Perth’s new apartment market recorded its strongest quarter of sales since Q4 2021, with 412 apartments sold in Q1 2026 and a record quarterly sold value of $537 million, according to Urbis’ latest Apartment Essentials results.

Urbis said the March quarter result reflects strong, highly product‑specific demand across both ends of the market, from more attainable projects delivering at scale, through to premium stock being absorbed by equity‑rich downsizers.&nbsp;

David Cresp, Partner at Urbis, said the key story in Perth is not demand, it is the market’s ability to convert demand into delivered housing.&nbsp;

“This is the strongest sales quarter since Q4 2021, and it reinforces that demand in Perth is real and it’s local,” David Cresp said. “But the task now is delivery, turning that demand into projects that can actually be built and completed.”&nbsp;

[smartcode_project:default project_id=110291 project_image_fid=302785]

<h2>Affordable product leads, premium demand remains resilient</h2>

Sales in Q1 were led by more affordable projects, with The Boulevard (SKS Group) recording 115 sales in the quarter, the presentation noting this is only the second time a single project has surpassed 100 quarterly sales. The project was able to offer more affordable housing product right next to a train station.&nbsp;

Palmyra West (Finbar) also delivered strong results with 28 sales in Q1, following 84 sales in Q4, with an average price of under $800,000, underscoring depth of demand for well‑located, attainable new stock.&nbsp;

At the premium end, Urbis said downsizer demand is continuing, with the results highlighting Romeo (Applecross, Finbar) recording 75 sales and reaching almost 50% sold in one quarter.

Jual (Shenton Park, Celsius Property) also posted a strong quarter with 28 sales, reaching 39% sold in one quarter.

Urbis noted that Perth apartment demand is not speculative, not investor‑led, and not uniform, describing it as localised, often equity‑driven and highly product‑specific, a pattern reflected in the polarisation between strong “attainable” performers and premium downsizer product.&nbsp;

[smartcode_project:default project_id=148957 project_image_fid=364102]

<h2>Prices underpinned by costs, and the delivery risk is growing</h2>

Urbis said pricing pressure is cost not demand‑driven: construction costs and delivery risk are now a central constraint, with the results noting build costs remain elevated and volatile, and that energy, fuel and labour uncertainty weigh on feasibility.

David Cresp said a growing challenge for private Build‑to‑Sell developers is simply securing a builder in the current environment.

“Developers are really feeling the pressure from a building market that was operating at capacity and securing a builder is challenging,” David Cresp said, adding that even where a builder can be secured, “trying to get to the price that makes the development financially viable is incredibly challenging in the current market.”&nbsp;

Urbis’ broader WA commentary also notes that industry remains at or above capacity with lot and housing creation, and that many builders are limiting new sales to manage stretched workforces and fixed‑price contract pressures, conditions that flow directly into apartment feasibility and delivery timing.

[smartcode_project:default project_id=108869 project_image_fid=317905]

<h2>Supply: improving later, but still constrained, and Perth lags eastern benchmarks</h2>

While near‑term supply remains constrained, Urbis’ forecast shows completions lifting “Supply is forecast to be back above 1,500 apartments per annum for the first time since 2019”, with 1,775 completions forecast for 2026, and volumes remaining above that level over the following years.&nbsp;

Looking further ahead, completions are forecast to reach 2,500 in 2028, with the report noting 32% of that total is social/affordable, reflecting the role of government‑supported delivery in rebuilding the pipeline.&nbsp;

However, Urbis said Perth remains behind comparable markets on pipeline scale. In a national comparison of projects under construction, the report shows under construction Perth Build‑to‑Sell (BTS) at 3,446 apartments versus the Gold Coast at 7,922. Mr Cresp said “The challenge for Perth is how to we grow the delivery pipeline”.

Urbis’ conclusion is that Perth’s market is increasingly defined by product discipline and delivery certainty, with the research identifying “delivery certainty is key” and calling out builder risk and procurement models as core success factors, alongside “timing and staging”.&nbsp;

Joel Robinson

Perth apartment sales hit strongest pace since late 2021 as builder capacity tightens

<a href="https://www.apartments.com.au/developers/sammut-developments">Sammut Group</a> has secured development approval for its latest Brisbane apartment project, marking the Sydney developer’s next step in expanding its Queensland pipeline following the success of its debut Gold Coast development, Coast.

The approved project at <a href="https://www.apartments.com.au/new-apartments/44-glen-road-toowong-qld-4066">44 Glen Road, </a><a href="https://www.apartments.com.au/developments/toowong-qld-4066">Toowong</a> will deliver a 15-storey riverfront apartment building with 42 residences, significantly increasing the scale of the site’s previous approval for a smaller luxury scheme. Designed by Bureau^proberts, the development will comprise a mix of predominantly four-bedroom and two-bedroom apartments positioned to maximise Brisbane River and city views.

Sammut Director Julian Sammut said the group had been actively searching Brisbane for several years before identifying Toowong as the right fit.

“Brisbane was the right step for Sammut,” Sammut said.

“With the success of Coast we thought we should definitely look to do more in Queensland alone. We then pushed up to look at Brisbane. We've been looking for I'd say two to three years actually and it was hard to find the right location.”

<img alt="Sammut makes Brisbane apartment play" data-entity-type="" data-entity-uuid="" src="https://res.cloudinary.com/dz9xllyip/image/fetch/f_auto,c_limit,w_1440,q_75/https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/field/image/Screenshot%202025-12-23%20at%203.27.14%E2%80%AFPM.png?VersionId=dYAVIL7qdcGA8ojvkslSrLjczXFejSSx" />

Sammut said suburbs including New Farm and Teneriffe were considered before the group ultimately focused on Toowong due to its strong downsizer demographic and limited supply of developable riverfront land.

The site was acquired off-market after what Sammut described as a lengthy negotiation and planning process, with the developer pursuing an uplift to the original approval.

“We are DA approved now which is very exciting,” Sammut said.

“We've had our change approval come through and we've obviously doubled the height, 15 storeys plus rooftop. We've got 42 amazing apartments that are going to be coming to market soon.”

<img alt="Sammut makes Brisbane apartment play" data-entity-type="" data-entity-uuid="" src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,dpr_2.0,q_auto:good/https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202025-12-23%20at%203.27.26%E2%80%AFPM.png?VersionId=ohkRkY0dIZlqdfME2EZePsCQavRiBadE" />

Bureau^proberts said the design responds to Toowong’s evolving urban character, balancing contemporary apartment living with the area’s established residential identity.

