<p>Malaysian developer <a href="https://www.apartments.com.au/developers/s-p-setia">SP Setia</a> is the latest to jump into St Leonards booming Transport Oriented Development precinct.</p>

<p>The developer, which has previously delivered Sapphire by the Gardens apartment development in Melbourne, identified the Atchison Street site in 2023. It filed a Scoping Report around 12 months ago, and now has revealed the designs for the new&nbsp;40-storey mixed-use tower.</p>

<p>The State Significant Development Application covers <a href="https://next-portal.urban.com.au/projects/14650/summary">20-22 Atchison Street</a>, a 1,374 sqm site positioned between St Leonards Station and the new Crows Nest Metro station.</p>

<p>Designed by <a href="https://www.apartments.com.au/architects/cox-architecture">COX Architecture</a>, the project would deliver 181 apartments, above a four-storey commercial podium, five basement levels, and new public domain works along Mitchell Street. The apartment mix comprises 35 one-bedroom apartments, 39 one-bedroom-plus-study apartments, 85 two-bedroom apartments, and 22 three-bedroom residences.</p>

<p>The proposal has been lodged as a shop-top housing development under the NSW Government’s TOD planning pathway, which allows increased density around key transport infrastructure. The site sits within the recently rezoned Crows Nest Accelerated TOD Precinct.</p>

<p><img alt="First look: SP Setia targets St Leonards skyline with 40-storey TOD tower" data-entity-type="file" data-entity-uuid="b799673d-48e2-46b0-801a-0e33a9330100" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/atchinson%20site.png?VersionId=dPh0UfwfaHpbFL1R7H1cbZNbIW0CHbCC" /></p>

<p>SP Setia acquired the Atchison Street site as part of its continued expansion into the Australian apartment market. In comments made to City &amp; Country (The Edge Malaysia) in 2023, SP Setia President and CEO Datuk Choong Kai Wai described the acquisition as “a strategic move” aligned with the group’s post-pandemic market recovery strategy.</p>

<p>“Our target for this exceptional development is local and overseas buyers, including first-home buyers, downsizers and investors,” Choong said.</p>

<p>The tower has been designed as a slender vertical form rising from a mixed-use podium, with COX Architecture positioning the development as a response to the evolving St Leonards and Crows Nest skyline.</p>

<p>“The purpose of the project is to facilitate the delivery of high-quality housing at a strategically located site and deliver a built tower outcome that is consistent with the desired future character of St Leonards and aligns with the TOD controls,” the design report stated.</p>

<p><img alt="First look: SP Setia targets St Leonards skyline with 40-storey TOD tower" data-entity-type="file" data-entity-uuid="b1a85eee-76f7-436c-a6da-73ba827b9b13" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/atchinson%20entry.png?VersionId=dA9jHGPMcm.dDbwk4QfxqWiY5bfh3UVt" /></p>

<p>The podium would incorporate retail uses fronting Atchison Street, commercial tenancies, landscaped communal areas, and pedestrian improvements along Mitchell Street. Vehicle access and loading would be consolidated via Atchison Lane.</p>

<p>Residents would have access to more than 665 sqm of communal indoor and outdoor spaces, while the development proposes 96 parking spaces across five basement levels.</p>

<p>The proposal also includes a commitment for 10 per cent of residential floor space to be allocated toward affordable housing through a monetary contribution.</p>

<p>COX said the tower form responds directly to the emerging high-density character of the precinct while seeking to maximise solar access, cross ventilation, and outlook from apartments.</p>

<p><img alt="First look: SP Setia targets St Leonards skyline with 40-storey TOD tower" data-entity-type="file" data-entity-uuid="2163f85c-f63b-4be3-aafa-f8763976cec5" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Article%20Feature%20Image%20%28Grid%29_5.png?VersionId=WiAmtIKJ6.ZQ41EtYEQ1fol7AeorKBlL" /></p>

<p>“The building is orientated towards north,” the Apartment Design Guide compliance report noted, adding that the tower’s slim form was driven by the constrained inner-urban site dimensions.</p>

<p>The design also incorporates landscaped setbacks and communal open space at podium level, intended to soften the interface with surrounding streets and improve pedestrian amenity.</p>

<p>The project adds to a growing wave of redevelopment proposals reshaping St Leonards and Crows Nest following the opening of the Sydney Metro City line and the NSW Government’s push for higher-density housing around major transport nodes.</p>

<p>Last week Stockland filed plans just down the road. They want to build a <a href="https://www.apartments.com.au/new-apartments/601-pacific-highway-st-leonards-nsw-2065">52-storey tower on Pacific Highway</a>.</p>

<p><em>Read more:&nbsp;<a href="https://www.apartments.com.au/news/nsw/first-look-stockland-plans-52-storey-538-apartment-st-leonards-tower">First look: Stockland plans 52-storey, 538-apartment St Leonards tower&nbsp;</a></em></p>


Joel Robinson

First look: SP Setia targets St Leonards skyline with 40-storey TOD tower

<p><a href="https://www.apartments.com.au/developers/urban-property-group">Urban Property Group</a> has revealed plans for a new mixed-use tower at 10 Dangar Street, Wickham, advancing a proposal that would reshape the southern gateway to Newcastle’s city centre with one of the city’s tallest residential buildings.</p>

<p>The State Significant Development proposal, now on exhibition, seeks approval for a <a href="https://www.apartments.com.au/new-apartments/bowline-10-dangar-street-wickham-nsw-2293">43-storey tower</a> immediately adjacent to the Newcastle Interchange. The project would deliver around 200 apartments, including 42 affordable housing dwellings, alongside 99 co-living units, a 171-room hotel, retail space, and new public domain integrated through the site.</p>

<p>The scheme marks a significant escalation of plans previously approved for the site. Urban Property Group took over the prominent 2,904 sqm parcel, where excavation and demolition had already commenced under an earlier consent for a 14-storey mixed-use development.</p>

<p><img alt="First look: Urban Property Group unveils Newcastle’s next supertower at Wickham interchange" data-entity-type="file" data-entity-uuid="58a96dd9-407f-4d20-86b4-94e4bfeef74b" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/wickham%20podium.png?VersionId=LGlf08pdFGAZDzvx_CXC4XakHNZRuEE0" /></p>

<p>Designed by <a href="https://www.apartments.com.au/architects/sjb-architects">SJB</a>, the tower has been conceived as a landmark transit-oriented development anchored to the Newcastle Interchange precinct. The proposal includes 245 build-to-sell apartments across a mix of one, two, and three-bedroom residences, as well as two penthouses. Fifteen apartments and one operational unit are earmarked for NDIS housing. The co-living component would add a further 99 units, while the podium would accommodate retail uses and hotel facilities.</p>

<p>SJB said the site presents “a valuable opportunity to anchor the precinct by setting the standard for design, active ground planes and character at the key southern gateway.”</p>

<p>The architecture responds directly to the site’s position beside major transport infrastructure and within one of Newcastle’s fastest-evolving urban renewal precincts. The tower form sits above a sculpted podium designed to frame new public spaces, including a through-site pedestrian link connecting Station Street to Hannell Street, landscaped plazas, and activated retail edges.</p>

