A landmark former orphanage site in Surrey Hills could be transformed into a new residential community under plans lodged by <a href="https://www.apartments.com.au/developers/antipodean-land-developments">Antipodean Land Developments</a> that would deliver 76 apartments and townhouses while restoring some of the suburb's most significant heritage buildings.

The burgeoninng Melbourne-based developer has submitted plans for the 9,158 sqm site at 1 Kent Road and 24 Durham Road, home to the former St Joseph's Home for Destitute Children, a historic institutional complex dating back to the late 19th century. The proposal seeks to adaptively reuse several heritage buildings while introducing two new four-storey residential buildings set within extensive landscaped grounds.

Designed by <a href="https://www.apartments.com.au/architects/woods-bagot">Woods Bagot</a> and Kerstin Thompson Architects, the project has been conceived as a contemporary residential village embedded within a restored heritage precinct. The development team describes the design approach as "The Village in the Garden," with new buildings positioned among mature landscaping by OCULUS and significant heritage structures.

<img alt="First look: Antipodean Land Developments plans heritage-led apartment community in Surrey Hills" data-entity-type="file" data-entity-uuid="44ec8c1b-c0b6-44ae-859e-5811b3e6a023" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Untitled%20design%20%281%29.png?VersionId=p.p1_KFh4iQoV4nisdnPfQBAsWNi7m79" />

The proposal would deliver 76 dwellings comprising a mix of apartments and duplex-style residences, significantly increasing housing supply on one of the largest privately held residential landholdings in Surrey Hills. The development includes 127 car spaces, 24 bicycle spaces and more than 1,000 sqm of communal amenity, with the existing chapel building earmarked for conversion into resident facilities.

According to the planning submission, the project centres on the restoration and adaptive reuse of the site's most significant heritage assets, including the original c.1889 St Joseph's building, the chapel designed by architect Augustus Andrew Fritsch, and the historic brick perimeter walls and entry gates. The proposal also incorporates the retention of other contributory buildings including the former infirmary and school building.

Tract Consultants, in the planning report accompanying the application, said the scheme had been shaped through extensive heritage analysis and design development.

"The shared vision for the Site by the project team has culminated in a scheme which successfully breathes life back into a historic site while delivering upon the objectives of Victoria's Housing Statement in a carefully curated and contextually responsive manner."

<img alt="First look: Antipodean Land Developments plans heritage-led apartment community in Surrey Hills" data-entity-type="file" data-entity-uuid="7263b7d8-95ea-400f-9531-6ca7d22c3c33" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Untitled%20design%20%282%29.png?VersionId=4cR1tiWOsDpgxEOwZi5vVFcyvvOsYkIE" />

The proposal is being assessed under Victoria's Significant Residential Development with Affordable Housing pathway. As part of the application, three per cent of the project's residential development cost would be contributed to the Social Housing Growth Fund. The development would also provide a diverse mix of one, two and three-bedroom residences targeting a broader range of buyers than typically found in Surrey Hills' detached housing market.

Sustainability initiatives include an anticipated 66 per cent BESS score, natural cross-ventilation to 80 per cent of apartments, 28 per cent deep soil landscaping and a canopy cover outcome exceeding local planning requirements. The proposal also sets aside more than 1,083 sqm for communal indoor and outdoor resident amenity spaces.

<img alt="First look: Antipodean Land Developments plans heritage-led apartment community in Surrey Hills" data-entity-type="file" data-entity-uuid="33fad46f-fe26-4d0a-acfd-6b776e1c6a3d" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Untitled%20design.png?VersionId=D9F6WVSyYCtGvSUmith35LRp6R7PQkw_" />

Planning documents describe the property as one of the largest underutilised residential sites in Surrey Hills, arguing it presents a rare opportunity to introduce "missing middle" housing in an established inner-eastern suburb while preserving and revitalising a significant heritage precinct.

Antipodean Land Developments has built a reputation for design-focused residential projects across Melbourne, particularly in the medium-density sector. Previous developments include Neighbourhood in Brunswick East, delivered with Breathe Architecture, and Balfe Park Lane, designed by Kerstin Thompson Architects.

They've been very active in site acquisition as they build out their future development pipeline. They recently launched Thornubury House, 45 apartments above a mix of commercial, retail, and food and beverage tenancies, and have plans for a boutique project in Fitzroy and another <a href="https://www.apartments.com.au/news/vic/antipodean-plan-apartments-for-deepdenes-missing-middle-on-whitehorse-road">"missing middle" project</a> on Deepdene's Whitehorse Road.

Joel Robinson

First look: Antipodean Land Developments plans heritage-led apartment community in Surrey Hills

Developer <a href="https://www.apartments.com.au/developers/auyin-property-development">Auyin</a> is the latest to turn to the Victorian Government's Development Facilitation Program in an effort to secure approval for its long-planned, mixed-use project in Elsternwick.

In 2018, Auyin lodged plans with Glen Eira City Council for a 14-storey building, however Council approved a reduced eight-storey scheme. A subsequent VCAT appeal in 2019 upheld the eight-storey height limit.

The project was later amended to nine storeys, but Auyin is now seeking to revive something closer to its original vision. The developer argues that the planning context has evolved significantly over the past decade, particularly within the Elsternwick Activity Centre, where higher-density development has increasingly been encouraged along Glen Huntly Road.

The proposal would transform the 1,239 sqm site at <a href="https://www.apartments.com.au/new-apartments/7-12-horne-street-elsternwick-vic-3185">7-15 Horne Street</a>, opposite Elsternwick Railway Station, into a 13-storey residential and retail development designed by CBG Architects, with 40 apartments

The site currently comprises three commercial properties.

<img alt="First look: 13-storey mixed-use tower planned for Elsternwick activity centre" data-entity-type="file" data-entity-uuid="5f465dd4-509b-4082-a669-0253b313914b" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/elsternwick%20podium.png?VersionId=72frWi0SmQ5AVJ3ARRhX5ILUYObhTm7x" />

The proposed apartment mix comprises 25 two-bedroom and 15 three-bedroom residences above 200 sqm of retail space at ground level. Residents would have access to a 90 sqm wellness facility, a 351 sqm communal indoor and outdoor terrace on the third level, and extensive landscaped areas throughout the development. A publicly accessible 135 sqm plaza would be created on the north-east corner of the site, providing seating, landscaping, and a new gathering space adjoining Horne Street.

The design adopts a four-storey podium that references the finer-grain character of the surrounding streetscape, with the upper tower recessed behind generous setbacks on all boundaries.

<img alt="First look: 13-storey mixed-use tower planned for Elsternwick activity centre" data-entity-type="file" data-entity-uuid="e637e763-2abc-4c34-a0aa-5c7ad36fae18" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/elsternwick%20open.png?VersionId=J1AoOpZgTyaF.KeeFSX6lMjEScX8KKRi" />

A key element of the proposal is the reconfiguration and widening of the surrounding laneways. Vehicle access would be retained from Lois Lane, with upgraded pedestrian connections linking Ross Street and Horne Street. The development would provide 58 residential car spaces, two retail car spaces, and 52 bicycle spaces across two basement levels and ground-floor facilities.

Architecturally, the building draws inspiration from the established character of Elsternwick Village. The façade combines dark charcoal brickwork, textured concrete, bronze-toned metal detailing, and extensive planting integrated into podium and tower levels. The design also incorporates a chamfered corner treatment and publicly accessible plaza intended to strengthen pedestrian activity around the station precinct.

Elsternwick's last new development completion was&nbsp;EVA Elsternwick by Pitard late last year. <a href="https://www.apartments.com.au/developers/milieu-property">Milieu</a> is working away on its nature-led neighbourhood, <a href="https://www.apartments.com.au/new-apartments/elsternwick-gardens-by-milieu-8-gordon-street-elsternwick-vic-3185">Elsternwick Gardens</a>, on Gordon Street, with its first stage expected to complete next year.