“A place where traditional Queensland living has taken place for centuries; Toowong is seeing a shift of contemporary influence, commercial and retail hubs mixed with well-considered residential offerings – all the while maintaining its character and charm,” the architect noted in planning documents submitted to Brisbane City Council.

The architecture practice said the project’s form was shaped by its riverfront setting, flood considerations, neighbouring building scales, and view corridors.

“They said the mix of four and two-bedroom apartments capture the ‘fundamental qualities of Queenslander living,’ translated into the context of a contemporary subtropical building.”

The development sits just off Coronation Drive within walking distance of Toowong’s retail precinct and the upgraded Regatta ferry terminal, while also benefiting from proximity to the incoming green bridge connection to West End. Sammut said the accessibility and amenity offering were central to the site’s appeal.

The approval adds to growing residential activity along the Toowong riverfront, joining nearby projects including Consolidated Properties’ Monarch Residences and Spyre Group’s ARC Residences.

Sammut secures approval for debut Brisbane apartment development in Toowong

Developer Lanevick is heading back into Sydney’s apartment market after focusing more heavily on the luxury townhouse and terrace sector in recent years.

Lanevick, founded and directed by Steve Maroun, is expecting to receive approval in the coming months for a new apartment development in Gladesville, with the aim to launch it to the market later this year.

The 51-apartment project, designed by Studio Johnston, will comprise a mix of one-, two-, and three-bedroom apartments positioned toward the Hunters Hill downsizer market.

“Traditionally it’s been difficult for people in that market to downsize because there just hasn’t been the right product available,” Maroun said.

“We’re targeting buyers who might have 30 to 40 per cent of their house value sitting in the bank after downsizing.

“They still want good spacious entertaining areas, they still want quality design, but they also want flexibility and the ability to enjoy life a bit more after working hard for a long time.”

The project sits near Boronia Park and within close proximity to the Parramatta River foreshore, an area Maroun says offers more of a Hunters Hill lifestyle than a traditional apartment precinct.

“From a lifestyle perspective, it’s really more Hunters Hill than Gladesville,” Maroun said. “You’re close to the foreshore, close to parklands, and still connected back into the village precinct.”

From level four and above, apartments will capture water views&nbsp;toward Sydney Harbour. Communal amenity will include rooftop entertaining areas, wellness spaces, and a gym tailored toward owner-occupier buyers.

“We’ve really designed these apartments around that buyer coming from the Hunters Hill LGA and what they’re actually looking for in their next chapter.”

The proposed development has also been designed to respond to the changing character of the broader Gladesville town centre, where a growing number of mixed-use and residential proposals are expected to emerge over the coming years.

“Gladesville presented a rare opportunity to deliver a genuinely design-led residential project within an evolving lifestyle precinct, just moments from the growing Gladesville town centre, and we’ve approached the project with a strong focus on architecture, liveability and long-term community value,” Maroun said.

Maroun said Lanevick saw a first-mover advantage within the precinct as planning controls continue to evolve to accommodate greater housing density.

“We think there’s a real opportunity there that hasn’t really been serviced properly yet,” he said.

“There’s going to be a broader evolution of the whole Gladesville village precinct over time, particularly with more activation and mixed-use outcomes.”

The Venus Street proposal will include a commercial and retail component at ground level designed to contribute to that evolving streetscape activation.

“A big part of the thinking was how do you activate that area properly and create more vibrancy and amenity, which is what Hunters Hill has been looking for,” Maroun said.

Lanevick’s focus since 2020 has largely been on smaller-scale luxury townhouse and terrace developments. The developer recently completed Royale Randwick, also designed by Studio Johnston, where prices reached $3.65 million. The project was featured in the UDIA NSW 2026 Professional Development Prospectus and was also named a finalist for Development of the Year.

&nbsp;

Lanevick to cater for Hunters Hill downsizers with new Gladesville apartment development

Property developer One Living, backed by former Macquarie banker turned investment manager Chris Green’s investment firm, has unveiled plans to bring more institutional capital into housing to help address the national supply crisis.

The New York-based investor has focused his firm, GreenPoint Partners, on addressing the supply shortage hitting middle market housing in Australia.

It is backing the new One Living business to develop more than 1000 units along the eastern seaboard. The new firm is starting with a development on Mona Vale Road, on the border of Mona Vale and Pymble, in Sydney’s Northern Beaches, with around 140 apartments planned. They are eyeing off more sites across the city.

With cost pressures rising in the industry, One Living’s model is to be a vertically integrated developer-builder, so it can respond directly to the housing gap by removing the cost inefficiencies embedded in traditional residential delivery.

“We are building a platform designed to operate at scale and starting in a market where there’s a clear need for quality, attainable housing,” One Living joint managing director Joseph Scuderi said.

“It’s that missing middle – it’s that attainable end of housing… that’s what most Australians invest into and what Australians can actually afford.”

<img alt="Mona Vale" data-entity-type="file" data-entity-uuid="798dfa93-4941-4db6-a696-31e9dc18e81c" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%202.31.50%E2%80%AFPM.png?VersionId=mKBqi5C_DmeiXS.AtJkcR8LQIxqCqmFi" />

GreenPoint Partners brings years of experience assembling and scaling real estate operating businesses across major markets. And Green sees a big opportunity in Australia.

“For its size, sophistication and importance to the community, Australia’s living sector has remained largely under-institutionalised, which represents significant opportunity,” Green said. “GreenPoint identified that gap, assembled the right team, and is backing One Living to build a platform that is aligned to market needs.”

Green said being a builder-developer would give the company the capacity and flexibility it required to deliver reasonably-priced homes.

“We want it to be at that attainable level; not super high end luxury but at that attainable level,” he said.

<img alt="Mona Vale" data-entity-type="file" data-entity-uuid="74a5344a-4b26-4d4a-ada3-056b1220be77" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%202.32.15%E2%80%AFPM.png?VersionId=vY8hXHO4reBMdO8ZXMWCNtGZJofUPQ3j" />

&nbsp;

One Living will undertake a component of affordable housing in its schemes, which it will own and operate, and it could also run build-to-rent on some sites.

Green praised local policy settings.

“The NSW government is being very supportive, strategic and pragmatic in terms of how do we generate more supply of housing,” he said. “We think it’s actually positive for development and the bit that’s been lacking at that attainable level is that it’s lots of relatively small private developers, whereas we want to create an institutional platform.”

One Living is also&nbsp;looking at high-density projects and could take on more institutional funding in the future.

