The enormity of delivering a true skyscraper in Australia's new development market is often overlooked.

It has taken the best part of a decade since plans for Chevron One were first unveiled, but the 52-storey tower is now complete, with residents collecting their keys and moving into what has become one of the Gold Coast's most recognisable new landmarks.

Rising 127 metres above Chevron Island, Chevron One stands almost twice as high as any other building on the island. Its scale places it alongside the trio of towers at Jewel, arguably the last truly significant addition to the central Gold Coast skyline when they were completed around six years ago.

While there are several developments underway around a similar height to Chevron One, they are more concentrated within clusters of the highest towers in the city. The fact Chevron One sits within a developing precinct, looking back at the other high-rise developments in Surfers Paradise and Broadbeach, makes it a different proposition altogether. It will certainly become a reference point on the Gold Coast skyline.

[smartcode_project:default project_id=6515 project_image_fid=68833]

Developer Bensons Property Group is behind the 52-storey tower, which has just shy of 250 apartments, along with an exhaustive list of resident amenity spread across what is the largest development site ever assembled on Chevron Island.

The tower has been the talk of the town for years, says Ray White Projects Gold Coast agent Caitlin Rosenboom, who is selling the remaining apartments.

"People have been watching Chevron One go up for years," Rosenboom says, adding that many prospective buyers have been surprised by the scale of the views once they step inside.

"It's only when they walk through a completed apartment that they truly understand the position of the building," Rosenboom says.

"The views are jaw-dropping. Whether you're looking east over the ocean, across Surfers Paradise, along the river systems or out to the hinterland, every level offers something different but equally impressive."

[smartcode_project:default project_id=6515 project_image_fid=360215]

One of Chevron One's defining advantages is its location on the eastern side of Chevron Island on Stanhill Drive, a position which protects the views forever.

"There's only one row of houses between Chevron One and the water, and the height restrictions along the river means views from Chevron One can never be built out,"&nbsp;Rosenboom says.

While new apartment developments continue to emerge across the Gold Coast, Rosenboom says opportunities to secure a completed apartment with this level of outlook are becoming increasingly rare.

"The size of the site is something that would be incredibly difficult to replicate today," she says.

"That's allowed Chevron One to deliver the sort of amenity, open space and resident facilities that very few projects can offer. There are not many completed apartment buildings on the Gold Coast right now that can compete with the combination of scale, quality and amenity."

[smartcode_project:default project_id=6515 project_image_fid=68839]

There's around 2,000 sqm of amenity solely for the use of residents of Chevron One. Club One features a uniquely shaped swimming pool that mirrors the footprint of the building itself, set within a extensively landscaped gardens. There's also an indoor pool and spa, a fully equipped gym with a Pilates room, a yoga garden, a bookable private dining area and lounge that can host up to 30 people, and a 24-hour concierge service.

As for the buyers, Rosenboom is fielding enquiry from everywhere: Sydneysiders and Melburnians looking at the new and off-the-plan market following the changes in the Federal Budget, as well as those looking to relocate, through to South East Queenslanders seeking either a permanent home or a weekender bolthole.

"The Gold Coast lifestyle continues to resonate with people relocating from the southern states, and when they see the views and the quality of what's been delivered at Chevron One, it becomes very easy for them to understand the appeal," Rosenboom says.

A diverse mix of one, two and three-bedroom apartments remain available, with each offering "something a little different", be it the orientation and views, configuration, or level, to suit a wide variety of buyers.

The remaining apartments are ready to inspect in person, by appointment.

[smartcode_project_cta:default project_id=6515]

Joel Robinson

A decade in the making: Residents to move into Chevron One as construction wraps up

A general rule of thumb in new apartment developments is that the penthouses get the rooftop.

It's a formula that's become commonplace across Australia's apartment market. Residents might have access to a pool, gym or barbecue facilities on a dedicated lower level, but the most desirable outdoor spaces are typically reserved for the highest-priced homes at the top of the building.

<a href="https://www.apartments.com.au/developers/sherpa-property-group">Sherpa Property Group</a> has taken the opposite approach.

Rather than dedicating the rooftop to a handful of buyers, the Gold Coast developer has made it the centrepiece of its Flourish collection, creating expansive shared spaces from the best vantage point in the building.

The philosophy has reached its most ambitious expression at <a href="https://www.apartments.com.au/new-apartments/flourish-soleira-palm-beach-1150-1160-gold-coast-highway-palm-beach-qld-4221">Flourish Soleira</a> in Palm Beach, where two rooftop precincts connected by a skybridge will deliver one of the most extensive lifestyle offerings seen in a residential apartment project on the Gold Coast.

[smartcode_project:default project_id=150017 project_image_fid=374053]

"We're seeing a clear move toward developments that offer more than just an apartment," Sherpa Group founder Christie Leet said.

"People want spaces that support how they actually live, whether that's working from home, staying active, or spending time with family and friends.

"That's where amenity becomes critical. It's not just about what's included, but how those spaces are designed to be used every day."

[smartcode_project:default project_id=150017 project_image_fid=374052]

The breadth of amenity has already attracted buyers across multiple demographics. Younger first home buyers have been drawn to Soleira's one-bedroom apartments, a product rarely delivered in Palm Beach, while families have responded to practical inclusions such as the shallow children's pool adjoining the main lap pool and the extensive communal recreation areas.

Instead of a single rooftop, Soleira delivers two distinct lifestyle zones.

[smartcode_project:default project_id=150017 project_image_fid=372547]

The southern rooftop has been dedicated to wellness, featuring a gym, yoga and Pilates studio, work-from-home facilities, a wellness centre, spa, and hot and cold plunge pools.

The northern rooftop focuses on recreation and entertaining, incorporating a heated resort-style pool, private dining rooms, pizza ovens, barbecues, a golf simulator, children's recreation areas, and what is expected to be the Gold Coast's first rooftop basketball court, which will also double as a squash court.

[smartcode_project:default project_id=150017 project_image_fid=374054]

Beyond the rooftops, Soleira will introduce 1,500 sqm of curated retail beneath the towers, creating one of Palm Beach's first genuinely mixed-use lifestyle precincts where cafés, restaurants and convenience retail become part of residents' everyday lives.

Sherpa has also retained management rights across the development, allowing it to oversee the long-term operation of the building through a 24-hour concierge model. The developer is also exploring additional revenue streams within the precinct aimed at helping offset ongoing body corporate costs for residents.

[smartcode_project:default project_id=150017 project_image_fid=370962]

While Soleira is the largest project Sherpa has delivered, the rooftop-first philosophy has been evolving for several years.

It began with <a href="https://www.apartments.com.au/new-apartments/amargo-6-12-sixth-avenue-palm-beach-qld-4221">Flourish Amargo</a>, the first project released under the Flourish brand. Rather than competing at the ultra-luxury end of the market with oversized half-floor and full-floor residences, Sherpa focused on creating lifestyle-driven apartments supported by resort-style shared spaces.

