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

Joel Robinson

Units lead Melbourne price growth as apartments outperform houses: RPM

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

Frith & Howarth to deliver Brunswick’s largest apartments

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

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

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

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

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

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

Elliot Clarke

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EXPERT OBSERVER
The RBA has been the focus this week given the August Board meeting and today’s release of their latest Statement on Monetary Policy.
Unsurprisingly, <a href="https://rba.gov.au/media-releases/2020/mr-20-18" target="_blank">the RBA decision statement</a> maintained a cautious view on the global economy, noting that the outlook remains highly uncertain despite the worst of the contraction having passed.
The risks for the domestic economy were also highlighted: the growth view for 2020 maintained at -6.0% as the 2021 gain was revised down to +5%; and the end-2020 unemployment rate forecast revised up from 9% to 10% on the expectation that Victoria’s lockdown will result in further job losses.
In light of these factors, the Governor emphasised the RBA’s commitment to the 3-year bond yield target of 0.25% by announcing that CGS purchases would re-commence after the August meeting.
The statement also outlined the ongoing evolution of the Term Funding Facility, highlighting the liquidity support it has and will provide to the economy.  
<a href="https://www.propertyobserver.com.au/https://westpaciq.westpac.com.au/Article/44488" target="_blank">Westpac’s own growth view</a> remains more constructive on 2020 than the RBA, but we believe 2021 will disappoint.
Having revised our 2020 growth target from -4.2% to -4.7%, principally due to developments in Victoria, while keeping our +3.0% expectation for 2021 unrevised, we believe the Australian economy will end 2021 with a level of GDP 1.8ppts below that at December 2019. This compares to -1.0% <a href="https://www.rba.gov.au/publications/smp/2020/aug/economic-outlook" target="_blank">on the RBA’s baseline forecasts</a>.
On either view, labour market slack is set to become entrenched for an extended period. From its 10% peak later this year, the RBA anticipates that the unemployment rate will only slowly decline to around 7% at December 2022.
A full discussion of Westpac’s revised forecasts, the outlook for policy and the risks was provided by <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2020/August/er20200805BullAustraliasGrowthProspects.pdf" target="_blank">Chief Economist Bill Evans</a> this week.
The release of our <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2020/August/WestpacMarketOutlookAugust2020.pdf" target="_blank">August Market Outlook</a> publication this week also gave cause to reassess our global views. Most prominent are the divergent economic prospects of the US and China as well as the rapid depreciation of the US dollar currently underway.
Beginning with the US and China, the response of authorities in each jurisdiction to COVID-19 was polar opposite; unsurprisingly, so are the economic consequences now being seen.
Whereas China regained the activity lost in Q1 in just three months, the US looks likely to end-2021 with a level of GDP almost 3.0% lower than end-2019. Further, while short and medium-term risks for China are to the upside, they are most certainly skewed down in the US.
While out of the spotlight, Europe is somewhere in between, still having to suppress small but frequent COVID-19 outbreaks, but with the promise of co-ordinated fiscal support and an emerging global recovery getting brighter by the week.
That then brings us to the US dollar downtrend. The scale of the decline we have seen to date from the peak levels seen in April and May has been broadly in line with our expectations.
But, as is often the case in financial markets, the speed of the move has been much more rapid than we anticipated. As a result, the August Market Outlook includes meaningful revisions to our US dollar expectations against Euro and the British Pound.
The US dollar DXY index is now expected to retrace most of its gains since 2018, falling to 90.5 by end-2021. The risk remains that this move occurs quicker than forecast and/ or is more pronounced.
The gains we anticipate for China’s Renminbi highlight the promise of recovery for nations that have suppressed COVID-19’s spread.
While US/China trade tensions loom, China has ample trade opportunities before it within the Asian region, where economic development prospects remain strong. 
ELLIOT CLARKE is a senior economist at Westpac 
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j.ballantyne1990-6AQqhLzZaK