First look: Auyin seeks mixed-use apartment project in growing Elsternwick Activity Centre

<a href="https://www.apartments.com.au/new-apartments/otium-parkdale-123-125-como-parade-east-parkdale-vic-3195">Otium Parkdale</a>, the 13-residence boutique development by&nbsp;<a href="https://www.apartments.com.au/developers/huxtable-property">Huxtable Property</a>, has entered its final stages of delivery, with completion expected within the coming month and more than half of the residences sold.

The Como Parade East project is nearing the finish line at a time when opportunities to purchase new apartments in <a href="https://www.apartments.com.au/developments/parkdale-vic-3195">Parkdale</a> remain exceptionally limited. Fewer than 10 per cent of dwellings in the bayside suburb are apartments, making developments like Otium a relatively rare addition to a market traditionally dominated by detached housing.

[smartcode_project:default project_id=134974 project_image_fid=5427]

The three-level development comprises 13 residences, including ten two-bedroom apartments and three larger three-bedroom homes, all positioned above a secure basement car park.

Designed by <a href="https://www.apartments.com.au/architects/almeida-architects">Almeida Architects</a> with a strong connection to its coastal surroundings, Otium combines red brick, exposed concrete and dark metal detailing with integrated landscaping and greenery. Expansive glazing, generous balconies and terraces have been incorporated throughout the design to maximise natural light and reinforce indoor-outdoor living.

Inside, the residences feature engineered European oak flooring, natural and reconstituted stone benchtops, Bosch kitchen appliances, ducted heating and cooling, lift access and secure entry systems. The larger three-bedroom residences on the upper level have been designed with house-like proportions, while the two-bedroom apartments prioritise functionality, flexibility and low-maintenance living.

[smartcode_project:default project_id=134974 project_image_fid=5421]

The project is now in its final stages, with <a href="https://www.apartments.com.au/builders/labco">Labco</a> completing the remaining landscaping and external finishing works following the completion of the residences' interiors.

Otium's location within the heart of Parkdale continues to underpin its appeal. Residents will be just steps from local cafés, restaurants, shops and the newly elevated Parkdale Station, while the beach is less than a kilometre away.

With the project tracking ahead of schedule, buyers can currently secure a residence with a five per cent deposit and benefit from settlement terms of up to eight months. The advanced stage of construction also provides buyers with the opportunity to walk through the near-complete residences and experience the quality and finishes firsthand ahead of completion.

[smartcode_project_cta:default project_id=134974]

Otium Parkdale enters final month before completion as rare apartment opportunity nears sellout

A new boutique apartment development is entering the market in <a href="https://www.apartments.com.au/developments/chermside-qld-4032">Chermside</a>, with Brisbane-based developer <a href="https://www.apartments.com.au/developers/ausdev">Ausdev</a> bringing 33 residences to a well-connected pocket of Brisbane's north.

<a href="https://www.apartments.com.au/new-apartments/parkdrive-apartments-chermside-25-sammells-drive-chermside-qld-4032">Parkdrive Apartments</a>, at 25 Sammells Drive, will comprise a mix of one- and two-bedroom residences positioned within walking distance of Westfield Chermside, The Prince Charles Hospital, and Bradbury Park.

Established in 1989, Ausdev has a long-standing presence across both development and construction, with Parkdrive Apartments representing its latest residential project in Brisbane's northern suburbs.

[smartcode_project:default project_id=152125 project_image_fid=363778]

The development has been designed around open-plan living and natural light, with residences featuring stone benchtops, timber cabinetry, BOSCH appliances, and private balconies that extend the living areas outdoors.

Kitchens are positioned as the centrepiece of the homes, incorporating natural material palettes and integrated appliances, while bathrooms have been designed with a focus on functionality and understated finishes.

Residents will have access to a communal barbecue and entertaining area on Level 3, providing shared outdoor space within the development. Secure parking and lift access are also incorporated into the building.

The project will deliver a limited collection of 33 apartments, with one-bedroom residences priced from $749,000.

[smartcode_project:default project_id=152125 project_image_fid=363782]

Beyond the building itself, the location places residents within easy reach of several of Chermside's key amenities. Bradbury Park is around 350 metres away, while Westfield Chermside is approximately 1.3 kilometres from the site. The Prince Charles Hospital is located within 750 metres, and the Chermside Bus Interchange is around 1.5 kilometres away, providing connections across Brisbane.

Parkdrive Apartments adds to the growing residential pipeline in Chermside, a suburb that continues to evolve as a major retail, healthcare, and transport hub for Brisbane's north.

[smartcode_project_cta:default project_id=152125]

Ausdev introduces boutique Parkdrive Apartments to Chermside's growing centre

<a href="https://www.apartments.com.au/developers/skymark-group">Skymark</a>'s boutique Cronulla development Solis has secured a 10-year Latent Defects Insurance policy through Resilience Insurance, providing buyers of the 16-residence building on Ewos Parade with structural and waterproofing protection that extends a decade beyond the building's completion.

Currently under construction and due for completion in late 2027, <a href="https://www.apartments.com.au/new-apartments/solis-cronulla-8-ewos-parade-cronulla-nsw-2230">Solis</a> is one of a small number of new developments in the Sutherland Shire to carry Resilience LDI coverage, a distinction that carries increasing weight as buyer confidence in the off-the-plan sector continues to be shaped by how developers stand behind their product.

Latent Defects Insurance, which entered the Australian market in 2022 when Resilience Insurance was approved to offer the cover, protects buyers against major structural or waterproofing defects for ten years post-completion. Unlike traditional statutory warranties, it operates as a first-resort policy, if a covered defect arises, the insurer responds directly, without the buyer needing to pursue the builder or developer through a lengthy claims process.

Resilience Insurance CEO Corey Nugent has noted that the product addresses something fundamental to the new apartment market.

"The overarching feedback from prospective buyers in the new development space is that they want more confidence and assurances around the quality of the build," Nugent says.

"Resilience Insurance Latent Defects Insurance not only gives them complete peace of mind for 10 years, but it shows the developer they are buying from is standing by their product."

[smartcode_project:default project_id=150499 project_image_fid=370898]

For Solis, the Resilience LDI policy adds a meaningful layer of accountability to an already considered project. The development comprises nine two-bedroom and seven three-bedroom residences, including one dual-level three-bedroom apartment, across a five-storey building on Ewos Parade, positioned between Shelly Beach and South Cronulla.

Garden apartments connect directly to private landscaped courtyards, while upper-level homes capture beach views to the east from level four and above.&nbsp;

All 16 residences include at least one balcony or courtyard, and select apartments on the upper floors feature bar areas and secondary flexible living spaces.

Hiba Sander, Managing Director of Skymark, says Solis offers a rare balance, nestled between the quiet beauty of secluded beaches and the lively charm of South Cronulla's esplanade.

"It's a place to choose your pace and live gracefully, seaside'," Sander says.

[smartcode_project:default project_id=150499 project_image_fid=370900]

The architecture, designed by <a href="https://www.apartments.com.au/architects/ida-design-group">IDA Design Group</a>'s Michael Trinh, draws from the natural erosion patterns of <a href="https://www.apartments.com.au/developments/cronulla-nsw-2230">Cronulla</a>'s sandstone headlands, translating the organic forms of the coastline into soft curves, pavilion-style massing, and a material palette chosen for longevity in a salt-tinged environment.&nbsp;

Textured natural stone, soft renders, and timber-look battens reference the tones of the surrounding cliffs, while the building has been oriented to maximise natural light and passive ventilation, with primary living spaces facing north and east to capture morning sun and sea breezes.

"At Solis, our aim was to create architecture that feels quietly confident, grounded in natural materials like stone and timber, and elevated by light and landscape," Trinh says.&nbsp;

"The buildings are designed to sit gently within their coastal surrounds, with expansive glazing and abundant greenery creating a seamless dialogue between inside and out."

[smartcode_project:default project_id=150499 project_image_fid=370897]

Interiors by <a href="https://www.apartments.com.au/architects/hot-black">Hot Black</a> carry the same material language through to every room. Kitchens feature integrated Gaggenau appliances, sculpted stone benchtops, and Lo &amp; Co joinery, while bathrooms feature natural stone, timber, and brushed metal finishes.&nbsp;

Hot Black Founder and Design Director Sophie Safrin describes the intent as one of considered restraint: "At Solis, every detail has been thoughtfully considered to create a timeless coastal retreat, calm, refined, and effortlessly liveable. From natural finishes to seamless indoor-outdoor flow, Solis offers a quiet elegance that's deeply connected to its surroundings.

