2018 and 2019.
The history of underlying inflation indicates that a ½ per cent jump over the course of one year seems optimistic given the correction in housing that is underway.
The RBA’s analysis of the prospects for wages growth is tentative. In fact, it points out that “wage outcomes from enterprise bargaining agreements are likely to remain a drag on overall wages growth” and also points to its liaison work which notes that “there is still spare capacity in the labour market”.
Appropriately, the SoMP spends some time referring to international evidence which indicates that Australia’s unemployment rate could fall well below historical estimates of the NAIRU “before there is a material increase in wages growth”.
This evidence refers to globalisation, technological change, and changes in relative bargaining power. Other major risks to this inflation forecast relate to ongoing competitive forces in the retail sector and “a risk of further declines in administered prices” due to government initiatives to reduce cost of living pressures.
As was indicated in the Governor’s Decision Statement, the forecast for the unemployment rate has been lowered. However, this appears to be a cautious ‘mark-to-market’ exercise.
In August, the forecast was for the unemployment rate to fall from 5 ½ per cent in December 2018 to 5 per cent by December 2020.
The new forecast is for the unemployment rate to fall from 5 per cent in December 2018 (recognising the most recent employment report) to 4 ¾ per cent in December 2020.
The discussion around the risks of a lower NAIRU would suggest only a very limited prospect of resurgent wage pressures should the unemployment rate only fall by a ¼ per cent in two years.
It is difficult for a central bank to acknowledge political risks but with a Federal election certain to be called in 2019, the uncertainty/ confidence factor associated with such an event might also have been incorporated in the forecasts.
But their assumption around employment growth, income growth and business investment seems to indicate no effect taken into account – both construction activity and machinery and equipment investment are expected to be boosted.
Conclusion
On face value, the stronger growth and higher inflation forecasts might imply that the RBA is closer to raising rates than we have expected. That may well be the case from their perspective. But if the economy evolves as we expect with a slowdown in consumer spending, a contraction in residential investment, and softer confidence partly linked to global uncertainty, the RBA’s growth and inflation forecasts are unlikely to be achieved.
Of course, it will take some time for these developments to be apparent and based on the Governor’s comment “the Board does not see a strong case to adjust the cash rate in the near-term”, we have ample time for the outlook to evolve without a surprise policy adjustment based on these forecasts.
Westpac confirms its view that the cash rate will remain on hold through 2018, 2019 and 2020.  
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA wrong to rely on small wealth effect given ongoing falls in house prices: Bill Evans

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EXPERT OBSERVATION 
As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.
The themes that have become familiar in previous statements were repeated in this one: continuing global expansion; China slowing a little; international trade uncertainty; positive business conditions; household consumption a source of uncertainty; labour market outlook positive; wages growth low; but a gradual lift in wages growth expected; further gradual decline in the unemployment rate expected; inflation higher in 2019 and 2020; housing conditions in Sydney and Melbourne continue to ease; progress toward full employment and target inflation will be gradual.
However, the growth and unemployment forecasts have been revised. These forecasts will be confirmed in the Statement on Monetary Policy that will be released on November 9. The forecast growth rates for 2018 and 2019 have been revised up from 3.25% to 3.5%, while the 2020 forecast is for a slowdown, although the current forecast of 3% may now be revised up to 3.25%. With no real change in the wording, there is no clear justification for this upward revision, particularly for the faster expected growth in 2019.
Westpac expects growth to slow in 2019 to 2.7% reflecting a weaker consumer; a contraction in residential construction; a softening housing market; weakening global economy and some impact on business and household sentiment from the uncertainty around the federal election.
Less surprisingly, the forecast unemployment rate by 2020 has been revised down to 4 ¾% from 5%. That may be significant because 4.75% is below the generally accepted full employment rate in Australia of 5%. As such, that might imply that the Bank is more confident that significant wage pressures will be building. However, overseas evidence and measures of current slack in the labour market point to a benign wage outlook, even if the unemployment rate falls to 4.75%. Westpac expects that due to the headwinds described above for 2019, the unemployment rate is likely to rise somewhat through 2019 before drifting back by the end of 2019.
The September quarter Inflation Report printed around the Bank’s expectations and it does not appear to have changed its inflation forecasts.