<p><img alt="First look: Urban Property Group unveils Newcastle’s next supertower at Wickham interchange" data-entity-type="file" data-entity-uuid="a7bd6ff0-f7db-4ce8-a6dc-ea56e72c6149" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/wickham%20lanne.png?VersionId=xzf39VADyhj7zBQY2I9fx9vI62u2tuSb" /></p>

<p>The design report describes the project as part of the broader transition of Wickham into “a vibrant, high-quality mixed-use urban precinct” that leverages proximity to the station, open space, and regional connectivity.</p>

<p>A detailed public art strategy has also been prepared for the development. The strategy positions the project as “a transit-oriented development of state significance at the gateway to Newcastle’s city centre” and outlines a series of integrated artworks responding to Newcastle’s industrial and transport heritage.</p>

<p>Creative Road’s curatorial framework for the project, titled Unveil, draws on “stratified surfaces, carved volumes, and light-filled apertures” while referencing Newcastle’s transformation from an industrial city into a contemporary education and technology hub.</p>

<p><img alt="First look: Urban Property Group unveils Newcastle’s next supertower at Wickham interchange" data-entity-type="file" data-entity-uuid="77a882bb-14b1-4d28-99ff-9438e39508c0" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/wickham%20site.png?VersionId=cevgo_vN0eKPK78P8YcEu3mKPLkpFqE7" /></p>

<p>The proposal is being advanced through the NSW Housing Delivery Authority pathway after being declared State Significant Development in June 2025. The accompanying scoping report states the development aims to “maximise the site’s proximity to the Newcastle Interchange by delivering transit-oriented development” while increasing housing supply and affordable housing provision within the Newcastle LGA.</p>

<p>Urban Property Group’s plans align with the long-term strategic vision established under the Wickham Master Plan, which identified the interchange precinct as suitable for substantial uplift in height and density. The current proposal would significantly intensify that vision, positioning the tower among the tallest developments proposed for Newcastle.</p>

<p>The site sits immediately north of the Newcastle Interchange, bounded by Dangar Street, Hannell Street, and Charles Street. It is surrounded by a rapidly growing cluster of residential towers and mixed-use projects that have emerged following the completion of the light rail and transport interchange.</p>


First look: Urban Property Group unveils Newcastle’s latest tower at Wickham interchange

<p>Bottega House has completed settlement of a landmark riverfront site in Macquarie Street, St Lucia, representing its first major Brisbane development.&nbsp;</p>

<p>Positioned on the banks of the Brisbane River, the <a href="https://www.apartments.com.au/new-apartments/180-macquarie-street-st-lucia-qld-4067">premium site at 180 Macquarie Street</a> features uninterrupted river frontage in one of Brisbane’s most tightly held residential precincts.&nbsp;</p>

<p>The proposed development, currently under assessment with Brisbane City Council, has been designed by <a href="https://www.apartments.com.au/architects/plus-studio">Plus Studio</a> with interiors by <a href="https://www.apartments.com.au/interior-designers/mim-design">Mim Design</a> and will deliver a boutique collection of premium residences positioned specifically for owner occupiers and downsizers.&nbsp;</p>

<p>The residences are set to redefine luxury apartment living in the area, with a focus on architectural quality, refined finishes, landscape integration and elevated amenities including curated wellness facilities, resort-style pools and recreation spaces rarely seen in the local market.&nbsp;</p>

<p>Exclusive sales for the project will be led by Keenan &amp; Byrne, ahead of an anticipated launch later this year.&nbsp;</p>

<p>Bottega House Managing Director Nick Malloch said the project reflects the group’s ambition to deliver a highly curated residential offering within one of Brisbane’s most tightly held precincts.&nbsp;</p>

<p>“This is an incredibly rare riverfront opportunity and one we have approached with a long-term perspective,” Malloch said.&nbsp;</p>

<p>“Our vision from the outset was to create a boutique collection of residences that feel more like private homes than traditional apartments, with generous proportions, refined finishes and exceptional amenity throughout."</p>

<p>Malloch says there is a&nbsp;lack of premium owner-occupier stock of this quality in the market, particularly for downsizers wanting space, privacy and a true lifestyle offering without compromise.&nbsp;</p>

<p>"Demand is expected to be strong given the scarcity of premium riverfront opportunities of this nature within Brisbane’s inner-west."&nbsp;</p>


Bottega House secures landmark riverfront site in St Lucia 

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<p data-end="157" data-start="0">The arrival of the first piling rig officially marks the commencement of construction at SIERA’s new beachside apartment development, Exhale, in Northcliffe.</p>

<p data-end="459" data-start="159"><a href="https://www.apartments.com.au/new-apartments/exhale-surfers-paradise-8-enderley-avenue-surfers-paradise-qld-4217">Exhale</a>, a glass-encased tower featuring 54 large-scale apartments at 8 Enderley Avenue, is SIERA’s third Gold Coast development. It follows the recently completed PIPIS Bilinga beachfront project, which achieved suburb-record prices, and the soon-to-be-completed Chevron Island development, Tapestry.</p>

<p data-end="459" data-start="159">[smartcode_project:default project_id=112661 project_image_fid=359603]</p>

<p data-end="651" data-start="461"><a href="https://www.apartments.com.au/developers/siera">SIERA</a> Founder and Managing Director Brent Thompson said the arrival of the piling rig represented a significant milestone for the development, which is scheduled for completion in late 2028.</p>

<p data-end="950" data-start="653">Over the next month, around 260 piles are expected to be installed as work progresses on the basement structure. The building is anticipated to rise above ground level early next year, before unveiling its sculptural glass curtain wall, developed in collaboration with specialist façade engineers.</p>

<p data-end="1081" data-start="952">“The façade was designed to maximise panoramic coastal views while creating a distinctive architectural identity,” Thompson said.</p>

<p data-end="1081" data-start="952">[smartcode_project:default project_id=112661 project_image_fid=355935]</p>

<p data-end="1307" data-start="1083">Designed by BDA Architecture, Exhale will comprise just 54 two- and three-bedroom residences across 26 levels, a level of low-density living rarely delivered in this beachside pocket between Surfers Paradise and Broadbeach.</p>

<p data-end="1522" data-start="1309">The project has been conceived as a resident-only building, with no short-stay accommodation permitted. SIERA says the model is intended to appeal to long-term owner-occupiers rather than transient holiday demand.</p>

<p data-end="1522" data-start="1309">[smartcode_project:default project_id=112661 project_image_fid=361052]</p>

<p data-end="1714" data-start="1524">Residences have been designed with large-format layouts and expansive glazing, with most apartments featuring more than 30 metres of glass frontage to maximise natural light and ocean views.</p>

<p data-end="1945" data-start="1716">The amenity offering spans two levels and centres on wellness and lifestyle, including a heated magnesium pool, sauna, yoga and Pilates studio, gymnasium, private dining facilities, cinema lounge, and dedicated surfcraft storage.</p>

<p data-end="1945" data-start="1716">[smartcode_project:default project_id=112661 project_image_fid=359607]</p>