The landscape, designed by Julian Brady of <a href="https://www.apartments.com.au/landscape-architect/sitedesignstudios">Site Design Studios</a>, treats green space as an integral part of the resident experience rather than an afterthought.&nbsp;

"Gentle curves and layered native plantings mirror the ebb and flow of the ocean," Julian Brady says, "creating a serene connection between architecture and place."&nbsp;

Coco Republic has provided bespoke furniture packages tailored to the project's coastal palette.

[smartcode_project:default project_id=150499 project_image_fid=370899]

Skymark has an established track record in the Sutherland Shire, with a portfolio spanning Cronulla, Woolooware and Burraneer that includes Isla, Sylva, Bask, Shells, Sula and Mist. Securing LDI on Solis reflects a broader shift in how the developer is positioning its buildings to buyers, at a time when Resilience Insurance expects the policy to become mandatory in New South Wales by 2028.

Sales at Solis are launching soon through Ray White Projects, with an official event scheduled for 11 June. Enquire for more information.

[smartcode_project_cta:default project_id=150499]

Skymark takes out 10-year Resilience Insurance LDI at Solis Cronulla

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EXPERT OBSERVER
For the seventh quarter in a row inflation has underperformed market expectations with the headline CPI lifting 0.4% in the quarter compared to an median expectation of 0.5% qtr.
Westpac’s forecast was for 0.4% qtr.
Interestingly the mix of sectors prices was broadly as we had expected with some small downside and upside surprises but the overall print was slightly to the downside of our expectations.
At two decimal places the CPI rose 0.36% in the quarter while our forecast was 0.42%.
Following the December quarter CPI Westpac argued that searching for inflation in the Australian economy has been a fruitless as Vladimir and Estragon’s wait for Godot.
We are now looking at the play having a record run with the ABS for while there may be some anecdotal hints that inflation is around, the ABS is yet to report its appearance in any solid form in the CPI Survey.
Core inflation came in as expected rising 0.5% qtr (0.46% at two decimal places so a soft 0.5%) suggesting that Australian forecasters, as a group, are broadly getting the core inflation pulse corrected but continue to underestimate the deflationary pulse that is hitting certain sectors leading to greater than usual discounting (or less than usual post sales repricing) in those sectors.
The six month annualised pace of headline inflation printed 1.6%yr, down from 2.2%yr in Q1 and the recent peak of 2.5%yr in Q4 2017.
For core inflation, the six month annualised pace is now 2.0%yr from 2.0%yr in Q1, 1.7%yr in Q4 2017and 2.0%yr in Q3.
With core inflation just at the bottom of the RBA’s target band, inflation remains well contained at a very modest pace. This would leave the RBA quite comfortable with the current stance of monetary policy.
Without a doubt the Australian economy remains locked in a low inflation environment. Sectors that are experiencing some inflation –particularly tobacco and auto fuel then to a lesser extent, housing, health and education – are mostly being offset by the disinflationary pressure of the competitive squeeze in consumer goods. There are no signs we are about to experience a broader upswing in prices that you would normally expect to see at this late stage of an economic recovery.
Breaking it down a bit further prices came in broadly as expected with a mix of upside and downside surprises. However, given that the two decimal place print from the CPI was just 0.36%, compared to our forecast for 0.42%, then overall there was a very modest downside surprise in the survey.
Food prices were a touch softer than expected falling 0.4% vs our –0.2% forecast with a larger than expected fall in fruit &amp; vegetables (–2.7% vs –0.5%). Alcohol &amp; tobacco was stronger than expected (1.6% vs 0.6% expected) with a robust 2.8% rise in tobacco prices.
Clothing &amp; footwear came in as expected with a 1.3% seasonal re-pricing while housing costs were close to expectations rising 0.2% vs 0.1% expected. However the mix was very interesting with rents flat (0.2% expected), dwelling purchase rose 0.8% (vs. 0.5% expected) while the fall in utilities was great than expected (–1.2% vs –0.9% expected).
An area where the downside pressure appear to be significant was the smaller than expected seasonal re-pricing for household contents &amp; services (0.3% vs 0.8% expected) while health rose just 1.9% vs. the 2.6% expected this is despite a smaller than expected fall in pharmaceutical (–1.0% vs –1.6%)
Tradables rose 0.5% in the June quarter. Tradables goods rose 0.4% mainly due to automotive fuel (+6.9%qtr), audio, visual &amp; computing media and services (+3.0%qtr), garments for women (+2.2%qtr), and glassware, tableware &amp; household utensils (+3.5%qtr). The tradable services component rose 1.3%qtr due to international holiday travel and accommodation (+1.3%qtr) in response to peak period pricing for Europe and America. Tradables represent approximately 35% of the CPI.
Non-tradables rose 0.3% in the June quarter. Non-tradables goods rose 0.7%, mainly due to tobacco (+2.8%qtr), new dwelling purchases by owner occupiers (+0.8%qtr) and takeaway and fast foods (+0.8%qtr). The non-tradable services component rose 0.2%, mainly due to medical and hospital services (+3.1%qtr) and child care (+1.0%qtr). Non-tradables represent approximately 65% of the CPI.
Low inflation remains embedded in the economy.
We have seen inflationary expectations drift a little higher (we suspect rising fuel prices and until this year, rising power bills are responsible for this) but despite this the ABS CPI Survey again revealed little to suggest that the Australian economy is about to break out of its low inflation trap.
Through 2017, the big story was the rise in energy bills, particularly for electricity but also gas. However, in late 2018 there was a significant change in the wholesale electricity market as the expansion of renewable generation exceeded expectations, and power storage facilities enter commercial application, driving down wholesale prices. Some modest discounting of power bills has been reported and we are expecting this to continue through the remainder of 2018 and into 2019 which was a key reason for the recent downgrade to our inflation profile, for both headline and core, out to the end of 2019.
We will provide a full update on our forecasts in the CPI Economic Bulletin but at this stage, given that the run of soft updates that point to the Australian economy being in a low inflation trap, the risks to these forecasts still lie to the downside.
Justin Smirk is a commodity analyst for Westpac
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j.ballantyne1990-6AQqhLzZaK

CPI inflation is below expectations for the seventh quarter running: Justin Smirk

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Australia’s inflation target is to keep annual consumer price inflation between 2 and 3 per cent, on average, over time, a Reserve Bank of Australian discussion paper re-affirmed last week.
The measure of consumer price inflation is the percentage change in the Consumer Price Index (CPI), which is deemed is a suitable measure because it captures price changes for the goods and services that households buy, is independently produced by the Australian Bureau of Statistics, is publicly available and does not get revised.
Since the early 1990s, the rate of CPI inflation – also known as ‘headline inflation’ – has, on average, been within the target range and expectations of inflation have been consistent with the target.
The Reserve Bank also closely monitors ‘underlying’ inflation, which excludes items that have particularly low or high inflation rates (either frequently or in a given quarter).
This allows the Reserve Bank to look through any temporary factors that are affecting the CPI and to assess broader inflation pressures.
Underlying inflation has averaged around the same as headline inflation since the early 1990s. Low and stable inflation has reduced uncertainty in the economy and has underpinned economic growth.
  