“The way we will be able to achieve economies of scale is through size,” Green added.

One Living enters Sydney's new apartment market with Northern Beaches site acquisition

It's been several years since there's been an opportunity to buy a brand new townhome in Melbourne's coastal suburb of Mordialloc. Even apartment developments in recent times have been few and far between in the area.

Local developer LDS Property identified the gap in new housing, securing a site on White Street, directly opposite&nbsp;Woodlands Golf Club Mordialloc. They've recently launched&nbsp;<a href="https://www.apartments.com.au/new-townhouses/wm-residences-mordialloc-102-white-street-mordialloc-vic-3195">WM Residences</a>, just 13 townhouses which they have already started building.

Projects by Buxton Director Heath Thompson, who is selling WM Residences, says the townhouses x that perfect middle ground be

"Mordialloc residents have had limited options to downsize within the suburb, often forcing them to look elsewhere despite long-standing ties to the area," Thompson says.

"With very little comparable new supply coming to market, projects like WM Residences are well placed, particularly as buyers look to capitalise on current conditions amid constrained supply."

[smartcode_project:default project_id=134646 project_image_fid=6109]

The development, designed by regarded architecture firm&nbsp;<a href="https://www.apartments.com.au/architects/ewert-leaf">Ewert Leaf</a>,&nbsp;adopts a deliberately restrained architectural approach, focusing on simplicity, durability and liveability rather than overt design gestures.

The boutique scale is central to the offering. With only 13 three-bedroom residences, each home is configured to prioritise functional layouts and everyday use, supported by private terraces and secure two-car garages.

Ewert Leaf’s design response leans into a calm, neutral material palette. Interiors are defined by oak flooring, white walls and soft finishes, creating a consistent and understated backdrop. The approach avoids trend-driven detailing in favour of longevity, with an emphasis on natural light and spatial clarity.

[smartcode_project:default project_id=134646 project_image_fid=6110]

Beyond aesthetics, the homes are designed to meet contemporary performance expectations. Each residence targets a minimum 6-star energy rating, incorporating double glazing, comprehensive insulation and all-electric Bosch appliances.

The project’s location supports a walkable coastal lifestyle, sitting within close proximity to Mordialloc’s foreshore, Main Street retail strip and the train station. Local cafés and dining venues, including Suburbia Deli and Hendriks Café, are within a short walk, reinforcing the area’s established neighbourhood character.

[smartcode_project:default project_id=134646 project_image_fid=6116]

While <a href="https://www.apartments.com.au/developments/mordialloc-vic-3195">Mordialloc</a> is often defined by its beach and pier, the project taps into other areas of day to day living, offering easy access to local food, casual dining and transport, rather than positioning itself purely as a lifestyle retreat.

WM Residences reflects a continued trend across Melbourne’s coastal suburbs towards smaller-scale, design-led townhouse developments, particularly on infill sites where proximity to amenity is already established.

With construction commenced prior to its market entry, the project aligns with a growing preference among buyers for developments with visible progress and defined delivery timeframes.

[smartcode_project_cta:default project_id=134646]

WM Residences fills gap in Mordialloc townhouse market

Interest Rates

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NAB has just slashed several of its 2-year fixed rates for owner-occupiers paying principal and interest by 0.20 per cent.
For first home buyers NAB is offering 3.49 per cent, which is one of the lowest 2-year fixed rates available in Australia.
NAB is also offering $2,000 back on new loans of $250,000 or more.
This follows shortly after <a href="/news/anz-finally-cuts-fixed-home-loan-rates">ANZ cut rates</a> across several fixed rate home loans packages as of May 10.
ANZ was the last of the <a href="/news/westpac-joins-other-big-two-to-cut-fixed-home-loan-interest-rates">big four banks to reduce fixed rates</a> on home loans.
RateCity.com.au research director Sally Tindall said it was unusual to see one of the big four banks offer one of the lowest fixed rates in Australia.
“The fact that NAB, a big four bank, is offering one of the lowest fixed rates in Australia is a sign of the times,” she said.
“The big banks are now playing in the low cost loan space in a bid for new customers and they aren’t taking a backwards step.
RateCity data shows around 50 lenders have cut fixed rates in the last two months ahead of the expected RBA cut.
Some lenders are even moving variable rates in the week out from the RBA, including ING which moved rates today and Mortgage House, which now has the lowest ongoing variable rate in Australia of 3.29 per cent.  
Click <a href="https://www.propertyobserver.com.au/images/2019/5/30/NAB%20Slash%20rates.JPG" target="_blank">here</a> to enlarge.
<img src="https://www.urban.com.au/images/2019/5/30/NAB%20Slash%20rates.JPG" alt="">
Note: All interest rates in the tables above are for owner-occupiers paying principal and interest.
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j.ballantyne1990-6AQqhLzZaK