<p data-end="2220" data-is-last-node="" data-is-only-node="" data-start="1947">More than half of the apartments have already sold. SIERA has also opened a sales gallery for Exhale at its Chevron Island commercial premises, near its Tapestry tower and the site of its second Chevron Island apartment development, which is slated to launch in early 2027.</p>
</section>
</section>

<p>[smartcode_project_cta:default project_id=112661]</p>


SIERA kicks off construction at Northcliffe tower Exhale

<p data-end="320" data-start="79">Local Little Bay residents, along with buyers from premium postcodes across Sydney’s affluent Eastern Suburbs, have dominated purchases in developer-builder Urban Property Group’s first Eastern Suburbs apartment development, <a href="https://www.apartments.com.au/new-apartments/este-little-bay-jennifer-street-little-bay-nsw-2036">ESTE Little Bay</a>.</p>

<p data-end="638" data-start="322">The $250 million coastal project, one of the first new developments in the area in several years, has proven particularly popular with downsizers, especially those from Coogee and Bondi. One Double Bay downsizer paid $4.7 million for a four-bedroom penthouse, setting a new local apartment price record in the process.</p>

<p data-end="864" data-start="640">Buyers have been attracted to the combination of coastal tranquillity, premium design and amenity-rich neighbourhood living. The walkable village setting, along with proximity to three of Sydney’s leading golf courses, New South Wales Golf Club, St Michael’s Golf Club and The Coast Golf Club, has also been a key drawcard.</p>

<p>[smartcode_project:default project_id=112343 project_image_fid=352689]</p>

<p>Built across two low-rise buildings designed by <a href="https://www.apartments.com.au/architects/hill-thalis-architecture-urban-projects-pty-ltd">Hill Thalis</a> and set along a lush, landscaped green spine, designed by leading landscape architect <a href="https://www.apartments.com.au/landscape-architect/arcadia-landscape-architecture">Arcadia</a>, ESTE Little Bay offers a collection of one, two, three and four-bedroom residences with interiors by Richards Stanisich.</p>

<p><a href="https://www.apartments.com.au/developers/urban-property-group">Urban Property Group</a> Sales Director, Tom McIvor said the response to ESTE has been "nothing short of extraordinary."</p>

<p>“Buyers have been quick to recognise ESTE as a rare opportunity to invest in a coastal sanctuary that offers both seclusion and connectivity to the heart of Sydney,” McIvor said.</p>

<p>[smartcode_project:default project_id=112343 project_image_fid=352687]</p>

<p><a href="https://www.apartments.com.au/project-marketer/srm-residential">SRM Residential</a> Senior Director, <a href="https://www.apartments.com.au/project-marketer/srm-residential">Clayton Ross</a> said the local market has responded incredibly well, driven by ESTE’s exceptional location and the rarity it offers.</p>

<p>“We’ve seen strong interest from a variety of buyer groups, all of whom are drawn to the exclusivity and quality of the build and construction by the 4.5-star iCIRT-rated builder / developer, Urban Property Group. There’s truly nothing else like it along Sydney’s coastline.”</p>

<p>[smartcode_project:default project_id=112343 project_image_fid=352690]</p>

<p>The project also includes robust buyer protections, including Resilience Insurance’s Latent Defects Insurance, providing 10 years of structural cover, and an independent iCIRT-rating of the developer.</p>

<p>“The iCIRT-rating adds another layer of confidence,” Ross added. “Buyers see it as a safeguard for their investment and their lifestyle.” A highlight of ESTE’s offering is its exclusive wellness amenities, including a heated rooftop infinity pool and outdoor heated spa, a state-of-the-art Technogym fitness centre, and a sauna.</p>

<p><a href="https://www.apartments.com.au/new-apartments/este-little-bay-jennifer-street-little-bay-nsw-2036">ESTE Little Bay</a> is topped out and is on track to complete towards the end of 2026, with residents moving in before Christmas.</p>

<p>[smartcode_project_cta:default project_id=112343]</p>


Eastern Suburbs buyers snap up ESTE Little Bay apartments

Inflation

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<p>GUEST OBSERVER</p>
<p>With the RBA now expecting underlying inflation to move into the middle of the target band by the end of the forecast period, the Bank seems firmly on hold. </p>
<p>The Bank sees wages growth to be broadly unchanged this year, as some of the factors which have been holding down wages dissipate, after which it picks up gradually over 2018 and 2019. </p>
<p> We continue to see the cash rate on hold at 1.5 percent. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%201.49.05%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/02/10/Screen%20Shot%202017-02-10%20at%201.49.05%20PM.png" alt=""></p>
<p>DETAILS</p>
<p>The rising profile for underlying inflation is significant. The new forecast profile for underlying inflation shows inflation running between 1½-2½ percent until the end of 2018, after which it ticks up to 2-3 percent by mid-2019. While this is still a solid two years away it suggests that the Bank is more confident that inflation will eventually pick up. The Bank notes that some of the factors that have been holding down inflation, like the falling terms of trade and the decline in mining employment, are dissipating and also cites “evidence from surveys and liaison with firms suggesting that wage growth is unlikely to ease further”. </p>
<p>There were significant downward revisions to GDP growth in the near term and small downward revisions further out but we would not read too much into these. That is, the downgrade to the near term forecasts reflects base effects from the (temporary) weakness in Q3 GDP, while the small downgrade to the further out forecasts to 2¾-3¾, rather than the previous 3-4, in our view seems a much more achievable estimate. The Bank noted that it has lifted its forecasts for trading partner growth and the terms of trade, but lowered its estimates for consumer spending and employment growth.</p>
<p>Interestingly, the RBA published the unemployment rate forecasts in its table for the first time. It expects the unemployment rate at 5-6 percent over the forecast horizon, broadly similar to the previous forecasts included in its chart.</p>
<p>The RBA seems accepting of the level of the AUD. The currency hardly rated a mention in today’s SoMP which, together with Governor Lowe’s comments last night, suggests that at current levels the RBA sees the dollar as close to fair value.</p>
<p><em>Felicity Emmett co-head of Australian economics, ANZ Research and can be contacted <a href="https://www.anz.com/corporate/research/" target="_blank">here</a>.</em></p>
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jchancellor-FAypfDUnLy