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/16/I1.jpg" alt="">
The paper noted the inflation target provides a framework to guide a central bank’s policy decisions and to ensure accountability in its management of the economy.
The Reserve Bank adopted the inflation target in the early 1990s, as did various central banks around the world, with other central banks following suit over the subsequent decade.
In 1996, the Reserve Bank and the Government agreed on the importance of the inflation target and formalised this agreement in the Statement on the Conduct of Monetary Policy (which is typically updated following a change of government or Reserve Bank Governor).
The Reserve Bank uses an inflation target to help achieve its goals of price stability, full employment, and prosperity and welfare of the Australian people.
The paper noted this was because price stability – which means low and stable inflation – contributes to sustainable economic growth.
"Targeting inflation of 2 to 3 per cent avoids the many costs to the economy from inflation that is too high or too low," it noted.
If inflation is too high:
<ul>
<li>
Consumers’ purchasing power – the real value of money – is reduced. If prices are increasing faster than people’s nominal incomes, they will be able to afford fewer goods and services than before.
</li>
<li>
Workers may then seek larger wage increases to compensate for the effects of higher inflation on their purchasing power. In turn, higher wage growth raises firms’ costs, which may lead firms to raise prices further and/or reduce the number of workers they employ.
</li>
<li>
Spending and investment decisions may be distorted. This is because high inflation can influence when households make purchases or businesses make investment decisions. For example, if households expect higher inflation, they may make purchases sooner than originally planned to avoid paying more.
</li>
<li>
Returns on investment may be lower. Inflation influences investment decisions because a higher inflation rate will reduce the real return on the investment. Inflation can also affect the real interest paid by borrowers to lenders. For example, if inflation turns out to be higher than expected when the loan was agreed, the lender will get less than they had planned because inflation reduces the purchasing power of the interest earnings they receive.
</li>
<li>
Businesses need to update their prices more frequently and consumers spend more time comparing prices. This increases their uncertainty about the economy, which may discourage spending and investment and reduce economic growth.
</li>
<li>
A country’s international competitiveness may be lowered. If inflation is higher in one country, then the goods and services it produces will become more expensive compared with other countries (unless its currency depreciates). For more on exchange rates, see <a href="https://www.rba.gov.au/education/resources/explainers/exchange-rates-and-the-australian-economy">Explainer: Exchange Rates and the Australian Economy</a>.
</li>
</ul>
If inflation is too low:
<ul>
<li>
Consumers may delay purchases if they expect prices to fall. As a result, falling prices – a situation called ‘deflation’ – can lead to lower spending. Businesses could respond by laying off workers or reducing wages which, in turn, places further downward pressure on demand and prices.
</li>
<li>
Businesses facing difficult conditions may find it hard to reduce the real wages of their employees and may resort to laying off workers instead. This is because businesses that need to decrease their real wages usually choose to allow their nominal wages to grow at a rate that is below the general rate of inflation, and if inflation is very low this is more difficult to do.
</li>
</ul>
<div class="box">
A real value is a dollar value – also known as a nominal value – less the effects of inflation.
The difference between real and nominal values can be shown using income as an example. Suppose that a worker earned $100 last year and $105 this year. The worker has received a 5 per cent increase in nominal income. Also suppose that the inflation rate is 2 per cent over the same period. If we subtract the rate of inflation from the growth in the worker’s nominal income, then the worker’s real (or inflation-adjusted) income has increased by 3 per cent. This means that the worker can buy 3 per cent more goods and services than before. In other words, their purchasing power has increased by 3 per cent. This and some other examples are shown below.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/16/I2.jpg" alt="">
Monetary policy aims to keep inflation between 2 and 3 per cent, on average, over time, in support of the Reserve Bank's goals of price stability and full employment. Assessing the current and expected rate of inflation against the inflation target helps the Reserve Bank in making monetary policy decisions. When inflation is above the target, this can be a sign that the economy is overheating. When inflation is below the target, this can be a sign that there is spare capacity in the economy.
The cash rate is then used to dampen or stimulate economic activity so that inflation is consistent with the target. If inflation is expected to be higher than the target for a prolonged period, the Reserve Bank would typically increase the cash rate. If inflation is expected to be lower than the target for a sustained period, the Reserve Bank would typically lower the cash rate. Changes in the cash rate take time to affect the economy.
The discussion paper noted that was why the Reserve Bank looks to what inflation is forecast to be in the future when deciding on the level of the cash rate today. 
When deciding if monetary policy should respond to inflation – both current and expected – the Reserve Bank Board distinguishes between temporary and persistent changes in inflation.
<div>If inflation is expected to be:</div>
<div><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/3/16/I3.jpg" alt=""></div>
<div class="image-graph">Temporary changes in inflation may be caused by things like supply disruptions or seasonal sales, while persistent changes in inflation arise from things like a sustained increase in wage growth across the community. The Reserve Bank ‘looks through’ temporary changes in inflation when setting monetary policy. However, if households and businesses expect a change in inflation to be longer lasting, it can have a bigger effect on their behaviour and consequently become more important to monetary policy decisions.
Why target 2 to 3 per cent?
The 2 to 3 per cent target range is sufficiently low that inflation at this level does not significantly influence people’s economic decisions. This target range was set in the early 1990s when inflation of around 2 to 3 per cent had already been achieved. It was decided that inflation should be kept at around that rate, given the fact that the lowest average inflation rate experienced by other countries had, over many years, been a little over 2 per cent. At these levels of inflation an economy can achieve sustainable growth in output and employment.A higher inflation target could increase uncertainty and costs in the economy. A lower inflation target, on the other hand, is costly to achieve.For example:<ol>
<li>The reduction in growth in spending and investment required to keep inflation at a lower target would lower output growth and increase unemployment.</li>
<li>Having inflation much lower than 2 to 3 per cent over the medium term can limit the ability of monetary policy to stimulate demand. For example, in response to a sharp decline in aggregate demand, it may be the case that monetary policy should be set such that real interest rates become negative. Having a very low inflation target (so that actual inflation is close to zero) makes it more difficult to reduce real interest rates to such levels.</li>
<li>Businesses that need to decrease their real wages and prices in response to negative events usually choose to allow their nominal wages and prices to grow at a rate that is below the general rate of inflation; if inflation is very low, there is less room for a business’s wages or prices to grow at a rate below inflation.</li>
</ol>In addition, the inflation target must be high enough to account for measurement bias in the CPI. The CPI is upwardly biased because it is calculated with a fixed basket of goods and services which is only updated once a year; until 2017 it was updated only once every few years.A fixed basket does not take into account that households will adjust their spending patterns to buy less of items with relatively higher inflation rates and buy more of items that are becoming relatively cheaper. Consequently, the price of the basket of goods and services that they actually consume will increase by less than the price of the fixed basket. The Reserve Bank’s inflation target is flexible. This means that inflation does not need to be in the target range at all times, but on average, over time. Inflation can be affected by temporary influences, such as supply disruptions or a tax change, which monetary policy should not respond to.Furthermore, having a flexible inflation target allows the Reserve Bank to consider its broader objectives of employment and financial stability. </div>
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Understanding the RBA's inflation target: Economics 101 

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Recent history suggests downside risk to the December quarter CPI but due to forecast bias. Also we note there is no clear relationship between the Australian and NZ CPI.
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As we noted in our preview, <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2018/January/er20180126AusCPIQ4Preview.pdf" target="_blank">'Australian Q4 CPI preview'</a> there are clear downside risks to the December quarter CPI.
<h4>Sept Qtr CPI: 0.6%qtr</h4>
<h4>Dec Qtr CPI forecasts; WBC f/c: 0.8%qtr, Mkt f/c: 0.7%qtr, Range: 0.4%qtr to 1.4%qtr</h4>
 <img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Eco_Bulletin_Charts/Slide45.JPG" alt="">
Through the last four quarters Australian forecasters have overestimated the quarterly rise in the CPI by just under 0.2ppts (average of 0.175 at three decimal places). 
It appears that Australian forecasters have been slow to react to the disinflationary pulse that has hit the economy for at least a year now. With a median forecast of 0.7%qtr for the December quarter, there is a clear risk that the CPI will undershoot expectations yet again.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Eco_Bulletin_Charts/Slide48.JPG" alt="">
Westpac has left its quarterly forecast for the CPI at 0.8%qtr as that is the best estimate we can get from the partials we have even when we allow for some further disinflationary pressure in consumer goods space. 
However, in our mind the risks are asymmetric to the downside.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Eco_Bulletin_Charts/Slide47.JPG" alt="">
But what of the New Zealand CPI? Didn’t the December print come in at 0.1%qtr against a median expectation of 0.4%qtr? Doesn’t that highlight a significant downside risk to the Australian CPI?
Our research suggests there is very little correlation in the quarterly change in the NZ CPI and the Australian CPI. Nor is there any correlation between the forecasting errors for the NZ and Australian CPIs.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Eco_Bulletin_Charts/Slide52.JPG" alt="">
So while the ongoing disinflationary pressure in the Australian economy points to a downside risk to both Westpac’s and the market's forecast for the December quarter CPI, we would caution against using the New Zealand CPI as an argument.
Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.
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jrobinson-rf4aSBido9