Amargo introduced more than 800 sqm of rooftop amenity, combining wellness facilities, heated pools, entertaining areas, cabanas, pizza ovens and private dining spaces into what was designed as an extension of residents' homes rather than a facility used only occasionally.

[smartcode_project:default project_id=146527 project_image_fid=366550]

That approach continued with Flourish Oasis, where the same amenity-led philosophy was refined into a more boutique development. Strong demand from Sherpa's growing VIP database saw much of the project sold before it reached the broader market, reinforcing buyer appetite for apartment communities centred around shared lifestyle experiences.

Flourish Amargo is slated for completion mid-way-through next year, with Oasis to be delivered by late 2027. Flourish Soleira is expected to complete in 2030.

[smartcode_project_cta:default project_id=150017]

Sherpa takes amenity to the sky as Flourish Soleira captures booming Palm Beach demand

As apartment living continues to evolve across Sydney's growth corridors, the quality and distribution of shared spaces is increasingly shaping how residents experience home. Rather than functioning as add-ons, amenities are being embedded into the daily rhythm of a building, supporting everything from quiet retreat to social interaction, often within a single vertical community.

At <a href="https://www.apartments.com.au/new-apartments/aeris-melrose-park-nursery-street-melrose-park-nsw-2114">Aeris</a> in Melrose Park, this approach is resolved through a layered amenity offering that unfolds from ground level through to its upper podium. Developed by <a href="https://www.apartments.com.au/developers/sekisui-house-australia">Sekisui House Australia</a> in partnership with Hankyu Hanshin Properties, the project introduces 468 apartments across two towers and a mid-rise building, positioned at the highest point of the broader masterplan.

[smartcode_project:default project_id=426 project_image_fid=359199]

The amenity experience begins at street level, where two courtyards sit within a landscaped setting that connects residents to the wider network of parks and green spaces. These green spaces are not isolated pockets but part of a wider pedestrian network that links Aeris to the surrounding <a href="https://www.apartments.com.au/developments/melrose-park-nsw-2114">Melrose Park</a> precinct, including Central Park, future schools, and the Town Centre opening in July 2026. The result is a transition that moves from public to private without abrupt boundaries, allowing residents to pass through shaded, tree-lined environments before reaching the building itself.

Moving upward, the focus shifts to the level five podium, where the primary communal facilities are concentrated. This space brings together a 16-metre swimming pool, outdoor seating areas, and a communal BBQ zone arranged to take advantage of elevated outlooks. Seating is positioned beneath pergolas, creating pockets of shade that extend the usability of the space throughout the day. The pool edge aligns with views toward the wider district, reinforcing the sense of elevation that defines the project’s positioning.

In the adjacent building, this is complemented by quieter, more contemplative spaces, including an outdoor cinema set within the same level. Positioned to operate primarily in the evening, it introduces a different tempo to the shared environment, shifting from daytime activity to after-hours use without requiring separate zones.

[smartcode_project:default project_id=426 project_image_fid=360299]

The podium also accommodates an intimate private resident gym. Located on the lower levels, it gives residents convenient access to fitness facilities without leaving the building.

Above, the elevated podium sky deck extends the amenity offering, providing additional open-air spaces with elevated outlooks across the surrounding landscape. While more restrained in program, this upper level reinforces the project’s vertical progression, from ground-level greenery to elevated outlook, allowing residents to move between distinct spatial conditions within a single address.

This distribution of amenities reflects a deliberate response to how residents use space across the day. Sekisui House Australia Sales and Marketing Director Peter Kalaf points to the role these shared areas play in shaping buyer demand. Aeris has been conceived as more than a collection of apartments, with the podium pool, gym and outdoor cinema forming part of a broader lifestyle offering that extends the home beyond each individual residence.

[smartcode_project:default project_id=426 project_image_fid=360300]

What distinguishes Aeris is not the inclusion of these elements individually, but how they are arranged in relation to one another. Active, social, and passive spaces are layered vertically rather than separated, allowing residents to choose between them without leaving the building or moving far from their apartment. This proximity supports both routine use, such as a morning swim or evening workout, and more occasional gatherings, whether around the BBQ area or within the cinema setting.

The amenity design also sits within a broader framework of connectivity across Melrose Park. The Melrose Park Town Centre, anchored by Coles and Dan Murphys, features a mix of retail, dining, health and lifestyle offerings, bringing everyday convenience closer to residents. By the end of the year, more than five hectares of parks and open space, equivalent to around seven football fields of green space on residents' doorstep, will further enhance the precinct, allowing the internal facilities at Aeris to operate as an extension of the wider neighbourhood rather than a substitute for it.

Construction at Aeris continues to gather momentum, with ground floor slabs expected to be completed in late 2026 before the first sections of the buildings begin to rise above ground.

[smartcode_project_cta:default project_id=426]

Elevated amenity anchors daily life at Aeris, Melrose Park

Repeat buyers are one of the strongest measures of confidence in any apartment development.

At <a href="https://www.apartments.com.au/new-apartments/era-newcastle-west-124-126-bull-street-newcastle-west-nsw-2302">ERA</a> in Newcastle West, some purchasers are returning to <a href="https://www.apartments.com.au/developers/gwh">GWH</a> after living at the developer's One Apartments. Their decision to purchase again was driven by the quality of life they found after moving into their first GWH home.

Keith Wilton had spent years living in a house in East Maitland before deciding it was time for a change. Apartment living had always been on his radar, but he was selective about what he wanted.

<iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/FH_1EzB-1vs?si=XScVlP1ERsTDJoME" title="YouTube video player" width="560"></iframe>

"I had some boxes I wanted to tick," he says.

Keith points to the open-plan design, generous outdoor areas and considered inclusions as key reasons One Apartments worked for him.

“One of those things was a nice indoor open plan area, but also I wanted a nice outdoor open area that I could entertain on in summer or Christmases or birthdays,” he says.

He also found value in the smaller details, from integrated appliances to shared resident spaces including the pool, cinema and rooftop areas.

[smartcode_project:default project_id=135096 project_image_fid=356818]

After comparing several developments, he chose One Apartments because of GWH's longstanding local reputation and his own experience working with the developer on a commercial project more than a decade earlier.

"I knew that they were local, that the quality of the build was going to be up there. I'd looked at other apartment complexes around and close by, and I just knew that here was a better decision location wise."

Today, Keith says the move has completely changed how he experiences Newcastle.

"I enjoy living in this location because it's more of a lifestyle change. That Newcastle city living where you can walk to restaurants and bars and even beaches and parks and even shopping across the road."

[smartcode_project:default project_id=135096 project_image_fid=356828]

Beyond the location, he says it's the sense of community that has surprised him most.

"Everyone loves living here because they chose to live here, but everyone looks out for each other. It's a real great community feel here."

For Aimee and Lyle Goodman, the journey started almost by chance.

<iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/tsioMLcnjas?si=zq-ys3JuWpfa5hFv" title="YouTube video player" width="560"></iframe>

The couple happened to be having coffee in Newcastle when they noticed the site where One Apartments was about to begin construction.