Rising profile for underlying inflation is significant: ANZ's Felicity Emmett

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<p>The RBA typically seeks 2 percent to 3 percent as its ideal range, but the latest inflation figures sit well outside.</p>
<p>Headline inflation was up 0.5 percent in the December quarter and 1.5 percent over the year. </p>
<p>Core CPI up 0.4 percent in the quarter and 1.6 percent over the year.</p>
<p>Blogger Pete Wargent noted Perth rents had plummeted in the rental housing component (lead image).</p>
<p><span>He noted Hobart had a strong rental market.</span></p>
<p>Commentator Callum Pickering, managing director &amp; chief economist at CP Economics also noted "t<span>hat is some rental bust we are seeing in Perth and Darwin."</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/25/Screen%20Shot%202017-01-25%20at%2011.58.27%20AM.png" target="_blank"><span style="font-size: 12.16px; line-height: 1.3em;">Click to enlarge</span></a></p>
<p><span style="font-size: 12.16px; line-height: 1.3em;"><img src="https://www.urban.com.au/images/2017/01/25/Screen%20Shot%202017-01-25%20at%2011.58.27%20AM.png" alt=""></span></p>
<p> </p>
<p>Pickering suggested rents constrained by wage growth across the nation. </p>
<p>Commbank's Craig James noted inflation has bottomed, "but it certainly doesn’t seem on a sharp acceleration path."</p>
<p>Annual inflation has lifted from 1.0 percent to 1.5 percent over the past six months, but it remains well below the Reserve Bank’s 2-3 percent target band, he advised. </p>
<p>"But while inflation is not yet a concern for the Reserve Bank, interestingly consumers have other ideas.</p>
<p>"The latest weekly consumer sentiment survey by Roy Morgan and ANZ put inflationary expectations (out two years) at the highest level in 4½ years.</p>
<p> "No doubt the lift in petrol prices has spooked consumers and caused them to take their eyes off other prices which are either falling or becalmed. </p>
<p>"It is clear that interest rates will stay low for an extended period.</p>
<p>"The Reserve Bank doesn’t need to cut rates again with inflation trending higher, rather than lower.</p>
<p>"And there are doubts that rate cuts would actually do much in terms of driving the economy higher and lifting inflation," James said. </p>
<p>He noted the main changes were tobacco prices rose by 7.4 percent, with petrol up 6.7 percent, domestic travel and accommodation up 5.5 percent and home purchase up 0.5 percent.</p>
<p>"The CPI was dragged lower by a 2.6 pe cent fall in international holiday travel and accommodation, 5.1 percent fall in clothing “accessories” and 3.2 percent fall in waters, soft drink and juices." </p>
<p><span style="font-size: 12.16px; line-height: 1.3em;"> </span></p>
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Inflation remains subdued as housing rental markets go bust in Perth and Darwin

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<p><span>GUEST OBSERVER</span></p>
<p><span>Household spending can be divided into three broad categories, services, retail trade, and non-retail goods. Where households spend has implications for overall economic activity. </span></p>
<p><span>For example, spending in labour intensive services sectors, such as health, or restaurants, will typically have a larger impact on overall economic and jobs growth than spending on some retail goods, such as furniture and clothes, which are largely imported. In this note we look at the broad long- term trends in the three expenditure categories. </span></p>
<p><span>Retail trade share of household spending has stabilised</span></p>
<p><span><a href="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.31.34%20AM.png" target="_blank">Click to enlarge</a></span></p>
<p><span><br><img src="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.31.34%20AM.png" alt=""><br></span></p>
<p> </p>
<p><span>The retail trade share of household spending was on a long term downward trend but looks to have stabilised</span><span>. In the early 1980’s </span><span>retail trade accounted for over 40% of household spending compared to 31% today. The main beneficiary has been the services sector. Households have increased their share of spending on services from around 50 percent in the earl</span><span>y 1980’s to around 60 percent now</span><span>. </span></p>
<p><span>The long run decline in the retail trade share of household spending reflects the fall in prices of retail goods relative to other goods and services. In volume terms, the retail trade share of total household spending has stayed very close to 30 percent </span><span>since the data began in the early 1980’s.</span></p>
<p><a href="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.32.54%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.32.54%20AM.png" alt=""></span></p>
<p> </p>
<p><span>However, for the last three years the retail trade share of household spending has been flat. With volumes also being broadly steady, this shows that that the discounting of retail goods relative to other goods and services has eased. </span></p>
<p><span>Part of the stabilisation of retail prices relative to services is due to the depreciation in the Australian dollar. This has helped to lift import prices in Aussie dollar terms. However </span><span>RBA research </span><span>shows that this lift has not been as large as would have been expected given the size of the depreciation. Increased competition is limiting the pass through from imported prices to sales prices. </span></p>
<p><span>It also reflects a sharp slowing in services inflation since late 2013. Services inflation has typically been higher than for inflation for goods. However, both are now running at an annual rate of just 1.5 percent over the year to September. Inflation of market based services, such as meals out and hair cuts, has slowed more sharply to an annual rate of just 0.9 percent over the year to September. </span></p>
<p><span>The slowing in services inflation, and inflation more generally, reflects a number of factors. Firstly there is spare capacity in the economy, which can be seen in the high rate of labour market underutilisation. Secondly, increased competition globally and advances in technology have reduced the pricing power in many markets.</span></p>
<p><a href="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.34.09%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>In a recent speech, RBA Governor Lowe spoke about how reduced pricing power was not just effecting the manufacturing sector, but service sectors too. Thirdly, job security fears have been heightened since the GFC. This means </span>that workers are less inclined to push for wage increases, in sectors where part- time work is replacing full-time permanent positions.</p>
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<p><span>But services share is still increasing </span></p>
<p><span>The share of household spending on services has increased over time. Spending on purely discretionary services, such as restaurants, accommodation and recreation, accounts for around 15% of household outlays. This share has been broadly stable over time. Contrary to popular perception, the share of spending on </span><span>“</span><span>meals out</span><span>” </span><span>has declined over time, now accounting for 5.2 percent of spending compared to 6.2 percent 30 years ago. </span></p>
<p><span>So the upward trend has been driven by an increasing share of spending on non-discretionary services, such as rent, health, education, transport and communications. These categories account for 45 percent of household spending, having increased from around 30 percent 30 years ago. The shift in spending reflects relatively stronger price increases for these services as well as a change in preferences towards these areas. </span></p>
<p><span>For example:</span></p>
<p>Insurance and other financial services – growth in this category is running at 6.5 percent over the year to June. As a share of housing spending, insurance and other financial services now accounts for 9.2 percent, compared to 8.4 percent three years ago.</p>
<p><a href="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.35.15%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/11/16/Screen%20Shot%202016-11-16%20at%208.35.15%20AM.png" alt=""></p>
<p>Growth in this category has been driven by an increase in the volume of spending. Excluding price effects, the proportion of spending on this category has also increased by a similar magnitude.</p>
<p>Consumers have shown a higher degree of caution around employment prospects in recent years. As a result they may be taking on a greater degree of insurance to guard against the loss of income, a decline in health or loss of other assets. There are also a larger number of products on offer.</p>
<p>Spending on health services rose by almost 10% over the year to June. The share of household spending continues to increase, accounting for around 5% compared to 4% ten years ago. The increase has been driven by both relatively strong price increases as well as an increase in volume of spending. The ageing population has also boosted spending on health and this trend will continue. A higher proportion of the population now has (subsidised) private health insurance which has boosted the number of elective procedures.</p>
<p>Education has also grown at an above average pace, with spending up 5.8% over the year. Education accounts for 4.7% of household spending compared to 3.5% 10 years ago. The increase in the share of spending is due to relatively strong price increases and also a larger volume of spending on this category. For example, a greater proportion of people are finishing year 12 and undertaking further education.</p>
<p>One category of discretionary services spending which has increased over time is overseas travel. As a share of household outlays, expenditure on travel has increased from 2.5 percent in the early 1980’s to around 3.7 percent now. The share of spending on flights has fallen as the relative cost has declined.</p>
<p>However outlays on overseas accommodation and other travel costs has increased.</p>
<p>Spending on non-retail goods is falling</p>
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<div class="column">The retail trade share of household spending has stabilised in recent years. And the services share continues to increase. This means the share of spending on non-retail goods has declined. </div>
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<br>In particular, the share of spending on vehicles and their maintenance has fallen by 1 percent point over the past three years. There has been a long run downtrend in spending on these categories with the share of households spending around currently 7 percent compared to a peak of 11 percent in the 1980s. This largely reflects price falls – the price deflator for vehicles has declined by 25% since late 2007, while the deflator for the maintenance of vehicles is 7 percent lower over the past three years. Vehicles are cheaper, more reliable and can be funded via mortgage redraws at a lower cost.</div>
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<br>Summary</div>
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<br>Changes in relative pricing, which have reduced the price of goods relative to services, have contributed to some very long run trends in household spending. Households have spent an increasing share on the consumption of services, while spending on retail and other goods has declined.</div>
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<br>However the good news for retailers is that their share of household spending has been stable in recent years. This reflects a lower Australian dollar, which has lifted the price of some retail goods. However it also reflects a fall in the price of other consumption goods, such as cars, and a slowing in services inflation.</div>
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<br>With plenty of spare capacity in the labour market, wages growth and non- tradeables inflation are likely to remain soft for many years. This means the relative price of services is likely to remain subdued. And the upward trend in the services share of household spending may flatten out. </div>
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<p><em>Kristina Clifton is economist, Commonwealth Bank, and can be contacted <a href="https://www.commbank.com.au" target="_blank">here</a>.</em></p>
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Trends in household spending: CBA's Kristina Clifton