Downside risk to the December quarter CPI: Westpac's Justin Smirk

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GUEST OBSERVER
New weights could lower the pace of headline inflation by up to 0.4ppt (–0.3ppt core) by end 2018.
Every five years or so the ABS revises the weights in the CPI based on its detailed household expenditure survey. This brings the CPI up-to-date with the latest spending patterns associated with changing technology and individual preferences as well as correcting a substitution bias that emerges over time as spending tends to rise (fall) for items where relative prices have declined (risen).
There is also a drift in the share of the expenditure classes in the CPI towards those that are rising more rapidly and away from the expenditure classes where prices are falling. 
The ABS has estimated that historically, this substitution bias is worth around ¼ of a percentage point on the annual rate of inflation at each re-weighting. 
The ABS is set to re-weight the CPI (the 17th CPI) with the release of the 2017 December Quarter CPI. However, we concur with a recent comment from RBA that looking at the historical impact of re-weighting the CPI may not provide a reliable guide to the upcoming re-weighting. 
Using our bottom-up approach for forecasting inflation out to 2018 and applying our estimate of the revision to the weights we find that our headline inflation forecast is 0.4ppt lower by the December quarter 2018 compared to our existing forecast. We also found that the re-weighting lowers our core inflation forecast by 0.3ppt. 
A big part of this revision to our forecast is due to the lowering of the weight for tobacco in the CPI from our implicit estimate for December 2017 (before re-weighting) of 4.2% to 2.5%. At the 2011 reweighting tobacco’s weight was 2.3%.
As our revised weights are estimated from the best information we have on hand we will do another update post the release of the latest Household Expenditure Survey. However, as we can’t fully replicate the ABS’s methodology will not complete a formal review of our forecasts until the ABS releases the new weights.   
Until then what we can say is that the downside risk to the inflation outlook is somewhat greater than the historical estimate of 0.2ppt and could be as large as 0.4ppt.
Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/">here</a>.
 
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jchancellor-FAypfDUnLy

Upcoming CPI re-weighting to lower inflation: Justin Smirk

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GUEST OBSERVER
The consumer price index (CPI) for June 2017 was released earlier this week showed that over the quarter headline inflation was recorded at 0.2% which took inflation to just 1.9% over the year to June 2017. 
Although annual headline CPI was temporarily within the Reserve Bank (RBA) target range of 2% to 3% over the March 2017, it has been below target for 10 of the past 11 quarters.
<a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-1-1.jpg" target="_blank">Click to enlarge</a>
<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/2017/08/04/chart-1-1.jpg" alt="">
Adjusting dwelling value growth for inflation provides valuable insight into the housing market’s performance.  With inflation currently at such a low level, adjusting for it is not resulting in any additional capital cities seeing value decline however, over the longer term it does highlight the significant under performance in terms of value growth for certain cities.
<a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-2-1.jpg" target="_blank">Click to enlarge</a>
<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/2017/08/04/chart-2-1.jpg" alt="">
While in nominal terms capital city dwelling values declined in 2008 and then again in 2011-12, in real terms the declines were larger over these two periods and values also declined in 2004-05.  In nominal terms, values fell by -6.1% between March and December of 2008 and by -6.4% between September 2010 and June 2012.  In real terms, values fell by -2.6% between March 2004 and December 2005, by -8.3% between March and December 2008 and by -10.8% between September 2010 and December 2012.
<a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-3-1.jpg" target="_blank">Click to enlarge</a>
<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/2017/08/04/chart-3-1.jpg" alt="">
Since the value declines ceased at the end of 2008, only Sydney, Melbourne and Canberra have actually recorded real growth in dwelling values.  In all other cities, real dwelling values are currently lower than they were at the end of 2008 which is now almost nine years ago.  This data really highlights the uneven nature of growth across the capital city housing markets since the end of the financial crisis. It also shows that low mortgage rates alone are not the driver of the much stronger growth in Sydney and Melbourne.
<a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-4-1.jpg" target="_blank">Click to enlarge</a>
<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/2017/08/04/chart-4-1.jpg" alt="">
The above chart shows the change in real dwelling values across each capital city relative to their most recent market peaks.  The chart again shows that values are only above their previous peak in Sydney, Melbourne and Canberra.  Brisbane values are -9.3% lower than their peak in March 2008, Adelaide values peaked in June 2010 and are still -6.3% lower.  In Perth, the market peak was September 2007 and values are still -20.0% off their peak and in Hobart values are -11.2% lower than their peak which occurred in December 2007.  Finally, Darwin has seen the largest fall in real dwelling values, down -26.7% from its peak with the peak having occurred in September 2010.
The regularly reported nominal value data is valuable however, it is important and interesting to consider the impact of inflation on dwelling values from time-to-time.  As the data shows, outside of Sydney and Melbourne and to a lesser degree Canberra, dwelling value growth has been extremely weak for a number of years now.
Cameron Kusher is research analyst for CoreLogic. You can contact him <a href="https://blog.corelogic.com.au/about/" target="_blank">here</a>. 
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ckusher-ujnxiKuFQs

Since 2008, only Sydney, Melbourne and Canberra have seen ‘real’ growth in dwelling values