"We were aware GWH was planning a development," Aimee says. "We made one phone call and things moved pretty quickly after that."

As busy business owners, they initially thought apartment living would simply reduce the maintenance that came with larger homes. Instead, it fundamentally changed how they spent time together.

"We actually catch up more as a family now," Aimee says.

"We've had homes with big yards and lots of space, but everyone ended up in different rooms. Here we'll have dinner together, the kids can play, and we spend far more quality time together."

[smartcode_project:default project_id=135096 project_image_fid=356829]

Lyle says their confidence came from GWH's reputation within Newcastle's building industry.

"I know people who've worked across different apartment projects, and whenever GWH came up the feedback was always the same. They're rock solid. They're quality."

That confidence only grew throughout the buying process.

"One of the things that really impressed us with GWH was the whole process, was the communication," Lyle says. "It was consistent, it was regular, there was no problem if we had some weird questions, there was no problems in getting answers."

[smartcode_project:default project_id=135096 project_image_fid=351104]

Aimee says one moment stood out.

"The project actually finished on time. We realised we needed to hurry up and sell our house because everything was happening exactly when they said it would."

The positive experience at One Apartments ultimately gave all three buyers the confidence to purchase again with GWH, this time at ERA.

Their confidence reflects what many buyers are seeking in today's apartment market. Location remains important, but so too does certainty around delivery, quality and long-term liveability.

[smartcode_project:default project_id=135096 project_image_fid=356822]

ERA builds on those foundations with 280 one, two and three-bedroom apartments across two landmark towers in <a href="https://www.apartments.com.au/developments/newcastle-west-nsw-2302">Newcastle West</a>.&nbsp;

Designed by <a href="https://www.apartments.com.au/architects/fk-australia">Fender Katsalidis</a>, the project will include more than 2,000 square metres of resident amenities, including a resort-style pool, gym, sauna, private cinema and rooftop entertaining spaces overlooking the harbour and coastline.&nbsp;

The development is also within walking distance of the Newcastle Interchange, Honeysuckle, Darby Street, the harbour foreshore, restaurants, retail and the city’s beaches, continuing the walkable lifestyle that existing GWH buyers say has transformed how they live.

[smartcode_project:default project_id=135096 project_image_fid=356826]

For Keith, the appeal remains straightforward.

"You feel at home even before you've moved into your home."

For Aimee, the change is measured in time.

“I just felt like I had more time,” she says.

[smartcode_project:default project_id=135096 project_image_fid=351102]

Construction at ERA is now underway, with more than half of the residences already sold and limited two and three-bedroom apartments remaining in the East Tower release. Priced from $980,000 for two-bedroom residences and $1.46 million for three-bedroom residences, buyers can secure an apartment with a 10 per cent deposit, with premium homes offering ocean views from Level 8 and harbour views from Level 10.

ERA is also backed by Resilience Insurance's 10-year Latent Defects Insurance policy, providing protection against structural or waterproofing defects for 10 years after completion. The project is anticipated to be completed in early 2028.

[smartcode_project_cta:default project_id=135096]

From ONE to ERA: Why buyers are choosing GWH again in Newcastle West

Virgate Property Group is preparing to commence construction of Verdé, its new apartment development in Melbourne's Arts Precinct at Southbank, following a strong run of sales that has seen more than half of the project's 173 apartments secured.

Verdé has attracted a broad mix of first home buyers, owner-occupiers upgrading from nearby inner-city suburbs and investors, with younger owner-occupier couples aged between 28 and 45 accounting for the strongest enquiry. Many are already living in Southbank, South Melbourne, Albert Park, Port Melbourne, South Yarra and the CBD.

"Verdé is located in one of the most desirable pockets of southern Melbourne," Blair Property Group Director Darren Blair, who is managing sales at Verdé, said.

"It's within walking distance of the Arts Centre, Royal Botanic Gardens, Albert Park Lake, and Southbank's restaurants and retail. It's a great lifestyle location with strong amenity and liveability, which made it a very attractive choice for the project."

[smartcode_project:default project_id=4661 project_image_fid=372549]

Virgate was already familiar with the precinct, having previously delivered the successful Domain House development in neighbouring South Melbourne. That experience gave the developer confidence to acquire the Coventry Street site and continue expanding its presence in Melbourne's inner south.

"We had been keeping an eye on the site and the broader precinct for a few months before deciding to move forward with the acquisition," Virgate said.

The project was ultimately secured in 2020 following feasibility studies, planning assessments and due diligence, with the brief centred on delivering "a high-quality, considered design that feels both refined and fit for purpose."

[smartcode_project:default project_id=4661 project_image_fid=314259]

Designed by <a href="https://www.apartments.com.au/architects/bruce-henderson-architects">Bruce Henderson Architects</a>, Verdé comprises 173 one, two and three-bedroom apartments priced from $599,000. The architecture is distinguished by a faceted glass façade that responds to both the site's outlook and Melbourne's changing light conditions.

According to Bruce Henderson Architects, the coloured glazing gives the building a distinctive identity while also providing privacy and solar shading, with residences oriented to capture views across the bay, city skyline and surrounding parklands.

Inside, <a href="https://www.apartments.com.au/interior-designers/designoffice">DesignOffice</a> has created interiors focused on natural light, efficient planning and enduring materials. Apartments feature engineered oak flooring, natural stone benchtops, floor-to-ceiling glazing and SMEG appliances, while a restrained material palette aims to complement the expansive outlooks rather than compete with them.

[smartcode_project:default project_id=4661 project_image_fid=372550]

Resident amenity has also been designed around everyday functionality rather than occasional use. Facilities include a concierge-serviced lobby, residents' lounge with fireplace, library and co-working space, gym, terrace garden with barbecue facilities, ground-floor café, and package delivery management.

The project's location continues to be one of its strongest drawcards. Positioned on Coventry Street, Verdé sits within walking distance of the National Gallery of Victoria, Arts Centre Melbourne, Royal Botanic Gardens and Albert Park Lake, while Southbank's dining precinct, Sturt Street trams and the new ANZAC Station are all nearby. The surrounding education catchment also includes Melbourne Grammar, Melbourne Girls Grammar, Mac.Robertson Girls' High School and several major university campuses.

The sales team says buyers have responded particularly well to the combination of location, design quality and long-term liveability.

"They're responding really positively to the quality of the design, premium resident amenities and the uninterrupted views. Many also appreciate the location and how connected it is to everything they need."

The ability to secure stamp duty savings before completion has also been a key factor for purchasers, alongside the opportunity to personalise finishes ahead of settlement.

With construction set to commence soon and more than half the apartments already sold, Verdé enters its next phase as one of the Arts Precinct's more established apartment developments, offering remaining buyers an opportunity to secure a residence before construction advances further. Expected completion is scheduled for late 2027.