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

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<p class="introbullets">GUEST OBSERVER</p>
<p class="introbullets">The Q3 CPI printed 0.7 percent compared to Westpac’s forecast for 0.9 percent. The market median was 0.5 percent. The annual rate is now 1.3 percent/yr compared to 1.0 percent/yr in Q2 and 1.3 percent/yr in Q1. The June quarter was the lowest rate of annual inflation since June 1999.</p>
<p class="introbullets">The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.3 percent compared to the market’s expectation of 0.4 percent rise. Westpac’s forecast was also 0.4 percent. In the quarter, the trimmed mean gained 0.35 percent while the weighted median lifted 0.28 percent. The annual pace of the average of the core inflation measures is now 1.5 percent/yr from 1.6 percent/yr in Q2 (originally reported as 1.5 percent/yr) and Q1 (Q1 has been revised from an original estimate of 1.4 percent/yr).</p>
<p class="introbullets"><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.32.55%20PM.png" target="_blank">Click to enlarge</a></p>
<p class="introbullets"><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.32.55%20PM.png" alt=""></p>
<p class="introbullets">The six month annualised pace of core inflation came in 1.7 percent/yr pace, a lift from 1.5 percent/yr in Q2 and the fifth quarter in a row it has been below the bottom of the target band; lowest six month annualised pace since the 1.3 percent/y print in March (a seventeen year low).</p>
<p class="introbullets">Our top of the market forecast was based on large contribution from fresh fruit &amp; vegetables boosting a solid contribution from electricity bills. Fresh &amp; fruit &amp; vegetables rose as expected (11.6 percent) but total food was slightly softer at 1.7 percent (our forecast was 2.1 percent) due to softer prices elsewhere in this grouping. We suspect the ongoing competition from new entrants is keeping disinflationary pressure in this sector.</p>
<p class="introbullets"><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.38.43%20PM.png" target="_blank">Click to enlarge</a></p>
<p class="introbullets"><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.38.43%20PM.png" alt=""></p>
<p class="introbullets">The lift in electricity bills was there but it was about half of what we had expected with utilities lifting 2.5 percent vs our expectation for 5.7 percent. Rents rose 0.3 percent (0.2 percent expected) while dwelling purchases lifted 0.4 v (as expected). All up housing rose 1.0 percent vs our expectation for 1.4 v (a 0.23ppt contribution vs 0.31ppt forecast).</p>
<p class="introbullets">Two areas of upside surprise were clothing and footwear (0.3 percent vs –0.1 percent expected) and household contents &amp; services (1.1 percent vs 0.8 percent expected). While this is only a modest upside surprise it does suggest we are finally seeing some pass–through from the earlier devaluation of the AUD and higher raw input costs.</p>
<p class="introbullets">The modest gain for housing has been key to holding down core inflation. The large rise in electricity bills is trimmed out of the core measures while the subdued gains for dwellings and rents remain in. In the quarter dwelling price gains eased back in Sydney (0.5 percent from 1.5 percent in Q2 and 0.5 percent in Q1) as did Brisbane (0.4 percent from 0.9 percent in Q2 and 0.4 percent in Q1) while Melbourne has picked up the pace (0.8 percent from 0.9 percent in Q2 and 0.5 percent in Q1). Dwelling prices continue to decline in Perth falling 0.4 percent (from –0.1 percent in Q2 and –2.2 percent in Q1).</p>
<p class="introbullets"><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.40.06%20PM.png" target="_blank">Click to enlarge</a></p>
<p class="introbullets"><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.40.06%20PM.png" alt=""></p>
<p class="introbullets">Non-traded prices rose 0.5 percent in Q3 from 0.4 percent in Q2 which has seen a modest lift in the annual pace to 1.7 percent/yr from 1.6 percent/yr. Given the lift in power bills that boosted this quarter result, and remembering that the September quarter get the usual seasonal boost from the annual repricing of administrated prices, then this is a subdued print.</p>
<p class="introbullets">Traded goods prices rose 1.0 percent/qrt following a 0.6 percent/qtr gain in Q2 and a very weak –1.4 percent in Q1. The September quarter saw something of a reversal for the auto fuel prices (–2.9 percent/qtr vs. +5.9 percent/qtr Q2 and –10% in Q1) while fresh fruit &amp; vegetables build on the modest Q2 gains (11.6 percent compared to 1.7 percent Q2 and –4.3 percent in Q1). However, excluding fuel, food and tobacco traded goods lifted 0.6 percent which is a modest gain from run of softer numbers (–0.3 percent in Q2 and 0.1 percent in Q1). This left this ‘core’ measure of traded goods prices at a very modest 0.9 percent/yr.</p>
<p class="introbullets">So the September quarter was a mixed update with some softness continuing in the non-traded sector but signs of AUD (and rising input costs) inflationary pass-through to clothing &amp; footwear as well as household contents &amp; services. But offsetting this is the clear ongoing competition in the groceries space which is holding down food prices overall. So while we may argue we have seen the low point for core inflation, any acceleration from here is going to be a very mild one. </p>
<p class="introbullets"><em>Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.</em></p>
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Modest gain for housing key to holding down core inflation: Westpac's Justin Smirk