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GUEST OBSERVER
The Q4 CPI printed 0.5 percent compared to Westpac’s forecast for 0.6 percent.
The market median was also 0.6 percent. The annual rate is now 2.1 percent/yr compare to 1.5yr in Q4, 1.3 percent/yr in Q3 and 1.0 percent/yr in Q2. The June quarter was the lowest rate of annual inflation since June 1999.
The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4 percent on average compared to the market’s expectation of 0.5 percent rise.
Westpac’s forecast was also 0.5 percent. In the quarter, the trimmed mean gained 0.48 percent while the weighted median lifted 0.38 percent, both on the softer side of expectations highlighting just how modest the broader inflation picture is outside a few isolated sectors. The annual pace of the average of the core measures is now 1.8% from 1.5%yr in Q4 and Q3.
The six month annualised pace of core inflation came in 1.8%yr, a modest lift from the 1.6%yr pace in Q1, making this the eighth quarter in a row the six month pace has been below the bottom of the target ban. Our current forecasts do not see the six month annualised pace of core inflation returning to the band till the March quarter 2018.
<a href="https://www.propertyobserver.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.25.59%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.25.59%20AM.png" alt="">
As always there were surprises in the quarter even from the components we have some data on but this time they were quite modest. Our forecast 0.6%qtr was based on large contribution from power bills, auto fuels and the usual seasonal bump in health care, domestic travel and education being partially offset by falling fruit &amp; vegetables, seasonal discounting for clothing, footwear and household contents plus the steady decline in audio visual &amp; computing prices.
What stood out compared to our forecasts was the stronger rise in dwelling prices (1.0%qtr vs 0.5%qtr expected) but this was the only significant upside surprise. Food prices overall fell –0.2% (0.0% expected) while household contents &amp; services were down 1.0% (1.0% expected), health costs rose just 2.0% (2.6% expected), car prices continue to fall (–0.5% vs 0.5% expected) and a surprising 1.9% fall in holiday travel (+0.9% expected) due to an unexpected fall in domestic travel costs.
The March quarter continues the run of softer inflation prints as the competitive margin squeeze appears to remain in place. Dwelling costs have lifted a bit (we don’t know if that is due to the inclusion of attached dwellings prices) and rising power bills are coming through but rent inflation remains very modest. So even with inflationary expectations drifting back towards the long-run average (we suspect fuel and power bills are responsible for this) there is little in this release to suggest that inflation is gathering any momentum. 
Our preliminary estimate for the core measures for Q2 2017 is 0.5%qtr/1.7%yr holding inflation below the bottom of the RBA’s target band. 
Fuel prices and rising power bills does not change the fact competitive pressures continue to prevent inflation from accelerating.
Rising fuel prices were there, as was the usual seasonal bump in education and health as well as the jump in power bills. And we did see a bit of a lift in dwelling prices (which now includes attached dwellings) associated with strong jumps in Sydney and Brisbane which added to the expected lift in electricity prices. However, as we noted in our preview, there was clear risk that the recent appreciation in the AUD, along with intense competition in the retail space, would limit the upside risks and, in fact, could present some downside risks to our forecasts.
In the end this came through with falling prices for clothing &amp; footwear household contents &amp; services, car prices, audio visual &amp; computing &amp; international travel.
ABS estimates small negative seasonality in the March quarter.
The ABS analysis points to some seasonality in the March quarter CPI with the seasonally adjusted estimate rising 0.55% a percentage point up on the headline 0.45% estimate.
After trimming the core measures rose 0.4 percent/qtr.
The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4% on average compared to the market’s expectation for 0.5% rise. Westpac’s forecast was also 0.5%. In the quarter, the trimmed mean gained 0.48% while the weighted median lifted 0.38% highlighting just how modest the broader inflation picture is outside a few isolated sectors. The annual pace of the average of the core measures is now 1.8% from 1.5%yr in Q4 and Q3.
The six month annualised pace of core inflation came in 1.8%yr, a modest lift from the 1.6%yr pace in Q1, making this the eighth quarter in a row the six month pace has been below the bottom of the target ban. Our current forecasts do not see the six month annualised pace of core inflation returning to the band till the March quarter 2018.
For a broader core inflation measure, more in line with some international measures, all groups excluding food &amp; energy rose 0.3%qtr/1.5%yr.
Competition is holding back traded goods inflation as the AUD appreciation lowers import prices.
As always there were surprises in the quarter even from the components we have some data on but this time they were quite modest. Our forecast 0.6%qtr was based on large contribution from power bills, auto fuels and the usual seasonal bump in health care, domestic travel and education being partially offset by falling fruit &amp; vegetables, seasonal discounting for clothing, footwear and household contents plus the steady decline in audio visual &amp; computing prices.
In the quarter, the ABS reported a 0.2% decline in food prices with falling fruit &amp; vegetables prices (–1.9% we expected –2.1%) adding to a broader than expected weakness. The rise in auto fuel was much as we expected (5.7%) as were the gains in tobacco &amp; alcohol (1.1%). However, traded goods prices continue to fall overall as clothing &amp; footwear fell 1.5% (our forecast was –1.9%), household contents fell 1.0% (forecast was –0.6%), car prices fell 0.3% (forecast was –0.5%) while the seasonal lift in domestic holiday travel did not happen. In fact domestic holiday cost fell (–0.3% vs 4.0% forecast) compared to the rise that the BITRE data was suggesting.
All up traded prices fell 0.2% in Q1 but due to base effects the annual pace lifted to 1.3%yr from 0.1%yr. We would argue that this soft pace of traded price inflation highlights just how competitive the retail space has become and how retailers have very little ability to pass on any upstream price pressures.
Non-traded prices lifted less than 1.0% in the quarter.
Housing is a key factor underpinning the momentum in core and non-traded inflation. The 0.8% rise in Q1 was much as expected (0.7% forecast) but the composition was interesting. Dwelling purchases gained 1.0% with outsized gains in Sydney and Brisbane (1.3% and 1.9% respectively) adding to the steady 1.0% gain in Melbourne. There has been something of a turnaround in Perth with a 0.2% rise in Q4 but prices fell 0.8% in Q1. We also have to note that we don’t know what impact the inclusion of attached dwelling prices have had on this series. Rents continue to move very gradually higher with a 0.1% gain in the quarter.
Rising energy bills are starting to appear in the CPI with a 2.2% rise in utilities bills in Q1; we had forecast a 2.4% rise. We expect that power bills inflation with gather some momentum through 2017 and there is a clear risk this could extend into 2018.
<a href="https://www.propertyobserver.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.27.08%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.27.08%20AM.png" alt="">
Holding back the pace of non-traded price gains was a more modest 3.1% rise in education (3.8% was expected) and a 2.0% gain in health (2.6% expected). The Federal Government has been targeting rising health costs and the Q1 lift in pharmaceutical in particular was smaller than it has been in recent years (4.9% vs 5.7% expected).
Non-traded prices rose 0.9% lifting the annual pace to 2.6%yr from 2.1%yr. Rising housing costs are key to this and without the constraints on education and health non-traded inflation would be rising at a more rapid pace placing some upwards pressure on core inflation. 
Looking forward housing remains key as other price pressures remain subdued and the AUD pass through is restrained.
The March quarter was another soft update on inflation. Competitive margin squeeze remains in some consumer sectors while the gains for health and education have been more modest than expect. Dwelling costs have gathered momentum adding to the pressure from power bills but rents inflation is holding a 22yr low. So despite the recent rise in inflationary expectations towards the long run average, the March CPI update suggests that inflation remains well contained.
Our preliminary estimate for the core measures for Q2 2017 is 0.5%qtr/1.7%yr holding inflation below the bottom of the RBA’s target band. Our projections do not see core inflation return to the band until September quarter 2018 while headline inflation is set to ease back below the band by early 2018. 
 
Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.
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Rent inflation is holding a 22yr low: Justin Smirk