[smartcode_project_cta:default project_id=4661]

Virgate's Verdé Southbank moves toward construction as sales fly past halfway stage

Inflation

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GUEST OBSERVER 
An explanation of why central banks can’t deal with simultaneous low unemployment and inflation.
The financial data this week were largely centred on inflation in Australia and China, and what the Reserve Bank of Australia (RBA) thought about those things at their last board meeting.
This gives us the chance to focus on what is the most important issue in macroeconomics at the moment, and will govern the behaviour of the RBA, the US Federal Reserve, and the European Central Bank in coming years.
A key question in thinking about how central banks should set interest rates is the relationship between economic output and inflation. Too much inflation is bad, as is too little, so policymakers want to balance stable inflation with as much output (GDP growth, employment, etc) as possible.
But how to do this?
A tantalising candidate answer to this was offered by New Zealand economist A.W.H. Phillips. Looking at data in the United Kingdom from 1861 to 1957, he noted that when unemployment was high, wages increased slowly; when unemployment was low, wages rose rather quickly.
If this were a stable, predictable, relationship, this would be great news for policymakers. Pick where you want to position yourself on the inflation-output tradeoff and <a href="https://www.investopedia.com/terms/p/phillipscurve.asp" target="_blank">the Phillips Curve</a> tells you the answer.
Alas, it has long been know that this relationship is rather less clear than in Phillips’s data.
The <a href="https://www.investopedia.com/terms/r/rationaltheoryofexpectations.asp" target="_blank">rational-expectations</a> revolution, ushered in by <a href="https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1995/lucas-bio" target="_blank">Nobel Laureate Robert Lucas</a>, showed that a relationship like the Phillips Curve would depend on what people thought policymakers were going to do. In other words, you can’t rely on historical data when making policy, if those policies affect the data (as they always do). This is known as the “Lucas Critique”. And it’s right.
The thing is that policymakers need to make decisions, now. And being “right” is all well and good, but being practical is pretty important, too.
So for a long time, policymakers fudged things by using what they called the “expectations-augmented Phillips Curve”. Basically a hack.
But now, even that has broken down. Neither the Fed nor the RBA can understand within any framework how it can be that both inflation and unemployment are so low. Take the US: 4.2% unemployment and 1.4% inflation. It should be, according to basic economic theory, that when workers are so scarce one has to pay them more to work, so inflation goes up.
But not according to the data. The big and important question is: why not?
The cheap answer is that we are not measuring things correctly. For example, there is a lot of “underemployment” so that 4.2% isn’t really right – these folks aren’t working all the hours they want.
There is probably some truth in that, but it’s hard to believe there has been a dramatic shift in the proportion of those underemployed in the last decade. Even if it is true, it still begs the question: why?
I think it’s safe to say that not only does nobody know for sure, nobody has a good conjecture. Or, to quote the celebrated US baseball player Yogi Berra when a high-school teacher asked him: “don’t you know anything?”, Berra replied “I don’t even suspect anything”.
A wild guess is that it’s not mismeasurement, but technology.
A lot of employment relationships are now determined through online matching. There are fewer intermediaries – including unions. That has diminished the bargaining power of most workers, limiting their ability to extract higher wages when labour-market conditions are tighter.
In addition to this, central banks like the Fed and the RBA have now established a strong reputation for being tough on inflation. That has taken time to take hold, so it is reasonable to think that if there was an expectations-augmented Phillips Curve it would have changed over time – perhaps getting to where we are now.
The real test, of course, will be if central banks abandon inflation targeting in favour of more output-focused policies. That might well be the right thing to do. But I, for one, would be surprised if the relationship between unemployment and inflation didn’t change as a result of that.
<img src="https://counter.theconversation.com/content/85824/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">Or to put it a different way: Lucas was right.
Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.
<a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a>, Professor of Economics and PLuS Alliance Fellow, <a href="https://theconversation.com/institutions/unsw-1414" target="_blank">UNSW</a>
This article was originally published on <a href="https://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-economics-cant-explain-why-unemployment-and-inflation-are-both-low-85824" target="_blank">original article</a>.
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rh-YsoTT2xMuQ

Economics can't explain why unemployment and inflation are both low: Richard Holden

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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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Operational costs for commercial buildings have increased by double the rate of inflation and four times the rate of construction cost rises during during the last 10 years, according to the latest figures from Turner &amp; Townsend. 
The company compared increases in the cost of rates, electricity, insurance, maintenance wages, cleaning and security. These were then compared with cost movements for the CPI (consumer price index) and the cost of non-residential construction from the Australian Bureau of Statistics data.
Gary Emmett, senior economist for Turner &amp; Townsend, said while the overall operational expense items have increased by 58 percent during the last decade, CPI inflation rose 28 percent and the cost of non-residential construction was up 16 percent over the same time period. 
The analysis covered Sydney, Melbourne, Brisbane, Perth and Adelaide. 
“Primary factors driving cost increases are rates, electricity and insurance. Wages and cleaning costs have increased at inflation or just above, while security increased at less than inflation,” said Emmett.
“What we discovered is these items tended to increase significantly in some years, however drop off in others. Electricity costs are prone to spikes and troughs, increasing by 18 percent in 2012 and then falling by two percent in 2015 - 2016. 
“Of all the items included, electricity was the most volatile with severe increases experienced in each region during the last decade, but not simultaneously. In both 2010 and 2012, electricity spikes were particularly high across all five regions. The last six months has demonstrated electricity costs throughout Australia are escalating.”
He said rates have always risen more than the CPI in all regions over the past decade. In both 2008 and 2009, these were particularly high in all regions with average rate rises above six percent. 
For Melbourne and Adelaide, rate increases in 2013 and 2014 were about 16 percent.
“As a result of the national electricity market changes, including a transition to renewable energies, there is a high probability suppliers will continue to increase charges in the short term while new technologies and distribution systems are implemented,” said Emmett.
Higher Council rates reflect a need to increase revenue. Average rate increases of around four percent are currently below the 10-year average of 5.7 percent. 
“Weaker public sector wages growth and CPI growth rates may hold rate increases at similar levels within the next few years.”
“Insurance premiums are up 60 percent nationally within the last ten years, more than twice the increase in CPI. Climate change, higher fire and flood risks are likely to increase insurance premiums,” Gary added.
The commercial building sector is set for solid growth during 2017-18 based on the number of new commercial buildings commencing in the coming year. Office construction is predicted to increase in all of the east coast capitals. 
Sydney is likely to lead with its strong service economy driven by finance, real estate and insurance. However, Melbourne and Brisbane are also looking to experience a surge with several new projects poised to start.
“Businesses need to be mindful of the additional costs of building ownership as costs typically spiral upwards. The trend towards higher cost increases across major commercial building expenses is evident over the past decade. Businesses are unlikely to impact on council rate increases apart from lobbying, which is more often than not unsuccessful.
“With electricity so volatile, there is a greater requirement for more sustainable designs. Building owner operators or building tenants should identify sustainable energy saving technologies to reduce power usage, and insist any new buildings install these technologies.”
An analysis reflected that the operating cost increases across the states were fairly evenly spread, though Brisbane was marginally higher. Electricity costs have risen by 144 percent in Brisbane within the past ten years, compared to 114 percent nationally.
“When considering where to locate, landlords and tenants are increasingly evaluating whole of life costs rather than up-front costs,” Gary concluded.
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jonathanchancellor-7SQnKwU6yx