Downward forecast revisions highlight enduring uncertainty: Elliot Clarke

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EXPERT OBSERVATION
Labour market data provided two contrasting perspectives on Australia’s economy. Meanwhile, consumer sentiment strengthened, and business conditions remained above average.
Following last month’s 5.0% unemployment rate, a level historically regarded as consistent with full employment, the <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2018/November/Labour-FI_chart_packOct18.pdf" target="_blank">Australian labour force survey for October</a> was keenly awaited. It certainly did not disappoint, with the unemployment rate remaining at 5.0% despite a partial reversal of the 0.2ppt decline in participation seen in September. On a multi-month basis, it is employment not participation that is driving the unemployment downtrend. At October, annual employment growth stood at 2.5%yr, nearly a percentage point above population growth. Furthermore, those gains have largely been full-time in nature.
The above trend is favourable for household income growth, increasing aggregate hours worked across the economy and reducing slack. However, this tightening of the labour market is yet to stoke wages growth. In the September quarter, <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2018/November/WPI_Q32018.pdf" target="_blank">the wage price index</a> rose just 0.6% (2.3%yr) and was weaker still for the private sector at 0.5% (2.1%yr). Arguably this disconnect between wages and employment growth is in part due to considerable underemployment (those working less hours than they would like to). That said, the current level of underutilisation is historically consistent with wages growth around 2.5%yr, not the 2.1%yr currently being seen in the private sector. Herein is evidence of other factors being at play, principally globalisation; technology; and a focus on efficiency amongst large corporates.
In terms of the outlook for wages, it is troublesome that the states of NSW and Vic, who have seen a more aggressive downtrend in unemployment and underemployment, are also yet to see a substantial lift in wages growth, respectively 2.2%yr and 2.5%yr at September.
The enduring disconnect between wages and employment arguably is a key reason why <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2018/November/er20181114BullConsumerSentiment.pdf" target="_blank">family finance perceptions</a> continue to lag households’ economic and labour market expectations; and now, even as family finance views are shifting to above long-run average levels, why ‘time to buy a major household item’ is at 18 month lows and spending intentions for Christmas are the weakest they have been since 2014. House price expectations, which are now on par with their lowest ever level back to mid-2009, are decidedly unfavorable for spending, as is the pressing cash-flow reality of high household debt. Weakness in consumer spending was also evident in the <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2018/November/er20181113BullAustralianBusinessConditionsOct.pdf" target="_blank">NAB business survey</a> for October, particularly in NSW. That said, while confidence is now below average in aggregate, conditions for businesses remain above average overall on the back of robust trading conditions and profitability.
Moving offshore, data released this week for China points to the investment trend having troughed. That said, the acceleration in activity will be slow in coming amid headwinds from ongoing structural change in the finance sector and, to a lesser extent, uncertainty associated with trade policy. On that front, murmurs of the US’ being willing to compromise with China on trade bolstered markets overnight. President Trump will meet President Xi at the end of the month. The hope is that this conversation can turn the tide and stop any further intensification of tensions. This would only be a starting point for negotiations however. Many hurdles must be overcome for a lasting solution to be attained.
For the US, data has been light but broadly supportive of the ongoing robust, non-inflationary uptrend in activity continuing, with the CPI benign in October (annual core inflation at 2.1%yr) as retail sales beat expectations (0.8%). Admittedly retail sales were bolstered by Hurricane season replacement spending in October and higher oil prices in the month, but underlying momentum remained robust. Chair Powell again showed confidence in the US economy and the outlook this week despite weakening residential investment and uncertainty over the lasting benefit of fiscal policy to growth. Recent market volatility is not a material concern, nor are global risks and trade tensions. But all are being watched closely. The move to hold a press conference after every FOMC meeting and to review “strategies, tools and communication practices” highlight a desire by Chair Powell and the Committee to be more nimble as this cycle matures. 
For Europe (and the UK), Brexit has again been the focus. A brief respite from Brexit uncertainty was seen mid-week as the UK Cabinet rubber stamped a transition deal agreed by UK and European negotiators. But multiple ministerial resignations the day after consequently put Prime Minister May’s position and the deal in jeopardy. It is not at all clear if the current deal will remain let alone what a replacement deal might look like. Of course the final deal, whatever its terms, then has to be passed by both the UK and EU parliaments. On the Italian budget, the Government has remained steadfast in not adjusting the proposal in response to disagreement from the European Commission. Whether the European Commission goes through with imposing infringement penalties will be of key interest in the weeks ahead.  
Elliot Clarke is senior economist at Westpac and can be contacted <a href="https://www.westpac.com.au/" target="_blank">here</a>.
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Strong jobs growth yet to spur wages and spending: Elliot Clarke