Since the last board meeting, evidence around house prices and auction clearance rates point to a further slowdown in the Sydney and Melbourne housing markets. Despite that, the Governor’s language around housing is all but unchanged. The slight difference is that he qualifies “credit extended to owner-occupiers” as having “eased” but remaining “robust”, compared to the  October Statement’s description as just “remains robust”.
The second paragraph in the Governor’s Statement which refers to the global economy is identical to the Statement in October, despite developments in equity markets and a surprise reduction in China’s growth rate.
In the following paragraph, which usually relates to financial conditions, the tightening we have seen is noted and equity prices are recognised to have declined. However, there appears to be no real concern about the flow through to the real economy.
We have been a little surprised that the Bank has not recognised the fall in the Australian dollar in recent months referring to it remaining “within the range it has been in the past two years on a trade-weighted basis”. Since the last Board meeting, the TWI actually lifted from 62.2 to 62.3 and yet the Governor has decided to expand on the usual commentary with “although it is currently in the lower part of that range”.
Conclusion
As discussed, we are a little surprised that the Bank has decided to lift its growth forecast in 2019 to 3.5% (0.75% above estimates of potential growth). Westpac expects growth to slow to 2.7% in 2019 (around potential). We will have to wait until the Statement on Monetary Policy on November 9 for an explanation behind this lift.
Clearly, the Bank is less concerned about the headwinds that we have outlined above. As always, while policy is forward looking, it responds to reality rather than long-term forecasts. We expect that through 2019, the Bank will be surprised about the slowdown in the Australian economy and adjust its outlook accordingly. As such, we remain comfortable with our forecast that the cash rate will remain on hold in 2019 and, indeed, in  2020.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA will be surprised with slowdown in economy: Westpac's Bill Evans

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EXPERT OBSERVER
The Reserve Bank Board meets next week on November 6.
The Bank will also release the November Statement on Monetary Policy on November 9.
Of course the Governor will announce that there has been no change in the cash rate.
Readers will be aware that Westpac adopted a “no change” call for both 2018 and 2019 back in September 2017. At that time markets were pricing in three hikes by end 2019.
Today, markets are pricing only the probability of around 50% of one hike by end 2019 and a full 25bps is not priced-in until end 2020.
Back in August this year, Westpac forecast that the cash rate would remain on hold in 2020.
So, while a year ago we were offering readers some forecasts that were significantly at odds with market pricing, our views today are now largely factored in by the market.
That does not mean that our views are universally supported. In the latest Bloomberg survey of economists’ forecasts, only 10 of the 24 forecasters expect the cash rate to be on hold (one is calling cuts) by end 2019. In addition, 9 of those 13 forecasters expecting rates to be rising expect multiple hikes. Note that the other three major Australian banks expect rate hikes next year.
So the case for rates on hold is certainly not a universally accepted one.
As usual we will scour the Governor’s statement next Tuesday for any hints towards a firmer tightening bias, but there is unlikely to be much to encourage these efforts.
The Statement’s themes will be the same: continuing global expansion; China slowing a little; international trade uncertainty; Australian growth to average a bit above 3% in 2018 and 2019; positive business conditions; household consumption a source of uncertainty; labour market outlook positive; wages growth low; but a gradual lift in wages growth expected; further gradual decline in the unemployment rate expected; inflation higher in 2019 and 2020; housing conditions in Sydney and Melbourne continue to ease; progress toward full employment and target inflation will be gradual.
The Statement on Monetary Policy will include an update of the Bank’s forecasts out to December 2020.
Forecasts for GDP growth are likely to be unchanged from the August Statement on Monetary Policy: 3.25% in 2018 and 2019; and 3% in 2020. These forecasts indicate above potential growth, which is generally accepted to be 2.75%.
Headline Inflation forecasts in August were 1.75% in 2018; 2.25% in 2019; and 2.25% in 2020.
With higher petrol prices than were expected in August, the RBA may raise its forecast for headline inflation in 2018 from 1.75% to 2%.
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Underlying forecasts for inflation were 1.75% in 2018; 2% in 2019; and 2.25% in 2020.
These forecasts are likely to be unchanged.