Commercial building operational costs rise at twice the inflation rate: Turner & Townsend

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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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The latest ABS figures shows the Consumer Price Index rose 0.2 percent in the June quarter.
This follows a rise of 0.5 percent in the March quarter of 2017.
The most significant price rises for the quarter were medical and hospital services (+4.1 per cent), new dwelling purchase by owner-occupiers (+0.9 per cent) and tobacco (+1.0 per cent).
 These rises are partially offset by falls in domestic holiday travel and accommodation (-3.2 per cent) and automotive fuel (-2.5 per cent). The CPI rose 1.9 per cent through the year to June quarter 2017 having increased to 2.1 per cent in the March quarter 2017.
Bruce Hockman, chief economist for the ABS said that inflation in Australia remains low.
"Price falls for automotive fuel; and ongoing competition in the clothing and food retail markets has contributed to this quarter’s result.
"In addition, the ABS continues to closely monitor the impact of Cyclone Debbie on fruit and vegetable prices.
"While strong price rises were recorded for select fruit and vegetables such as tomatoes, beans, cucumbers, melons, berries and bananas in the June quarter 2017 - these rises were offset by falls in seasonally available fruits such as oranges, mandarins and apples."
CommSec's Craig James suggests the benign inflation will keep the rates on hold next week.
"There is no smoking gun to justify a change of interest rates in any direction," James said.
"Inflation is comfortable just below the Reserve Bank’s 2-3 per cent target band.
"Inflation isn’t rapidly moving below the target band, nor is it rapidly lifting back into the target band.
"So the Reserve Bank can stay on the interest rate sidelines.
REIA President Malcolm Gunning suggests the low CPI is good news for homebuyers and renters.
“The annual change for both the analytical series of trimmed mean and for the weighted median was 1.8 per cent with the annual change in the trimmed mean being the same for the past four quarters and the weighted mean up by 0.1 percentage points compared to the year to the March 2017," he said.
"This is below the RBA’s target zone of 2-3 per cet and suggests the continuation of historically low interest rates for some time yet."
“The latest CPI figures show that the increased investment in housing through the current taxation arrangements has kept growth in rents lower than they have been historically.
“In Sydney and Melbourne where much of the investor activity has been focussed the increase in rents in the past twelve months has been 2.5 per cent and 1.7 per cent respectively.
“With the CPI figures always a central component of the RBA’s consideration, the latest inflation data would suggest that home buyers can be comfortable in the knowledge that interest rates will remain stable for a while yet."
For more information <a href="https://www.abs.gov.au/ausstats/abs@.nsf/MediaRealesesByCatalogue/902A92E190C24630CA2573220079CCD9?OpenDocument" target="_blank">click here</a>.
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jrobinson-rf4aSBido9

June quarter ABS figures show subdued inflation

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GUEST OBSERVER
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The RBA has broadly left its near-term growth forecasts intact while medium-term projections are unchanged. 
 Inflation forecasts are untouched and core inflation is expected to gradually rise from here.
The RBA have a soft downward trajectory for the unemployment rate that broadly tracks around 5 3⁄4 percent.
 We have the RBA cash rate on hold at 1.5 percent throughout 2017 and into 2018.
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The RBA’s updated forecasts haven’t shifted the monetary policy dial in the slightest. The Bank has forecast decent growth outcomes over the next few years. And while core inflation is not expected to get back to target until 2018, it is forecast to rise gradually. 
The RBA is, however, more confident that its forecasts will be achieved. We think that the Bank retains its neutral bias despite there being no forward guidance in today’s Statement on Monetary Policy (SMP).
<a href="https://www.propertyobserver.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.15.15%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.15.15%20AM.png" alt="">
 
Looking at the Bank’s through the year forecasts implies that the pace of growth picks up from 2 percent/pa mid-2017 to an above-trend 3 percent by year end. The economy is forecast to be growing by a strong 3 1⁄4 percent by mid-2018. LNG production, infrastructure spend and a lift in non-mining investment are expected to push growth higher. 
The RBA expects LNG exports to add 1⁄2ppt to GDP growth in both 2017 and 2018 in QII. The Bank has indicated that Cyclone Debbie will negatively impact on coal exports. But judging from the RBA’s growth forecasts the impact has not been severe enough to revise down GDP estimates. The Australian economy would be deemed to be in good shape if the RBA’s growth outcomes can be achieved. While we think they are possible, they look a best case scenario and the risk is that output growth undershoots the Bank’s forecasts. At this stage, QI GDP growth is shaping up as a soft print. 
The RBA expects household income to grow, “at a similar rate to consumption, implying little change in the household saving ratio.” Here we note that the savings rate has been trending lower since dwelling price growth lifted. The fall in the savings rate has supported consumption growth in the face of weak wages growth.
<a href="https://www.propertyobserver.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.16.46%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.16.46%20AM.png" alt="">
 
The Bank’s assessment on the labour market is best characterised as temperate. The RBA sees employment growth as “moderate” over the next six months but expects it to pick up to around its “long run” average beyond that. The GDP and employment growth forecasts are reconciled by the big contribution to growth that will come from LNG production which is not labour intensive. 
A possible decline in underemployment also explains the disparity between GDP and employment forecasts (i.e. growth in hours worked could be stronger than employment growth if some part-time employees find additional work). The unemployment rate is forecast to be around 5 3⁄4 percent over the forecast period but with a very mild downward trend. 
On wages, the RBA expects growth to remain steady over the next year before picking up over 2018 and 2019, although, “at a slightly slower pace than had been forecast in February.” Inflation forecasts are unchanged from February. Core inflation is expected to rise gradually but is unlikely to get back to target until 2018. We agree.
<a href="https://www.propertyobserver.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.18.00%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.18.00%20AM.png" alt="">
 
It sounds like a broken record now, but rate cuts are off the table unless the housing market falters or the unemployment rate materially rises. We think that the inflation prints over 2017 will take a back seat to developments in the labour and housing markets.
 As such, our monetary policy call has the RBA on hold in 2017 and well into 2018. The risk, however, lies with another cut given weak wages growth, below target core inflation and an expected further downturn in hard commodity prices. 
Gareth Aird is economist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905">here</a>.
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Growth and inflation forecasts broadly unchanged: Gareth Aird