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According to the ABS, consumer inflation in Australia has risen by 63% since 1998, according to Gareth Aird, an economist for CBA.
Over that same period, national dwelling prices have lifted by ~300% (chart 1).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%201.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%201.jpg" alt="">
Looking at the more recent past, dwelling prices have lifted by 44% since QI 2013 while headline inflation has only risen by 8% (chart 2).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%202.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%202.jpg" alt="">
For all intents and purposes, dwelling prices are excluded from the CPI.
In a technical sense, “new dwelling purchase by owner-occupiers” is included.
But this is simply the cost of new homes excluding land (i.e. it is basically a residential construction cost index).
In reality it’s not a representative measure of dwelling prices because it doesn’t take into account the primary driver of changes in the price of a dwelling – which is of course the price of land.
Growth in the new homes ex-land component of the CPI bears no resemblance to changes in dwelling prices (chart 3).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%203.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%203.jpg" alt="">
And yet this component of the CPI is worth a non-trivial 8.7% of the total basket.
According to the ABS, land prices are excluded from the CPI because they don’t fit the definition of a consumption good.
The ABS states that, “the CPI only includes goods and services that are purchased by households for consumption.
A consumption good or service is one from which households directly derive utility or satisfaction.
Any business–related purchases by households are excluded from the basket, as are those items that have a significant savings or investment component, such as land and capital goods.”
Here one could reasonably argue that purchasing a home to live in has aspects of both investment and consumption as utility and satisfaction are derived from home ownership.
We continue: the ABS also states that, “the principal purpose of the CPI has been to measure inflation faced by households to support the operation of macroeconomic policy decision making.”
Our emphasis is on “inflation faced by households” because clearly based on the exclusion of land prices in the CPI the ABS does not consider dwelling price rises to be “inflation faced by households”.
That is true for households who own a home.
But for aspiring home owners dwelling prices are part of the inflation that they face.
Their exclusion from the CPI therefore makes it an inaccurate measure of the type of living costs that they face.
The RBA supports the exclusion of land prices in the CPI and according to the central bank, “the purchase of existing housing represents a transfer within the household sector (which means that there is zero net expenditure by the household sector in these transactions)”.
Very true. But then rent is also effectively a transfer within the household sector from tenant to landlord and rent is included in the CPI.
Land is not the only component of the cost of home ownership that is excluded from the CPI.
Mortgage interest payments are also not in the consumer basket (they were included prior to 1998).
And there is no estimate of imputed rent (i.e. owner-occupiers are effectively renting properties from themselves).
This simply leaves “rent” as being the main component of the CPI that picks up changes in the cost of having a roof over one’s head, notwithstanding the ‘residential construction cost index’ component.
This would be fine if households were completely indifferent between renting and purchasing a home (i.e. if they were perfect substitutes).
But this is simply not the case.
Here we want to point out that we are not arguing for the inclusion of dwelling prices in the CPI.
Rather, we are questioning the basis for their exclusion given nothing in the CPI as it currently stands fairly picks up changes in the cost of purchasing a dwelling to live in.
For illustrative purposes, it’s very easy to construct a CPI that includes changes in dwelling prices.
Here we construct a modified CPI (called CPIH) whereby dwelling prices account for 10% of the basket – roughly equivalent in size to the “new dwelling purchase by owner-occupiers” component of the CPI.
We use the ABS residential price index as the measure of changes in dwelling prices to construct our new CPIH. The results are telling, but unsurprising.
The inclusion of dwelling prices in CPIH, even just accounting for 10% of the basket, pushes up the annual change significantly since 1998.
The annual change in CPIH is, on average, 55bps higher than the annual change in CPI (chart 4).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%204.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%204.jpg" alt="">
The point of this exercise is to highlight how the exclusion of dwelling prices from the CPI has masked the uplift in the cost of living for households who don’t own a dwelling but aspire to purchase one.
For them, the cost of living has risen by more than is implied by the CPI. This is, to an extent, very much a question of generational equity.
Real wages growth has generally been positive over the past five years despite falling nominal wages growth as CPI inflation has been trending down (chart 5).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%205.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%205.jpg" alt="">
But if we deflate nominal wages growth by a measure of inflation that includes dwelling prices (i.e. CPIH) the picture looks quite different (chart 6).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%206.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%206.jpg" alt="">
Deflating wages growth by CPIH more accurately captures real wage changes for those who aspire to own a home.
These individuals (or households) are generally below 35.
To put it another way, younger people, who are less likely to own a dwelling, have faced a greater deterioration in real wages than is implied by deflating nominal wages by the CPI.
This is because the single biggest purchase they are yet to make is not included in the CPI. And it has, of course, been rising much, much quicker than the CPI itself.
There is a monetary policy, inflation and dwelling price nexus.
The RBA’s mandate is to maintain price stability, full employment and the economic prosperity and welfare of the Australian people.
To achieve this, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy, as measured by the CPI, in the 2–3% range on average, over the medium term.
Interest rates have needed to be on a long-run downward trend for the RBA to meet its inflation target as the neutral rate has fallen (charts 7 and 8).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%207.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%207.jpg" alt="">
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%208.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%208.jpg" alt="">
Throughout that period, Australia’s stock of debt has risen as a share of income, mainly driven by the household sector (chart 9).
<a href="https://www.propertyobserver.com.au/images/2017/04/20/Chart%209.jpg" target="_blank">Click to enlarge</a>
<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/2017/04/20/Chart%209.jpg" alt="">
Most of that debt has been going into bricks and mortar and dwelling prices have therefore risen faster than income.
But as discussed above, none of this has been captured in the CPI.
Back in 1997, the RBA argued against the inclusion of land in the CPI in its submission to the 13th Series CPI review.
And they also argued against including a mortgage interest component in the CPI because, “the interest charges as measured tend to distort the signal offered by the CPI of inflationary trends, by incorporating the policy responses to those trends.”
In other words, if the RBA cut (increased) rates then interest charges would fall (rise) thereby having the opposite intended impact by pushing down (up) on CPI inflation.
But including dwelling prices in the CPI would assist the RBA in hitting its inflation target.
Lowering (raising) interest rates has an immediate positive (negative) impact on the price of the very thing not included in the CPI – dwelling prices.
The hangover in Australia from pushing interest rates lower over an extended period of time to hit an inflation target has been a huge accumulation of debt and very high dwelling prices.
A raft of other policy decisions have also played their part.
The interest rate lever has helped to smooth out the business cycle.
But as we sit close to the lower bound in rates, and with debt a share of income at a record high, it seems futile to chase inflation any lower via more monetary policy stimulus unless the housing market falters and the appetite for additional debt cools.
A suite of policy reforms could help here.
When Governor Lowe appeared before the House of Representatives Standing Committee on Economics in late February he stated that, “the main effect (of another rate cut) would be more borrowing for housing, pushing up housing prices.” Touché!
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What if dwelling prices were included in the CPI?: Gareth Aird

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GUEST OBSERVER
The Australian Bureau of Statistics (ABS) released consumer price index (CPI) data for the September 2016 quarter last month. 
According to the data, headline inflation increased by 0.7 percent over the quarter to be 1.3 percent higher over the year. 
Meanwhile, underlying inflation was recorded at 0.3 percent over the quarter and 1.5 percent higher over the past 12 months. Both headline and underlying inflation have increased at a rate below the RBAs target range of 2 percent to 3 percent. 
This would usually see the RBA cut interest rates to try and lift inflation however, the previous cuts in May and August, which had the same intent, have not successfully lifted inflation. 
What those cuts did manage to do was re-energise growth in housing, particularly in Sydney and Melbourne. 
For this reason there is some speculation as to whether the RBA will risk cutting interest rates again given concerns that a lower cash rate will fail to push the dollar lower and lift inflation but add further heat to an already strong housing market.
With the CPI data released, we can pair it with the CoreLogic home value index data to September 2016, in order to obtain an understanding of real growth in values. 
Although headline value growth is lower than it was a year ago, so too is headline inflation which mean that real value growth, particularly in Sydney and Melbourne remains strong.
<a href="/images/2016/10/31/CoreLogic%201.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/31/CoreLogic%201.jpg" alt="">
The above chart highlights the real and nominal changes in home values across each capital city over the 12 months to September 2016.  In both real and nominal terms values have fallen over the past year in both Perth and Darwin while they have increased across each of the remaining capital cities. 
There’s also been evidence that along with Sydney and Melbourne, where growth has been strong for almost four years now, value growth has also picked up in other cities such as Adelaide, Hobart and Canberra.
<a href="/images/2016/10/31/CoreLogic%202.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/31/CoreLogic%202.jpg" alt="">
If you look at the compound annual change in real home values over the past five, ten and 15 years, the 15 year time-frame in most capital city provides the strongest performance. 
The clear exception is in Sydney where the last five years have resulted in the strongest annual returns.  In contrast, across all other capital cities except for Perth and Hobart the past five years have recorded the weakest annual growth across each of the three time-frame. 
This result really highlights the strength of the Sydney market over the past five years and its relative weakness over the 10 years preceding.
<a href="/images/2016/10/31/CoreLogic%203.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/31/CoreLogic%203.jpg" alt="">
Since the end of 2008 (ie post GFC), growth in home values has significantly skewed towards the Sydney and Melbourne housing markets. 
As highlighted in the above chart, when adjusted for inflation values are lower that they were at the end of 2008 in Brisbane, Adelaide, Perth, Hobart and Darwin. 
Sydney and Melbourne have also seen a substantially greater increase in values relative to Canberra which was the only other capital city to have seen an increase in real home values.
<a href="/images/2016/10/31/CoreLogic%204.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/31/CoreLogic%204.jpg" alt="">
Sydney and Melbourne are the only two capital cities in which real home values are now back above their previous peaks. 
After peaking all the way back in the March 2004 quarter, real home values in Sydney are now 35.3 percent higher in Sydney and in Melbourne they are 17.2 percent higher than their September 2010 peak. 
All other capital cities are still recording real home values below their previous peaks.  The magnitude of these declines are recorded at: -10.2% in Brisbane, -5.3 percent in Adelaide, -20.2 percent in Perth, -15.6 percent in Hobart, -23.8 percent in Darwin and -1.0 percent in Canberra. 
In some of these cities, values peaked many years ago, as far back as 2007 in Perth and Hobart and 2008 in Brisbane.
Although interest rates are low and in real terms homes have been becoming more affordable outside of Sydney and Melbourne it still hasn’t proved to be enough to lure substantial demand and subsequent growth across the other capital cities. 
What this highlights is the importance of employment, what sets Sydney and Melbourne apart, outside of more expensive housing prices, is the fact that they both have strong economies which are creating jobs. 
Housing affordability alone is no longer enough to attract an increasing level of housing demand, you need a strong economy and the jobs that go along with those strong economic conditions.
Perth and Darwin in particular are well into a fairly substantial value decline phase which is appears set to continue.  Since their respective market peaks in September 2007 and September 2010, real home values are now -20.2 percent and -23.8 percent lower respectively.
Cameron Kusher is research analyst for CoreLogic. You can contact him <a href="https://blog.corelogic.com.au/about/">here</a>.
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Home values now more than 20 percent down in Perth and Darwin