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GUEST OBSERVATION 
The past week has been light on data, but full of angst. At the centre was President Trump again raising questions over the appropriateness of the Federal Open Market Committee's (FOMC) ongoing gradual normalisation.
The market subsequently found cause to be more cautious on growth, the S&amp;P500 jolting 3% lower on Wednesday before recovering almost 2% on Thursday. Markets across the world, by and large, followed suit.
During an interview with the Wall Street Journal, President Trump made clear his displeasure with the FOMC over their gradual normalisation.
President Trump’s focus was arguably more on his economic legacy than the appropriateness of the FOMC’s actions, made clear by comments referencing President Obama’s “zero [interest] rates”.
But President Trump did clearly say that he sees the FOMC as the biggest risk to the US “because I think interest rates are being raised too quickly”.
Many across the globe would instead argue that it is his administration’s trade policies that are the greater cause for concern, particularly with respect to business investment.
While the US Markit PMI’s held up in October, according to the flash release, core durable goods shipments and orders both showed weakness in September.
For core shipments, September was the second consecutive flat outcome. Core orders furthermore signalled that growth is to remain absent, falling for a second consecutive month in September.
This soft trend fits with the deterioration seen of late in the regional business surveys’ investment intention series, but is a stark contrast to the optimism around fiscal expansion and domestic demand.
Taken together, these observations highlight the uncertainty that the tariffs have created.
Combined with the end of extraordinary fiscal policy in late-2019, the negative shock to business investment from the US’ own tariffs is crucial to our view that growth will decelerate through mid-2019 and see the FOMC go on hold – indefinitely.
US housing data released this week gave the FOMC an additional reason to be cautious but not alarmed.
New home sales fell over 5% in September; moreover, this was the fifth decline in six months.
If we take a step back and consider data for the past two years however, the trend looks more flat than downward.
Given home builder confidence and Case-Shiller house price growth remain strong, and the 30-year mortgage rate accommodative, the current level of sales should persist and inventories remain manageable.
Turning to Europe, the ECB met for their October meeting this week. By and large, their views were unchanged.
The Council continues to have considerable confidence in the domestic economy, particularly the strength of employment.
The latter is expected to flow through to wages and underlying inflation in time, bringing inflation to the ECB’s ‘near 2% year target’. Although risks are still considered “broadly balanced”, evident in the Q&amp;A however was that external risks to this view have built.
This highlights a need to pay close attention to the ECB’s forecasts as they are updated at the December meeting and the end of each quarter thereafter.
We remain of the view that only the deposit rate will be increased from late-2019, with the refinance rate to wait until at least mid-2020. Risks to this view are skewed towards a later start to hikes.
Coming back to Australia, in the absence of any data, RBA discussion of the labour market was the focus.
Following the unemployment rate’s jolt lower to 5.0% in September, historically the benchmark for ‘full employment’ in Australia, Deputy Governor Debelle remarked this week that “We [the RBA] have an open mind on the question of what actually constitutes full employment”. 
Westpac’s own view is that the unemployment rate consistent with full employment is actually likely to be well below the current 5.0% figure, hence wage growth and inflation are unlikely to pick up anytime soon.
This fits with the experience of the US where, with the unemployment rate now a percentage point below historic estimates of ‘full employment’, wages are only just starting to accelerate robustly.
Looking ahead, we see the Australian unemployment rate holding near 5.0% through 2018 and 2019, and hence wages growth and inflation remaining benign.
The next key update for Australia will be the September quarter CPI report, due next week.
On all fronts, it is expected to highlight the absence of inflation pressures and justify the RBA remaining on hold through 2019 and 2020.    
Elliot Clarke is a senior economist at Westpac and can be <a href="https://www.westpac.com.au/news/authors/elliot-clarke/" target="_blank">contacted here.</a>
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Trump's tariffs likely to lead to further interest rate caution: Westpac's Elliot Clarke

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Momentum in China’s housing market has continued to build in recent months. At June, 84% of the 70 cities surveyed were reporting monthly price gains – the strongest outcome since August 2016. At 90%, gains for the established market were broader still – a high back to April 2013.
While the breadth of gains is striking, their quantum remains relatively subdued compared to heights reached in 2015 and 2016.
For new housing, prices in tier 2 are currently up 6.6%yr, while in tier 3 they have risen 6.0%yr. Tier 1 house prices are, in contrast, broadly in line with their year ago levels after annual growth troughed at –1.0% in April.   
For existing housing, very similar outcomes have been seen: prices in tier 1 are unchanged; and in tier 2 and tier 3, they are up 6.3%yr and 3.8%yr respectively.
Taking a look at the monthly growth pulse for new housing, it is evident that momentum is picking up. Average growth has lifted from –0.1% in January to 0.3% in June; while the maximum gain has jumped from 1.2% to 3.3%. 
Authorities are less likely to react to accelerating price growth in this instance given it is being seen in tier 2 and 3, where construction activity and wealth gains are desired, and because (in a macro sense) strength in residential construction is currently necessary to offset weakness in other key sectors – namely utilities and transport.
Growth in housing starts has accelerated ahead of sales, so it is right to expect construction momentum to hold up in the second half of 2018.
That being said, if the pace of sales does not follow, then construction activity growth will again fall back as inventory is worked through.
<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/2018/8/17/china%201.jpg" alt="">
If authorities decide that a further easing of financing conditions is needed, it will come via another cut to the Reserve Requirement Ratio (we forecast 100bps by year end) and the provision of additional liquidity to interbank markets. By and large, region-specific mortgage restrictions will remain in place.  
<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/2018/8/17/china%202.jpg" alt="">
Elliot Clarke is a senior economist at Westpac and can be <a href="https://www.westpac.com.au/news/authors/elliot-clarke/" target="_blank">contacted here.</a>
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Perspective on Asia, China housing update July 2018: Elliot Clarke