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<p>GUEST OBSERVER</p>
<p>Low inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.7 percent in the September quarter, above expectations for a lift of 0.4-0.5 percent. In seasonally adjusted terms the CPI rose by 0.4 percent. The annual rate of inflation rose from a 17-year low of 1.0 percent to 1.3 percent (seasonally adjusted 1.4 percent).</p>
<p>Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 percent in the September quarter (1.7 percent annual); the weighted median rose by 0.3 percent (1.3 percent annual) and the CPI less volatile items rose by 0.5 percent (1.7 percent annual). Overall, underlying inflation rose by 0.4 percent in the quarter and by 1.6 percent over the year.</p>
<p>Main changes: Fruit prices rose by 19.5 percent in the quarter with electricity up by 5.4 percent, tobacco up by 2.3 percent, vegetables up 5.9 percent and property rates and charges up 4.0 percent. The CPI was dragged lower by a 2.9 percent fall in petrol prices and a 2.5 percent fall in telecom equipment and services.</p>
<p>What does it all mean?</p>
<p>Inflation has lifted from the canvas, albeit with a lot of help from higher prices for fruit and vegetables. Still, the higher headline rate of inflation will serve to lift key measures of inflation expectations and thus make it more likely that inflation will return to the 2-3 per cent target band in coming quarters.</p>
<p>Underlying inflation remains low: up 0.4 percent in the quarter to be up 1.6 percent for the year. But if recent floods cause more food inflation, this will drive headline inflation, and in turn, lift underlying price measures.</p>
<p>It is clear that inflation is still historically low. So, the Reserve Bank can still cut rates if it wants to take out some insurance on a stronger growth/stronger inflation outcome. So a rate can’t on November 1 can’t be totally ruled out. But financial markets are not betting on it – with pricing suggesting that there is a 6 per cent chance of a rate cut in November. And the Reserve Bank is indeed looking for reasons not to cut rates rather than reasons to reduce rates to new record lows.</p>
<p>It is clear that interest rates will stay low for an extended period. Global competition ensures that retailers can’t lift prices in the current environment. </p>
<p>The Reserve Bank would also welcome the fact that coal, oil and iron ore prices are rising, the US economy remains in good shape, China is still expanding at a near 7 percent annual clip and that European growth is looking better. Inflation still faces challenges in returning to 2-3 percent, but prospects of getting back to the band are looking better.</p>
<p><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%2012.30.11%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%2012.30.11%20PM.png" alt=""></p>
<p><em>Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.</em></p>
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Inflation edges its way higher from a 17-year low: CommSec's Craig James

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<p>The latest <span>inflation data</span> was a <span>little stronger</span> than most economists had been expecting.</p>
<p><span>The Aussie dollar</span> has climbed since 11.30am as a consequence.</p>
<p><span>Headline CPI </span>grew by 0.7 percent over the quarter, against 0.4 percent over the June period, bringing the annual rate to 1.3 percent from 1 percent.</p>
<p><span>Core inflation</span> has weakened over the September quarter, with the<span> trimmed mean CPI</span> rising 0.4 percent against the prior 0.5 percent.</p>
<p>It puts the annual rate unchanged at 1.7 percent. The <span>weighted median </span>on a quarterly basis has eased to 0.3 percent from 0.4 percent, with the annual rate steady at 1.3 percent.</p>
<p>Fruit prices pushed inflation higher.</p>
<p>The <span>Aussie </span>has climbed to US77 cents.</p>
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jonathanchancellor-7SQnKwU6yx

Inflation stirs though underlying inflation stays lows

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<div class="column">GUEST OBSERVER</div>
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<br>We expect Q3 CPI data (on 26 October) to show that underlying inflation has remained weak. On our forecasts, the data are unlikely to be enough to provide confirmation that disinflationary forces are fading.</div>
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<div class="column">This would complicate the monetary policy outlook, although we don’t expect the RBA to mechanically respond to a low result.</div>
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<br><p>We expect the trimmed mean to have risen by 0.3 percent q/q and the weighted median by 0.4 percent q/q. This would see the average of the two measures rise by 0.4 percent q/q and be steady at 1.5 percent y/y.</p>
<p> </p>
<p>Importantly, the risks around this forecast seem tilted to the downside given still weak wage growth, low rental inflation, and ongoing pressure on a broad range of retail prices. A key uncertainty in the forecast is around new house prices. This is the largest item in the CPI at 9 percent of the basket and has been quite volatile over the past year.</p>
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<p>In our view, an outcome for the average of the two underlying measures of 0.3 percent q/q or less would concern the RBA given it would be below the implied RBA forecast and likely trigger a downgrade to the RBA’s inflation profile.</p>
<p>That said, the backdrop is quite different from April when the weak Q1 CPI print was released: the RBA has two rate cuts in the pipeline and recent communication has sounded comfortable about policy settings; the domestic economy looks more robust; commodity prices have risen; the property market has re-energised; and the changes to the statement on the conduct of monetary policy have increased the RBA’s ability to tolerate below-target inflation on financial stability grounds.</p>
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<p>Given this, the detail will be important in assessing any implications for monetary policy. There is little domestic monetary settings can do about global factors (notably competitive pressures weighing on tradable inflation), but the RBA would likely be concerned if there is broad-based weakness across non- tradable inflation.</p>
<p>Should the RBA be confronted with this scenario, we doubt there would be any urgency to respond. Indeed, in such a scenario, we would think it would be more appropriate for the risk of further easing in February to shift, rather than for November.</p>
<p> </p>
<p>Apart from the more robust backdrop, waiting until February would provide the RBA the opportunity to see one more GDP print (on 7 December), one more inflation print (in late January), another round of wages data, as well as a few more months of data on both the housing and labour markets. In addition, the US Federal Reserve is likely to have tightened by that time, which could have consequences for the AUD.</p>
<p>The headline CPI is forecast to have risen by 0.5 percent q/q in Q3, slightly higher than the 0.4 percent q/q Q2 outcome, leaving annual inflation steady at 1 percent y/y. Our daily tracking of petrol prices imply a 3.2 percent fall in the quarter.</p>
<p>THE BROAD THEME REMAINS ONE OF WEAK INFLATIONARY PRESSURES</p>
<p>Retail price inflation is being restrained by global competitive pressures. Meanwhile, weak wage growth – which is showing only tentative signs of stabilising – and low inflation expectations are weighing on non-tradable inflationary pressures1. New house prices are the key exception to this, with inflation in this sector likely to have remained relatively solid given the high level of construction activity.</p>
<p>Consequently, we expect inflationary pressures to remain relatively subdued across a broad range of items, with both tradable and non-tradable inflation expected to remain soft. Indeed, we continue to see a weak inflation environment over the coming year (see Figure 1). </p>
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<div class="column">Tradable inflation continues to be contained as domestic firms face intense global competitive pressures, which has curbed pricing power and limited the degree of currency pass through (see Figure 3).<br><p>These competitive pressures likely have several years to run across both consumer staples and durables. Indeed, we continue to see weak inflationary pressures across supermarket prices, clothing &amp; footwear, furnishings, and audio visual &amp; computing equipment.</p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.36.46%20PM.png" target="_blank">Click to enlarge</a></p>
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<p>Meanwhile, weak wage pressure is likely to see market services inflation remain mild and continue to lean on administered inflation. Wage growth is showing tentative signs of bottoming, but any recovery is likely to be a slow process given a significant degree of underemployment. </p>
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<div class="column">The housing component is forecast to add 0.2ppt to headline CPI, reflecting a seasonal increases in utilities and property rates as well as a rise in new dwelling purchase prices.</div>
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<br>That said, there is a high degree of uncertainty around new house prices. This is the largest item in the CPI at 9 percent of the basket and has been quite volatile in the past year. Building approvals for houses have remained at elevated levels, but new house price inflation has weakened sharply on a y/y basis (see Figure 6). Given renewed strength in the housing market, we expect a reasonable rise of 0.7 percent q/q in Q3 (after 0.9% q/q in Q2 and 0.2% q/q in Q1).<br><p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.39.45%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.39.45%20PM.png" alt=""></p>
<p>While we expect new house price inflation to continue to remain relatively strong in the coming quarters, upside pressure from this component is likely to fade over 2017-18 as construction activity peaks and then moderates. Indeed, investor finance for new construction has weakened in recent months and suggests building approvals may be close to a peak.</p>
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<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.41.35%20PM.png" alt=""></p>
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<p>Rental inflation (which accounts for 7 percent of the CPI basket) is forecast to remain very weak at +0.2 percent q/q, consistent with surging supply.</p>
<p>Given the supply of apartments coming on stream over the next year (Figure 7) and the investor-led nature of this property cycle, rental inflation is forecast to remain soft over the forecast period – a concern recently highlighted by the RBA. </p>
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<div class="column">Petrol prices have had a significant influence on headline CPI this year.</div>
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<div class="column">Our daily tracking suggests petrol prices fell by 3.2 percent in Q3, subtracting 0.1ppt from the headline CPI. We think global oil prices have found a base and forecast a slow upward trajectory from current levels, which will contribute to higher headline inflation in the quarters ahead.</div>
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<br>The communications category is forecast to subtract 0.1ppt from CPI in Q3, with prices forecast to have fallen by 1.8 percent q/q in Q3. Prices for telecommunication and equipment items have been falling since late 2013 and the downward pressure shows no sign of abating. </div>
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<p><span>Tobacco </span><span>prices are forecast to add to headline CPI in Q3, with the annual 12.5% excise increase on 1 September 2016 pushing tobacco prices higher. That said, we note that most of the impact of this administered price rise comes through in the December quarter. </span></p>
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<p><span>Holiday travel and accommodation </span><span>is forecast to contribute 0.1ppt to quarterly CPI, reflecting a seasonal increase in international travel, while BITRE data points to a jump in domestic airfares.</span></p>
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<p><em>Jo Masters is senior economist, ANZ and can be contacted <a href="https://www.anz.com/personal/" target="_blank">here</a>.</em></p>
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Expect new house price inflation to remain strong: ANZ's Jo Masters