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GUEST OBSERVER
This month’s Q1 2017 CPI inflation numbers provided additional support for our long held view that the RBA is unlikely to cut its cash rate further.
Underlying inflation, as measured by the average of the trimmed mean and weighted median, lifted to 1.8% y-o-y in Q1, which is up from its low point of 1.5% in Q3 and Q4 2016. Domestically produced, non-tradable inflation has also continued to pick up pace, rising by 2.6% y- o-y, up from 1.6% in Q2 2016. Although underlying inflation remains below the bottom edge of the RBA’s 2-3% target band, it does appear to be past its trough.
The RBA also has a high hurdle for considering further cash rate cuts, as it is more concerned about the Sydney and Melbourne housing price boom than low inflation expectations becoming embedded. RBA Governor, Phil Lowe, has stated that it would not be in the ‘public interest’ to cut the cash rate further, even if it got inflation back to target sooner, if it boosted housing prices and debt. In response to this concern, the prudential regulator has tightened its settings further in recent weeks.
If there are no cuts expected, the key question becomes: when will the RBA consider lifting its cash rate? On this, the Q1 CPI numbers also suggest that rate rises are not likely any time soon. Although inflation is rising, the pick-up has been gradual and inflation remains low. In our view, the timing of the next hike in the cash rate largely depends on the outlook for wages growth. Our central case sees the unemployment rate gradually falling in coming quarters and wages growth lifting in H2 2017, helped along by the boost to national incomes from the recent rise in commodity prices. We see the RBA lifting its cash rate in Q1 2018.
Given that we expect only gradual cash rate rises, that Australia’s household debt is high and recent prudential tightening is underway, our new onshore AU/NZ Rates/FX strategist, Tom Nash, is favouring curve flattening. We also see some modest near- term downside to the AUD to US72 cents, albeit back to US75 cents by end-2017. 
<a href="https://www.propertyobserver.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.07.17%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.07.17%20PM.png" alt="">
CPI inflation picked up in Q1 and is back in the RBA’s 2-3% target band for the first time in nine quarters (Chart 1). More importantly, for the policy rate outlook, the underlying measures of inflation have edged higher and appear to be past the trough. The average of the RBA’s two preferred measures of underlying inflation – the trimmed mean and weighted median – lifted to 1.8% y-o-y in Q1, up from a recent low point of 1.5% in Q3 and Q4 2016. The momentum in inflation also appears to be more than just due to temporary factors, such as rising oil prices or the effect of previous falls in the AUD, with domestically produced, non-tradables inflation continuing to trend higher (Chart 2).
The lift in inflation supports the case that the RBA is unlikely to cut further. However, with inflation remaining low, we think the CPI numbers, on their own, provide little motivation for the RBA to consider lifting the cash rate any time soon.
Business conditions and confidence are lifting
For the RBA to be convinced to lift its cash rate, the central bank is expected to need further evidence that underlying inflation is headed back to target. In our view, a key factor is the outlook for wages growth. Wages growth has been running at its slowest rate in multiple decades, which has been putting downward pressure on domestic inflation (Chart 3). Although there are some signs that wages growth is stabilising, as yet there is little evidence of a pick-up.
<a href="https://www.propertyobserver.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.09.38%20PM.png" target="_blank"> Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.09.38%20PM.png" alt="">
Surveyed business conditions imply growth should pick-up 
However, there are clear signs that business conditions have been improving recently. The NAB survey of business conditions rose in Q1 2017 and implies solid economic growth (Chart 4). This should, in turn, motivate increased hiring and some tightening of the labour market. This could deliver upward pressure on wages growth over time. The key driver of the improvement in business conditions has been a sharp lift in conditions in the mining industry, as higher commodity prices have boosted profitability (Chart 5).
<a href="https://www.propertyobserver.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.10.29%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.10.29%20PM.png" alt="">
As we have argued previously, we expect that some part of the lift in commodity prices will feed through to domestic wages, much as it has done in the past (see Downunder Digest: Show me the money, 20 April 2017). Historically, there is a strong positive correlation between unit labour costs (productivity-adjusted wages growth) and the terms of trade in Australia (Chart 6). Although we do not expect this relationship to be as strong as in the past, when the rise in commodity prices had motivated mining investment booms, we do expect it to feed through to a modest lift in wages growth in H2 2017.
Prudential settings have been tightened to cool housing
Concerns about the leverage-fuelled house price booms in Sydney and Melbourne have led the RBA’s Governor, Phil Lowe, to repeatedly note that it would not be in the ‘public interest’ to cut the cash rate again if it drove a further rise in housing prices and debt.
The Australian financial authorities backed this rhetoric with action by further tightening the prudential settings in the past few weeks. This included: reinforcing that banks should not grow their investor lending any faster than 10% a year; requiring that interest-only loans are no more than 
30% of new lending (down from a current run rate of 40%); and that banks maintain appropriate loan serviceability tests in the face of heightened risks, amongst other measures. Tighter prudential settings had already seen effective rates for housing investors rise by 25bp in March.
<a href="https://www.propertyobserver.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.11.22%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.11.22%20PM.png" alt="">
There is some evidence that the tighter prudential settings are cooling the housing market, with the daily measures of Sydney and Melbourne house prices levelling out in April (Chart 7). However, it is worth noting that April is also typically a seasonally weak month for the housing market. Nonetheless, the tighter prudential settings and increased rates for investors are expected to see investor loan approvals pull back from their recent high levels in coming months (Chart 8).
However, it is worth keeping in mind that the international and local experience suggests that prudential tightening typically only has a short-lived cooling effect on housing markets, before fundamental factors, such as housing supply and demand and interest rates reassert themselves. The RBA will be aware of this evidence. On the margin, we see the exuberant housing market as likely to make the RBA a bit more hawkish on its cash rate settings, albeit only to the extent that its policy rate setting is still consistent with the outlook for inflation. The outlook for wages growth remains the focus.
<a href="https://www.propertyobserver.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.12.11%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.12.11%20PM.png" alt="">
RBA tactics and forecasts
We expect the RBA to remain firmly on hold at its May meeting (2 May) and to give no suggestions that it would consider cutting further. At the same time, we do not expect any discussion about possible rate rises either. In its official statement, due to be published on 5 May, we expect the GDP and underlying inflation forecasts to be unchanged from the February 2017 statement (Charts 9 and 10). HSBC’s growth and inflation forecasts are slightly stronger than the RBA’s last published set of numbers.
Fixed Income and FX Strategy
AUD Rates: Front-end floored but lacking catalysts
This macroeconomic back-drop and RBA stance should place an implicit floor on money market rates. We think current OIS and cash rate future pricing is close to this floor – the market implies 0-5bp of cumulative cuts over the next six to nine months – skewing risk-reward towards paying/ steepening structures in the very front-end. However, such strategies should be tactical given the lack of near-term catalysts to re-price the RBA.
Beyond the RBA dates, yield pick-up is more attractive in forward starting swaps beyond one year but even then risk premium is still notably lower than in mid-March (Chart 11) and we see New Zealand as a better candidate for front-end receivers given the similar macro back-drop but considerably better roll-down profile.
<a href="https://www.propertyobserver.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.13.31%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/28/Screen%20Shot%202017-04-28%20at%202.13.31%20PM.png" alt="">
More broadly, while the HSBC fixed income team also subscribes to the view that the next move in the cash rate is more likely to be a hike than a cut, investors should position against curve pricing that reflects an aggressive hiking cycle given a range of domestic structural factors that should constrain long-end rates (see AUD Rates: Cheap enough, 30 March 2017). We see ample room for the curve to flatten, given the swap curve is still 70bp steeper than 2016 lows between two and 10 years.
AUD-USD: prone to disappointment
The AUD’s buoyancy so far this year contrasts with interest rate differentials that have continued to grind lower (Chart 12). This disconnect between FX and rates could be observed in the aftermath of the April RBA meeting when the cash rate was left unchanged but AUD-USD immediately fell 0.5%. This occurred despite the RBA doing exactly as expected, with little ‘new news’ in the accompanying statement. In contrast, market interest rates, which already imply a broadly neutral path for the cash rate over the next 12 months, were largely unchanged.
The RBA’s lack of commentary that explicitly confirms reflationary themes, when compared to more hawkish commentary elsewhere, has put downward pressure on the AUD. With our economics team not expecting any changes to the RBA’s forecasts or rhetorical tone, we think the AUD-USD is likely still prone to disappointment. We forecast AUD-USD at 0.72 by end-Q2, before recovering to 0.75 by year-end. 
 