On October 31, we received the Inflation Report for the September quarter of 2018. The key underlying measures would have disappointed the RBA. The annual pace of the average of the core measures further slowed to 1.7% from the 2.0% pace in the March quarter. The six month annualised pace of the core measures is now 1.5% - the slowest pace since September 2016.
Recall that in May 2016, the then Governor Stevens was expecting 2.5% for core inflation through 2016 but revised that down to 1.5% following the release of the March quarter CPI. The Governor responded to that shock with a rate cut of 25 basis points in May and another in August.
At that time, the 6 month annualised pace of core inflation registered 1.4% through the March quarter and 1.2% through the June quarter. So momentum in inflation was indeed lower than current momentum but not by a significant margin. The longer the subdued 1.5% momentum continues, the harder it will be to justify the forecasts of 2% in 2019 and 2.25% in 2020.
One aspect of the detail within the September quarter 2018 CPI result that stood out was the sharp fall in the price pressures associated with house building. This component, which has the biggest weight in the CPI and consistently appears in the core measures, slowed from 0.8% in the June quarter to 0.1% in the September quarter.
We had a similar result for the March quarter in 2016 (0.2%) but the measure bounced back 0.9% in the June quarter as the housing market recovered through 2016 in response to the May and August rate cuts. Between March 2016 and December 2016 new lending to property investors lifted by 40% and house prices in Sydney (up 11%) and Melbourne (up 7%) both boomed in the last six months of 2016.
There will be no such recovery in 2018 or 2019. The RBA has made a clear commitment to holding the cash rate at the current level and bank lending policies continue to tighten and house prices in Sydney and Melbourne are likely to fall through 2019.
As a comparison with 2016, we note that new lending to investors has fallen by 27% over the last year and there is no sign of any relief.
It is entirely reasonable that builders in the process of constructing new residential developments in Sydney and Melbourne will find great difficulty in passing on cost increases as this particular component of the CPI has remained weak for many quarters. Supply is also likely to maintain downward pressure on rents which are another key component of the CPI.
We would not expect the RBA to incorporate such concerns in their forecasts. They will continue to forecast rising inflation out to 2020 despite the risks around housing as well as the ongoing threat to inflationary expectations as the headline rate stays well below the 2.5% target (on a calendar year basis headline inflation has been below 2% since 2014).
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The final forecast which appears in the SOMP will be for the unemployment rate.
The forecast in the August SOMP were for a gradual decline to 5.25% in December 2019 continuing to 5% in December 2020.
That was always a very awkward forecast for the RBA which is promoting the prospect of rising wage pressures particularly through 2019 and 2020.
For Australia, the “full employment” rate estimate is generally considered to be 5.0% but we have found that in other developed economies (particularly the US and UK) the full employment rate is lower in the current cycle than that historically. In the US, the unemployment rate has fallen to 3.7% (well below the previously accepted full employment rate of 4.75%) yet wage pressures are only just beginning to emerge, (the Employment Cost Index has lifted by 2.8% in the year to September).
It seems highly unlikely that in this current world of increasingly rapid technological change; globalisation; risk aversion of employees; low inflationary expectations and low trade union membership that Australia’s full employment rate is 5%.
With the current print (September) on the unemployment rate now at 5.0% (compared to 5.5% in the August SOMP) the RBA is expected to lower its 2020 unemployment forecast to 4.75%.
Note that the RBA use the three month average of the seasonally adjusted monthly unemployment rate estimate, which is currently 5.2%, as their latest read. That recognises the volatility in monthly estimates and the potential for the recent sharp fall in the unemployment rate to reverse somewhat over the next few months. Abstracting from the short-term particulars, the core profile of the forecast will be consistent with the key theme of a “gradual decline in the unemployment rate”.
In contrast, Westpac’s forecast reflects a likely slowdown in jobs growth in 2019 with the unemployment rate ticking up to 5.3% through 2019 before settling back at 5.0% by end year. In 2020 we would broadly concur with a 4.75% unemployment forecast by end 2020 although would not see that level as full employment.
Note that the August SOMP discussed the dynamic around the wealth effect as a risk but not a central theme driving the forecasts.