NAB cuts two year fixed rates

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GUEST OBSERVATION
Australia’s lowest ever Reserve Bank cash rate – 1.5% – is about to be consigned to history.
On Tuesday Governor Philip Lowe made it clear he plans to cut it in two weeks’ time. The money market cash rate (from which all other rates derive) will then fall to 1.25%.
After that, if betting in the market is right, he will cut the cash rate to just 1% by Christmas.
Speaking in Brisbane, Lowe said the Reserve Bank board <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-05-21" target="_blank">was of the view that</a>:
"Inflation was likely to remain low relative to the target, and that a decrease in the cash rate would likely be appropriate. 
"A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at its meeting in two weeks’ time the board would consider the case for lower interest rates."
The bank is forecasting a tick up in economic growth from the present 2.3% to 2.75% by the end of the year and a fairly steady unemployment rate.
But here’s the thing. He was keen to emphasise that those forecasts only applied if he cut rates twice this year – that’s twice, before the end of the year.
<hr>
Reserve Bank cash rate since 1990
<a href="https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
<a class="source" href="https://www.rba.gov.au/statistics/cash-rate/" target="_blank">Reserve Bank of Australia</a>
<hr>
He is planning to do it because the economy is weak, much weaker than his political masters suggested during the election campaign. Consumer spending is “unusually soft”.
"Over the past three years, household disposable income has increased at an average rate of just 2.75%. This compares with an average of 6% over the preceding decade.
"As this period of weak income growth has persisted, it has become harder for households to dismiss it as just a temporary development – as something that will pass quickly. The lower rate of income growth has also made it harder for households to pay down debt. The end result has been that many people have decided to adjust their spending plans."
The cuts are just the start
It isn’t much good cutting interest rates if mortgage rates don’t follow. That will be up to the banks. But until this week, even if they had passed it on, there would have been so many would-be borrowers it wouldn’t have helped.
That’s because, whatever the interest rate and whatever a would-be borrower’s ability to make payments, banks have generally refused to lend to anyone who couldn’t cope with a rate of 7.25%.
It’s been the doing of the Australian Prudential Regulation Authority – one of the Reserve Bank’s sister organisations. It regulates banks and super funds and other institutions in order to keep the financial system stable.
In December 2014 it directed the institutions it supervises to impose serviceability assessments that incorporated a buffer of at least two percentage points above the loan product rate they were offering and a minimum floor rate of <a href="https://www.apra.gov.au/sites/default/files/141209-Letter-to-ADIs-reinforcing-sound-residential-mortgage-lending-practices.pdf">at least 7%</a>.
That meant that if new mortgage rates were 5%, as they were at the time, the lenders had to satisfy themselves that the borrower could cope with 7%. As new mortgage rates fell to 4.5% they still had to satisfy themselves that the borrower could cope with 7%.
Banks have needed unreasonably high buffers
APRA’s directive stated that “prudent practice would be to maintain a buffer and floor rate comfortably above these levels”, meaning that in practice most lenders wouldn’t lend to anyone who wasn’t able to cope with the mortgage rate climbing to 7.25%, no matter how unlikely that was becoming.
On Tuesday this week, a few hours before Governor Lowe delivered his speech, it wrote to the institutions again, <a href="https://www.apra.gov.au/sites/default/files/letter_consultation_on_revisions_to_prudential_practice_guide_apg_223_residential_mortgage_lending.pdf" target="_blank">telling them that</a>: "the low interest rate environment is now expected to persist for longer than originally envisaged. This may mean that the gap between actual rates paid and the floor rate may become unnecessarily wide."
It was proposing to remove “reference to a specific 7% floor”.
The required serviceability buffer would climb from 2% to 2.5%, and it would no longer expect lenders to use a rate “comfortably above” that buffer.
Soon, they’ll be able to lend more…
While strictly speaking the letter notified lenders of a one-month consultation period, what it really did was notify them that the changes were about to be implemented.
In recent months most new mortgage rates have been below 4.5%, with some high-quality borrowers able to get rates as low as 3.6%.
The new arrangements will allow banks to assess them on their ability to make payments on a 6% to 7% loan instead of a 7.25% loan.
Should the next two cash rate cuts be passed on, it would allow them to assess lenders on their ability to repay a 5.5% to 6.5% loan.
It would represent a substantial easing of credit standards for new borrowers.
..up to 10% more
My calculations suggest it would increase the borrowing capacity of home buyers by as much as 10%, enough to have a material positive impact on the housing market.
APRA’s move (almost certainly taken in consultation with the Reserve Bank) both makes a cut in the Reserve Banks’s cash rate less imperative and more potent.
As interest rates get lower, further cuts seem to have been losing their ability to get people and businesses spending and borrowing, something the Governor would have been thinking of when he referred in his speech to the “limitations” of relying on just one instrument to boost the economy.
It would also be up to the government to provide “additional fiscal support” (which means extra spending or tax cuts) including through spending on infrastructure and “policies that support firms expanding, investing and employing people”.
The first of his rate cuts, due in a fortnight, will have more impact than it would have had APRA not acted.
Or perhaps not as much as he would have hoped if the banks, carrying big costs as a result of the misdeeds uncovered in the royal commission, don’t pass it all on.<img src="https://counter.theconversation.com/content/117500/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
Warren Hogan, Industry Professor, University of Technology Sydney
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/cutting-interest-rates-is-just-the-start-its-about-to-become-much-much-easier-to-borrow-117500" target="_blank">original article</a>.
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Cutting interest rates is just the start. It’s about to become much, much easier to borrow