<a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 
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RBA's next move likely to be up but not for some time yet: HSBC's Paul Bloxham

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<div>GUEST OBSERVER</div>
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<div>Australian consumer prices rose by 0.5 percent in the March quarter and annual growth in prices rose to 2.1 percent - a little bit below market expectations (of a 0.6 percent lift over the quarter).</div>
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<div>The groups that recorded the most significant prices rises were as expected – higher fuel and electricity prices, a lift in some broader housing-cost measures and health prices (seasonal impact of changes in the Pharmaceutical Benefits Scheme). Price falls were based in international holiday travel (a seasonal effect), fruit and furniture (post-Christmas sales).</div>
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<div>The Reserve Bank of Australia’s (RBA) underlying  measure of inflation (the average of the trimmed mean and weighted median) which takes out extreme price fluctuations was up by 0.4 percent in the March quarter (also a little below expectations of a 0.5 percent lift) but annual growth lifted to 1.8 percent (from 1.5 percent in the previous quarter). The RBA targets inflation of 2-3 percent over time (see chart below), so the latest upward move in underlying inflation would certainly be welcomed by the central bank given that the RBA rate cuts in 2016 were largely in response to very low inflation readings.</div>
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<div>The rise in both headline and underlying inflation are also consistent with the RBA’s own inflation forecasts (which see headline inflation of 2% and underlying inflation of 1.75 percent by the June quarter).</div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/04/27/image009.png" target="_blank">Click to enlarge</a></div>
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<div><img src="https://www.urban.com.au/images/2017/04/27/image009.png" alt=""></div>
<div>Source: ABS, AMP Capital</div>
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<div>However, it is noteworthy that outside of volatile items like petrol prices (up 5.7%qoq) and government influenced prices like health (2%qoq), tobacco (+1%qoq), utility charges (up 2.2%qoq) and education (up 3.1%qoq), pricing power in the economy remains very weak. This is evident in prices for “market goods and services excluding volatile items” being flat in the quarter and up just 1% year on year and underlying price weakness in areas like rents (up just 0.1%qoq), clothing (down 1.4%qoq), furnishing and household equipment (down 1%qoq) and holiday travel and accommodation (down 1.9%qoq).</div>
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<div>Implications</div>
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<div>While the March quarter inflation result slightly disappointed expectations, the RBA would be happy that inflation is moving in the right direction (into its 2-3% target band). But, underlying inflation is still too low and will probably remain below the RBA’s target band for the majority of 2017. Wages growth still remains around record lows, the economy is running below-trend which indicates that spare capacity exists and the $A remains too high all which will keep a lid on underlying inflation. </div>
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<div>There are some near-term upward pressures to headline  inflation over the next few months including higher electricity prices and the impacts of Cyclone Debbie in Queensland (which should only add around 0.2 percentage points to headline inflation). But, besides these disruptions, we still see underlying inflation remaining weak for some time. </div>
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<div>Our base case is that with inflation moving in the right direction and given the RBA’s increased emphasis on an inflated Sydney and Melbourne housing market and rising household debt the RBA is unlikely to make any adjustments to interest rates any time soon and we expect it to keep the cash rate at 1.50% for the next year at least. However, low underlying inflation pressures mean that there is still more chance of a rate cut this year than a rate hike.</div>
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<div><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.</div>
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soliver-smf6LQXgW9

Low underlying inflation pressures drive chance of rate cut this year

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RBA Governor Philip Lowe says inflation will only rise slowly but the combination of record high household debt to income when wages were growing slowly was a “sobering combination”.
Speaking at the Australia-Canada Leadership forum, Lowe said “households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination”.
He said “wage growth has been subdued given the ongoing slack in the labour market” and there was “downward pressure on retail prices from intensified competition”.
Although, low level of interest rates means that the debt-servicing burdens are not that high at the moment.
He said with given that outlook, underlying inflation would only increase gradually.
“Our central forecast is for headline inflation to increase to above 2 per cent later this year, boosted by increases in oil and tobacco prices. The increase in underlying inflation is expected to be a bit more gradual.”
The RBA has stuck to its forecast of 3 percent economic growth over the next couple of years. 
“If inflation is low for a long period of time, it is certainly possible that inflation expectations adjust, making it harder to achieve the objective. At the moment though, I don't see a particularly high risk of this in Australia. The recent lift in headline inflation is helpful here and most measures of inflation expectations are within the range seen over recent decades,” he said.
In relation to the risks from additional borrowing, he said it was possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets and hurt the overall economy.  
In summary, Lowe said “flexible inflation targeting with a medium-term focus remains the right monetary policy framework for Australia”. 
 
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High debt, weak wages a 'sobering combination', warns RBA’s Lowe