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GUEST OBSERVER
Australian consumer price data for Q3 2016 indicates that while inflation remains below the Reserve Bank of Australia’s (RBA) target band, there are signs of stronger price growth, indicating we may be near the inflation low for this cycle. This provides mixed signals for Australian commercial property.  For the retail sector, the data indicate both tradeable and non-tradeable goods inflation appears to have stabilised, suggesting improved pricing may support retail sales growth. However, this is likely to be limited by soft wages growth and ongoing competition in the supermarket and apparel sectors. Stronger inflation may also put upward pressure on bond yields, limiting demand for Australian commercial real estate and A-REITs. However, thecommercial real estate bond yield spread remains very large andAustralian commercial real estate continues to look attractive compared to many overseas markets, suggesting investment demand should remain solid.
<a href="/images/2016/10/27/unnamed.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/unnamed.jpg" alt="">
 
What happened?
Consumer price data for Q3 2016 was released today by the Australian Bureau of Statistics (ABS). Theheadline inflation data show annual growth of 1.3%, up from 1.0% in June and price growth over the quarter rose to 0.7% from 0.4% in June. The growth was stronger than expected with the consensus estimates at 0.5% quarter on quarter (QoQ) and 1.1% year on year (YoY)
The headline figure includes some items with volatile pricing, so the RBA tends to keep a closer eye on measures of ‘core’ inflation such as the Trimmed Mean and Weighted Median. These rose by an average of 1.5% over the year. At 1.5%, the figure remains below the RBA’s target range of 2%-3%, the low price pressure being a factor in the RBA’s decision to cut the cash rate to 1.5% in August. The market, as indicated by ASX 30 Day Interbank Cash Rate Futures, was yesterday pricing in the chance of another rate cut at next Tuesday’s RBA meeting at just 16%. The low core inflation data may increase the odds of another rate cut, however, emerging signs of price growth in some areas may temper this.
Unlike previous quarters in 2016, price growth across the various categories was generally positive (Figure 1). 
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.28.08%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.28.08%20AM.png" alt="">
While most price growth continues to appear in non-discretionary categories such as health andeducation there was also growth in a number of ‘retail’ categories including appliances, furnishings andapparel. The strongest price growth was in the alcohol and tobacco category and was largely due to tobacco tax increases. Food price growth picked up on a surge in fruit and vegetable prices, up 11.6% QoQ. Falling utility prices had been dampening overall CPI increases, however in Q3 utility costs had their strongest increase since the end of carbon pricing with electricity costs rising 5.4% QoQ (Figure 2).
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.29.17%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.29.17%20AM.png" alt="">
Tradeable and non-tradeable goods price growth appears to have stabilised after several quarters of slowing growth (Figure 3).
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.30.11%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.30.11%20AM.png" alt="">
Tradeable goods price growth was 0.7% over the year. Still low, though it had averaged zero growth over the previous six quarters. Tradeable goods inflation is usually correlated with changes in the Australian dollar (AUD), however, this relationship has broken down recently (Figure 4). 
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.31.08%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.31.08%20AM.png" alt="">
The break appears correlated to the relatively soft petrol prices, which now appear to be stabilising (Figure 5). 
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.32.49%20AM.png" target="_blank"> Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.32.49%20AM.png" alt="">
Weak apparel price growth also contributed to low tradeable goods inflation. While apparel price pressure is still soft, the 1.2% YoY growth recorded this quarter is the strongest since March 2012. The soft growth is likely due to increased price competition from new international retailers such as H&amp;M, UNIQLO and Zara as well as increased use of mobile technology for price comparison.
What does it mean?
Retail
Areas of increased competition such as apparel and supermarkets have contributed to weaker retail price growth though there are signs prices are stabilising. Sectors with stronger price growth, such as household goods, are continuing to benefit from the strong east coast housing market and small business tax deductions. This suggests the downward pressure on moving annual turnover growth will begin to dissipate and sales growth improve (Figure 6).  
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.33.45%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.33.45%20AM.png" alt="">
That said, the upside is likely to be limited by factors such as weak income growth. Employment data, released last week, show a spike in part-time employment.  This is part of a continuing trend associated with the end of the mining boom and is correlated with relatively weak wages growth (Figure 7).
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.34.42%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.34.42%20AM.png" alt="">
Investment demand
A low inflation, soft economic growth environment has resulted in very low interest rates across the globe. This led to a global hunt for yield and relatively strong demand for Australian commercial property. Therelatively wide property income – bond yield spread has supported the demand for Australian commercialproperty. Whilst today’s data suggest we may be near the low point for inflation in this cycle and put upward pressure on bond yields, they would need to increase significantly before Australian commercial real estate begins to look relatively expensive (Figure 8).
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.35.42%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.35.42%20AM.png" alt="">
In addition, Australian commercial real estate appears relatively attractive compared to many overseas markets, which should also support ongoing demand from international investors. 
A-REIT performance has been linked to changes in bond yields. Figure 9 indicates the increase in theS&amp;P/ASX 200 A-REIT index has been correlated with the fall in bond yields since 2011. If bond yields continue to increase from their recent lows, this is likely to limit A-REIT stock price growth.
<a href="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.36.43%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.36.43%20AM.png" alt="">
John Sears is national director, research, Cushman and Wakefield and can be contacted <a href="https://www.cushmanwakefield.com.au/en-gb/" target="_blank">here</a>.
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CPI and the impact on commercial property: John Sears

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GUEST OBSERVER
September quarter inflation was slightly higher than expected at 0.7 percent quarter on quarter or 1.3 percent year on year (up from 1 percent yoy).
However, this was driven by sharp price rises for only a handful of items with fruit and vegetables up 11.6 percent/qoq, electricity prices up 5.4 percent/qoq, tobacco prices up 2.3 percent/qoq and property rates and charges up 4 percent/qoq.
Underlying inflation was actually lower than expected at 0.3 percent/qoq or 1.5 percent/yoy. Deflationary pressures remain significant across a range of areas with clothing prices up only 1.2 percent/yoy, rents up just 0.7 percent/yoy, household appliances up only 1.3 percent/yoy, motor vehicle prices down 1.6 percent/yoy and ongoing weakness in prices for recreation and culture (up 0.6 percent/yoy). 
Both tradeable and non-tradable inflation remain weak at 0.7 percent/yoy and 1.7 percent/yoy respectively.
<a href="/images/2016/10/27/image004.png" target="_blank">Click to enlarge </a>
<img src="/images/2016/10/27/image004.png" alt="">
Source: ABS, AMP Capital
 
Implications for the RBA 
While it’s a close call, the September quarter inflation result was probably not low enough overall to trigger another rate cut from the RBA at next week’s Board meeting. Both headline and underlying inflation are in line with the RBA’s inflation forecasts and the rise in headline inflation may reduce the short term downside threat to inflation expectations and at the same time economic growth in Australia looks reasonable with the worst of the mining investment slump behind us and a rise in commodity prices set to boost growth in national income. As such, the RBA can afford to be patient in waiting for inflation to head back to target and thereby avoid the risk of adding to financial instability (read a further acceleration in Sydney and Melbourne home price gains) with another rate cut for now.
However, inflation is still very low, it’s not clear that it has bottomed yet and the $A remains uncomfortably high so it’s premature to close the door on another rate cut.
Overall, we think that the RBA will leave rates on hold when it meets again next week, but that another cut (more likely next year) cannot be ruled out.
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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