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EXPERT OBSERVER
The property market will remain weak well into 2020 unless the RBA cuts interest rates and these are passed on by the banks.
However, it was the introduction of lending restrictions by APRA, followed by the greater scrutinisation of loan applications as a result of the Royal Commission, that was the catalyst for the downturn, has just released its latest Quarterly Risks &amp; Opportunities Report.
Tighter lending standards, the findings of the Banking Royal Commission, political uncertainty, fears of the potential changes to negative gearing and capital gains tax, restrictions on foreign investors, unit oversupply and large falls in dwelling commencements had all had a material impact on the property market.
The major risks associated with residential property have, and continue to be, significantly increased in comparison to the risk levels in the long term.
This is due to a combination of factors that are changing the face of the property landscape with no price increases and significant improvement expected until at least the end of 2020.
There’s an 80 per cent chance the ALP will come into power at the forthcoming Federal election and this win will see the implementation of their policy to limit negative gearing to new housing only and reduce the discount on capital gains tax from the current 50 per cent to 25 per cent to come into effect on January 1, 2020.
This will simply make property investment, in both existing and new dwellings, by far less attractive.
<a href="https://www.propertyobserver.com.au/Visit%20www.riskwiseproperty.com.au" target="_blank">RiskWise</a> demonstrated that fears of the proposed changes have already impacted the market with price reductions accelerating following the Liberal Party leadership spill in August last year. In addition, auction clearance rates dropped below 50 per cent towards the end of 2018 in both Sydney and Melbourne and are currently in the low to mid-50s.
Buyer sentiment had been greatly diminished with strong reductions in activity by investors who realised they had to wait for the election results, the implementation of the taxation policy, and a new low equilibrium point to be reached, before they could act.
Investors understand the potential increases to out-of-pocket expenses due to the taxation changes, which are equivalent to a significant and sudden interest rate increase of 1.15 per cent in the Sydney unit market.
RiskWise analysis shows there is an 80 per cent likelihood the RBA will cut interest rates during the second half of 2019 with a further cut before the end of the year or early 2020, with the banks ‘highly likely to pass them fully on to borrowers’. 
This will significantly reduce price reductions, particularly in the Sydney and Melbourne markets, and increase demand in the markets that have shown resilience and already enjoy good demand. Interest rate cuts have a direct impact on out-of-pocket expenses and also have an impact on buyer sentiment, particularly investors.
GDP growth is also below target, largely due to a reduction in dwelling commencements, and a drop in consumer sentiment has an impact on household spending.
In fact, according to ABS data, there has been a major reduction in household wealth, driven by a reduction of land and property values. While household wealth is falling, the household-debt-to-income ratio hit a new record just shy of 200 per cent.
While APRA has removed the 30 per cent interest-only lending cap, this is unlikely to have a material impact on the housing market. Banks will continue to mitigate the risks associated with interest-only loans in a market where the majority of the properties that are purchased or re-financed are depreciating assets.
In addition, there is a 7 per cent stress test (where many lenders set the stress test at 7.25 per cent) when it comes to the ability to service a loan making it extremely difficult to get approval from lenders.
Negative equity has also become a major risk, particularly for lenders who have concentration of loans in weak markets within Western Australia, Queensland and the Northern Territory.
Also, the majority of the properties that have been purchased in Sydney and Melbourne in the past couple of years have depreciated in value and properties that have loan-to-value ratio (LVR) of 90 per cent or more carry a high level of risk of negative equity.
The next quarter will be crucial for the housing market due to the election results and expected high level of certainty regarding RBA’s interest rate cuts, but expect the weak outlook to continue.
Macro-economic measures, particularly in relation to Consumer Price Index (CPI), employment and GDP growth will play central roles in whether there would be an interest rate reduction sooner rather than later.
Our analysis shows us however, that at least for the foreseeable future, and especially with the likely introduction of the taxation changes, that the weak housing market will continue with high levels of apartment supply, combined with low sales volumes, and a continuous reduction in dwelling commencements, that will help to absorb the high level of supply gradually over time.
State-by-State Overview:
In New South Wales, the combined effects of unaffordable housing, poor investment serviceability ratio and lending restrictions have led to a quick reduction in house and unit prices. In addition, there has been a significant reduction in investor activity. Without RBA interest rate cuts and / or a Labor loss in the federal election, Sydney is likely to experience continuous price reductions over the next couple of years, with an estimated annual reduction of 4-6 per cent for both this year and 2020. Some regional areas, however, are likely to hold well. An RBA interest rate cuts is likely to mitigate price reductions.
Victoria has the highest population growth in the country, enjoys a solid economy and a healthy job market. However, like NSW, dwelling prices have fallen, although to a lesser extent, as have auction clearance rates. Again, this fall can be attributed to the same factors as that of NSW – lending restrictions, significantly lower investor activity, fear of changes to the current taxation regime and expectations of price reductions. Therefore, without RBA interest rate cuts that are much needed to support this market and / or a Labor loss in the federal election, over the next couple of years, the prospect for the Melbourne housing market is negative with annual price reductions in the order of 4-7 per cent for both this year and 2020. However, a number of regional areas, in particular Geelong and Ballarat, which deliver solid capital growth, present only a low level of risk and are projected to continue delivering solid capital growth both in the short and long term.
The Australian Capital Territory delivered good economic growth and experienced the second largest population growth rate in the country, delivering capital growth and a relatively resilient property market. While growth rates have decelerated in recent months, dwellings in the ACT present a relatively low level of risk for major price reductions and are projected to deliver modest capital growth in the next couple of years. Houses are still enjoying, and likely to continue to do so, some capital growth while the unit market remains reasonable, although it does carry a higher degree of risk to deliver negative growth in the short term, particularly due to its reliance on investor activity.
The modest growth pace in the Queensland housing market continues although for units remains poor or negative. Some areas, particularly in South-East QLD including the Gold Coast and the Sunshine Coast, enjoy good population growth and healthy demand for houses. Other areas, such as Central QLD, are still experiencing poor demand for dwellings, very high vacancy rates and a very soft property market. An oversupply of units in inner Brisbane makes this market particularly susceptible to the impact of potential taxation changes. Other areas that have a high supply of new units also present high levels of risk, particularly where there are relatively affordable houses as, generally, houses are significantly preferred dwelling alternatives.
The South Australian economy has shown some improvement but still has a high effective unemployment rate which has led to very low population growth and soft housing demand meaning only modest capital growth is forecast for houses. However, houses in popular areas, such as Adelaide Central and Hills carry a low level of risk and are projected to deliver solid long-term returns. Some areas have unit oversupply and are experiencing weakness, particularly Adelaide CBD where poor growth is forecast.
In Western Australia, lending restrictions had the most impact thanks to its weaker economy. Perth prices, which had stabilised, began to fall once again. The impact is expected to increase if a blanket approach is also taken when implementing the proposed taxation changes. While the state’s economy has returned to positive growth, a combination of a very high effective unemployment rate, low population growth and a significantly below-average economic activity level has resulted in price reductions for both houses and units. Finally, units carry a very high risk due to the combination of oversupply, lending restrictions and low demand, particularly in central Perth.
Tasmania leads the country in investment serviceability with its high median rental returns and low average dwelling price. However, Hobart has gone off the boil, with CoreLogic figures showing a 0.9 per cent slide of dwelling prices last month. Houses fell 1.2%, while unit growth was only 0.3% in March. A significant increase in dwelling prices in recent years, less affordable housing, decelerated price growth, fewer people turning up to open home inspections and fewer inquiries on listings, indicate that housing affordability has made an impact and that the growth rate was unsustainable. It is projected to significantly decelerate in 2019 and further into 2020, with some areas likely to deliver very low or negative capital growth.
The Northern Territory experienced poor population growth resulting in negative dwelling growth and a very soft property market. Poor demand for dwellings and price reductions, combined with a relatively high median household income have resulted in the most affordable dwellings (i.e. the lowest price-to-income ratio) in the country. The property market is projected to remain soft, particularly for units. Furthermore, it is likely that the NT housing market will be a victim of unintended consequences from the blanket implementation of the potential taxation changes that will further reduce investor activity.
DORON PELEG is the CEO of <a href="https://www.propertyobserver.com.au/Visit%20www.riskwiseproperty.com.au" target="_blank">RiskWise Property Research</a>
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Interest rate cuts and election results keys to property market: Doron Peleg 