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GUEST OBSERVER
The Reserve Bank hasn’t materially changed inflation forecasts but it has trimmed economic forecasts over the near-term. Economic growth is now seen at 1.5-2.5 percent in June 2017, around one percentage point lower than previous forecasts.
Inflation is expected to hold between 1.5-2.5 percent over the forecast period – below or at the low end of the 2-3 percent target band.
Home loans: The number of loans (commitments) for budding home owners (owner-occupiers) rose by 0.4 percent in December after rising by 1.3 percent in November. The value of loans (owner occupier and investment) rose by 0.4 percent in December after rising by 2.2 percent in November.
Owner-occupier loans rose by 1.3 percent but investment loans fell by 1 percent.
What does it all mean?
The latest Monetary Policy statement has given the Reserve Bank the opportunity to flesh out how the economy is tracking. And it seems like the Central Bank is in the glass half-full camp. Policymakers have updated economic growth and inflation forecasts and it is clear that growth remains relatively sound.
Interestingly inflation is expected to remain below or at the low end of the Reserve Bank 2-3 percent target band over the next two years. Essentially the assumption of subdued inflation is despite the potential inflationary impact of higher commodity prices - which suggests a lack of inflation across the rest of the economy.
The assumption of low inflation and stronger economic growth over time suggests that interest rates remain on hold.
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<div class="column"><a href="https://www.propertyobserver.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%202.01.18%20PM.png" target="_blank">Click to enlarge</a></div>
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 Importantly given that near-term growth forecasts have been downgraded and now expected to hold between 1.5- 2.5 percent, it is clear the central bank is prepared for a degree of softness across the domestic economy. Interestingly when coupled with subdued inflation it suggests policymakers will keep the door open to provide further stimulus. However it should be made clear that the central bank is essentially holding a neutral policy stance. The economy was essentially lacklustre throughput the majority of 2016 despite unemployment drifting to 3-year lows. However the anecdotal evidence across the economy suggest that activity levels are now lifting.
 In that context the latest housing finance data is encouraging. Not only did the number of overall housing finance commitments lift for the second straight month, but it was driven by owner-occupier loans rather than investment loans. Overall the Reserve Bank is correct in its view that conditions in the housing market are very mixed.
What do the figures show?
Housing finance - number
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<li>The number of loans (commitments) for budding home owners (owner-occupiers) rose by 0.4 percent in December after rising by 1.3 percent in November.</li>
<li>Excluding the refinancing of dwellings, the number of loans was up by 2.4 percent.</li>
<li>  The number of new home loans was down by 4.4 per cent on a year ago.</li>
<li>  Loans by owner-occupiers for the construction of homes fell by 0.3 per cent in December.</li>
<li>  Loans to buy newly-erected dwellings rose by 3.2 per cent.</li>
<li>  Loans for the purchase of established dwellings (excluding refinancing) rose by 0.3 per cent.</li>
<li>  The number of refinancing transactions fell by 3.5 per cent.</li>
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Lending across states/territories: NSW (+1.5 percent); Victoria (+0.8 percent); Queensland (-1.3 percent); South Australia (-1.9 percent), Western Australia (-2.7 percent); Tasmania (-2.7 percent); Northern Territory (+0.5 percent); ACT (6.3 percent).
Housing finance - value
The value of new housing commitments (owner occupier and investment) rose by 0.4 percent in December after rising by 2.2 percent in November. Owner-occupier loans rose by 1.3 percent but investment loans fell by 1 percent. The value of loans by owner-occupiers and investors to build new homes fell by 1 percent in December after rising by 5 percent in November. The value of loans to build new homes fell from $3.1 billion to $2.74 billion in December.
Housing finance – other statistics
The proportion of first-time buyers in the home loan market held steady at 13.8 percent in December (long-term average 19.4 percent).
The proportion of fixed rate loans rose from 12.5 percent to 14.6 percent in December – a seven month high. And the average home loan across Australia stood at $375,800 in December, down 0.8 percent in the month but up 0.5 percent on a year ago.
Key take-aways from the Reserve Bank report
 Below are our key “take-aways” from the Reserve Bank’s latest quarterly review.
“Inflation is expected to increase as the effects of some factors that have been weighing on domestic cost pressures dissipate”(p3)</div>
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 “Headline inflation is expected to pick up to 2 per cent in early 2017. The increase in underlying inflation is likely to be gradual. These forecasts are little changed from those published in the November Statement on Monetary Policy” (p3)</div>
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 “Wage growth is forecast to increase only gradually” (p3) “ there has been some evidence from surveys and liaison with firms suggesting that wage growth is unlikely to ease further.” (p3)
  “Overall conditions in the established housing market have strengthened further, although there is significant variation across the country.” (p2)</div>
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   “The global economy entered 2017 with more momentum than earlier expected.” (p1)</div>
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   “Global inflationary pressures are somewhat stronger than they have been for some time,” (p1)</div>
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   “ real GDP looks to have increased in the December quarter. Beyond that, the outlook for the domestic economy is little changed from three months ago and the ongoing adjustment to the end of the mining investment boom is expected to continue.” (p2)   “Real GDP declined in the September quarter, a significantly weaker outcome than was anticipated. Some of the decline can be attributed to disruptions to coal supply and bad weather affecting construction activity.” (p1) 
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<div class="column">“Although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall.” (p62)</div>
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   “The forecast for consumption growth has been adjusted lower and implies a stable saving ratio over the forecast period, rather than declining, as previously assumed.” (p61)</div>
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   “The unemployment rate is expected to edge lower over the forecast period, suggesting only a modest reduction in the degree of spare capacity in the labour market from current levels.” (p58)</div>
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   “ exports of Australian goods and services in aggregate are forecast to continue growing at a solid pace.) (p58)</div>
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   “Given the stronger tone of more recent indicators, consumption growth is expected to be a little stronger than in mid 2016 over the forecast period.” (p57)</div>
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   “GDP growth is forecast to increase to 21⁄2–31⁄2 per cent in late 2017, and to be above potential for most of the forecast period.” (p57)</div>
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   “Some of the factors weighing on reported GDP growth in the September quarter were temporary and have not materially affected the outlook for growth.” (p56)</div>
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 “While considerable uncertainty remains about the economic policies of the new US administration, reductions in personal and corporate taxes are likely.”</div>
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<div class="column">“However, there is a rising risk that more restrictive and protectionist trade and immigration policies under the new administration could harm global growth prospects.” (p55)</div>
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<div class="column">  “A significant portion of the increase in investor credit growth is also likely to reflect the extension of credit to investors settling the payment of newly completed apartments that were purchased off the plan at an earlier time.” (p46) </div>
<div class="column"> “More recently, overall debt funding costs (by major banks) are estimated to have been stable, despite a little upward pressure from the increasing share and cost of long-term debt and deposit funding.” (p43)   “Much of the apartment construction is geographically concentrated, particularly in inner-city Melbourne and Brisbane. This increases the chance that (localised) oversupply could develop, and would exacerbate the effect on local area prices if that were to occur.” (p37)
What is the importance of the economic data?
Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market. The Reserve Bank releases its Statement on Monetary Policy each quarter. The Statement is the Reserve Bank’s assessment of economic and financial conditions and also contains the latest inflation views. The Statement is crucial is assessing the short-term outlook for interest rates.
What are the implications for interest rates and investors?
The rebalancing of the domestic economy away from mining investment will remain the trigger for interest rates, especially given that inflation is subdued and expected to remain at the low end of the 2-3 per cent target band. However a number of indicators make rate cuts look less likely than even six months ago – improved Chinese activity levels, a stronger terms of trade, a modest lift in domestic activity and the Reserve Bank view that inflation has bottomed.</div>
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<div class="column">The home finance market is not a driver of interest rates at present. The Reserve Bank won’t be lifting or cutting rates on the lending trends. But with borrowers now looking more carefully at the market, competition across lenders looks likely to heat up. </div>
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<div class="column">Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></div>
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