“Recent declines in national housing prices have been gradual and follow several years of very strong growth. Accordingly, there is no evidence that moderate housing price declines have weighed on household consumption to date. Nevertheless, housing assets account for around 55 per cent of total household assets, so lower housing prices could lead to lower consumption growth than is currently forecast. Although the earlier gains in national housing wealth may not have encouraged much additional consumption, it is possible that the consumption decisions of highly indebted and/or credit-constrained households could be more sensitive to declines in housing prices than to the previous increases.”
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We expect this issue to remain a risk in the November SOMP but not a factor incorporated into the forecasts.
We view that risk as being much more likely and a central component behind our growth forecasts.
Westpac expects growth in 2019 to slow from 3.3% in 2018 to 2.75% in 2019.
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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 will stick to positive forecasts but risks are mounting: Bill Evans

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EXPERT OBSERVER 
This month’s small gain follows a 5.2% fall through August and September. During that period the boost from the tax cuts announced in the May budget had faded while the leadership change; mortgage rate increases; declining house prices and rising petrol prices were weighing on confidence.
It is encouraging that these negatives seem to have, at least for the time being, run their course. Several positives have likely helped stabilise the Index, including strong economic growth, a solid labour market and ongoing recoveries in the previously weak mining states.
The net effect has seen the headline index holding slightly above the 100 line indicating that optimists are just outnumbering pessimists. The slight ascendency of optimists has been the case for 11 consecutive months since December 2017. That contrasts with the previous 12 months between December 2016 and November 2017 when the Index registered below 100 for 11 of those 12 months.
Concerns around interest rates and house prices are still apparent. The sub-group detail showed sentiment amongst households with a mortgage continued to weaken in October, dipping a further 0.8% to be down 6.4% over the last two months. Interestingly, the breakdown by voter group suggests some of the negative sentiment impact from the change in Prime Minister in late August may have reversed with confidence amongst those identifying as Coalition voters recovering about two thirds of the 6.4% drop recorded in September.
Most index components recorded small gains in October. Assessments of family finances showed the most promising revival. The ‘finances vs a year ago’ sub-index rose 2.6% to be comfortably above levels this time last year, albeit still a couple of percentage points below the highs seen earlier this year. The forward view is less convincing. The ‘finances, next 12 months’ sub-index only edged up 0.6% and is 4.1% below its high following the announcement of the tax cuts in the Budget in May.
Consumer expectations for the economy also showed mixed moves. The ‘economic outlook, next 12 months’ sub-index posted a solid 2.3% rally but longer term expectations continued to soften. The ‘economic outlook, next 5years’ sub-index is now down 9.1% from the five year high recorded back in July.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/10/consumer%20sentiment%201.jpg" alt="">
Spending-related sentiment showed little change on the relatively downbeat tone in recent months. The ‘time to buy a major household item’ sub-index inched 0.1% higher but is still around the lowest levels seen since November last year.
Labour market expectations, which were a notable bright spot in the weak September survey, softened a touch in October. The Westpac Melbourne Institute Unemployment Expectations Index lifted 1.7% (recall that higher reads mean more consumers expect unemployment to rise in the year ahead). Despite this, the index still shows a clear improvement from the softer reads through June-July-August with a solid 5% improvement on a year ago. Most of this is coming from a more balanced performance across the major states, with a particularly dramatic turnaround in labour market expectations in Western Australia.
<a href="https://www.propertyobserver.com.au/images/2018/10/10/consumer%20sentiment%202.jpg" target="_blank">Click here</a> to enlarge:
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/10/consumer%20sentiment%202.jpg" alt="">
Consumer views around housing continue to deteriorate. The ‘time to buy a dwelling’ index slipped a further 0.9% following September’s 4.8% fall, unwinding all of the 5.5% gain in August. Despite the weakening, buyer sentiment is still well above the lows seen through mid-2017.
Consumer expectations for house prices posted another sharp fall in October. The Westpac Melbourne Institute Index of House Price Expectations dropped 7.4% to 101.4, taking the index below its 2015 low point to the weakest level since the first month the survey question was run, in May 2009. The state detail showed a particularly sharp 20.3% drop in Victoria, suggesting the price correction in Melbourne, which has been slower to come through than in Sydney, is starting to bite.
Bill Evans is the Chief Economist for Westpac
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