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The next three RBA meetings are clearly live for a rate cut, says the NAB's Alan Oster.
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With its outlook for below trend growth, and below target inflation combined with little further improvement in the labour market, NAB expect the RBA to cut rates twice in 2019, taking the cash rate to a new record low of 1%.
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"We expect a cut by at least August."
"We have left our call for the first cut as July, with a follow up in November." 
However, with the RBA still looking for an improvement in the labour market and monthly figures often volatile, NAB recognise that the timing of the first cut will be especially data dependent.
"On the one hand a marked deterioration in upcoming labour market data as well as weaker national accounts partials, could see the cut brought forward to next month.
"Against that a cut could be delayed to August when the Bank will have observed another quarter of likely weaker GDP growth, a further update on the CPI and a revised set of staff forecasts ahead of the next SMP."
NAB noted labour market indicators should be closely watched, as a turn in the labour market could reasonably be 1.0 expected given the prior slowing in output growth.
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The NAB Survey measure of employment weakened in April and job ads appear to have fallen.
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The NAB reported the impact of the downturn in the housing market was "affecting both output and inflation data.
"The cooling appears to be ongoing, with prices continuing to decline and building approvals continuing to trend down."
NAB expect dwelling investment to record another decline in Q1 following the relatively sharp fall in the last quarter of 2018. 
"Overall we expect dwelling investment to decline by around 20% over the next two years. 
"Alongside this, we expect house prices to decline by another 5% nationally over 2019 and early 2020 before levelling out for a period."
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The report noted capital city house prices have now fallen by almost 10% since peaking in late 2017. 
"These declines have been led by Sydney (down 15%) and Melbourne (down 11%) where the role of investors is much larger and prices saw a much more significant rise. 
"That said, recent months have seen price declines broaden to the other states, with Brisbane and Adelaide having now declined over the year in addition to the ongoing weakness in Perth. In Hobart growth has slowed, but the city remains the standout, with prices remaining well up on a year ago," Alan Oster said.
On the activity side, building approvals continued their trend decline in March, unwinding the spike a month earlier. 
Over the past year approvals are 27% lower and are now 37% below their peak in 2017.
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The decline in approvals is evident across both houses and apartments down 19% and 57% respectively from their peaks in 2017. 
The decline in approvals suggests that activity in the sector will weigh on growth overall as the pipeline of outstanding work is completed.
NAB noted alongside the cooling in the market, housing credit growth has continued to slow. 
Investor lending slowed to just 0.7% y/y in March 2019, while growth in credit extended to owner-occupiers is tracking a little higher but has slowed to 5.7%. 
Overall housing credit has risen by 4.0% over the past year. 
ABS data on the value of new loan approvals has continued to trend down suggesting that credit growth will likely weaken a little further over coming months.
"To date, the adjustment in the housing market appears to have occurred in an orderly fashion – and may have served to reduce the prior build up of risk in the sector," Alan Oster said.
"We see the weakness in prices as having been driven by the earlier tightening driven APRA restrictions, a waning in foreign investor demand as well as affordability constraints themselves. 
"In addition it appears that there are some pockets of oversupply. 
"Going further, we see the cooling in the market continuing with prices declining a little further and also a notable downturn in the construction cycle. 
"Beyond this, we are closely watching for any additional spill overs from this sector to other sectors."
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Next three RBA meetings are live for a possible rate cut: NAB

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EXPERT OBSERVER
Three months ago we said “It all gets down to jobs.” And that point has clearly been emphasised by the Reserve Bank in the period since. If the Reserve Bank is tempted to cut interest rates in coming months it will be because there is clear evidence that the jobless rate is trending higher, while at the same time there is disappointment on the wages paid by employers.
You have to admire the Reserve Bank’s stoicism with its forecasts. Over the past six months the Reserve Bank has downgraded short-term economic growth and inflation forecasts and pushed-out its expectations by around a year.
Confusingly Reserve Bank “domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate.” Despite that, inflation struggles to get to 2 per cent and the jobless rate stays at 5 per cent. The Reserve Bank needs to provide a clearer explanation of his views and assumptions.
Reserve Bank remains confident on outlook: 
The full Statement on Monetary Policy can be found here: <a id="LPlnk836631" href="https://www.rba.gov.au/publications/smp/2019/may/pdf/statement-on-monetary-policy-2019-05.pdf" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">https://www.rba.gov.au/publications/smp/2019/may/pdf/statement-on-monetary-policy-2019-05.pdf</a>
<ul>
<li>Key Paragraph: “At its recent meeting, the Board focused on the implications of the low inflation outcomes for the economic outlook. It concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.”
</li>
<li>Growth &amp; inflation: “Growth in the Australian economy has slowed and inflation remains low.”
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<li>Spending: "The near-term outlook for consumption growth has been revised lower because weaker housing market conditions and income growth are likely to continue to drag on spending."
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<li>Household spending: “Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction. Despite this, the labour market is performing reasonably well, with the unemployment rate steady.”
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<li>Incomes: "Some recovery in income growth is likely, because employment growth is expected to remain solid, wages are expected to increase and the tax offset for low and middle-income taxpayers is set to come into effect in the second half of this year."
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<li>Incomes: “Disposable income growth is also expected to be supported by lower net interest payable owing to the lower cash rate assumption.”
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<li>Home prices &amp; spending: "The deterioration in housing market conditions is expected to continue to weigh on consumption in coming quarters."
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<li>Home building: "There is a risk that dwelling investment declines by more than currently forecast in the near term."
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<li>Home building: …“information from the liaison program points to a significant slowdown in activity in the early stages of residential development.”
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<li>Inflation: Core inflation is “expected to remain low in coming quarters, largely because the weakness in housing- related items is expected to persist for a while.”
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<li>Global: “The global growth outlook has been revised slightly lower and the risks remain tilted to the downside.”
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<li>China: “The outlook for China continues to be an important source of uncertainty for the external environment facing Australia’s economy. The Chinese authorities face significant policy trade-offs and it is unclear how various policy changes will play out.”  “The outlook for trade policy remains uncertain and negative developments could harm global growth.”
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<li>Wage pressure: “…there has been some upward pressure on inflation as a result of the decline in labour market spare capacity.”
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<li>Wages: “The moderate increase in wages growth forecast over the next year is consistent with information from the Bank’s liaison program.”
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<li>Jobs: “A number of other indicators suggest that labour market conditions remain positive and that spare capacity is being absorbed. There has been a notable decline in the rate of medium-term unemployment (between 13 weeks and one year)…”
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Implications for interest rates and investors:
CommSec doesn’t expect a change in interest rates for a few months yet. But a cut in rates is factored into Reserve Bank forecasts, presumably on a softer job market.
The Reserve Bank says that “The domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate.” While the RBA always notes that forecasts are based on technical assumptions, this time it is quite explicit with the rate cut assumptions.
The Reserve Bank is no doubt hoping that fiscal stimulus is applied over the next year through tax cuts and targeted spending. The 
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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Infrastructure boom fundamental in driving the economy: CommSec's Craig James