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<p><img src="https://counter.theconversation.edu.au/content/64265/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>In the revolving door of economic ideas, the old can be suddenly new again. Independent Senator Nick Xenophon resurrected one such idea this week.</p>
<p>He said the Reserve Bank of Australia should replace its inflation target of 2-3 percent per annum with a target of nominal GDP growth of around 5.5 percent per annum.</p>
<p>This is more than just an armchair economics debate – it could seriously affect all households and businesses in Australia.</p>
<p>First, a short primer. The RBA determines the general level of interest rates that we all pay on loans and earn on deposits. It has no legislative power to directly set rates, but it might as well have because its indirect control is so precise via other legislative requirements on banks.</p>
<p>The RBA’s aim is to restrict inflation – the average rate of increase in prices – to a band between 2 and 3 percent over a period of years between economic booms and downturns. Why 2-3 percent? Because too much inflation is bad, and so is too little inflation. 2-3 percent is the sweet spot.</p>
<p>A higher rate of inflation (remember it’s an average) means some prices are going up more than others creating uncertainty about future costs and selling prices, which discourages investment expenditure. Higher inflation also encourages speculative investments in housing and other assets, which can create speculative bubbles. And as we know, bubbles can burst.</p>
<p>Inflation that is too low, say 0-1 percent, means some businesses are selling at prices that are stagnant or falling, but their debts are not falling. That leads to difficulty in meeting debt repayments. So if the RBA thinks inflation is heading up beyond its target, it will raise interest rates to stop households and businesses borrowing and spending, which reduces pressure on prices. If it thinks inflation is too low it will cut rates to encourage us all to borrow and spend.</p>
<p>Now back to Xenophon’s idea. He, and some respected economistsbefore him, think inflation is the wrong target. What if, they argue, inflation is going up only because energy prices are going up? High energy prices can’t be good news for businesses and households. So why would the RBA want to make life even harder by raising interest rates to lower inflation? Madness they say. Better to target the sum of the inflation rate plus the growth in national output of goods and services (GDP), what is called nominal GDP growth.</p>
<p>So if inflation is going up but output is going down because of the depressing effect of high energy prices, nominal GDP would be flat and the RBA would do nothing, neither contracting nor expanding nominal GDP growth – the right policy.</p>
<p>Economists are split on this and have been for years. In August 2011 The Economist newspaper decided it was a good idea, and then three months later published an article against the idea. This is not unusual in economic debates incidentally – many economic “principles” are in fact contested, as is the case for most social sciences.</p>
<p>One big problem with Xenophon’s idea is that the theory does not fit the times. It is not the right policy for today.</p>
<p>Energy prices are not going up; they have been falling and are now flat. Yes, electricity prices have been going through the roof in South Australia and to a lesser extent elsewhere. But oil prices have been falling or flat over recent years, and this has a more pervasive effect than government bungling of the electricity market.</p>
<p>So output growth and inflation are not moving in opposite directions – both have fallen in recent years. Inflation is now below the bottom of the RBA’s target zone of 2-3 percent on any of the alternative measures.</p>
<p>The RBA, along with most central banks of advanced countries, would actually like to see more inflation, not less. Annual output growth is struggling to reach 3 percent, which is below the long run average of 3.5 percent. Hence nominal GDP growth is below the 5.5 percent long-run average that Xenophon would target. So whether the RBA targets inflation or nominal GDP growth doesn’t matter – the policy would be the same – that is, stimulate spending by lowering interest rates, which is exactly what it has been doing.</p>
<p>Another downside is that although nominal GDP growth would be more stable, inflation would tend to be more volatile. Inflation could jump up and down, but as long as output growth moved in the opposite direction the RBA would do nothing to dampen the volatility in inflation. Volatile inflation increases the uncertainty about future prices, which inhibits investment spending by firms and households.</p>
<p>A bigger problem with the RBA’s inflation target that would not be resolved by adopting a nominal GDP target, is that the inflation target only refers to prices of goods and services – it ignores asset price inflation. The rapid rise in house prices in Sydney and Melbourne in recent years is a potentially serious problem that has been essentially ignored by the RBA. A better idea than nominal GDP targeting would be to include asset prices as well as the prices of goods and services in its inflation target.</p>
<p>And finally, if a nominal GDP target is such a good idea, then why is no country doing it? It is within the charter of most central banks to target nominal GDP growth instead of inflation, but none are, at least not formally.</p>
<p>Many central banks look at wider economic conditions as well as inflation. They will temporarily tolerate higher inflation when output growth, but the inflation rate remains their primary target. This flexibility seems reasonable, keeping inflation as the primary target. We would be the first to experiment with a strict nominal GDP target. Do we really want our Reserve Bank to be the world’s guinea pig?</p>
<p><em><span class="fn author-name">Ross Guest is p</span>rofessor of Economics and National Senior Teaching Fellow, Griffith University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/ross-guest-13155" target="_blank">here</a>.</em></p>
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Why some economists think the RBA should drop its inflation target