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EXPERT OBSERVER
For Australia, the past seven days have been focused on the labour market, with updates for wage growth and employment received.
On employment, the 4k decline in jobs in the month of July was well below the market’s expectation, but in line with our own. Given it follows an outsized 58k gain in June, the weak July outcome is certainly not a cause for concern. Indeed the past three months have seen an average monthly gain of 22k, ahead of the 18k trend pace of growth. Looking ahead, we anticipate that momentum in employment will slow in the second half of 2018.
Based on employment growth, wages growth should be much stronger than the 2.1% reported for the year to June 2018. Here we see the impact of the underutilisation of workers which, in our view, is set to remain a significant concern hence. Broadly we believe this under-reported slack will hold nominal wage inflation around 2.0% through the remainder of 2018 and 2019 and, as a consequence, real wage growth will be negligible. This situation will continue to weigh on households’ perceptions of their family finances and willingness to spend.
Another important consequence of inflation persistently at the lower-bound of the RBA’s target range and weak (or no) real wage growth is that household’s inflation expectations are suppressed. Our Chief Economist Bill Evans has taken up this important topic this week. The take-home point for policy is that “there must be a risk that, at least from an expectations perspective, low inflation is embedded in the system for longer than the Bank and the market are currently expecting”.
Outturns as above would be a stark contrast to the positive expectations of the Government and the RBA – the latter re-iterated during Governor Lowe’s appearance before the House of Representative’s Standing Committee on Economics this week. This is why we believe aggregate growth in 2019 will be sub-trend, and that the RBA will remain on hold into 2020.
Turning to the US, the New York Federal Reserve’s consumer credit survey was the highlight, but out of the headlines. Conflict between the US and Turkey instead remained front of mind for the press. This is a highly uncertain situation, and is unlikely to be resolved soon. We are not overly concerned by the effect this situation will have on global trade or growth, but we are mindful of potential spill-over effects to the European banking sector (who have considerable exposure to Turkish corporates) and to sentiment towards other emerging markets. Developing nations geographically near Australia are in a far better situation than Turkey and where they were in the late-1990’s (based on current account and external debt metrics). Hence a real economy and/or emerging market financial market contagion in our region is highly unlikely. Still, amid uncertainty, market participants are likely to sit on the sidelines until the data confirms there is no need for concern.
As we continue to outline, the greater risk to the region is likely that emanating from China’s domestic banking system as it undergoes lasting change to rein-in shadow banking activity and shift the majority of credit supply to the banks. Chinese credit data is now available to July. In the most recent release, a further fall in shadow banking credit was seen such that credit provided by these shadow lenders has now only increased by about RMB700bn in 2018 compared to almost RMB3.5trn at this time in 2017. Greater lending by the banking system has only offset around RMB900bn of the reduction in new shadow credit in 2018, so total credit growth in 2018 is almost RMB2trn less than the prior year. This outcome is intended and well managed, but whenever a policy shift of this magnitude is undertaken, there are risks which must be monitored. It is not happenstance that Chinese regulators have recently acted to ease financial conditions and bolster market liquidity.
In these uncertain times, a clear positive for China’s economy is their housing market. In stark contrast to the 5.5% gain for total fixed asset investment, real estate investment is running at a 10% year-to-date pace. Further, the recent acceleration in starts implies that the majority of this momentum will be sustained into year end, particularly as continued robust price growth in tier 2 and 3 make for an attractive sales environment.
If gains for this sector are to endure, then both central and local authorities will need to push ahead with their intended long-term reforms to drive growth in industry and incomes across the nation. As we look ahead to next week, US/China trade relations will again fill the headlines, given a Chinese trade delegation is reportedly heading to the US for talks just before the US’ next round of tariffs are to take effect.    
Elliot Clarke is a senior economist at Westpac and can be <a href="https://www.westpac.com.au/news/authors/elliot-clarke/" target="_blank">contacted here.</a>
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