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ANZ has cut rates across several fixed rate home loans packages as of May 10.
It makes them the last of the <a href="/news/westpac-joins-other-big-two-to-cut-fixed-home-loan-interest-rates">big four banks to reduce fixed rates</a> on home loans.
Australia’s fourth largest bank has cut between 0.20 per cent and 0.60 per cent off owner occupier and investor fixed loans.
The cuts make their rates more comparable with their big four competitors.
<img src="https://www.urban.com.au/images/2019/5/10/ANZ%20Rates%201.JPG" alt="">
(Source: RateCity.com.au)
On the same day, Macquarie Bank, Australia’s eighth largest home lender has reduced variable rates on a range of loans by up to 0.51 per cent.
Macquarie Bank's lowest ongoing variable rate, available to new owner occupiers paying principal and interest with a 30 per cent deposit, is now 3.69 per cent – a drop of 0.12 per cent.
As a result they now offer a lower a lower variable rate than the big four banks alongside HSBC, who offer the same rate for new customers.
Sally Tindall, RateCity.com.au research director said, "with more competitive pricing, Macquarie Bank has seen an 18.4 per cent growth in their home lending year on year, according to the most recent data from APRA."
“The move by ANZ today comes as no shock. Some of their fixed rates were sticking out like a sore thumb. Now ANZ has some of the most competitive 3 and 5-year fixed rates available from the big four banks,” she added.
<img src="https://www.urban.com.au/images/2019/5/10/ANZ%20Rates%202.JPG" alt="">
(Source: RateCity.com.au)
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ANZ finally cuts fixed home loan rates

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GUEST OBSERVATION
Suncorp Bank is now offering fixed home loans with some of the lowest advertised interest rates on the market.
The Brisbane-based bank’s packaged home loans for both owner-occupiers and investors have three-year fixed rates that rival most variable-rate products.
From today, the Home Package Plus Special Offer home loans offer interest rates of:
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<li>3.49% p.a. (4.24% comparison rate) for owner occupier, principal and interest borrowers</li>
<li>3.69% (4.50% comparison rate) for investment, principal and interest or interest-only borrowers</li>
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Both of these new interest rates are available for loan-to-value ratios (LVR) of up to 90% – that’s a minimum deposit of 10%.
In addition, owner occupier and investment customers can get rates as low as 3.44% and 3.64% respectively if they use Suncorp’s fast refinance (owner-occupied refinancers can also get $1,500 cashback with Suncorp).
It should be noted these are packaged home loan products, meaning borrowers would need to combine the loan with a Suncorp bank account to be eligible for the rate.
This means they come with a higher comparison rate compared to other non-packaged products, which reflects higher fees.
Suncorp’s packaged products come with a $375 package fee, but the comparison rate on the special offer products are still much lower than its non-packaged products.
Suncorp’s standard fixed owner-occupier loan, for example, has an advertised rate of 3.94% and a comparison rate of 5.43%.
On its website, Suncorp promises to waive this $375 fee in the first year.
How do these new rates compare?
These new interest rates are among the lowest on the market at the time of writing, and are a testament to the sheer number of rate drops there have been lately, particularly when it comes to fixed rates.
Big four banks Westpac and the Commonwealth Bank also began offering lower fixed home loan interest rates this week, but their new rates pale in comparison to Suncorp’s latest rates.
Commbank’s new three-year fixed package home loan for owner-occupiers offers a rate of 3.79% (4.98% comparison rate) while Westpac is offering 3.89% (4.92% comparison rate) on its three-year fixed package.
These rate cuts follow a similar move in late March, where Suncorp cut some of its other fixed-rate home loans by as much as 70 basis points.
This article was originally published on <a id="LPlnk675834" href="https://www.savings.com.au/home-loans/suncorps-new-fixed-home-loan-rates-among-the-lowest-on-the-market/" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">Savings.com.au</a>.
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Suncorp’s new fixed home loan rates among the lowest on the market

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EXPERT OBSERVATION 
This month’s RBA Board meeting saw interest rates remain on hold for the 29th meeting (or 32nd month) in a row. No surprise there.
But while the RBA’s post meeting statement was little changed in relation to global conditions, the strong labour market and the housing “adjustment”, it did sound a little bit more dovish in two areas.
First in its acknowledgement of weak December quarter GDP growth and consumer spending.
And second in adding at the very end of its statement that it “will continue to monitor developments”.
Of course it would be dangerous to read too much into this but maybe the RBA’s neutral bias on rates is getting a bit less neutral in the direction of easing.
Our view remains that the RBA is underestimating the impact of the housing downturn on the economy – particularly in terms of its impact on consumer spending – and as a consequence we still see weaker growth and lower inflation than the RBA is forecasting.
As a result, our view remains that the RBA will cut the cash rate to 1% by year end.
At this stage it makes sense for the RBA to see what the Budget and the election bring in terms of fiscal stimulus, but our base case is that the first cut will come around June but with the RBA moving to an easing bias at its May meeting.
SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital
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RBA starting to sound a little more dovish: Shane Oliver

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The February meeting of the RBA has seen the cash rate remain on hold at 1.5 percent.
It has now stayed at record lows for 27 consecutive meetings. 
The last time the rate changed was in August 2016.
CoreLogic's head of research Tim Lawless said the declining house price market will likely put pressure on the RBA in the future, however he predicted a hold at today's meeting.
"The RBA has looked past the housing downturn which has gathered some momentum over the past three months", Lawless said.
"The hold decision was widely anticipated, considering a subtle uplift in CPI and steady labour market conditions, however financial markets are increasingly leaning towards the next move from the RBA being a cut rather than a hike. 
"With CoreLogic’s January hedonic index revealing national dwelling values are falling at the fastest rate since the GFC, while Sydney and Melbourne’s rate of decline is now the most rapid since at least the early 1980’s, there is the potential the RBA may be becoming less comfortable with the performance of the housing sector. 
"Add to this a consistent downtrend in dwelling approvals, weakening consumer sentiment and softer retail trade figures, and it looks like the household sector could start to weigh down economic growth. 
Figures released by the ABS yesterday showed dwelling approvals declined to lows not seen since 2018.
Lawless said the RBA may consider a rate cut due to a number of out of cycle rate hikes.
"The weeks preceding the RBA meeting saw several smaller lenders pushing mortgage rates higher in response to persistently high funding costs, following an average 14 basis point rise in owner occupier mortgage rates since September last year. 
"If we see mortgage rates rising more broadly, we might see the RBA become more willing to consider a rate cut in an effort to offset higher funding costs and support heavily indebted household balance sheets."
 