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<div class="column">GUEST OBSERVER</div>
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<div class="column">Low and falling investment yields from most major asset classes point to a constrained medium term return outlook. For a diversified mix of assets, this has now fallen to around 6.9 percent on our projections.</div>
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<br>For investors the key is to: have realistic return expectations; allow that inflation is also low so real returns aren’t down as much; focus on asset allocation; and focus on assets with decent &amp; sustainable income.</div>
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<div class="column">Introduction</div>
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<div class="column">While the high inflation of the 1970s and early 1980s was bad for investment returns at the time, it left a legacy of very high investment yields which helped set the scene for high investment returns through the 1980s and 1990s. Back in the early 1980s the RBA's "cash rate" was averaging around 14%, 3 year bank term deposit rates were around 12%, 10 year bond yields were around 13.5%, commercial and residential property yields were running around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. Such yields meant investments were already providing very high cash income. So for assets like property or shares only modest capital growth was necessary to give good returns. As a result, back then the medium term (5-10 year) return potential from investing was solid. In fact most assets had spectacular returns in the 1980s and 1990s. Australian superannuation funds saw returns average 14.1% pa in nominal terms and 9.4% pa in real terms between 1982 and 1999 (after taxes and fees). </div>
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<p>But since the early 1980s the starting point in terms of investment yields has been moving progressively lower, resulting in slowing 10 year average nominal and real returns for superannuation funds as seen the chart above. Today the RBA cash rate is just 1.5 percent, 3 year bank term deposit rates are just 2.6-3 percent, 10 year bond yields are just 1.9 percent, gross residential property yields are around 3 percent and while dividend yields are still around 6 percent for Australian shares (with franking credits) they are around 2.5 percent for global shares. This note looks at the medium term return potential from major assets and the implications for investors. </p>
<p>Potential return drivers</p>
<p>In getting a handle on potential medium term returns from an asset class the key is its starting point valuation. For example, if current yields – say bond yields and dividend yields – are lower than “normal” then this will likely constrain returns relative to the past. Investment returns have two components; capital growth, and yield (or income). The yield is the most secure component and generally speaking, when you start your investment the higher it is the better. So our approach to assessing medium term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth. We prefer to avoid a reliance on forecasting and to keep the analysis as simple as possible. Complicated adjustments just lead to compounding forecasting errors. </p>
<p>For equities, a simple model of current dividend yields plus trend nominal GDP growth (as a proxy for earnings and capital growth) does a good job of predicting medium term returns. This approach allows for current valuations (via the yield) but avoids getting too complicated.1 The next chart shows this approach applied to US equities, where it can be seen to broadly track big secular swings in returns. </p>
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<p> <a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.17.56%20AM.png" target="_blank">Click to enlarge</a></p>
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<p>For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.</p>
<p>For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation. </p>
<p>For bonds, the best predictor of future medium term returns is the current bond yield. If a 10 year bond is held to maturity its initial yield will be its return over 10 years. The close relationship between 10 year bond yields and subsequent returns from bonds is clear in the next chart. </p>
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<p><a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.19.43%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p>Projections for medium term returns</p>
<p>Return projections using this approach are shown in the next table. The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. Note that:</p>
<p>We assume central banks average around or just below their inflation targets, e.g. 2.5 percent in Australia &amp; 2 percent in the US.</p>
<p>For Australia we have adopted a relatively conservative growth assumption below nominal GDP growth potential reflecting the headwind from weak commodity prices &amp; the impact of this on resource sector profits &amp; sales growth.</p>
<p>We allow for forward points in the return projections for global assets based around current market pricing – which adds 1.8 percent to the return from world equities.</p>
<p>The Australian cash rate is assumed to average 2.75 percent over the medium term. Cash is one asset where the current yield is of no value in assessing the asset’s medium term return potential because the maturity is so short. So we assume a medium term average. Normally for cash this would be around a country’s potential nominal growth rate, but we have adjusted for higher than normal bank lending rates relative to the cash rate and higher household debt to income ratios which have pulled down the neutral cash rate.</p>
<p>Combining the return projections for each asset indicates that the implied return for a diversified growth mix of assets has now fallen to 6.9 percent pa and is shown in the final row. </p>
<p><a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.21.50%20AM.png" target="_blank">Click to enlarge</a></p>
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<p>Megatrends influencing the growth outlook</p>
<p>Several themes are allowed for in our projections: slower growth in household debt; the backlash against economic rationalist policies of globalisation, deregulation and small government; rising geopolitical tensions; aging and slowing populations; low commodity prices; technological innovation &amp; automation; the Asian ascendancy &amp; China’s growing middle class; rising environmental awareness; &amp; the energy revolution. Most of these are constraining nominal growth and hence investor returns. However, technological innovation is positive for profits and some of these point to inflation bottoming. (See “Megatrends ”, Oliver’s Insights, July 2016. </p>
<p>Key things to note </p>
<p>Several things are worth noting from these projections. </p>
<p>The medium term return potential using this approach continues to soften largely reflecting the rally in most assets of the last few years which has pushed investment yields lower. Projected returns using this approach for a diversified growth mix of assets has fallen from 10.3% pa at the low point of the GFC in March 2009 to 6.9% now. </p>
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<p><a href="/images/2016/08/17/Screen%20Shot%202016-08-17%20at%208.25.44%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>The starting point for returns today is far less favourable than when the last secular bull market in shares and bonds started in 1982, due to much lower yields.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Government bonds offer low return potential thanks to ultra low bond yields.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Unlisted commercial property and infrastructure continue to come out well, reflecting their relatively high yields.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian shares for growth potential.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>The downside risks to our medium term return projections are referred to endlessly by financial commentators: namely that the world is plunged into another recession or that investment yields are pushed up to more normal levels causing large capital losses. The upside risks are (always) less obvious but could occur if global growth improves but inflation remains low which could see a continuing search for yield further pushing up capital values.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Implications for investors</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>There are several implications for investors:</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>First, have reasonable return expectations. The combinatinofof low investment yields &amp; constrained GDP growth indicate it’s not reasonable to expect sustained double digit returns. In fact, the decline in the rolling 10 year moving average of superannuation fund returns (first chart) indicates we have been in a lower return world for many years.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Second, allow that this partly reflects very low inflation. Real returns haven’t fallen as much and are still reasonable. </p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Third, using a dynamic approach to asset allocation makes sense as a way to enhance returns when the return potential from investment markets is constrained. This is likely to be enhanced by continued bouts of volatility.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Finally, focus on assets providing decent sustainable income as they provide confidence regarding future returns, eg; commercial property and infrastructure. </p>
<em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"><br>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.</em>
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