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RBA holds official cash rate in first meeting of 2019

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EXPERT OBSERVER
Economists expect the cash rate to remain steady for yet another year even though inflation is on the floor. 
The Reserve Bank kicks off its first meeting for the year next Tuesday facing the same dilemma it did throughout last year.
It hasn’t got easier.
The bank has a very public, fairly clear objective: to keep inflation <a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19" target="_blank">between 2% and 3%</a>. But it keeps missing it. Over and over and over again, and on the downside.
As the following chart shows, inflation has been below the bank’s target band for nearly all of the past four years.
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<img src="https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="">
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During his decade in office, the previous governor Glenn Stephens achieved an average inflation rate of 2.46% – almost bang in the centre of the target band.
During his subsequent two and half years in the job, Philip Lowe has averaged just 1.87%. At no point during Lowe’s term of office has the average fallen within the target band. The rate for December, <a href="https://www.propertyobserver.com.au/http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0">released on Wednesday</a>, was 1.8%.
Next Wednesday Lowe will make an unusual address to the <a href="https://www.npc.org.au/speakers/philip-lowe-npc-sydney-address/" target="_blank">National Press Club</a>, during which he will outline his thoughts about the year ahead.
It is a year which The Conversation’s forecasting panel predicted will be free of interest rate adjustments, making it a record 40 months without a rate move – Lowe’s entire term in office.
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<a href="https://images.theconversation.com/files/256590/original/file-20190131-112389-hml5ue.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/256590/original/file-20190131-112389-hml5ue.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
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<h2>The RBA has more than one target</h2>
Although the inflation target is an important part of the Reserve Bank’s mandate, it is also asked to <a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19" target="_blank">focus on other things</a>. Among them are GDP growth, employment, and (probably less explicitly) the Australian dollar and house prices.
And therein lies the problem. Unless the rate moves needed to meet all those objectives point in the same direction, the bank needs to make trade-offs, or sideline one or more of its objectives.
A classic principle of economics is that a policy-maker needs one instrument (or policy tool) for each objective. It is called the <a href="https://www.propertyobserver.com.au/https://www.jstor.org/stable/2282568?seq=1#metadata_info_tab_contents" target="_blank">Tinbergen Rule</a>, after the 1969 Nobel Laureate.
The bank has four or five objectives, but really only one tool – the cash rate, stuck at 1.5% since Lowe took the job.
Throw in the ability to partially shape market expectations through speeches by Lowe and Deputy Governor Guy Debelle (so-called “open mouth” operations), and maybe it has two.
Since Lowe took office, the casualty of this imbalance between instruments and objectives has been the inflation target. And it’s unlikely to change for some time.
<h2>So why is inflation so low?</h2>
Australia is not alone. Advanced economies around the world have had several years of low wages growth, low productivity growth, and low inflation. Populations are ageing, less keen on spending, and have a glut of excess savings.
Add to this the fact that technology and international trade have made a whole range of goods probably permanently cheaper and it’s hard to find inflationary pressure.
Potentially making things worse in Australia is the decline in house prices in Sydney and Melbourne eating into consumer confidence and with it, spending. <a href="https://theconversation.com/vital-signs-so-far-its-more-of-a-house-price-blip-than-a-bust-in-the-making-109568" target="_blank">With well over half of the economy coming from private spending, already soft consumer spending could be hit further.</a>
So far, RBA Governor Philip Lowe has been doing an admirable impression of Mr Micawber, in the Charles Dickens novel David Copperfield. When it comes to inflation, he is hoping “something will turn up”. But it hasn’t, even with historically low levels of unemployment.
Worse still, it doesn’t even seem to really be ticking up in the United States, <a href="https://www.thebalance.com/unemployment-rate-by-year-3305506" target="_blank">despite the lowest year-end unemployment rate since 1969</a>.
<h2>And why does it target inflation?</h2>
The bank targets inflation in order to maintain credibility.
The high levels of inflation in the 1970s and ‘80s – despite quite high levels of unemployment – led to the realisation that expectations had a lot to do with it.
Put simply, if people believe prices are going to rise sharply they will demand steep wage rises, which will cause prices to rise sharply. It becomes a “wage-price spiral”.
Macroeconomists and central bankers realised that a credible commitment to keep inflation low would remove the need for the large wage rises, cutting off the spiral before it got going.
The bank describes the rationale for its inflation target <a href="https://www.rba.gov.au/inflation/inflation-target" target="_blank">this way</a>:
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3%, on average, over time. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.
That’s been the logic for the past 25 years. We have certainly done away with inflationary spirals. We are in the age of secular stagnation, with an excess of savings chasing too little spending. A world where, since the turn of this century, robust growth has only really been possible when accompanied with financial bubbles–first in dot-coms, then in housing.
<h2>So what’s a central banker to do?</h2>
<a href="https://theconversation.com/vital-signs-its-time-to-discuss-a-new-framework-for-central-banking-101978" target="_blank">There is an active debate</a> among <a href="https://www.rba.gov.au/speeches/2018/sp-dg-2018-04-12" target="_blank">central bankers</a> and leading macroeconomists about whether to abandon the inflation targeting framework.
Luminaries like former US Treasury Secretary <a href="https://www.brookings.edu/research/why-the-fed-needs-a-new-monetary-policy-framework/" target="_blank">Larry Summers</a> argue that inflation targets are, <a href="http://shakespeare.mit.edu/hamlet/hamlet.1.4" target="_blank">to borrow from Hamlet</a>, “more honour’d in the breach than the observance”.
Right now Lowe faces a real dilemma. If he doesn’t cut rates, the inflation target will become more and more of a joke. It will add to pressure on him to articulate a new monetary policy framework for a new secular-stagnation era.
If he does, he risks re-inflating the housing bubble, boosting already sky-high household debt, and giving himself even less wiggle room if a recession hits.
On Tuesday he’ll leave the cash rate at 1.50%. And on the first Tuesday of the next month, and the the next, and the one after that…
But I think he’ll begin serious internal discussions about a new monetary policy framework, and the mechanics of getting into (and out of) a massive bond-buying program (otherwise known as quantitative easing or printing money) if needed to ward off the next recession should the cash rate remain or get so low he can’t cut it further.
He might have already started. He might drop further hints on Wednesday.
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<a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a>, Professor of Economics, <a href="http://theconversation.com/institutions/unsw-1414" target="_blank">UNSW</a>
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/vital-signs-yet-another-year-of-steady-rates-whats-the-point-of-the-rba-inflation-target-110574" target="_blank">original article</a>.
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